Insight Enterprises Inc (NSIT) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q4 2005 Insight Enterprises Earnings conference call. [OPERATOR INSTRUCTIONS].

At this time, I’d like to turn the conference over to your host for today’s call, Mr. Stanley Laybourne, Chief Financial Officer.

Thank you.

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 and year ended December 31, 2005.

Joining me, Stanley Laybourne, Chief Financial Officer, is Rich Fennessy, President and Chief Executive Officer 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 and year 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, January 26, 2006.

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 September 30, 2005.

Insight Enterprises assumes 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 to GAAP measures 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.

Thank you, Stan.

Hello, everyone.

Happy New Year and thanks 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, non-GAAP net earnings, non-GAAP diluted earnings per share, and we reached our highest non-GAAP operating margin since Q1 2002.

Specifically, our consolidated quarterly net sales grew by 3.4%, and non-GAAP net earnings grew 9% year-over-year.

Additionally, non-GAAP diluted earnings per share grew 13% year-over-year to $0.35 from $0.31 in the fourth quarter of last year, and up from $0.33 in the third quarter of this year.

Non-GAAP earnings from operations as a percentage of net sales reached 3.3%, up from 3% in the fourth quarter of 2004 and up from 3.1% last quarter.

For the full year 2005, our consolidated annual net sales grew 5.8% in non-GAAP and non-GAAP net earnings grew 10% over 2004.

Additionally, non-GAAP diluted earnings per share grew 10% to $1.29 in 2005 from $1.17 in 2004. [Inaudible] aside, we grew non-GAAP diluted earnings per share by 14% if you exclude from 2004 approximately $0.04 related to earnings from our discontinued operation [Inaudible].

Non-GAAP earnings from operations as a percentage of net sales reached 3.1% for 2005, up from 2.9% for 2004.

In a few minutes Stan will review with you the details of the fourth quarter and 2005 results for each of our operating segments.

Throughout 2005, I reviewed on each of our earnings calls the progress we made against each of our 2005 goals and objectives.

These goals and objectives were designed to fuel the transformation of our business from an IT product provider to an IT solutions provider.

As you heard on previous calls, we have made significant progress against each of our goals and objectives throughout 2005.

As I reflected on 2005, I have summarized the year into three key points.

One, Insight Enterprises grew with the industry.

Two, Insight Enterprises improved profitability.

And three, and most importantly, Insight Enterprises significantly strengthened the foundation of our business, enabling us to more easily, efficiently and successfully achieve our stated objective of gaining profitable market share.

Here are some highlights and how we strengthened the foundation of our business in 2005.

We redefined the vision of the organization to more accurately reflect our strategic direction and to clearly state who we want to be as an organization.

Historically, our vision has been to be the best source of computer products and services for business.

This vision for the company was the catalyst for developing our historic product-based transactional business model.

The new vision is to be the trusted advisor to our clients; helping them enhance their business performance through innovative technology solutions.

This new vision for Insight has been embraced across the organization and now serves as the guiding light, the continued transformation of our business into a solutions-based relationship business model.

To support the vision for the organization, we’ve introduced a new set of values across the organization to help define who we are.

Our new value statements are: we exist to serve our clients; we respect and take care of each other; and we act with integrity in all we do.

These value statements sets a tone for Insight’s culture and help to truly strengthen the overall Insight experience for our teammates, clients and partners.

We flattened our organizational design, increased our operational efficiency and significantly strengthened our leadership team.

In 2005, we changed over 30% of the leadership team to ensure the right players were in the key positions, leading their business to ultimate levels of performance.

As a result, we have a new leader of our Insight U.S. business, Mark McGrath, a new leader of our DAC business, Jim Kebert, and a new Chief People Officer, Gary Glandon.

We promoted David Rice as new Chief Information Officer.

We promoted Cathy Eckstein as new Chief Marketing Officer.

We have a new leader of our Insight U.S.

SMB business, Charles [Layne].

We have a new leader of our Insight U.S.

Services business, Steve [Ketzor], and several other new executives in key sales, marketing and services positions throughout the organization have been appointed.

To support our business objectives as well as every teammate working at Insight, we made several changes in our people and development policies and practices to improve our teammates’ overall experience.

We implemented changes in benefits, compensation programs, performance planning, skills development and career development.

As a result, we reduced attrition in many of our business areas and we improved our overall teammate satisfaction compared to last year.

We expect these dynamic programs to continue to lower attrition, improve productivity and increase satisfaction rates in 2006.

Finally, we initiated several key investments in 2005 to strengthen our foundation and support future growth.

We began investments to upgrade our IT systems to the mySAP business suite to fuel continual improvements in our operational efficiencies.

We’ve invested in building a new skill program called Insight World Class, focused on enhancing the skills of our teammates throughout the organization so we can truly maximize our role as a trusted advisor to our clients.

And we’ve invested in growing our marketing organization in marketing expense.

The marketing investments have facilitated greater Insight brand awareness and increased alignment with our key partner across the geographies in which we do business.

In 2005 in total, 2005 was a very successful year for Insight.

As we delivered solid business results and implemented multiple changes throughout the organization to support our transformation.

Recognizing the dynamic business environment in which we and our clients work we will continue to transform.

I am proud to tell you that Insight had, in fact, clearly moved in the right direction.

It is well positioned for continued success and we enter 2006.

Appropriately, our 2006 goals and objectives have remained consistent with those for 2005.

They are: one, drive a lasting competitive advantage by enhancing teammate, client and partner relationships; two, improve the Insight experience through E-enablement; three, accelerate sales and service skills to support our trusted advisor strategy; four, increase client acquisition and penetration; and five, grow revenue faster than the market and achieve non-GAAP operating margin of 4% by Q4 2006, excluding equity compensation expense.

As I stated earlier, our net sales growth in 2005 was 5.8% over 2004, a rate we believe was near market rates.

However, we only grew our North American business by 3.8% in the fourth quarter.

Early in the year, our sales growth with large enterprise clients in North America was very strong, offset by stalled growth in sales to our SMB clients.

As we looked to improve profitability in the fourth quarter, the growth rates in our large enterprise business were clearly affected by a very competitive pricing environment.

The good news is that we saw acceleration of our SMB business as we continued to drive improvements in our daily execution.

As it related to our U.K. business, we continue to be very pleased with what we believe are above market growth rates in the United Kingdom, as quarterly net sales grew 5.9% in British pound sterling over the prior year.

Let me explain how we specifically plan to grow net sales faster than the market in 2006.

We are focused on the following key activities: increasing the number of active SMB clients; leveraging our services capability to enhance profitability, especially within our large enterprise clients; increasing the share of IT spend within each client; enhancing sales training and development; outlining sales and marketing strategies; leveraging e-commerce capabilities; increasing the number of account executives; and driving improvements in sales productivity.

Of course net sales growth is important.

But perhaps even more important is our companywide focus on achieving our operating margin target of 4% by Q4 2006, and, of course, our diluted earnings per share targets.

To meet our operating margin and EPS targets, in addition to growing net sales faster, we need to increase gross margin and lower selling and administrative expenses as a percentage of net sales.

We believe approximately half of our operating margin improvement will come from gross margin improvement and half from lowering operating expenses as a percentage of net sales.

Let me explain how we plan to increase gross margins.

We are focused on the following key activities: increasing attach rates for warranties, integration, leasing, accessories and services; improving growth rates in net sales to SMB clients, which are generally conducted as higher gross margins; actively managing freight margin tools; leveraging automated pricing tools; and hand development plans to drive growth of higher margin product categories like software.

To lower selling and administrative expense as a percentage of net sales, we are focused on the following key activities: continuing to tighten our management system and focus on expense management throughout the organization; leveraging the new mySAP business suite functionality in the second half of 2006 to automate manual processes and adopt best practices; improving sales to support ratios; enhancing our alignment with our key partners to fully leverage our partners’ investments in our Insight relationship; and reducing our product catalog to only feature high demand products and solutions.

Now, I’d like to tell you how we will support our financial [inaudible] relative to executive comp.

We’ve aligned the entire executive team’s compensation around three key financial metrics: net sales growth; operating margin; and diluted earnings per share.

Our 2006 cash base incentive compensation plan is tied directly to net sales growth and achievement of operating margin targets.

Our 2006 equity-based incentive compensation plan features restricted stock units with the majority being performance-based restricted stock units, tied to attaining our 2006 diluted EPS target.

Please note that our targets for operating margin and diluted EPS exclude equity compensation expense and any other adjustments we would normally exclude when disclosed non-GAAP financial information in our quarterly earnings release.

So we are aligned, focused and motivated to ensure 2006 is a great year for Insight, our teammates and our stockholders.

Now, I’ll ask Stan to provide more details on our fourth quarter and 2005 performance across each of our operating segments.

Stan.

Thanks, Rich.

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

Consolidated net sales grew 3.4% year-over-year, and non-GAAP diluted earnings per share grew 13% to $0.35, compared to $0.31 in the fourth quarter last year.

The non-GAAP numbers for Q4 2005 referred to in the earnings release and this conference call exclude $7.5 million or $5.1 net of tax in restructuring expenses in Insight U.K. for the move to the new facility in London.

The restructuring expenses include the remaining obligations under the old lease, as well as duplicate rent for the new facility in the fourth quarter.

The non-GAAP numbers also exclude $979,000 or $649,000 net of taxes for the cumulative effect of the change in accounting principle for the adoption of FASB interpretation #47, Accounting for Conditional Asset Retirement Obligations as described in the earnings release.

The cumulative effect of this change in accounting principle of $979,000 represents the accumulated amortization of increase in leasehold improvements and the accretion of the present value of the liabilities since the lease inception dates.

The affects on future periods is estimated to be an increase of approximately $170,000 per year in amortization expense and $100,000 to $140,000 per year in interest expense.

These amounts as they relate to provisions in our United Kingdom lease will fluctuate with changes in the exchange rates.

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

Insight North America had net sales growth of 5.8% year-over-year.

As Rich said earlier, we saw increased growth rates in sales to SMB clients in the latter part of 2005, while growth rates in sales to our large enterprise clients declined from the first half of the year.

We are not seeing a decline in demand, but we did not see the normal end of the year spike in the last seven to ten days of December that we normally experience with our large enterprise client.

The number of account executives in our North American operations was 1,074 at December 31, 2005, down from 1,106 at December 31, 2004, and basically flat compared to 1,071 at the end of last quarter.

Net sales for average account executives were $655,000 in the fourth quarter of 2005, an 8.3% increase in productivity compared to $605,000 in the fourth quarter last year, and basically flat compared to $658,000 last quarter.

The average tenure of our North American account executives is 3.9 years, up from 3.5 years in Q4 2004, and up from 3.8 years in Q3 of 2005, with 25% of the account executives having less than one year experience, 15% 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 Q4 2004 remained fairly stable, although we did see increases as a percentage of net product sales in networking and connectivity as well as storage.

We saw some decreases as a percentage in net product sales in desktops and servers as well as software.

Overall, Insight North America posted earnings from operations as a percentage of net sales of 3.1% in Q4 2005, up from non-GAAP earnings from operations of 2.7% in Q4 2004, and GAAP earnings from operation of 2.8% last quarter.

In Q4 2005, our gross margin increased to 11.2% from 11.1% in Q4 2004, and is consistent with 11.2% last quarter.

The increase from Q4 2004 was due primarily to increases in supplier reimbursements as a percentage of net sales, increases in freight margin and increases in referral fees from Microsoft enterprise software agreement renewals, offset partially by decreases in product margin and increases in the write-down of inventories.

The changes within gross margin compared to last quarter included increases in product margin, offsets by increases in the write-down of inventories and decreases in freight margin.

Selling and administrative expenses as a percentage of sales were 8.1%, down from 8.4% last quarter and down from 8.4% of non-GAAP selling and administrative expenses in Q4 2004.

Compared to Q4 2004, we have benefited from increases in net sales and increases in efficiencies due to operational improvement and restructuring activities.

Additionally, we had a very concerted effort across all departments to control operating expenses in Q4 2005, which resulted in decreases in expenses over Q4 last year and last quarter in a majority of our departments.

We are committed to managing our expense structure as necessary to establish a cost structure that is in line with our profitability goals.

Our results in Q4 prove we have the ability to do just that.

In Q1 2006, however, we do expect our operating expenses to increase in dollars and as a percent of net sales primarily due to our investments in training, the mySAP upgrade and seasonally lower net sales in Q1.

In British pound sterling, Insight U.K. posted an increase in net sales and non-GAAP earnings from operations of 5.9% and 21%, respectively, compared to the fourth quarter last year.

Sequentially in British pound sterling, net sales declined 10.1% and non-GAAP earnings from operations declined 20%.

Seasonally, the fourth quarter is typically a weaker quarter for our United Kingdom operations than the third quarter.

As a result of a stronger U.S. dollar, Insight U.K.’s quarterly non-GAAP earnings from operations grew 14% compared to the fourth quarter last year, and sales were basically flat in U.S. dollars.

Sequentially in U.S. dollars, net sales decreased 11.8% from the last quarter and non-GAAP earnings from operations decreased 22%.

Our growth in net sales in British pound sterling continues to be faster than we believe the market is growing.

As it relates to next quarter, we expect an increase in net sales in British pound sterling sequentially and year-over-year as the first quarter is typically the strongest quarter for Insight U.K.

Insight U.K. posted non-GAAP earnings from operations as a percentage of net sales of 2.6%, an improvement over 2.3% in Q4 2004, but down from 2.9% last quarter.

The non-GAAP earnings from operations in Q4 2005 exclude $7.5 million in restructuring expenses discussed earlier related to the move to the new facility in London.

The move occurred as planned during the last week of December with no significant effect on operations.

This new building will provide Insight U.K. with a much better layout for our business model and with additional room for growth.

Additionally, it is in a more desirable location which we believe will help employee recruitment, retention, productivity and morale.

The number of account executives in our U.K. operations was 266 at December 31, 2005, a decrease from 298 at December 31, 2004, and from 293 last quarter.

We lost some account executives during 2005 as a result of a targeted recruiting by some of our competitors and because of the move to the new facility.

We decided to postpone most of our hiring until after the first of the year.

Our plan for Q1 2006 is to add approximately fifteen to twenty-five new experienced account executives, although that number will depend on the number of quality candidates we interview.

Average tenure of our United Kingdom account executives was 2.3 years, compared to 2.2 in Q4 2004, and 2.2 years last quarter, with 40% of the account executives having less than one year experience, 26% with one to two, 14% with two to three, and 20% with more than three years experience.

Net sales per average account executive were $392,000 in the fourth quarter of 2005, a 6% increase in productivity compared to $369,000 in the fourth quarter last year, and a 6% decrease in productivity compared to $417,000 last quarter.

Sales by product category compared to Q3 2004 show strong growth in storage, while software and monitors are down as a percentage of new sales.

Software wad down primarily due to a large sale to an enterprise customer in Q4 last year.

Monitors are down primarily due to the decreases in the average selling prices.

Gross margin increased to 13.8% in Q4 2005 from 13.2% in Q4 2004, and 13.3% last quarter.

Compared to Q3 2004, the increase in gross margin was due primarily to the decrease in write-downs of inventories, offset partially by decreases in product margin 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.

Compared to Q3 2005, we saw increases in product margin and a decrease in write-downs from inventories, offset by a decrease in supplier reimbursements as a percentage of net sales.

Selling and administrative expenses as a percentage of net sales were 11.2% in Q4 2005, an increase from 10.3% last quarter and an increase from non-GAAP selling and administrative expenses as a percentage of net sales of 10.9% in Q4 2004.

The increase from Q4 2004 was due primarily to investment in marketing, sales support and sales compensation plans for 2005.

The increase from Q3 2005 was due primarily to the decrease in net sales.

This brings me to Direct Alliance, which saw a 10.4% increase in net sales and a 3% 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 as an accommodation to our clients at little or no margin.

Net sales increased 1.6% compared to Q3 2005, and non-GAAP earnings from operations were $3.1 million, a 10% increase over last quarter.

The increase in net sales compared to last quarter was due to the increase in products, in pass through product sales, as well as an increase in service fees.

The increase of earnings from operations is due primarily to increases in gross profit, attributable to the increase in service fees and decreases in operating expenses related primarily to cost savings initiatives across various departments.

In Q1 2006, we expect earnings from operations to decrease to between $1.5 and $2 million, due primarily to renegotiated fee structures for contract renewals with some of Direct Alliance’s largest clients and a seasonal decrease in client sales that generate performance fees.

Turning to a couple of balance sheet metrics, days sales outstanding and ending accounts receivables increased to 52 days in Q4 2005, from 50 days in Q4 2005.

While annualized inventory terms decreased to 28 times in Q4 2005, from 31 times in Q4 2004.

The increase in DSOs is due primarily to an increase in net sales with terms longer than net 30, primarily related to our large enterprise and public sector clients.

The increase in inventories is due primarily to increases in opportunistic purchases and a decision to carry additional inventory for our integration labs and upcoming project with large enterprise and public sector clients.

At the beginning of the quarter, we completed our stock repurchase program announced in March and May of 2005, which totaled over 2.7 million shares repurchased during 2005, at an average price $18.34.

As we released today, the Board has authorized an additional $50 million to be repurchased.

Another topic I wanted to discuss briefly is equity compensation.

As you all know, under SFAS #123-R, stock options will be expensed in the consolidated financial statements effective for us in Q1 2006.

We elected to not make any modifications to existing stock options outstanding prior to this date, such as accelerated vesting, because we did not believe that it made business sense.

We did, however, take the opportunity to reevaluate our equity compensation plans and we designed plans for 2006 that we believe will provide an excellent balance between motivation and retention for our teammates, as well as the best return for out stockholders.

Given this, we elected to issue no stock options in 2006.

Instead, we issued a smaller number of restricted stock units compared to historical numbers of option grants, a portion of which are service-based and all of which vest over three years.

A larger portion are performance-based and the number of actual RSUs teammates receive will be determined by 2006 consolidated non-GAAP diluted earnings per share with payout varying with position and non-GAAP earnings per share results, the low and above internal target levels.

Please note that our internal targets per operating margins and diluted EPS exclude equity compensation and any other adjustments we would normally exclude when disclosed non-GAAP financial information in our quarterly earning releases.

We believe these plans, which are consistent across the organization and complement our cash compensation plans, will drive a company-wide focus on internal financial targets and be less dilutive through our stockholders.

Our 2006 equity compensation expense, which includes expense attributable to vesting of stock options and restricted stock issued in prior years is estimated to be between $13 million and $14 million.

The actual amount will likely vary either higher or lower based on achievement of 2006 consolidated non-GAAP diluted earnings per share for the year, compared to our internal target for non-GAAP diluted earnings per share.

The expense range given assumes targeted EPS is reached.

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

Rich.

Thank you very much, Stan.

Thanks to our valued teammates, clients and partners, 2005 has been a very exciting year.

There is new energy and enthusiasm at Insight.

As we continue our evolution to a world class solutions provider.

We believe 2006 promises to be another rewarding year, as we go to market with enhanced strategy, better tools and improved capabilities.

That concludes my comments.

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

[OPERATOR INSTRUCTIONS].

Sir, I have your first question today coming to you from Mr. John Lawrence with Morgan Keegan.

Good afternoon, guys.

Hey, John.

Rich, would you start off - - and thanks for that update, both from the sales and the gross margin line.

Can you give us just a little bit more detail of how the calendar flows throughout, especially first quarter and second quarter of how important mySAP is to the milestones to get this where the performance in the second half will be achieved?

Sure, John.

Obviously, from my perspective, because of the stronger foundation that we’ve placed going into 2006, we are expected year-over-year improvements each and every quarter.

And these will result really from revenue and gross margin activity taking hold throughout the organization.

But it is true that many of the operational efficiency, call that expense improvements, are targeted for the second half of the year as we look to implement re-engineered business processes to support the upgrade to IT system, which is obviously the mySAP project.

So as we look at it today, we are looking for quarterly improvement first quarter, second quarter on a year-to-year basis, where we’re seeing for more improvement on a year-to-year basis in the third quarter and the fourth quarter thanks to the mySAP project.

What that project’s all about there’s multiple aspect to it in terms of things that are going to drive benefits for our business.

But specifically what we’re doing right now and the work started last year and it’s underway right now as we speak, is really taking this as an opportunity to quite honestly re-engineer some of our key processes inside of our company.

Everything from how we do our purchasing functions to how we do collections, and really is looking for ways to go automate and eliminate manual steps in the process to do two things: one is to hopefully improve the client experience; two is to improve productivity; and actually a third thing, and that is also to be cost out.

We believe all of those are going to be very possible based on our initial work and where we are and that project is moving ahead quite nicely.

It will start to get deployed in our environment starting in the third quarter.

At this point in time, we expect the third quarter - - the project will start to be turned on in terms of people of moving form the old system to the new system on their desktop.

We do believe this time that we’re going to be able to bring over the majority of all users, consider that sales as well as back office operations, to the new system throughout the third quarter.

So as of the third quarter, we’ll be fully on the new my SAP upgrade going into the fourth quarter.

So that’s kind of a quick snapshot of where we are from a timing perspective.

The first half, what we’re really focused on is fine tuning the system, doing all of the re-engineering of the key business processes, doing all of the classic change of management steps you need to go through to make sure the migration’s a successful one such as building the training manuals, building the old way of doing your job to the new way you’re doing your job so if we roll this thing out in a very sophisticated way, we have minimal business disruption.

Thanks.

And secondly, while your competitor - - your large competitor indicated something about realigning obviously geographically the sales force, any continence there?

Have you looked into that and those types of things?

Sure, John.

Clearly today, our enterprise in our public sector businesses are already aligned geographically.

And this has been a great help for these two businesses as we align ourselves with our key vendors.

We actually made the decision back in September that we needed to align our SMB telesales teams, which today are operated out of Tempe and Montreal, to go geographic as well.

And so we started the work back in September and we just fully deployed a geographic alignment in the first two weeks of January.

So our SMB telesales team has now been aligned geographically, like our enterprise and like our public sector team already was, and we have great expectations that’s going to really help grow that business even better than we saw it in the second half of 2005, and also greatly help us go align more closely with the key vendors out there in the marketplace.

And I’ll tell you one of the reasons why that’s important is most of our key vendor partners, call that [Fisko], call that an HP, call that an [inaudible] or IBM, their sales organizations are pretty much geographically aligned.

So as you talk about getting involved and having a solutions discussion with a client and getting a manufacture partner with an Insight person, whether it’s on the phone or in a face-to-face engagement, it’s critical for us to be aligned geographically with them so we can go get that [inaudible] and get that joint sales process in place and hopefully also get some lead pass coming our way whereas they uncover opportunities in their territory and they don’t know who to send it to or who to go work with.

Because now have our SMB sales people aligned geographically, they know exactly who to the person is in Tempe that is assigned to their geographic region.

So we think it is definitely the right move, and we’re very happy that we have already completed it in the first two weeks of January.

Our focus now on the first quarter is just exploiting that and trying to go take the SMB business to new levels.

Thanks.

Good luck.

Thanks, John.

Thank you.

Sir, your next question’s from Jason Gursky of JPMorgan.

Good afternoon, guys.

Hey, Jason.

Hey, Stan.

I’m wondering if you could just humor me and repeat what you said on your expectations for revenues here in North America.

My line cut out on me as you were saying that.

Well, in North America, what we do first of all, it is a seasonally weaker quarter from the enterprise point of view from Q4.

And so that’s probably when it cut out at that point as compared to Q4.

Now the good this, SMB usually picks up a little bit, and then over in the U.K., that is a much stronger quarter than Q4 in the U.K.

So I think that’s what you’re referring to, Jason.

Yes, exactly.

Okay, I was wondering if you could just add a little bit detail about SG&A in absolute dollars quarter-on-quarter and the decline.

I was just wondering if there was any type of bonus accrual or reversal there or something like that.

No, I think that’s a great question.

If you noticed, and again if you look at the actual numbers, it went down about $2.5 million, if I remember correctly, overall.

And as I said in the script, Jason, it was really across all departments.

I’d love to be able to say it’s this or that or whatever, but I think it was a concerted effort that was done and we placed into position at the beginning of Q4.

And that’s what led to my comment that really leads me to believe that we can control these operating costs when called upon to meet certain targets.

So I’d love to be able to say it was in this department or something like that.

There was no unusual material reversal that would really have done it.

It was just a cost containment by every department within the company.

And I might add, not only in Insight North America, but Insight U.K. did it and so did Direct Alliance.

And clearly back in the second quarter of last year, as you remember, we took a restructuring activity, and we obviously saw the benefit of that in the third quarter as well as the fourth quarter.

But I would tell you - - and this is Rich speaking obviously, there is an increased focus across the organization at a very high level on expense management and all the little things from travel to hiring to paper ordering supplies.

And we were just trying to create an attitude that obviously SG&A structure of our business is a critical line of it that we need to go get down over time, and I was very pleased with what we saw in the fourth quarter in terms of our success on that and the fact that we got the SG&A down.

As you look at our North America results, I think we got it down to 8.1% which is a very low level from where we’ve been and obviously a major driver in us getting to our operating margin of 3.3% which, as I said earlier, is the highest we’ve been since Q1 2002.

Right.

And then just lastly and I’ll turn the call over, just a couple of quick ones on revenue.

You mentioned that it softened at the latter end of December, you didn’t see the big flush like you normally see.

I’m just curious if that continued on into January.

And then just qualitatively, you talked about corporate sales versus SMB sales, with SMB having picked up.

Were corporate sales actually down during the quarter year-on-year and SMB up a bit more?

Or did both of them actually grow?

Both of them actually grew.

Clearly, if you look at our North American sales results coming in at 3.8%, we did not meet our internal targets.

But with inside that result, we are very encouraged about the SMB business.

We obviously called that out, I think it was the second quarter, and we placed our new [inaudible] in place and put in a lot more discipline in terms of how we run our sales floors and how we run our activities.

And I think we saw, as we called out in the third quarter call, some improvements in that business and we saw that accelerate even more so in the fourth quarter, so that business is starting to show some nice momentum which we hope to leverage as we go into 2006.

As it relates to our enterprise business, we clearly have seen a decline in the growth rates we experienced from the first half.

In the first half, that business was going very strong.

But we also saw in the fourth quarter a very aggressive pricing environment, especially as we’re trying to close out the year.

And since our focus is really on driving profitable market share, we are very much prepared to sacrifice growth to ensure we hit our profitability objectives, and that’s exactly the deals we walked away from in the fourth quarter that have an impact on revenue growth.

In order to hit our profitability goals, we thought it was best not to go for those, and that’s why we saw slower growth in our enterprise business.

Okay, great.

Thank you, guys.

Thank you.

We’ll go to Joel Wagonfeld from First Albany.

Thank you.

I have two questions, one on the model and then one on DAC.

First, I was just wondering in terms of the model and the growth what you think the overall market grew at in Q4 as compared to [inaudible] 3.4% and what you’re expecting for market growth in calendar ’06.

And the reason I ask is because last quarter on the call, you said you thought that you could get to the 4% margin target in Q4 ’06 by essentially growing inline with the market and not assuming any gross margin improvement.

And it sounds like now, you’re saying that you need to go above the market and you do have to assume that you improve gross margin as well as improve your operating expense leverage.

So I’m just wondering in order to get to that 4% - - so I’m just wondering what’s changed since the last conference call.

And then I have a follow-up on DAC if I could.

Thanks.

I think there was couple on that one, so let me break it down.

From a market perspective, obviously we don’t know where the overall market came in the fourth quarter.

My best guess is somewhere in that 5% to 6% range.

So that’s why we don’t think we hit market growth rates from our performance in North America.

We do believe in the U.K. that it grew less than our 5.9% of local currency, so we believe we actually gained market share in our U.K. business.

So - - and we’ll see how IDC comes out with their final number for the quarter.

We’re obviously anxious to go see that.

As it relates to 2006, obviously we don’t want to provide guidance in terms of where we’re going from a revenue growth perspective.

But what we did call it on the last call is we are looking to go and achieve our 4% objective.

We are looking to go grow faster than we have historically because obviously our goal is profitable market share growth.

And we’ve declared that one-third of our improvement would come from gross margin improvement, and we said two-thirds would come from operating margins leverage.

So we have changed a little bit, and basically what we’re now saying is 50% gross margin improvement and 50% operating margin improvement, part of that because as we looked at some of the levers in terms of how we closed out the fourth quarter, quite honestly are at expense, leverage [inaudible] we did a little bit better than we were thinking.

So to add to the improvement, we need to get off of our expense structure with a little bit less so we believe that about half will come from there.

And now the other half will come from the gross margin improvements.

And we believe, by the way, and I call it out so I won’t repeat myself, there’s quite a few levers that we can go pull that we are focused on from a gross margin perspective to try to go drive improvements on gross margin.

The first one highlighted which is obviously just being more diligent and focused on selling warranties and services and integration around the product sale is one of the major things we’re very focused on inside of the company.

Joel, this is Stan.

If I could just follow-up on that one.

I thank you for that.

I think I came way from the last conference call with the impression that on this one, you might see your preliminary view of the market growth for calendar ’06.

No, at this point we don’t and we haven’t given forward guidance in ourselves.

From a market perspective, our planning assumption is the market can be pretty similar in terms of a demand environment to what we saw in 2005.

So we believe the North America market will be growth in a 5% to 6% range, but we’ll go modify it based on getting the actual data once the year gets settled.

But our view right now is the market’s going to growing at a 5% to 6% range.

Thanks, and Stan.

Yes.

Oh, I was going to make a comment, Joel.

Right.

How quickly I forget.

Joel, a couple of things.

One, I don’t think we have changed any from what we did last quarter because we have said consistently that in order to get to 4%, we anticipated growing quicker than the market.

Number two is Rich pointed out just to take it in different words, I think we are consistent with last quarter because of the good expense improvement this quarter.

That shifts the percentage from that one-third, two-thirds to 50/50.

And so I think we are being consistent.

I don’t believe there’s anything that has changed from last quarter to this quarter in our thoughts of what’s required to get to Q4 at a 4% operating margin.

Okay, thanks.

I might have been mixing and matching from different questions and came away with the wrong conclusion.

Second question is on DAC on the fee renegotiation.

They seem to be an ongoing thing and you alluded to them being a multi-year kind of thing.

And it looks like they hurt gross margin year-over-year by about 340 basis points in the December quarter.

I’m just wondering when, if at all, do you expect that this process of resizing or re-scoping or renegotiation will stabilize in what gross margin level.

It looks like you’re at about 22.1 right now.

Is that the floor or could it continue to go lower than that at DAC?

Yes, I would say obviously the multiple partners that we do business with inside of our DAC business and each of those contracts have different renewal terms, some one year, some two years, some other.

I would tell you the one we’re referring to right now is just an extension for one of our major contract for another year which is obviously good news.

But along with that, many of our manufacture partners are already looking for expense cuts just like we always look for expense cuts in a year-to-year basis.

And the result of that is typically lower contract value from our point of view.

It’s, quite honestly, business as usual and I don’t anticipate that changing much as each year as you come up for renegotiation having an opportunity for them and us to go talk about how to go take expense out and we saw that, so it good new and bad news.

We renewed the contract for another year which is good news.

But obviously there’s some lower rate in terms of our performance fees off of those contracts.

And obviously what we need to go do is look to go manage our expense structure to go make sure we can go to deal with that.

But also increase our focus from a new account perspective, try to go bring in new clients to go offset some of the loss from the contracts.

And are the sizes of those contracts going up?

In other words, are the actual gross profit dollars stable or up in spite of the lower gross margin?

Or is just a change in the terms and the size doesn’t really change?

Joel, it depends contract to contract when you’re looking at that.

But in general, a lot of times it is gross margin dollars are going down.

But offsetting that is usually and efficiency on our side, so it’s really a combination of things.

One thing I wanted to get in there which I think you mentioned is this kind of a bottom for this year or whenever from the operating margin, because that’s where I really look at things at Direct Alliance as opposed to gross margin because of the - - certainly from a percentage point of view because of the past due sales, etc.

And the answer is that we expect this to be the bottom.

First of all, seasonality accounts for that and then these renegotiated fees.

But what I think what you’ll see going throughout the balance of this year will be sequentially increasing operating margins at DAC and going positively, not negatively.

So I think this is the bottom for the year.

And that was similar to last year, also.

Great.

Thanks a lot.

Thank you.

Your next question is from John Coyle from JMP.

Thanks very much.

Good afternoon.

Just a couple of questions.

First, Rich, I was wondering if you might just elaborate a little bit more on the competitive environment in the enterprise segment and where it was coming from.

Was this an issue of large customers going more direct with OEMs was it more [inaudible] or where was it coming from?

I wouldn’t say there are new competitors on the landscape.

If you at the enterprise space, we typically come against household names.

It’s the Dell’s of the world, HP Direct, other - - although there’s not many resellers now, [inaudible] those type of partners, so not a different set of players.

I’d say what we just saw is the pricing that it took to win some of those transactions was very aggressive as we were closing out the fourth quarter.

And that is, I think, some of the other competitors were trying to go close out their fourth quarter and looking for their top line growth.

The pricing got very aggressive.

So we’re hoping as we go into Q1 that we’ll see a little bit of a reversal on that.

But obviously we want to put it more in our own control, so our strategy to go deal with that is try to go strengthen our services content inside each one of those large account engagements to go make sure we have an offset to the product margins.

Sometimes it’s pressured on a year-to-year basis.

[inaudible].

And my next question, on the services front, you rolled out the work you did over the past couple of quarters and your streamlining of the offering is a cheap price for the enterprise and the SMB.

Can you give an update of where that stands and if you’ve seen any movement or change in the past rates and just get some color there.

Sure.

Thanks for asking the question because it’s - - one thing that I’ve seen throughout 2005, when we put the organization’s focus on something, we get improvement.

So call it on 2Q some issues with our SMB business, put a lot of focus on it, so it gets better in 3Q and get even better in 4Q.

Services, as we call it out in our 3Q was something that, quite honestly, the business wasn’t doing poorly, it just wasn’t growing to the level it should have grown.

So at that time, you’ll remember we announced everything from organizational changes, new leaders coming in place to a realignment of how our sales team engaged with the services organization to some repackaging of the offerings that we were doing.

So we simplified the offering that we were offering to our clients as well as to our sales teams so they knew how to sell it a little bit more easily.

And I would tell you, we are very pleased with the fourth quarter results we saw from a services perspective.

It was a breakthrough quarter for us.

So as we go into 2006, we’re looking to go build upon that momentum because we had a good quarter in services in the fourth quarter.

I think that [inaudible] is doing some good stuff.

It’s still small numbers, still less than 5% of our revenue, but the reality is that we had a really strong fourth quarter which helped us to get to that operating margin level.

Because as you know, the services business is really not a revenue driver, it’s more of a margin driver.

And we saw the benefit of that in our operating margin performance.

And we’re looking to go build upon that as we go into 2006.

Great.

And just my final question.

How should we think about the new account executive hires in North America and you pay for ’06?

Sure.

Clearly our primary focus, as it has been, is improving account executive productivity.

We saw an 8% improvement in productivity in the fourth quarter.

And our focus is to continue to go drive that.

So we do believe, and I think I called out, that we do need to go bring on more account executives into our sales force to grow so we can go cover the market more broadly.

Our current plan right now is in North America to add between 50 and 100 new account executives in 2006, and inside of our U.K. business to go add about between 40 and 75 account executives in 2006.

The U.K. will be a little bit more front-end first-half loaded as are now moving into our new facility.

And we’re changing our recruiting practices and trying to go rebuild that sales team in that new location.

And I was [inaudible] North America adds will probably be a little bit more back-end focused in the year.

Great.

I’ll leave it at that.

Thanks.

Thank you.

Sir, your next question is from Matt Sheerin with Thomas Weisel Partners.

Yes, thanks.

Just wanted to get back to the issue of the operating margin and that 4% goal.

You did have some nice improvement this quarter.

But it sounds like in the March quarter with North America revenue blasted down and SG&A up a bit here, unless we see a big improvement in gross margin, your operating margin will be blasted down.

So that basically just gives you a window of two to three quarters to get a pretty significant 70 basis point or so improvement.

Should we be looking more toward back-end improvement and not expecting a big jump in the next quarter or so?

As I think John Lawrence asked from the front of the call, we clearly see the biggest improvement from an operating margin perspective happening in the second half of 2006, as a result of a couple of things.

Obviously the biggest one being the benefit of getting higher operational efficiency as an expense out of our business thanks to the mySAP project.

But also some of the timing that we think it’s going to take for some of our initiatives on gross margin and top line sales and start taking those [inaudible].

We think they’re going to be stronger as we work through first quarter into second and then into the second half.

Let me just answer this whole 4% question because obviously the question is are we still committed - - I believe we can get there.

Yes, I do still believe we can achieve the 4% operating margin target.

And while there are obviously a lot of factors that can influence our performance against this target, we are completely committed to driving towards the objective.

We have set our budgets accordingly.

We have developed detailed plans back in the month of October and November as we did our strategic plan for how we’d achieve our budgets.

And to reinforce it, as called it out in our script, we’ve aligned our executive tops to achieve in the objectives.

So I do believe we can get there.

It’s clearly going to be a lot of hard work and there are obviously factors sometimes out of our control that can influence it relatively substantially, like vendor programs as an example, but we believe we have the right plans in place.

And again, we’ve aligned our executive top structures to after it and this is something that the whole organization’s very focused on, and we’re going to go drive it throughout 2006.

Okay.

Fair enough.

And just a question to clarify in your comments about the enterprise sales being a little softer at the end of the quarter, so was that mostly competitive issues as opposed to demand?

Are you concerned about a drop-off or a slow down in demand at all?

Or is it just more competitive issues and being prudent about margins?

We still saw a lot of bids and projects coming across the desk and we still believe the overall demand environment has not declined much from that mid-single digit level.

So I don’t think it’s necessarily at this point our view as a demand statement.

It’s just quite honestly the characteristics of the deals and the profitability we think we’ve gotten off of those deals.

So again, getting back to my point, hopefully we think some of that is just trying to go close out the fourth quarter for many of our competitors.

We’ll see how that plays out here in 2006 1Q.

Obviously our strategy is to try to go offset some of the pricey pressure on the product by increasing our services content, and we have our whole organization - - and thank God we had a strong fourth quarter in services, so we’ve got some momentum that we think we’ll be able to leverage in some of these large enterprise engagements.

Okay.

And then just lastly on the realignment of SMB by geographic region, have you seen any distractions in the sales force at all?

Or has it gone pretty smoothly?

Again, we just finished it in the first two weeks, so we just finished last week.

But I would tell you, there is a very positive buzz on the sales force, as an example.

For those folks who’ve been to our facility in Tempe, as an example, literally everybody moved desks.

They’re in different stadiums and, in some cases, they have new managers and they’re very, quite honestly, charged up about the change because they have an opportunity to really go build a business in a geographic area.

They have - - we’ve already established tight connections with our key vendor partners in those geographic areas to help them facilitate the transaction.

We’re increasing the connection with our geographic enterprise branch offices.

As you know, today, one of the unique things we go to market in the enterprise space is we have branch offices across the country and we haven’t historically linked them up with their SMB teams because there are not many customers that wouldn’t mind a face-to-face visit every now and then.

We now have the opportunity because SMB is now geographically aligned like our enterprise teams to connect those two sales people that’s required for an opportunity to go combine the efficiencies of a telesales approach with perhaps a proposal presentation of a face-to-face sales call which we believe is going to be a great value add for us going into 2006.

Okay, Rich.

Thanks a lot.

Thank you.

Sir, we’ll go Dan [Levin] with Robert W. Baird.

Thanks.

Good afternoon.

Real quick on the SG&A, nice job of bringing that down this quarter.

I would jut like to get a sense of how much of that decline was shifting expenses our of the fourth quarter into the first quarter versus actually cutting costs out of the system and actually getting rid of future expenses?

Dan, this is Stan.

As mentioned earlier, it was really a concerted effort of cost containment.

So I would look at it as elimination as opposed to deferral.

Now there may be limited cases that there may be some deferrals over.

But I would say the real story here is the cost containment and therefore the elimination of expenses.

Okay, great.

I would say the only deferral of any nature was we did defer some training that we had teed up for the month of October which is $200,000 to $300,000 that we put into the month of January.

And quite honestly, that was just probably better timing in the first place because we didn’t want to tie people up in the fourth quarter in training.

And we’re rolling that out as part of this geographic alignment here in the first quarter.

So that’s probably the most material line item that was a fourth quarter original expense that we decided to go execute in the first quarter.

Okay, great.

And then just to talk about the mySAP implementation quickly.

Just given the nature of these things, there always seems to be some sort of unforeseen delay.

If that were to happen and we weren’t able to get the benefits from the mySAP work and the process improvements and so forth this year, what would be a reasonable margin target as to those improvements?

Quite honestly, we haven’t done that analysis to go dig into that.

Clearly, our view of this mySAP upgrade is one is we feel very confident we can go start it as well as finish the majority of it in the third quarter.

We obviously as an organization have experience in this since we integrated two companies and brought [inaudible] for the first time into the company a couple years ago.

And for the most part, the team that did that very effectively is leading this project.

And, again, we view this as an upgrade versus a new deployment which characteristically should be easier for us.

And we’re putting a lot of the good focus around change of management in place to go make sure we’re ready for this change.

So obviously with - - I’ve been involved in this project - - you guys all have experienced IT projects.

There’s always risk associated with those, but we think we’re doing the right job right now in the first half of the year to minimize those risks to prepare ourselves for successful deployment in the third quarter.

Okay.

Then the last question is are you expecting any incremental expenses to roll into the second and third quarters that we should be aware of around the implementation and training and change of management and so forth, or are those already largely in the expense base?

They’re already in our expense budget that we’ve set for the year, so obviously we’re going to start some training expenses in the late second quarter - - third quarter, to get people ready for the workflow changes and the process changes so you know how to [inaudible].

So as we’ve set up our budgets, we’ve taken all of those into consideration.

Great.

Thanks, guys.

Thank you.

Sir, we’ll go to Brian Alexander with Raymond James.

Thanks, good afternoon.

You talked about the SMB group in North America accelerating this quarter - - second straight quarter I think that’s happened.

And then also you had the deceleration on the large corporate side.

But I’m still not clear, did SMB grow faster than large corporate?

You mentioned that they both grew.

No.

For the full quarter, SMB did not grow faster than large corp.

So in the month of December, we saw SMB growing faster.

But overall for the quarter, enterprise is still growing faster.

But I will tell you, SMB grew faster than it did in 3Q and the gap between our enterprise and our SMB growth narrowed substantially because of strength in SMB, but also because of some weakness in our enterprise growth.

So do you think we hit that inflection point in the first quarter, Rich, where we’ll start to see SMB outpace large corporate growth?

I would tell you, I really look at it from that perspective because quite honestly, from an enterprise perspective, there are so many issues that can influence that.

Obviously one of these large account situations - - once it grows in a pretty substantial way.

I would tell you that I am looking for SMB to grow to faster than it did in 4Q and 1Q, based on the momentum that we’re starting to see out of that business.

And then looking at the gross margin performance in North America, you were up a little bit year-over-year despite the negative mix shift toward large corporate which you just described.

Is it fair for us to assume that you saw gross margin improvement in each of your major segments within North American on a year-over-year basis?

If you remember correctly, I think we called out that we anticipate gross margin deterioration in Q4 given the enterprise mix.

And I think there’s some strength in our GP performance overall that we didn’t see and held it flat, so we were pleased with the gross profit performance given, like you said, the increase in the enterprise mix.

And then also you mentioned - - I think you said that you would expect operating margins to continue to improve on a year-over-year basis each quarter this year, with more weight towards the back half of the year.

But I wanted to also understand if you expect that same pattern to hold on a sequential basis?

Because I’m still not clear if we’re expecting operating margins to be up sequentially in the first quarter.

I understand the commentary about seasonally weak sales in North America and a higher expense ratio.

But in the last couple of years, you’ve actually had some big increases in gross margin sequentially in the first quarter.

So when you put all that together, should we still be able to see a sequential increase in operating margin in Q1 and thereafter for the rest of the year?

No.

At this point, we don’t expect that.

We are looking for obviously year-to-year improvement from an operating margin perspective, which is what we’re focused on and what we anticipate doing.

And the way we’re running the business, quite honestly, is looking at each quarter in 2005 and making sure we drive improvement on a year-to-year basis.

Because as you know, within a quarter, there are characteristics of the quarter that are unique to the quarter, whether it’s enterprise mix, whether it’s large Microsoft license renewals, etc., there are several factors that go into it.

So our focus is driving that necessary sequential improvement in operating margin, but more year-to-year improvement quarter-by-quarter throughout the year is how we see this plan out.

Okay, and then maybe two more quick ones.

One for Stan.

Stan, can you just go over what you said about DSOs one more time?

I’m not quite sure I understand exactly why they increased as much as they did.

It doesn’t sound like there was a meaningful difference in the growth rates between your large corporate business and your SMB business.

Yet I think you pointed to that as the reason for the increase in DSOs.

Well, what I said, Brian, was that the increase was due primarily to net sales with longer terms than net thirty in both the large enterprise and in the public sector.

So basically we were giving longer terms that just stretched out from a collectability point of view.

I have no concern on that.

From a historical looking back, from a write-off, we have been improving every quarter on that on reducing it.

So I don’t feel at any rate it’s an exposure area.

We are more than adequately covered in that area, from my point of view, from the reserve.

But it’s just from a sales point of view, some of our clients have demanded longer than thirty, primarily forty-five day terms.

So should we think of the new DSO level as a baseline to model off of?

Or do you think this was an unusual time of the year where you made temporary concessions to certain customers and we’ll expect to see the DSOs come back down into the 40’s.

I would hope that we would see them coming back down.

One thing we have to keep in mind also, Brian, is 12/31 - - I hate to use the term “window dressing,” but a lot of companies will be slower in paying in the December quarter.

If my memory serves me correctly, we popped up last year, too.

So my goal and certainly something that we want to shoot for is to improve on that metric, and I would hope that it would be down at the end of Q1 and we make some progress to get into the high 40’s which, as you remember, is an area where I can think we can get to.

My last question just relates to notebooks, desktops and servers.

If I look at your performance this quarter, in North America specifically, it looks like notebooks were down about 11% sequentially, desktops and servers on a year-over-year basis were down about 11%, and we saw similar weakness, if you will, out of your major direct marketing competitors.

So I’m just trying to get a better handle on what’s going on in those categories.

Is this something - - because clearly we’re not seeing that type of performance out there in the market.

I’ve seen fairly healthy growth, particularly on the notebook side.

Is this something specific to the direct marketing channel?

Are there issues with some of your vendors in these areas?

Or just help us understand why those trends behaved they way they did.

Actually, I think you have - - the data’s presenting a different point of the facts than is reality.

What you see in those data, what we report is the percent of our overall mix.

In fact, our notebook business grew 5% on a year-to-year basis.

And actually our ASPs and notebooks went up 3% on a year-to-year basis.

So overall, we had a very strong notebook performance in the quarter as compared to some of the results have published.

And our overall notebook business is, quite honestly, has been something that was strong in 3Q and some was strong 4Q, and we’re very pleased with.

As it relates to our server business, actually servers again, we’re actually pleased with our server business in terms of - - we didn’t have the best third quarter, but we saw a very nice improvement going into the fourth quarter.

It was actually up about 15%, a little bit over that, on a quarter-to-quarter basis from a server perspective, though we have seen some decline in ASPs and servers.

I would tell you on the desktop side of the equation, we did see some pretty substantial ASP deterioration in our desktop business.

Our unit buy wasn’t too bad.

But overall, our ASPs went down, so we saw some revenue deterioration.

So we’re very focused on that.

But actually, we’re very pleased on the notebook side of our business.

The best part of our business right now, if we can talk products for a second, is some of the other categories.

Networking, as an example, is doing very well for us.

And that’s really a testament to our focus on this whole solution provider strategy.

Voice over IP is very hot customer need out there today, which I think we’re exploiting very well.

House, we’ve talked about wins like the Arizona Cardinals.

But we’ve had several other wins in the fourth quarter that’s really taken that category to whole new levels inside of our performance which helps us to improve our overall product margins.

Let me just stick one last one in there.

I appreciate it.

Going forward, if you’re expecting about half of the margin improvement to come from gross margin, it’s about 35 basis points plus or minus a couple.

I’m just trying to get a sense - - you laid out a bunch of initiatives, Rich, attach rates, faster growth in SMB, freight margin, higher margin product categories, should we think about each of those as contributing roughly equal portion to that 35 basis point increase, or are you counting on a disproportionate benefit from one or two of those initiatives?

Actually, the way I read them was in the order of importance and influence on our overall GP performance.

So if you look at it, I think the biggest driver for GP improvement for us going into 2006 will be increasing attach rate of warranties, integration, leasing and accessories and services.

Number two will be just the overall growth as a percentage of our business from our SMB business, given we generally conducted higher gross margins and I think we’ve said before typically about 2% higher gross margin on our SMB business.

Third one with be freight margin.

We believe we can improve our freight margin.

Fourth one would be leveraging the pricing tools that I think have helped us nicely in 2005.

But we believe there are some modules to our pricing tools that we’ll be bringing in the environment specific to how we do contract management with some of our large accounts that’s going to help us in 2006.

And then in the last area that we’re very focused on is trying to grow some new categories that we’re in today but just not in a big way, i.e., software, which is a profitable business.

But we’d just like to see it be a bigger part of our overall mix.

Thanks a lot.

I appreciate it.

Thank you.

Sir, your next question is from Andy [Harvard] with Pacific [inaudible].

Hi, guys.

I was just wondering if you could talk qualitatively - - quantatively, I guess, if you want, but on sales force productivity, how much of the productivity improvements over the last year or two have been from process improvement?

And how much is just from firing the underperformance sales people?

I’m not sure I can put a percent on the improvement.

Obviously from an overall dollar perspective, we’re up from - - a full year basis, we’re up from about $2 million per head to about $2.4 million per head now.

So in the fourth quarter, we saw, like I said, an 8% improvement.

And I would tell you it’s definitely a combination of the two.

We’ve changed a lot of our recruiting practices as well as our new hiring.

I think we’re brining in stronger people in terms of our new hires which is helping us get that more productive sooner.

So that helps our overall productivity measures, because clearly we get less revenue from a new hire versus someone who’s been here for awhile.

Clearly our whole tenure growing, I think we’re at 3.9 now as we exit the fourth quarter, clearly - - that’s a North America statement, and that obviously is a driver of productivity improvement.

But we’ve also had quite a bit of focus - - in fact, we have a whole group focused on just productivity from a process perspective.

One of the things that we did in the third quarter, we announced it fourth quarter and implemented it, is just retooling how our sales team engages with our services organization.

That was a big driver for productivity improvement.

Simple things like how do you go get a partner [inaudible] for a warranty that goes with that notebook you just sold?

The process that we had in place before was very cumbersome and timely.

And we simplified it, streamlined it, and that’s driving higher productivity for our sales team.

I don’t know if I could put a percent that - - 30% came from process re-engineering, 60% came from just a stronger sales force from a new hire perspective and training perspective, but it’s something like that.

Okay.

And then on your management to sales ratio, can you tell us where that is and where you are in that process?

Yes.

We called it out and it was specifically a statement around our SMB business.

We are running, I think back in the second quarter, at 19 to 1.

I think as we exited fourth quarter, we were right around 13.5 to 1, so we’ve made great progress on that.

And quite honestly, I think that’s another factor that’s helping us getting that business in a stronger way going forward.

We also just did something, quite honestly, that we haven’t done in many years.

We just pulled every one of our sales managers across the country into Tempe for two days of training in the first part of January.

And the focus was how to go build and strengthen your team and go implement a different management system for how you work with your team to grow the business.

So we’re putting a lot of focus on the management team across Insight that, I think, is the major lever for us to go drive improvements in our performance as we go through 2006.

Okay, and then one last one.

On your marketing spend, you picked up quite a bit in 2005.

Are you going to continue to ramp that up, or are you at a plateau that you guys are pretty happy with.

At this point in time, as you called out, we took it up from - - I think it was $13 to $17 million in 2005.

We see just minor growth in that number in 2006, to be relatively flat.

Our focus, quite honestly, is how to go and improve the effectiveness of that spend.

We’ve made - - did a lot of testing and a lot of new things in 2005.

Some worked, some didn’t work to be honest, and our focus in 2006 is really how to exploit those things that worked, how do you continue to build brand awareness but also get smarter from a database analytic perspective to drive tighter demand generation activities.

And that’s really the focus, as well as increasing the alignment with some of our key partners to go maximize their investments in us.

Okay.

Thank you.

Sir, your last question is from Jason Gursky of JP Morgan.

Hey, guys.

Thanks for taking a quick follow-up.

Rich, you did a great job of explaining all of the pluses that go into the gross margin number - - all of the things that are going to benefit it.

I’m just curious, one of the things you didn’t mention was just the product gross margin itself.

And I was wondering what your assumption was when you were putting the plan together on what product gross margins would be like back in October and November and the competitive environment may have firmed up just a bit.

I was just curious if any - - what your assumption was there and if anything may have changed over the last couple of months given the competitive environment.

Yes.

Our planning assumptions are a slight improvement from a product margin perspective, driven less by just changing the costs from manufacturers, but more to a mix of our SMB business growing.

Because our SMB business does generate higher product margins than our enterprise business, so it’s really a mixed statement of our customer set mix.

But we are - - our planning assumption is just gradual improvement from a product margin perspective.

And the trends that you saw in the latter part of the fourth quarter - -

And we saw that in the fourth quarter.

Our product margin - - we had some very nice product margin improvement from the third quarter of 2005.

Okay.

Thanks, guys.

Thank you.

Sir, there are no further questions.

I’ll turn it back over to you for closing comments.

Okay.

Well thank you very much for taking the time.

On behalf of Insight Enterprises, I’d just like to say thank you to our valued teammates, clients, partners and stockholders for a strong finish to 2005.

And I think we are very much set up going into 2006 to make it another great for, again, Insight, our teammates and out stockholders.

So thank you very much.

Okay.

Thank you, sir.

Thank you, again, ladies and gentlemen.

This brings your conference call to a close.

Feel free to disconnect your lines now at any time.