Insight Enterprises Inc (NSIT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to your fourth quarter 2004 Insight Enterprises Earnings Conference Call.

(OPERATOR INSTRUCTIONS.)

I would now like to turn the call over to your host for today’s presentation, Mr. Stan Laybourne, Chief Financial Officer.

Please proceed, sir.

Welcome everyone and thank you for joining the Insight Enterprises conference call.

Today we will be discussing the Company’s operating results for the quarter ended December 31, 2004.

Joining me, Stanley Laybourne, Chief Financial Officer, is Rich Fennessy, President and Chief Executive Officer of Insight Enterprises, Inc.

If you do not have a copy of the earnings release that was posted this afternoon, and filed with the Security and Exchange Commission on form 8K, you will find it on our website at insight.com under our investor relations section.

Since detailed financial and operating data are contained in the earnings release, we will only be concentrating on highlights of the quarter during the scripted portion of the conference call.

As usual, at the conclusion of the scripted portion, we will answer questions from our conference call participants.

Today’s call, including all questions and answers, is being web cast live and can be accessed via the investor relations section of our website.

An archived index copy of the conference call will be available approximately two hours after completion of the call, and will remain on our website for a limited time.

This conference call and the associated web cast contain time sensitive information that is accurate only as of today, January 27th, 2005.

This call is the property of Insight Enterprises, Inc.

Any redistribution, retransmission or rebroadcast of this call in any form, without the expressed written consent of Insight Enterprises, Inc. is strictly prohibited.

Finally, let me remind you about forward looking statements that will be made on today’s call, and non-GAAP measures discussed on the call.

All forward looking statements that are made in this conference call are subject to risk and uncertainties that could cause the actual results to differ materially.

These risks are discussed in today’s earnings release, and also in greater detail in our quarter report on 10Q for the quarter ended September 30th, 2004.

As required by the Securities and Exchange Commission rules, we have provided a reconciliation of non-GAAP measures to GAAP in our earnings release and 8K filing.

And you can find those documents on the investor relations section of our website.

Now I am pleased to introduce our new President and Chief Executive Officer, Rich Fennessy.

As many of you know, Rich joined us on November 15th, 2004, after an exhaustive search conducted by our Board of Directors.

Rich is a 17 year veteran of IBM, and most recently led ibm.com organization, which is IBM’s direct telesales and web channel operating in over 80 countries throughout the world.

Rich brings a wealth of experience within the IT industry, and proven leadership and team building strength that I believe will lead Insight Enterprises into the next stage of growth.

With that I will now turn the call over to Rich for opening remarks.

Thank you, Stan.

Hello everyone and thank you for joining us today.

I am honored and very pleased to be speaking to you as the newest member of the Insight Enterprises executive team.

The last 10 weeks for me have been truly exciting.

Not only did I get the opportunity to relocate my family from Connecticut just before winter hit, but I also personally experienced how well the worldwide Insight team executes as they close the fourth quarter.

Insight Enterprises was able to deliver 9% year-over-year net sales growth, and 24% year-over-year EPS growth, with non-GAAP diluted earnings per share of $0.31 for the fourth quarter.

In a few minutes, I will have Stan take you through the details of our fourth quarter results.

But first I’d like to share some of my observations on our business and our plans for 2005.

Since November 15th, I have visited all of our operating segments, including Canada and United Kingdom.

I’ve spoken with countless employees and customers and partners.

I reviewed the status of our key strategy, which is to migrate from an IT product provider to an IT solution provider.

I have also become familiar with the Insight climate and culture.

Perhaps most helpful I’ve learned about, is that some of the focus areas required to drive continued improvement in our execution.

Our initial business analysis is as I expected.

Insight Enterprises is well positioned for growth.

We are a dynamic international organization, who has multi-talented individuals, who will give their all to ensure that goals are achieved.

Let’s review Insights established 2005 goals and objectives.

One, driving growth in sales and profitability.

Two, improving the Insight experience through E-enablement of key business processes.

Three, accelerating sales and service skills to support targeted Insight solutions.

Four, increasing customer acquisition and penetration.

And five, developing a lasting competitive advantage by enhancing our relationship with employees, customers and partners.

In today’s marketplace, the essence of competition has shifted from what companies do to how companies do it.

In Insight’s business the how is dependent on the quality of our relationships and our relentless focus on operational excellence and our daily execution.

In that regard, for Insight to realize its full potential in the marketplace, we will focus on enhancing employee, customer and partner relationships.

These relationships play an integral role in the successful transformation of our business and in the execution of our business strategy, to be an IT solutions provider.

We will strengthen our world-wide management system and processes, leveraging best practices to improve daily execution.

Let’s take a minute to talk about Insight’s key strategy relative to becoming more of an IT solutions provider.

We will market across five specific solution areas.

We will align our sales, marketing, technical and service teams to support each of these areas.

The five insightful solution areas are manage IT.

This includes solutions focused on managing a business’ IT infrastructure, such as technology refresh and server consolidation.

Mobilize IT.

This includes solutions focused on product and services that assist businesses and their efforts to enhance the workforce mobility.

Examples include solutions around wireless devices, Wi-Fi infrastructure, wireless LAN and data voice convergence.

Thirdly, print IT.

This includes solutions focused on increasing efficiencies and lowering print costs for businesses such as print assessment, document management and pay per use.

Store IT.

This includes solutions focused on the storage needs of business customers in areas such as disaster recovery, storage management and regulatory compliance.

And lastly, secure IT.

This includes solutions focused on securing business’ communication, websites and work forces.

Examples include e-mail security, firewalls, and anti-virus systems.

These five insightful solution areas are specifically designed based on our expert and detailed assessment of our customers’ business requirements.

We will help solve our customers IT related problems from design and configuration to deployment and life cycle management.

We believe our long term relationships with the world’s leading IT vendors, combined with our technical expertise, will allow us to bring our customers a greater return on investment and reduce total cost of ownership across these solution areas.

We also believe this integrated, targeted approach greatly increases our value proposition to customers, partners and employees.

And here is further good news.

Insight has already experienced multiple successes in delivering these solutions to our enterprise customers.

We look forward to deploying more of these solution areas, to our SMB and public sector customers in 2005.

In addition to a solutions focused sales and marketing plan, I am very focused on operating more efficiently and effectively in order to deliver improved financial performance.

Throughout 2005, we will re-evaluate key aspects of our business.

I expect continued enhancements to our systems, strategies and processes to drive operational and financial improvements.

One very important focus will be driving higher growth rates in our North American SMB business.

We lost some momentum with this customer group during the maximus (sp) system conversion and found it difficult to attain our historical revenue growth rate.

In contrast, sales to large enterprise customers showed strong growth rates throughout 2004.

Again, it has been a busy 10 weeks for me and I’m eager to continue the growth of Insight’s worldwide business and to deliver an ever improving insight experience to our employees, customers and partners in 2005.

Now, I’ll turn the call back to Stan, to provide more details on our fourth quarter performance.

Stan?

Thanks, Rich.

The fourth quarter was another solid quarter, with sequential and year-over-year increases in quarterly net sales and earnings per share.

Consolidated net sales grew 9% year-over-year, and 1% sequentially.

Additionally, non-GAAP diluted earnings per share was $0.31, compared to $0.30 last quarter, and $0.25 in the fourth quarter last year.

The non-GAAP numbers for Q4 2004, referred to in the earnings release and this conference call, exclude the gain and expenses associated with the sale of the remaining PlusNet shares owned by the company, the tax benefit associated with the reduction in a deferred tax asset valuation allowance in connection with our UK operations, expenses associated with the hiring of our new CEO, and the tax effect of these items.

Now, let’s turn to the North American operations.

Q4 was another good quarter for Insight North America with sales growth of 9% year-over-year and 2% sequentially.

Q4 is seasonally a stronger quarter for sales to our large enterprise customers.

So, as expected, we saw stronger sequential growth rates to this customer group.

As Rich discussed earlier, growth rates are not where we want them to be to our SMB customers.

And this is a key focus area in 2005.

The number of account executives in our North American operations decreased by 23 from last quarter to 1,106.

And we expect the number of account executives in Insight North America will remain flat in Q1 2005, as we continue to focus efforts on account executive productivity and retention.

Of course, if market conditions dictate the hiring of additional account executives, we will respond accordingly.

The average tenure of our North American account executive is up from 3.4 years last quarter to 3.5 years, with a 28% of our account executives having less than one year experience, 14% with one to two, 10% with two to three, and 48% with more than three years experience.

The increase in the average tenure is due primarily to the decrease in the hiring of new account executives during the quarter.

The average account executive productivity was up 8% sequentially and 17% year-over-year.

Sales by category remained fairly stable, with the exception of increases in desktops and servers, as well as monitors, due to enterprise customers initiating refresh cycles and upgrading servers as Microsoft discontinues its support of NT 4.0.

We were pleased to see our initiatives to increase gross margin are paying off.

And in Q4, increases in gross margin attributable to these initiatives, more than offset downward pressure on gross margin, from the shift in our customer mix.

Our gross margin has increased to 11.1% in Q4, from 11.0% last quarter, and 10.8% in Q4 2003.

The increase from 2003--Q3 was due to an increase in product margin across all customer segments, an increase in enterprise software agreements, for which we are paid a referral fee, and a decrease in write-downs of inventories.

These increases were offset partially by a decrease in supplier reimbursement and freight margin, as well as an increase in sales to large enterprise customers which are typically at a lower gross margin.

Non-GAAP selling and administrative expenses as a percentage of sales were 8.4%, compared to 8.4% last quarter, and 8.7% in Q4 2003.

In absolute dollars, selling and administrative expenses increased sequentially, by a little over $1 million due to increases in marketing, primarily attributable to the Insight fold.

Overall, Insight North America reached a non-GAAP operating margin of 2.7%, the highest operating margin in the past 10 quarters.

Looking forward, Q1 has historically been a seasonally weaker quarter for sales to large enterprise customers.

Given that a little less than half of our Insight North American sales are to these customers, we expect sales and earnings from operations to be flat to slightly down in Q1 2005, compared to Q4 2004 for Insight North America.

Turning to Insight UK, where Q4 is seasonally one of the weaker quarters.

Net sales this quarter for Insight UK decreased 4% sequentially, but increased year-over-year 12%.

Excluding the effects of fluctuations in the exchange rate, net sales in Q4 decreased approximately 6% sequentially, but grew year-over-year 2%.

We expect sales to increase both sequentially and year-over-year in Q1 2005, as the first quarter is seasonally the strongest quarter for our UK operations.

However, keep in mind that Q1 2005 has 61 ship days compared to 64 ship days in Q1 2004.

The number of account executives in our UK operations was 298 at December 31, and was basically flat from the 300 at the end of last quarter.

We expect to hire, on average, between 10 and 20 account executives per quarter during 2005.

Average tenure of our United Kingdom account executives remained constant this quarter, compared to last quarter at 2.2 years, with 52% of the account executives having less than one year experience, 19% with one to two, 6% with two to three and 23% with more than three years.

Sales by product category were fairly constant from Q3, with the exception of an increase in software due to a large sale to an enterprise customer in Q4.

Gross margin was 13.2% in Q4, compared to 13.1% last quarter and 13.5% in Q4 of 2004.

The increase from last quarter was due primarily to an increase in product margin due to product mix, service margins and supplier discounts.

These increases were offset partially by an increase in the write-downs of inventories and a decrease in supplier reimbursements.

Non-GAAP selling and administrative expenses as a percentage of sales were 10.9% in Q4, compared to 10.3% last quarter and 11.5% in Q4 of 2003.

The increase over last quarter was due primarily to the decrease in net sales and the sequential increase in bad debt expense due to a bad debt recovery recorded in Q3 2004.

In absolute dollars, selling and administrative expenses remained relatively flat.

Overall, UK posted a non-GAAP operating margin of 2.3%.

Insight UK has done a great job over the past eight quarters, consistently growing earnings from operations over the prior year.

Direct Alliance posted net sales of $18.8 million, down slightly from $19.2 million last quarter, and $19.1 million in Q4 of 2003.

For the three month ended December 2004, Direct Alliance’s largest outsourcing client, IBM, accounted for approximately 61% of Direct Alliance’s net sales.

And the top three clients represented 87% of net sales.

Due to the announcement of the pending sale of IBM’s notebook, desktop and personal accessory lines to Lenovo, there have been some questions surrounding the effect this sale will have on Direct Alliance’s contract and programs with IBM.

Although it is still too early to know for certain, we do not currently believe this will have a material adverse effect on Direct Alliance’s operations.

We have maintained a strong relationship with IBM over the years, which we hope to continue.

Additionally, we hope to develop a new relationship with Lenovo, with programs structured to assist them with the United States sales and marketing strategies.

However, there are no certainties and a loss of either, or both of these relationships could have a material adverse effect on Direct Alliance’s results and operations.

Direct Alliance’s gross profit decreased slightly to $4.8 million, compared to $4.9 million in the third quarter of 2004.

Non-GAAP selling and administrative expenses increased slightly to $1.6 million, compared to $1.5 million last quarter.

Resulting in non-GAAP earnings from operations of $3.2 million, and an operating margin of 17%.

Direct Alliance was successful in adding a large consumer electronic manufacturer as a client during the quarter, bringing the total number of new clients added in 2004 to three.

The program for this new client is scheduled to start in Q1 2005, and although it will take some time for the program to ramp up, as is the case for all new programs, we are pleased that Direct Alliance has successfully added another new client.

On December 14th, 2004, we sold our remaining shares in PlusNet, a leading internet service provider located in the United Kingdom, only five months after we successfully completed the initial public offering of PlusNet on AIM, a market of the London Stock Exchange.

PlusNet began trading under the symbol PNT on July 14th, 2004, and the initial public offering price was approximately $1.67 per share.

In the initial public offering we received net proceeds from the sale of our shares of approximately $17.4 million, recorded a gain on our sale of shares of $6.7 million, and bonus expenses of approximately $929,000, related to a management incentive plan, with the top executives at PlusNet.

In December, we sold our remaining interest in PlusNet for approximately $2.39 per share, resulting in additional net proceeds of approximately $30 million.

We recorded a gain in Q4 on the sale of the remaining shares of approximately $17 million, and bonuses expenses of approximately $2.3 million.

The sale of shares in the IPO reduced our ownership of PlusNet from 95% to approximately 45%.

And as such, the investment in PlusNet, starting in Q3 2004 was accounted for under the equity method.

This means that prior to the IPO, PlusNet was consolidated in our financial statement and we included 95% of PlusNet net earnings in our consolidated results of operations.

From July 15th, 2004, the date of the IPO, until December 14th, 2004, the date we sold our remaining shares, PlusNet was no longer consolidated, and only 45% of PlusNet’s net earnings were recorded in our consolidated financial statements as non-operating income.

Because we have now divested our entire interest in PlusNet, these historical results of operation and the gain on the sale of our shares are disclosed in the statement of earnings as discontinued operation.

Bonus expenses paid to PlusNet management, however, do not qualify for such treatment and therefore, continue to be recorded as selling and administrative expenses.

Included in the $0.31 non-GAAP diluted EPS for Q4 is $632,000 of net earnings attributable to our 45% interest in PlusNet’s net earnings until the date of disposal.

This will not continue in Q1 2005.

It will be offset partially, but certainly not entirely, by increases in interest income earned on cash proceeds from the sale, and decreases in interest expense associated with the proceeds that were used to reduce outstanding debt.

Although PlusNet continued to have strong performance, being an internet service provider was not core to our business.

And it had been our goal for some time, to maximize shareholder value by divesting PlusNet when the market was right.

We are pleased that we were able to successfully divest PlusNet quickly, while providing a substantial return on our initial investment.

Turning to the balance sheet, accounts receivable has increased, both sequentially and year-over-year.

While DSOs have increased to 50 days from 49 days a year ago.

The increase can be explained by increases in sales to large enterprise customers who normally pay slower, and increases in sales of enterprise software agreements agreement and services, which are recorded as net revenue, while the corresponding receivable are recorded gross.

Inventories have increased due to opportunistic purchases, and inventory acquired for large enterprise customer’s products.

Debt has been reduced to only $25 million from $65 million one year ago, and $105 million two years ago.

Overall, our financial condition has improved significantly over the past year.

As detailed in the earnings release, we had several items that are included in the reconciliation from GAAP, diluted EPS of $0.62 to non-GAAP diluted EPS of $0.31.

These items include the gain and expenses associated with the sale of PlusNet shares, which I just described, the tax benefit associated with the reduction in our deferred tax asset valuation allowance in our United Kingdom operations, which I will talk more about, expenses associated with the hiring of our new CEO, and the tax effects of these items.

In connection with the reduction of our deferred tax valuation allowance, because of the consistent profitability of our UK operations, and expected future profitability, we determine that it is more likely than not, that we will be able to utilize certain deferred tax assets that we have historically recorded evaluation allowance against.

As a result, we recorded a tax benefit of approximately $5.5 million in Q4, representing the reduction in a deferred tax asset valuation allowance.

Additionally, we recorded approximately $1.3 million of expenses associated with the hiring of our new CEO.

This amount represents the fee paid to the search firm, as well as the signing bonus and relocation expenses pursuant to Rich’s employment contract.

Before I end, I would like to remind everyone that this past Monday represented the 10th anniversary of our initial public offering.

When I look back over the last 10 years I am so proud to have been a part of this remarkable journey.

In 1994, we were primarily a catalogue company in the United States, with annual sales of $217 million.

More than a third of our sales in 1994 were to consumers, and over 20% of our sales were of the Insight branded computer.

In 2004, we have posted sales of over $3 billion, of which over 99% are to business customers in the United States, the United Kingdom and Canada.

It has been a great 10 years, and I am very excited about the direction the company is going and opportunities that lie ahead in the next 10 years.

I’ll now turn the call back to Rich for final comments.

Rich?

Thanks, Stan.

As I stated at the beginning of this call, I am pleased with the results of the quarter and the momentum we are building as we forge ahead into 2005.

Over the next few months I will continue my work with the team to develop the strategies and plans for the continued transformation of our business, and the successful execution of our business strategy.

On Thursday, May 12th, 2005, we will be hosting an analyst day here in Tempe, Arizona.

By that date I will have been here for six months, and I look forward to further sharing with the analysts and investing community, what I have learned and our plans for executing our strategies in more detail.

That concludes my comments.

Stan and I are now available to answer any questions that you may have.

(OPERATOR INSTRUCTIONS.)

Brian Alexander from Raymond James.

Please proceed, sir.

Rich, just a couple of questions.

You mentioned you’ve been at Insight for about 10 weeks now.

Maybe tell us a little bit about why you joined the company, number one.

And then number two, it sounds like you believe the current strategy is the right strategy.

I’m just wondering what plans do you have, if any, to change that strategy.

First of all, the reason I joined the company is because again, as I said up front, I think we have great opportunities for future growth.

Coming in, I mean quite honestly the strategy of migrating our business from an IT product provider to an IT solution provider, I think is right on.

I mean I think it’s right in line with what customers are looking for.

As you know, in today’s marketplace, there are some customers that are buying products and there are some customers, and we used to call those self-integrators, they know what they want.

And there are some customers who are needing help.

They want help in developing solutions to their problems that IT products can help them address.

And I believe by migrating to an IT solutions provider strategy, we address both sets of customers, which increases the pie in which we compete in the marketplace.

So I think the strategy is right on.

But in my opinion though, our strategy will be successful is dependent upon our success in building relationships though with our employees, customers and partners.

I mean this is where we need to drive continued improvements as we move forward to truly differentiate ourselves in the marketplace.

We must also obviously, increase our focus from an operational excellence perspective in driving improvements in our daily execution.

If we do this, I think this is what drives us to increase profitability and revenue growth.

But again, I joined Insight because I do believe we have great opportunities for growth.

I think we also have great opportunities to truly help our customers solve their tough IT problems by providing multi-vendor solutions.

And then you talked a little bit about regaining momentum in SMB, which had been lagging your large corporate business.

And I’m assuming that the small and medium sized business segment didn’t grow sequentially this quarter, given about 2% overall growth in North America.

Just give us a sense of how you regain that momentum and what types of investments do you think you have to make to get there.

Let me just try to give you a little feel for me.

And clearly, we had a strong growth rate in our enterprise business in 2004.

And while I was only around for a part of that year, that clearly took away some of the integrated focus from our SMB business.

Additionally, the turnover amongst our sales executives in SMB was high.

But in my opinion, it was really all about execution.

And again, in 2005, we’ve got to go focus from an execution perspective to improving our SMB business.

And as an example, we need to try tighter alignment between sales and marketing to really help drive sales productivity.

We need to go increase our marketing investments, again, to help drive sales productivity, which is exactly what the strategy is.

Overall, as I referred to earlier, over the coming weeks and months we’re kind of building the strategies and plans we need to go drive us in growth in terms of 2005 as well as into the future, a lot of folks on the SMB part of the business.

So again, it is a great opportunity to drive net sales growth, as well as obviously profit growth.

And I guess finally, where do you think the biggest opportunity is, I guess, over the next 12 to 18 months?

What metrics should we be focused on?

What metrics should investors be focused on, to determine the progress that you’re making?

Do you think there’s a bigger opportunity from a top line growth perspective, or do you think there’s more opportunity to improve profitability?

I’m going to give you my perspective, and Stan, feel free to add to it.

The biggest opportunity for us is to improve gross margin.

I mean clearly if you look at our business model and what we need to go focus on, in addition to driving top line revenue growth and improvements in our employee relationships and our customer relationships and our partner relationships, is we’ve got to go improve gross margin.

And clearly, there are a set of tactical actions, and we’re in the midst of building some what I’d call strategic actions to go drive that improvement.

And let me just give you a feel for what I’m talking about.

From a tactical perspective, I mean we need to go evaluate our pricing strategy.

We need to go evaluate our stocking strategy.

We need to improve alignment with our partners to increase supplier reimbursement.

We need to increase our market unit sales initiatives.

We need to enhance our system capabilities to drive more up-sell, which drives a higher margin.

And the good news is there are a set of actions from a tax perspective, across each of those areas.

And many of which have been implemented prior to my arriving, which drove some of the improvements that we saw in the fourth quarter.

More strategically though, and in terms of really driving a closure in our gross margin gap, is we need to go really focus on, and again, I’ll keep making the point because I really do believe it’s critical for our success moving forward, is improving our relationships with our employees, partners and partners.

Let me just put that into perspective.

By improving our employee relationships, this translates into higher revenue and GP per rep.

By improving our employee relationships, this is obviously a prerequisite to improving our customer relationships.

And we all know that happy customers buy more, which translates into more revenue.

Obviously more customers buying through Insight is actually the primary driver of improving partner relationships.

And obviously improved partner relationships will drive further investments into our business, both in the area of building our solutions capability, as well as our overall profitability.

So in my opinion, it is all connected.

By improving employee relationships, we will improve customer relationships, which will fuel improvement in our partner relationships, which will help us drive revenue and profitability growth.

Quite honestly, I think it’s that simple.

There’s a lot of hard work involved.

But my believe is, if we can go enhance and strengthen our relationships across those three groups on a strategic time scale, that’s how we start driving the material changes in our overall gross margin performance.

I’ll go ahead and answer also on a metric [inaudible] to kind of do from your point of view.

I think operating margin is a great way to really monitor us, which again, feeds off of what Rich said.

It’s the GP, it’s the sales and all of that.

But I think that is still a metric that everybody should look at.

And I still continue to believe, although we don’t give guidance other than the little slivers that we gave throughout this presentation, I think we would all be very disappointed if by the fourth quarter of 2006, we didn’t get that operating margin up to 4%.

And that isn’t an outlandish statement, because as you know, we’ve been higher than that in the past.

But I think that’s something that we’re all very much focused on.

And obviously sales take a part of it, GP takes a part of it, operating expense, investments, everything else.

But I think that is the metric that people should continue to do.

We got the 3% this quarter.

And as I said, hopefully we’ll get to 4% by the end of Q4 of ’06.

And Stan, just to clarify, given that you do have some initiatives in place to drive growth, are you still comfortable with the expense guidance that we’ve talked about previously in terms of commissions being 10% of gross profit dollars and other expenses being between 1% to 2% of sales?

Yes.

That still works, Brian.

Probably the only thing that I would throw in here, and I think that’s a great question to ask is, is in marketing, if you remember way back at the beginning of 2004 we were spending about $2 million a quarter.

Actually for the total of 2004, we were about $13 million for that year in marketing.

We plan to increase that at least substantially, from our point of view, 50% or more, up to $20 million in 2005.

And the reason I bring this up is again, there’s a delicate balancing act that we have to do there, that if we’re very sensitive to the operating margin on the bottom line, we want to invest when we have the opportunity to do so, but we would still want to increase our operating margin, along with our goals.

So I think all the guidance that you have had in the past stands.

The only thing that I would throw in there is keep in mind that marketing, I think you will see an increase, which hopefully will lead to benefits down the line.

The other thing to keep in mind is that a part of the supplier reimbursement that we get on vendor participation, may go up in the cost of goods sold as a result of the new EITF that was put out in ’02.

So consequently, you may see operating expenses go up, the GP go up accordingly.

And that’s why I come back to what I told you earlier.

I think operating margin is a very good thing to monitor us on because I don’t really care where it comes from, just as long as it drops to the bottom line.

But is that incremental $7 million?

Are you expecting that to be funded by your vendor or is that incremental cost?

There is certainly a large portion of that that we expect to be funded by our vendors.

Another portion of it will be reinvestments, as we go.

I mean we’re starting to see pick-ups in our product margin.

You know, good things like that that are happening, on top of sales.

So I guess what I’m saying is we’re going to take some of that profit that we otherwise would have had and invest in that because in the future, it pays benefits down the line.

The other thing that I want to mention is why are we going to get these vendor participations?

Well, we just had a very good participation in a vendor conference that we had, where we had over, was it 600, I believe it is, vendors participate in it.

And showed an awful lot of interest toward our strategy that Rich outlined earlier in the call.

So I think again, to go back to your question, we’re going to increase more in marketing.

We’re going to see the majority of that coming from that participation.

But a portion of it will be profits that we take and invest into the future.

The net result though is we’re very much focused on operating margin.

Does that answer it?

Yes.

Thank you.

Joel Wagonfeld of First Albany.

A question on the strategy that you outlined.

It seems like, unfortunately, you’re not the only ones that have reached similar conclusions.

It seems like nearly every player in the channel is focused on moving to more of a solution oriented partnered value proposition.

So I’m wondering, are you going to need additional investments in training or is it just going to be a better organization of the existing skill sets that you have?

It seems like it’s more than just getting the marketing message out.

You have to have the capabilities behind that.

And if it is going to require additional investment, is that reflected in our models?

And then finally, just in terms of the new system, how does that fit into this new strategy and have you kind of squeezed all of the productivity that you can out of that or is there still more to come?

I think it’s important we have a discussion real quickly on what are solutions.

And solutions are solving our customer’s problems.

And the reality is a solution can be just selling a notebook computer, or a solution can be a selling a server along with some services, along with some desktops, along with some consulting, in terms of how they’re going to go bring that into their environment to go maximize the return off their investment.

The reality is, from an Insight perspective, and while a lot of folks talk about solutions, and obviously coming from a company like IBM, which had a major solution focus, I believe there is a huge demand in the marketplace for an Insight type business model to go position themselves as not just not just go buy products from us efficiently, but we can offer both.

If you want to--we’re here to help you solve your problems.

If that translates into buying products, great.

And we want to do that very efficiently and very effectively.

If that translates into services or products and services combined, great.

We want to go provide that as well.

Investments are already being made as relate to strengthening our services component.

And as you know today, one of the things that is driving our large enterprise success is the fact that we have a robust set of services capabilities that we acquired through our Comark [ph] acquisition years ago, and that we’ve been strengthening through the years.

Our strategy going forward is quite honestly scale those capabilities down into the SMB customer set, as well as the public sector.

And Joel, also on your productivity question, are all productivity increases taken into account, absolutely not.

There is a lot of electronic E-enablement that we can do here that I think will gradually happen over a period of time.

So I think you’re going to see some improvement in operating expenses.

And consequently, some of that improvement, we can let drop to the bottom line, while others we invest in this strategy going forward where we need to.

I just want to emphasize one more time what Rich said.

You know, there are a lot of people out there that are on this path.

But if you recall back when we bought that large company in Chicago, we bought them for size.

We bought them because they had a large customer base, while we had small and medium, and we felt we needed the full bandwidth.

But we also bought them because they had extremely good service capabilities that could compete with HP, IBM and with Dell.

And they continue to do that today.

So I think our objective is to take those excellent capabilities that we acquired, and run those down into the small to medium sized business, just like Rich said.

So it really is more just a better, or clearer organization and execution of the existing assets and capabilities that you have as opposed to continuing to go out and acquire even more?

Yes, I think that’s right.

Good question.

I’m jumping in here, Rich, on that, on acquisition.

When I hear that, I immediately jump on the chair.

I mean yeah, if there’s a strategic acquisition out there that makes sense on service capabilities, we will certainly look at those.

Right now we have an awful lot of opportunity to grow organically and to do things internally.

So I can say without a doubt, right now are we looking at any acquisition?

No.

But in the future, if it makes sense from a strategic point of view or just from an accretiveness economic point of view to the bottom line, we’re going to look at those where it’s appropriate.

But if we don’t find any, we have an awful lot of capability to do exactly what Rich outlined with what we have right now.

David Small, Goldman Sachs.

Rich, you talked a lot about improving relationships with your employees.

And given that you are a outgoing, a call center type business, that could be a difficult thing to do.

Can you just give us some examples of how you plan to do that?

And I just have one or two follow-ups to that.

Sure.

And those are obviously the plans that we are obviously in the midst right now of developing.

But the reality is, we’ve already announced since I’ve been here and put in place, a compensation structure for our senior executives, to go pay them and improving overall employee satisfaction inside the organization.

The reality is, our employees have a strong want and desire to have a long term relationship with Insight.

We do employee surveys twice a year, and that comes through very clearly.

But they’re looking for us to help them develop their career.

Help them build skills.

Help them obviously, prosper financially by generating good wealth, by selling more and things of that nature.

And obviously from our perspective, that’s what we want to accomplish.

So we’ve already put in place, for example, the compensation structure.

We’re working on other plans as we speak, to go really drive considerable improvements from an employee/staff perspective, inside of our organization which will translate to higher employee tenure and lower turnover rate, which is exactly the goal.

Which will then translate into higher revenue and GP per rep, which then translates to bottom line performance for Insight.

So overall it’s just good business besides being good for our employees.

But when you talk about compensation changes, are you changing the commission rates?

We put money on the topic of improving employee satisfaction at a senior enough level so it’s driving change across the organization in terms of how we help our employees strive inside of our environment.

Okay.

The second question regards what you said about hiring during your script.

Given the growth you expect in the future, I was a little bit surprised that you’re not going to be a little bit more aggressive on your hiring.

Can you just explain that part of the strategy?

Sure.

And obviously preparation of these calls, even though it’s the first time I’ve had the great opportunity to spend time with you all, I’ve listened to previous calls, I’ve listened to the CDW call and there’s obviously a very large interest in number of reps.

I think it’s important for me to kind of communicate one point to you.

Our model is changing.

And growth of sales is no longer, in my opinion, predicated by just adding account executives.

The first priority is driving up productivity.

In North America as an example, we generated over $600,000 per rep in the fourth quarter, which is up 17% year-over-year.

But we still have a lot of upside in terms of productivity in my opinion.

And that is the first priority.

So we are reevaluating all aspects of our sales executives and sales managers’ jobs, to make certain we create an environment for success, and that we automate or redirect or eliminate those tasks that take away from productive selling.

We expect that the number of account executives, as you said, to be relatively flat in the first quarter in our North American business.

But of course, if market conditions dictate the hiring of additional account execs, we will respond accordingly.

Now, one point that Stan did also highlight, in our UK business we do have plans to go do moderate hiring per quarter, about 10 to 20 account executives through 2005.

But the focus from my perspective, in terms of where we’re going to get improvement is by focusing on strength in the employee relationships, we’re going to strengthen employee tenure, and we’re going to drive higher productivity per rep.

Throughout that process we will obviously evaluate adding new resources as required.

But right now I think we have a huge opportunity to drive improvements in productivity.

And then Stan, maybe can you just give us a sense during the quarter for the growth rate year-over-year, between SMB and corporate.

You mentioned a few times SMB was a little bit weaker than you expected.

If you’d just give us a sense between the difference between the growth rates between corporate and SMB.

Yeah, David, as you know, we don’t give out the customer segment information really for two reasons.

One is competitive.

But the second reason is we are continually shifting accounts back and forth.

And so consequently you can’t just take numbers and say hey, here’s apples to apples to compare that.

However, having said that, we can certainly see trends that are happening in each of the groups.

And that’s why we told you we saw in the Enterprise group, throughout the year, that that was growing much stronger than the SMB business.

I think when you look, particularly on a sequential basis, that we were only up a couple percent.

And you take that into account, then you’re roaming back with a pretty good assumption that SMB was basically flat to maybe just a teeny bit up or so.

And so consequently there is a difference between the two.

And it isn’t an exact science, David, because of the shifting around of accounts.

Okay?

One last thing.

The last quarter you discussed the potential for a share buy-back.

I think I recall it was going to be brought up to the Board.

Absolutely.

Given that you’re now, a net cash positive position, what’s the thinking there in terms of the use of the cash?

Richard, do you have any view on this as well?

Have you thought about this at all?

Let me go ahead and start.

First of all, we did discuss that at the board meeting.

Had a lively discussion on it, and that will be continued at our next board meeting.

While you say that we have sufficient cash, do remember that a great majority of that is locked over in the UK right now.

We’re going through the analysis of whether to repatriate it.

But one of the reasons for bringing back is not stock buy-backs.

They don’t allow that.

So consequently, we still do have debt on the financial statements of $25 million.

And therefore, where we kind of left it from a Board perspective is let’s go ahead, continue to pay down this debt.

We’ll revisit it at the next board meeting and go from there.

Now, keep in mind you know, you’ll probably put your pencil to paper and say well, geez, you’re going to be out of that debt next quarter.

Well, I hope not.

And the reason is, is because if sales grow, then we’re going to have to fund receivables.

Receivables take about 45 to 50 days to pay, whereas payables are under 30 days.

So if you have good growth, then you’re going to start borrowing again.

And that’s what I hope to see happening.

David Manthey of Robert W. Baird.

In terms of the days, just for modeling, Stan, could you tell us what the number of days you’re using for the four quarters of 2005?

I don’t have that in front of me.

I mean I think you can pretty much get that off a calendar.

The one thing that I do have is in the UK, in Q1, there was 64 days last year, and because of where Easter, I believe it falls this year, it’s only 61.

But David, outside of that, I just don’t have that with me right now.

All right.

There’s just some subtlety in how people calculate that.

You just calculate every single selling day that’s not a holiday, as a selling day?

And not weekends.

Okay.

Not yet anyhow.

Well, no.

We know you do it.

But we’re still on just the weeks.

And the second question is for Rich.

In terms of these five solution areas that you’ve singled out.

I think it was five.

I’m wondering how you plan on using that within the confines of Insight as it stands today.

Are you thinking about putting specialists in these different teams?

Are you developing specific solutions that you’ll train people and sell?

Or how do you plan on using these different buckets that you’ve identified?

Well, clearly the plan--and this is not a future plan, because we’re already doing it today, is to build specialty over on the services side, as well as the selling side, to support each of the solution areas.

And then the most important aspect of it is to then make sure that the marketing plan supports each aspect.

So if you see our marketing going forward, which perhaps you’ve already seen it, you’ll see it’s focused on each of these five solution areas.

So quite honestly, from my opinion, with the amount of marketing investments that we are allowed to make given our current I&E structure is we need to go make sure that marketing is reinforcing and driving out there the awareness of the solutions in the marketplace that Insight can go bring to the table.

But then make sure that sales is obviously skilled and trained to go sell it, and back it up with services resources to help them figure out the implementation plan for bringing that solution or provisioning that solution for each of the customers.

So the good news is, is that work is already being done in the enterprise space.

And again, the direction for 2005 will probably go take that focus down into the SMB and the public sector space.

Because I believe it is one of the major drivers that differentiates ourselves in the marketplace and helps us go drive the gross margins that we need to go drive.

You have no further questions at this time, gentlemen.

Well, thank you all very much for joining today’s call.

And again, I look forward to seeing you all on May 12th, here in Tempe, Arizona.

On behalf of Insight Enterprises, thank you to our valued employees, customers, partners and shareholders.

That ends today’s call.

Thank you.

Ladies and gentlemen, this concludes your conference call for today.

We thank you for your participation.

You may now disconnect.

Good day.