Insight Enterprises Inc (NSIT) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Insight Enterprises Inc. third quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr. Stanley Laybourne, Chief Financial Officer.

You may proceed.

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 September 30, 2005.

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

If you do not have a copy of the earnings release that was posted this afternoon and filed with the Securities and Exchange Commission on Form 8-K, you'll find it at 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 webcast live and can be accessed via the Investor Relations section of our website.

An archived indexed 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 webcast contain time sensitive information that is accurate only as of today, October 20, 2005.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises 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 risks 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 on our quarterly report on Form 10-Q for the quarter ended June 30, 2005.

Insight Enterprises seems no obligation to update, and does not intend to update any forward-looking statements.

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

And you can find those documents on the Investor Relations section of our website.

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

Hello everyone, and thank you for joining us today.

I am very pleased to announce that Insight had another solid quarter.

We obtained year-over-year growth in net sales and non-GAAP net earnings.

And we continue to make significant progress in implementing improvements across our international business.

Specifically to our consolidated quarterly net sales grew 5.7%, and non-GAAP net earnings grew 11% year to year.

Additionally, non-GAAP diluted earnings per share grew 10% year to year to $0.33 from $0.30 in the third quarter of last year, and up from $0.31 the second quarter of this year.

Non-GAAP earnings from operations reached 3.1%, up from 2.9% in the third quarter of 2004 and up from 3% in the last quarter.

Within Insight North America net sales grew 5.3% over the prior year and 4.5% over last quarter (technical difficulty) which we believe is at near market growth rates.

In British pounds Insight UK grew 10.1% over the prior year and 9.9% over the last quarter, rates that continue to be faster than we believe the overall UK market is growing.

In a few minutes Stan will review with you the details of our third quarter results for each of our operating segments.

On our July call I discussed at length the developments and accomplishments regarding our 2005 goals and objectives.

These goals and objectives are designed to fuel the transformation of our business to be more of a solutions provider.

Today I will provide you a brief update on the progress we have made during the third quarter.

I will also provide an update on the specific actions we put in place in July to help us strengthen our performance in support of our goal of gaining profitable marketshare within North America.

Our 2005 goals are, one, developing a lasting competitive advantage by enhancing our relationships with teammates, clients and partners.

I cannot stress it enough, relationships are critical to our business.

Here we have made really great progress especially during the third quarter.

We're proud to announce that our UK operating segment was recently awarded the distinguished Investors and People designation.

This accreditation is awarded to only the best companies to work for in the UK, based on a rigorous assessment process.

This is a testament to the value we place on our teammates worldwide and illustrates how our UK operation has successfully deployed the values and operating principles we are adopting throughout all of Insight.

Congratulations to all of our teammates in the UK for this commendable accomplishment.

As you know from previous calls, we have been very focused on reducing teammate turnover.

Hence we are very pleased to announce that in the third quarter we reduced our trailing twelve-month North American sales turnover by 24% compared to Q3 last year, excluding nonvoluntary terminations.

Our next teammate’s satisfaction survey is scheduled for November, so we will plan to update you on the results of that survey on our next conference call.

In regard to enhancing client relationships, our monthly client satisfaction survey process continues to help us drive improvements in delivering a superior client experience within Insight.

To support efforts in migrating to a more client centric organization, we recently engaged an independent consulting group to conduct an intensive set of phone interviews with over 400 of our existing clients and 100 prospective clients in order to gain a better understanding of what it takes to motivate our clients to increase their IT spend with Insight.

This information will greatly assist us in developing our 2006 strategies to grow our business and our solutions capability.

Finally, as it relates to enhancing partner relationships, we are already three-quarters into the execution of our 2005 partner program.

And we continue to see good results from our joint marketing efforts with our key business partners.

We have much stronger partner relationships now.

And we will continue to leverage these partnerships during the fourth quarter, as well as work with our partners to implement and enhance 2006 partner program.

This program will be jointly developed with our partners starting at our annual partner forum on November 16.

Now let's move onto the progress on our second 2005 goal, improving the Insight experience through the enablement of key business processes.

In the second quarter we announced our decision to upgrade the SAP component of our Maximus system to the mySAP business suite.

This project plan is moving ahead as scheduled, and will start to be deployed during the first half of 2006.

While we focused on our system upgrade, we also continue to focus on implementing tactile (ph) enhancements to our systems and processes to increase productivity and efficiencies.

As an example, we just launched what we refer to as service level shipping.

Service level shipping fully automates the freight carrier selection process based on our client's delivery requirements.

Historically our process involved our sales account executive in too many steps associated with the freight process.

The intended benefit of this change is improved client satisfaction, increased productivity of our sales team, and higher freight margin as we manage our shipping costs more closely through automation.

We also continue to focus on enhancing both Insight.com and our customized client webpages, as we strive to increase the percentage of electronic transactions.

In North America and the UK electronic sales in the third quarter increased 38% and 33% respectively over Q3 2004.

Great progress is being made.

Our third goal for 2005 is to accelerate sales and service skills to support targeted Insight solutions.

Although we have seen growth in our services sales, we have not seen our desired level of growth, given our competencies in this area and the demand that exists in the marketplace.

We have found that while Insight has service capabilities that very effectively compete in the market, some of our internal engagement processes make it cumbersome for our sales executives to engage the appropriate (technical difficulty) and our services resources to assist in attaching services as part of a solution sale.

So at the end of the third quarter we significantly restructured our technical and services organizations by consolidating several different independent functions into two groups, a Client Solutions Center for the SMB sales division, and a second group we call the National Practice Group for our large enterprise sales.

As part of this restructuring we have also developed a new internal workflow process for the sales account executives to engage the appropriate resources to assist in a solution sale.

Whether that involves more complex products, services, software licensing, warranties, or leasing.

We are optimistic that we will be able to better leverage our capabilities as a result of these changes.

And we will therefore increase the speed of our transformation into a true solution provider to our clients.

I'm pleased to announce that we recently appointed Steve Cadzore (ph) as Senior Vice President of Client Solutions in order to help lead this transformation within the U.S.

Steve brings to the job more than 23 years of management experience within the IT industry, most recently working for Keen Consulting.

The fourth goal is to increase client acquisition and penetration.

It is my pleasure to announce that Insight Canada, our fastest-growing geography, was recently awarded the silver metal for Best SMB Solution at a computer dealer news channel Elite Award ceremony in Toronto.

The award honors solutions providers that demonstrate creativity, and business problem solving in a leadership role.

And it was presented to Insight Canada for the network design, migration and education solution it delivered to the Toronto Symphony Orchestra.

This award exemplifies our drive to more deeply penetrate existing accounts and to leverage our capabilities and assume the role of trusted adviser with our clients.

We plan to build on our successes and expand our solutions capabilities into even more client engagements throughout the world.

Our fifth -- and finally our fifth goal is driving sales and profitability growth.

Ultimately each of the previous four goals are designed to increase sales and attain profitability growth.

And they have assisted in doing that in the third quarter.

I am very encouraged by 16% (ph) growth in non-GAAP earnings from operations year to year in both North America and the UK.

We also continue to drive improvements in productivity as net sales per account executives grew 18% year to year in North America and 12% in the UK.

Within North America we have recently had several large enterprise wins.

And we anticipate continued enterprise business growth into the fourth quarter and 2006.

As it relates to our SMB business, we are making good progress in the implementation of the improvement plans we launched in July.

As a result, in the third quarter we experienced a turnaround in our SMB business as it grew both on a year to year and on a sequential basis.

As part of our strategy, our sales force in North America grew by 17 account executives, and our management span of control was reduced to 16 to 1 from 19 to 1 in the second quarter.

We are continuing to work towards a span of control of 12 to 1.

This obviously will enable management teams to spend more time leading and developing sales teams.

The good news is that we are continuing to grow and make progress, but still have more work to do to achieve market growth rates in our SMB business.

So efforts will continue to be very focused on growing the overall North American business faster than it has in the last two quarters.

Again, each of Insight's five 2005 goals are specifically aligned with our corporate transformation to being a more complete solutions provider and to the successful execution of our profitability goals.

Now I will turn the call back to Stan to provide more details on our third quarter performance across each of our operating segments.

The third quarter saw year-over-year increases in quarterly net sales and earnings per share.

Consolidated debt net sales grew 5.7% year-over-year, and non-GAAP diluted earnings per share grew 10% to $0.33 compared to $0.30 in the third quarter last year.

The non-GAAP numbers for Q3 2005 referred to in the earnings release and this conference call exclude severance expenses at Direct Alliance, duplicate rent expense in Insight UK for the new facility in London that we will be moving into at the end of December, and the tax effects of these items.

Now let's turn to the North American operations.

Insight North America had net sales growth of 5.3% year-over-year.

The number of account executives in our North American operations was 1,071 at September 30, 2005, down from 1,129 at September 30, 2004, but up 17 from 1,054 at the end of last quarter.

As of today we have also added a net of five SMB sales managers since June 30 in order to start reducing the ratio of sales managers to account executives, as Rich discussed earlier.

Despite the net increase in account executives, net sales per average account executives were $658,000 in the third quarter of 2005, an 18% increase in productivity compared to $558,000 in the third quarter last year, and a 6% increase in productivity from $619,000 last quarter.

The average tenure of our North American account executives in 3.8 years, up from 3.4 years in Q3 2004, and consistent with Q2 2005, with 24% of our account executives having less than one year experience, 16 with one to two years, 9% with two to three years, and 51% with more than three years experience.

The increase in the average tenure from prior year is due primarily to the decrease in turnover.

Sales by product category compared to Q3 2004 remained fairly stable, although we did see some decreases as a percentage of net product sales in software, printers and desktops, with increases in notebooks and monitors.

In Q3 2005 our gross margin increased to 11.2% from 11% even in Q3 2004, although we saw a decrease from 11.7 last quarter.

The increase from Q3 2004 was due primarily to increases in referral fees from Microsoft enterprise software agreement deals, decreases in the reserve for vendor receivables, increases in freight margin, and decreases in the write-down of inventories, offset partially by decreases in product margin, decreases in supply reimbursements as a percentage of net sales, and increases in the percentage of sales to large enterprise clients, which are typically transacted at a lower gross margin.

The decrease in gross margin from 11.7% last quarter resulted primarily from a decrease in product margin and a seasonal reduction in referral fees from Microsoft for enterprise software agreement renewals.

These decreases were offset partially by increases in services and decreases in the write-down of inventories.

Selling and administrative expenses as a percentage of sales were 8.4% consistent with Q3 of 2004 and down from 8.9% last quarter.

Compared to Q3 2004 we have benefited from increases in net sales and increases in efficiencies due to operational improvements and restructuring activities.

These savings were offset partially by investments we're making in the areas of marketing, IT and training.

Compared to last quarter we benefited from increases in net sales and increases in efficiencies due to operational improvements and restructuring activities taken last quarter, as well as a sequential decrease in marketing expenses.

These savings were offset partially by investments we're making in IT and training.

We continue to look at ways to control operating expenses, particularly in an environment where competitive pricing is placing additional pressures on product gross margin.

We're committed to reducing expenses as necessary to establish a cost structure that is in line with our profitability goals.

Overall in Q3 2005 Insight North America posted earnings from operations as a percentage of net sales of 2.8%, up from non-GAAP earnings from operations in Q3 2004 of 2.5%.

Insight UK continues to contribute strong operating profitability with posted increases in net sales and non-GAAP earnings from operations of 7.9% and 16%, respectively, compared to the third quarter last year.

In British pounds sterling we posted an increase in net sales and non-GAAP earnings from operations of 10.1% and 16%, respectively, compared to Q3 last year.

Sequentially sales increased 5.6% from last quarter, and non-GAAP earnings from operations grew 20%.

In British pounds sterling sales grew sequentially approximately 9.9% and non-GAAP earnings from operations increased 25%.

The non-GAAP earnings from operations exclude duplicate rent expense of $378,000 for the new facility in London that we do not yet occupy.

As we noted last quarter, Insight UK will move its London operation to the new facility at the end of December.

As such, Insight UK will be recording rent expense for both facilities for the rest of 2005, increasing expense in Q3 2005 and Q4 2005 by approximately $378,600 and $635,000 respectively.

Additionally, as reported last quarter, Insight UK will be taking an additional restructuring charge in Q4 2005 of between $6.5 million and $7.2 million for the remaining lease in the old facility.

The move is being made during last week of the quarter and is not expected to have a negative effect on the operating results for the quarter, with the exception of the duplicate rent expense and restructuring charge.

This new building will provide Insight UK with a much better layout for our business model, with additional room for growth.

Additionally it is in a much more desirable location which should help employee recruitment, retention, productivity and morale.

The number of account executives in our UK operations was 293 at September 30, 2005, a decrease from 300 at September 30, 2004, and a decrease from 303 last quarter.

Although we initially planned to add net account executives in the second half of 2005, we will likely postpone that add until after the move into the New London facility at the end of December.

Average tenure of our UK account executives was 2.2 years compared to 2.2 in Q3 2004, and 2.0 years last quarter, with 43% of the account executives having less than one year experience, 23 with one to two, 12% with two to three, and 22% with more than three years experience.

Net sales per average account executive were $417,000 in the third quarter of 2005, a 12% increase in productivity compared to $371,000 in the third quarter last year, and a 6% increase in productivity compared to the $393,000 last quarter.

Sales by product category compared to Q3 of 2004 showed strong growth in storage, networking and desktops, while printers and notebooks are down as a percentage of net sales due primarily to significant decreases in average selling prices in these two categories.

Gross margin decreased to 13.3% in Q3 2005 from 13.7% in Q2 2005, although it increased from 13.1% in Q3 2004.

Compared to Q3 2004 the increase in gross margin was due primarily to increases in supply reimbursements as a percentage of net sales, and a decrease in write-offs of inventory, offset partially by decreases in product margins due to an aggressive pricing environment, as well as some product mix shift to lower margin products, and a decrease in service margin as a percentage of net sales.

Compare to Q2 2005, we saw decreases in product margin, a seasonal decrease in referral fees from Microsoft enterprise software agreement renewals, and increases in the write-down of inventories.

These decreases to gross margin were offset partially by increases in supply reimbursements as a percentage of net sales.

Selling and administrative expenses as a percentage of net sales were 10.3% in Q3 2005, a decrease from 11.1% last quarter, and consistent with non-GAAP selling and administrative expenses as a percentage of net sales of 10.3% in Q3 of 2004.

The decrease from Q2 2005 was due primarily to the increase in net sales and increases in operating efficiencies due to operational improvements and restructuring activities.

Insight UK posted non-GAAP earnings from operations of 2.9%, an improvement over 2.7% in Q3 2004 and 2.6% last quarter.

This number excludes the $378,000 of duplicate rent discussed earlier.

This brings me to Direct Alliance, which saw a 6.7% increase in net sales and a 16% decrease in non-GAAP earnings from operations this quarter compared to Q3 2004.

The increase in net sales was due primarily to pass through product sales, which are transacted at an accommodation to our clients at little or no gross margin, offset partially by renegotiated fee structures as part of multiyear contract renewals with some of Direct Alliance's largest clients.

The renegotiated contracts have a negative effect on net sales and earnings from operations compared to Q3 2004.

The decreases caused by these renegotiated contracts were offset partially by increases in sales and earnings from operations contributed by other clients.

Net sales increased 12.7% compared to Q2 2005.

And non-GAAP earnings from operations were $2.8 million, a 7% increase over last quarter.

The increase in net sales compared to last quarter was due to the increase in pass through product sales, as well as an increase in performance fees resulting from increased clients sales and increased cost recovery fees.

The increase in earnings from operations is due to -- primarily to increases in gross profit attributable to increases in performance fees, offset partially by increases in operating expenses related primarily to IT.

Q3 Direct Alliance also recorded approximately $1 million in severance expenses related to the departure of the former President of Direct Alliance.

Turning to a couple of balance sheet metrics, days sales outstanding and ending accounts receivable were consistent with Q3 2004 at 47 days, while annual inventory turns increased to 33 times in Q3 2005 from 32 times in Q3 2004.

During the quarter we also repurchased an additional $24 million of common stock, representing approximately 1,274,000 shares repurchased during the quarter at an average price of $18.90.

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

As I communicated earlier, our third quarter performance was solid.

And we are progressing against each of our five strategic business goals.

We remain energetic and optimistic about the upcoming quarters, and continue to focus on critical areas in order to, one, grow net sales faster than the market and, two, achieve our consolidated operating margin target.

I know that our teammates throughout the world are rallying around our newly established vision, common values and operating principles, which together serve as a stable foundation for growth.

That concludes my comments.

At this time Stan and I are happy to answer your questions.

(OPERATOR INSTRUCTIONS).

Brian Alexander with Raymond James.

A couple of questions around the margins, Stan.

When your talking about gross margins on a year-over-year basis I think you talked about declines in supplier reimbursement as well as product margin.

And I know that these are two initiatives -- important initiatives that you guys have to help improve gross margins going forward.

Could you just talk a little bit more about why the declines there?

And specifically when should we expect both of those to contribute positively to gross margin performance?

First of all, let's take supply reimbursement.

In total dollars they went up right.

It was just as a percentage of sales that they were down.

So we are making good traction there.

Certainly within the industry right now that is a focus amongst all of our partners and everything to get the best return they possibly can there.

And we continue to do I think a relatively good job in that area.

And as I said in gross dollars it did go up.

From a product margin point of view, primarily we saw some tough competitiveness in the enterprise side of the business as opposed to the SMB side.

And so consequently I think that put some pressure on that margin area.

Now we're still taking a whole bunch of initiatives in order to improve gross margins throughout the things.

And I think Rich may want to comment on those margin improvement ideas.

This is Rich.

While GP for the North America was actually -- it is actually up 20 basis points on a year-to-year basis, clearly we do have a normal trend where over the last three years GP goes down in Q3 versus Q2, given again typical product margin decreases as well as referral fees from Microsoft and the enterprise software agreement.

Clearly though we are looking with the actions we had in place to grow more than just the 20 basis points that we grew on a year-to-year basis.

This action plans -- just to remind everyone -- that we're working on and will continue to work on as we go into the fourth quarter, is really fine-tuning our pricing methodologies in our tools, leveraging this new service level shipping capability that I talked about briefly, we believe has the opportunity to help us increase our freight margins, better alignment of our marketing plans around some high margin product categories to try to go get profitability off those categories, working with our business partners to, like you said, increase the investments they make in us, specifically to supplier reimbursements.

And we are actually positive about the amount of supplier reimbursements we received in the third quarter.

Again, it was up in raw dollars Q2 to Q3, down as a percent of revenue, but up in total dollars.

Clearly we're also looking to go increase the attach rate also of services, because we believe that is a profit driver.

This new organizational change that we just put in place, as well as restructuring about six different groups and putting them into one group so we have one services organization underneath Steve Cadzore we believe will be a catalyst for us to go drive better attach rates, which is a big driver of profitability as well.

And then finally, probably the biggest driver of profitability from a GP perspective is getting the SMB mix up as a percentage of the total.

And I'm very encouraged coming out of where I was -- look where we were in Q2 to where we now are leading Q3.

And we're starting to see some very positive signs from the new leadership change we put in there, as well as a lot of process changes that we saw grow both year-to-year and sequentially in the third quarter.

And obviously our strategy going into the fourth quarter is to keep focus on each of those individual tactical drivers of GP, and keep the focus on driving the SMB business to drive higher growth rates on a year-to-year basis.

And then just to add on that, and going into Q4 typically it is up from Q3.

We sure are targeting that from our own internal plans.

And again, as Rich said, I think we are optimistic from the point of view that we have the right action plans in place to accomplish that in Q4.

Just a couple of more, if I could.

On the OpEx, it looked like you had pretty good OpEx controls in the quarter.

Specifically in North America dollars were down sequentially despite some sales growth.

What actions did you take specifically during the quarter and/or what investments that you have been planning might you have delayed to get the OpEx down in Q3?

As you saw, with about a 50 basis point improvement from a SG&A perspective, both at the IEI level as well as North America level, we put a lot of focus on expense management in the quarter.

And really it was really the benefit -- part of it is the benefit of the restructuring action that we took at the end of the second quarter of last year.

And part of it was just good expense management in terms of looking at everything from travel to hiring to make sure we had the right positions.

Do we really need to fill those positions in the quarter?

And as we go into to the fourth quarter, we think we've done the right job from a expense perspective, that the total operating expenses going into Q4 will not grow materially except for the variable expenses that are tied to commissions, and specifically tied to revenue growth.

So I think we've gotten our expense structure in a much stronger position, again, going into the fourth quarter.

I guess my final question.

You have previously talked about operating margin targets by the end of next year of 4%.

And now that we're three-quarters of the way through 2005 and we're looking at operating margins that have essentially hovered between 3 and 3.1%, so obviously a lot of room to go.

I guess the first question is, is that still the target?

Is that still realistic?

And if so, how are we going to get there from here in terms of gross margin versus OpEx?

It just seems like you would have to see some expense reduction at this point to hit that target.

And I'm just trying to get a sense for whether any of those actions are being considered.

Sure.

Let me just tell you this.

We're still as a Company very committed to the 4% operating margin target for the fourth quarter.

We're in the midst right now of finalizing our annual budgeting process, which is actually a newly established process for Insight, of creating operating plans for each of our operating segments.

Those budgets are being built from the ground up with a target that says we're going to get to the 4% operating margin target by the fourth quarter this year.

So we're committed and we're setting our budgets accordingly.

As we see the levers to get there, it is clearly -- we do believe with the strength that we're starting to get back in our SMB business, and some optimism we have around our enterprise business basins and recent wins we've seen, we believe it is going to be a combination of net sales growing faster than the market.

And the majority of the growth in operating margin is going to come from operating expense leverage.

In terms of getting our expense structure down is a benefit of a couple of things.

One of them being, for example, mySAP coming into the landscape in 2006 with some of the infrastructure reductions that we are going to be able to go make off of that.

But also leverage off of our expense structure.

Our intention next year is to try to grow our expense model very slightly, again, only for those items that are tied to variable revenue growth.

Now do we hope for GP improvement as well?

Clearly we do.

But we're going to set our budgets to say that's the upside.

And we're going to go make sure that we can get there from an expense perspective.

I guess the last follow-up on that is what would be the minimum growth rate you would have to achieve to get the expense leverage that you would hope to achieve to hit the 4%?

It is right in line with where the market is growing.

And we're finalizing that right now to be honest.

It will be premature to go give you an exact number, because obviously there is multiple levers.

So we will be operating and setting up our growth plans over the next month to 45 days.

Clearly our intent is not to go drive crazy revenue growth, because we don't believe that would be the right way to go set up our budgets.

So we're looking to grow faster than the market, but again within a couple of points of it.

Matt Sheerin from Thomas Weisel Partners.

I just want to get in a question again on the expenses.

You talked about marketing expenses being down.

Although you have made a big push, Rich, in terms of talking about getting the brand out, increasing advertising.

What is your strategy?

Has it changed at all, or are you just kind of watching pennies quarter to quarter?

No, the strategy has not changed.

We still execute it to the plan that we committed at the beginning of this year, where we took our total marketing spend in '04 from $13 million up to $17 million in '05.

So we're still executing to that strategy.

We spent about 5 million -- about $4 million for the third quarter of marketing.

So we're committed to continuing to go take that marketing expense and go figure out best leverages to go generate demand out there.

But it is really -- I mean just some good classic old-fashioned expense management that had we put in place across the organization, looking at everything from travel policies to hiring to make sure we need those positions.

The big savings as we look to the future, we do believe, and we called it out at our analyst meeting for those folks were here, is one of the big opportunities with the mySAP project coming in in 2006 is to get some expense out, because we got a lot of manual processes still in our business.

And then regarding your SMB sales versus corporate, I know SMB was up, but was corporate still growing at a faster rate than the SMB market?

And has that et growth rate for the corporate sales changed over the last quarter or two or was it still at the same rate?

Clearly -- so we saw SMB grow faster than we saw in Q2.

Our enterprise business still grew faster than the market, but it grew less than it did in the second quarter in terms of year to year growth, Q2 versus Q3.

So that was -- and as Dan referenced, we also had some pricing pressures inside of the enterprise segments.

So some of that was by design as we tried to manage to profitability, because obviously we declared our goal is profitable marketshare growth.

So we did see enterprise come off a little bit its year to year growth rate Q3 versus Q2.

But as we look to Q4, based on some reason wins we've had, quite honestly in the enterprise segments as well as within public sector, we are optimistic we're going to get to some stronger growth rates on those businesses as we go into to the fourth quarter.

But you spill still expect gross margin to be up despite the strength in enterprise?

Our assumption here is, yes.

Our view on gross margin in Q4 is it will be up from where we were in Q3, because we do see in addition to the strength in the enterprise business we do see the SMB business continue to be stronger as we go into the fourth quarter.

Just a quick question on Direct Alliance.

You talked about that pass-through revenue.

Is that a onetime event?

So should we expect revenue from that to be down in the December quarter?

It varies each quarter, and as a matter of fact, if you look at the earnings release on the schedule that we provide to you, we always break that out so that you can monitor that.

It is really done as a convenience to our clients.

And for example, it was 14% this quarter -- this year -- whereas it was 10 last year.

It is kind of hard to predict that.

That is why to me when I look at it, I'm always interested in is what is that doing operating margin-wise as opposed to more focus on the sales, because they are such a small portion of our total business.

But again, if you look on our press release, you'll see where that is broken out each quarter.

And we have been doing that for probably the last three or four years.

David Manthey with Robert W. Baird.

Stan, could you tell me how many shares you repurchased again?

I didn't catch that.

Sure.

It was -- let me get the number here.

It was $1,274,000 shares, and they were repurchased at an average price of $18.90.

And then in terms of the cost profile here, last quarter you had pretty aggressively cut heads.

You eliminated 73 some positions with a lot of managers.

And now it seems like you are correcting back the other way a little bit with adding five SMB people here, and trying to get the number of managers per account executive ratio up a little bit.

How are the sales managers compensated?

Is it variable cost just like the account execs, or is it indifferent formula?

Let me break your point into two points.

When we in the last call talked about our expense restructuring in the end of the second quarter, we called out that part of this is a remix of expense.

We had too much in nonsales.

We wanted to get more in sales.

So our stated strategy at that point was to grow our sales managers, because we believe the 19 to 1 ratio we were running at was just too much.

So hence the managers weren't spending time with the sales team.

And then two was we said we believe that we're starting to get productivity and process improvement to the point in our training and our recruitment programs to point that we can feel comfortable adding salespeople to go get revenue from those salespeople.

As you remember, we had major turnover issues.

And the number I cited to be quite honestly is an incredible number where we've got our turnover and our sales organization in North America down 24% on a year to year basis.

And that is the benefit of quite honestly changes in recruitment policies, changes in new higher training programs, changes in our compensation program, changes in our benefits program.

But to me we will not be successful moving to a solutions discussion with our customers if every other month we are introducing a new sales rep to them.

So that was a key thing for us.

Now we are to the point, as we called out last quarter, that we want to start adding salespeople.

Because with process in place of that says that salespeople likely to leave at as high of a rate as they have in the past, we can be much more comfortable that those rapes can go translate into revenue growth opportunities for us.

Now as it relates to how our sales managers are paid, like our sales organization, they are paid as a percentage of the gross profit that they drive, is the primary driver for them through there are some measures that are tied to -- like a good manager, are they developing their team?

And we have performance metrics that are tied to that.

One last question.

Kind of a soft side question.

But, Rich, you have been there what about a year now.

And I'm just wondering in terms of the business processes that are in place today and some of the initiatives that you're working on, what percentage of the business today do you think is reflecting how you would like to see it versus some programs that are legacy?

Not that there is a distinction good or bad between those, but just how does that lay out today?

Good question.

From 11 months basically yesterday.

From my perspective let me break it into a couple of pieces.

I definitely feel very confident that we have a much stronger foundation of a business today than we did 11 months ago through various things that we've done.

One is I think we have a very strong leadership team today.

We have changed out about 40% of the executive team over the last 11 months.

Most recently we've just put a new services lead in, because we weren't happy with the level of growth we were having in our services business.

So I think I have a strong leadership team in place.

As it relates to other things that we have changed, I prefer to look at it from a functional perspective.

We have done almost a complete overhaul on our HR programs.

Everything from, again like I said, recruiting to training to compensation to benefits.

And I believe we have the right kind of programs in place now that really allows us to look quite honestly in the eyes of our teammates and say, hey, this is the good place to work.

And we're back backing up your hard work making this a great environment for you to go grow and develop.

So I feel very comfortable that we made the right kind of changes there.

Clearly always more work to go do.

From a marketing perspective, I think we are for the first time as an organization really starting to make some headway in terms of building some brand awareness out there in the marketplace of who Insight is, and the value propositions we're trying to communicate our customers.

Again more work to do from a market perspective, but Cathy Eckstein and her team are also new to the management team over the last 18 months, I think really strengthened our capability to leverage data from a database perspective, to do demand generation as well as brand building marketing.

I am very comfortable that our marketing team is getting stronger.

On the IT side, we are still today living with the legacy systems of the SAP application that was put in place to go integrate Comark and Insight.

And there are some deficiencies in that from a manual process perspective, and some front-end like lack of a CRM system, lack of an automated services business.

So we haven't fixed that yet.

But the mySAP project that we're going to be deploying in the first half of next year, I think is going to be a great step in the direction of actually allowing us to have a best run set of processes and systems to really go help us fuel our growth as we go into to 2006, 2007 and beyond.

So I feel good about the system strategy.

I would like to have it all be done by now, but that is hard stuff.

And we will start to see that come on in 2006.

As it relates to our operating units in terms of -- I feel very comfortable that our UK business, our Canadian business, and quite honestly our gap (ph) business are operating very effectively today.

And I think the results show it.

Inside of our U.S. business we have made a lot of changes from a leadership perspective to kind of how we -- you know, resources working together from a workflow perspective.

I think we still have more work to do there.

I think the initiatives are on the table, and Mark McGrath and his team I think are doing a good job of driving them to execution.

But some of the things that we're trying to change are a little bit deep-rooted.

And we need to go address those, and we are dressing those.

And I think we started to see some positive signs here in the third quarter.

I am anticipating even more positive signs to be shown in the fourth quarter as that business gets stronger, and will really set us up for a strong 2006.

John Coyle with JMP Securities.

Just a few questions.

First, Rich, I wonder if you could elaborate a little bit more on what you're doing to ensure that the mySAP implementation will go smoothly?

It seems from your comments earlier that in terms of OpEx control that is going to play potentially a significant role (technical difficulty) towards reaching your 4% operating margin goal.

Could you just provide a little color on the steps you are taking to ensure that is successful?

Sure.

So Dave Rice, who is our corporate CIO, as with any project has put in place your typical project management plan, which has the senior leadership team, myself included, as stakeholders of the project.

And then that broken into subprojects, where for example Stan is a stakeholder of the financial aspects of any changes we're going to make.

And Gary Glandon is the stakeholder of the HR aspect of the new system and what that means for our business.

So you've got your typical executive ownership in place as a line level, so this is not being viewed as an IT project.

This is viewed as an upgrade to how we do our business.

And we've asked the line owners to take an active role and insuring as we bring whatever changes we bring into our landscape that they support the business and they won't impact the business negatively.

And that we will go get benefits from them.

We then put a management system in place where we get together as a senior -- we call it the senior stakeholder series -- where we get together on a regular basis of go review the status of the project.

I think with any project, the good news is the team I think demonstrated very effectively with mySAP migration that they did back with the Comark acquisition that they know how to do a system project.

Our view is this is not as big as that one, but we're applying the same kind of discipline to our approach for managing the project.

Will you be employing any outside consultants to help manage it?

Actually, SAP, because we're a very big customer of them, have assigned consultants to go work with our team.

So we do have the leverage of SAP, which we view as a very positive thing, because they can help us learn what other best friend are doing as it relates to utilizing their application with inside their business.

Moving on to the salesforce, in terms of the headcount levels, and the extent of reaching the 4% operating margin goal in '06.

Where do see those levels trending towards?

And from a productivity perspective what more do the existing salespeople have left to go?

My plan is probably on the next conference, once we have the operating plans finalized will maybe some headlights into what that looks like.

But right now one of the variables that for example Mark McGrath is working on within his operating plan for 2006, is how much he can afford from a growth and headcount perspective what is required to hit the revenue targets?

So with that said, we are going to finalize those numbers and we will be finalizing those over the next four or five weeks when we present our operating plans to the Board of Directors in early December.

And within that will be our plans for headcount growth.

And then just finally on the services restructuring, the new model is in place to what degree -- how much longer until it is fully operational and completed the (technical difficulty)?

We announced it at the, I guess it was the end of September timeframe.

So we have moved people to the new organization.

We got the new leader in place.

We have his org chart in place.

So from a people perspective everybody has been put in to their new logical location in the organization.

We did have a few positions that we eliminated as part of that restructuring.

For example, we had two executive positions that we merged to one in order to go flatten our organization more.

So those are done and those resources are no longer part of the Company.

In terms of actually now leveraging that in day-to-day execution, I think that is going to be something we see the benefit of over the next several quarters.

John Lawrence with Morgan Keegan.

Would you comment just quickly -- just go into the marketing side just a little bit more.

You commented on the branding side, etc.

When do you see from a return on investment standpoint that a lot of this marketing really comes to the -- I guess comes to the bottom line?

Yes, I think that is a tough one, because within our marketing spend, quite honestly the biggest chunk of the year to year improvement was more around brand building.

And just from spend about half my career in marketing, brand building is a little tougher to go measure a return on investment for.

Because what we're really trying to go do for our sales organization is provide some air cover out there, so when they call a client they don't say, who the heck is Insight.

Or they think of Insight as an older Company, a cataloger versus somebody who is trying to go sell them solutions.

So that is a little bit harder to measure.

But one of the measures that we do look at is, is the marketing meaningful to our partners to the point where they want to invest with us on that marketing?

And the good news is, as Stan referenced earlier, the amount of investment in raw dollars actually increased Q2 to Q3.

And I think that is a strong testament that our partners are seeing some value from our marketing spend.

And as we -- we actually have our partner forum, which is our annual meeting where we bring about 400 of our partners together, on November 16 here in Tempe.

And the plan will be to go sit down and collaborate with them for what investments are they willing to go make with us in '06?

And how can we do take our marketing team into the next level?

And in addition to marketing alignment go spend some time on how we get our services organization and our field sales organization that are aligned to ensure we're successful going into 2006?

Along the same line on the productivity curve with the new salesforce, or the new trainees, you talked about the turnover.

What about the productivity from a sales productivity standpoint from those early classes?

Productivity is coming -- the numbers we quoted is overall 18% productivity gain in North America, 12 in the UK.

But what we did, as you will recall, is we have put in place a twelve-month training program versus our six-week training program that we had historically.

Basically the way that twelve-month works is the first two months they are 100% in classrooms.

The next two months they are in 50-50 classroom, 50-50 on the floor working with the manager, working with a colleague to go get comfortable in the sales environment.

And then after that first four months they are basically 80% on the floor, 20% going back to classroom training.

I would tell you I just had the opportunity to sit down with the last three months of training candidates we brought into the Company.

And, one, is the caliber is a much higher caliber than I have seen just in my nine months here.

So, I think our recruiting teams are doing a much better job.

And, two, the new hires that we're bringing in, a higher percentage is staying.

So I think the training and all that stuff is working.

It is a little bit too early for us to say, guess what, at six months, seven months, eight months that person is selling more on average then the old six months, seven months, eight months from a training -- because a lot of our training changes really just kicks in the last six months.

It is a little premature for me to have a real firm answer for you on whether those new hires are more productive than they were historically.

Stan, did you quantify what the restructuring on services meant to the fixed cost?

No, I didn't.

It was not a major amount at all.

Rob Armand (ph) with RK Capital (ph).

Can you talk a little bit more about mySAP and how long it will take to deploy?

And once you begin the process, I guess, maybe the process is already begun to some extent?

Again this is an upgrade to what we have today, so this is not bringing a new infrastructure into the environment.

This is an upgrade to what we have.

It will start in the U.S. in the first half of next year.

Firm dates have not been locked down.

But it will probably be more towards the second quarter in terms of bringing it in.

And then of off that we're still quite honestly finalizing the UK and the Canadian plants as it is clearly our intent to go bring those two geographies on.

That will either be in the second half of 2006.

So there is the potential that could be the first half of 2007 facing us, quite honestly, balancing -- it is a little bit different in those two geographies, because they currently operate under the old Max infrastructure.

So it's a little bit of a more complicated migration because it is Max to SAP, where in the U.S. it is just SAP to an upgraded SAP.

So we're still working some of the details of that.

The first priority, because where we think the biggest bang for the buck will be is in the U.S., so our strategy is to get that right, and get the rollout started in the first half of the year.

And then we will finalize our plan for the UK and Canada over the coming months.

So the hope will be the rollout is completed by the end of Q2 or the end of Q3 or -- in North America?

It will be started in the first half.

Probably most of the start will be in the second quarter in terms of actually bringing users on to a new system.

And the actual timeframe for rollout will be throughout 2006.

Is it one of those things that once you turn it on you immediately see savings or most of the savings right away?

It is going to be one of those deals -- the way we're building it, we're going to running two systems for a period of time, just as we migrate users over the, because it is not going to be, guess what, everybody is on the new systems day one and the old system is gone.

So I think the benefit financially we will see over a period of time.

If it is going to take you through the end of '06 to deploy it, and you are counting on mySAP to get you a lot of the kind of cost savings to get to that 4% operating margin target, I'm not sure I kind of (multiple speakers).

Actually you mischaracterizing a few of my words.

I don't think it is a lot of it, I just say it is easiest one to get our heads around.

We believe there is benefits -- for example now that our attrition rates are down substantially, there is benefits in our recruiting cost, as an example, going into 2006.

There is benefits in our training costs, because we have less new hires coming on, because we are retaining our folks.

So the good news is there is multiple expense levels that we're working on that we believe will translate in us getting that expense savings as we go into to 2006.

Good.

So the 90 basis points that you need to get here, most of that is not coming from mySAP, it is coming from everything else that you have been working on all this time, and SMB mix in everything else.

Exactly.

In terms of the -- great progress on the turnover reduction.

When you say it is fell 24%, do you mean in percentage points or kind of a change, i.e., if it used to be 50% did it fall to 26% or did it fall to something like 38%?

Rob this is Stan.

It is just a decrease in terms of percentage from what it was the year before.

Okay, so points.

Great.

And then on the UK reps being down sequentially, that makes sense that you want to wait until you move to the new facility.

Should we expect some sort of potential catch-up in terms of accelerated reps hiring in the UK in the first and second quarters of next year?

Yes.

Again, I don't want to defer it, but I think we ought to wait until next quarter, because Stewart is working on his operating plan, and then we will have more color on what he expects going into next year.

What you said I think is absolutely true.

It makes sense to wait until you get to the new spot.

That is why Stewart is doing it.

Let's see what he comes back with, and then we will answer that question next quarter.

As you filled out your plans and your budget for '06, what are you looking towards in terms of market growth out there?

Pretty similar to what we have seen recently, I guess, in what maybe mid single digit, or maybe even high single digit, or how do you look at it?

Right now we're looking at for the North American geography mid single digits.

And we're looking at lower than that for from a UK perspective from a market demand.

Obviously, everyone's guess is as good as mine on this topic.

But we did just have recently IDC here, as an example.

We asked them for their point of view, and that is pretty much in line with what they're seeing.

Very nice progress.

Thanks.

On behalf of Insight Enterprises I would like to say thank you to our valued teammates, our clients, our partners, and of course our stockholders.

Thank you very much.

I look forward to talking to you on the next call.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a great day.