Insight Enterprises Inc (NSIT) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Q3 2006 Insight Enterprises Incorporated Earnings Conference Call. [OPERATOR INSTRUCTIONS] As a reminder, this call is being recorded for replay purposes.

I would now like to to turn the call over to Mr. Stan Laybourne, Chief Financial Officer.

Please proceed, sir.

Welcome everyone and thank you for joining the Insight Enterprises Conference Call.

Today we will be discussing the Company's operating results for the quarter ended September 30, 2006, and the progress on integration of software Specter.

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 Security and Exchange Commission on form 8-K, you will find it on our web site at www.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 usually, at the conclusion of the scripted portion we will answer questions from conference call participants.

Today's call including all questions and answers is being webcast live and can be accessed at via the Investor Relations section of our web site at www.insight.com.

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

This conference call and all the associated webcast contain time sensitive information that is accurate only as of today, November 6, 2006.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the express 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 the conference call are subjected to risk and uncertainties that could cause the actual results to differ materially.

These risks are discussed in today's earnings release and also in greater detail in our quarterly report on 10-Q or the three months ended June 30, 2006.

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, you can find those documents on the Investor Relations section of our web site.

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

Thank you, Stan.

Good afternoon everyone and thank you for joining us today.

I'm pleased to announce that Insight had another successful quarter.

We achieved solid financial results, completed the acquisition of software spectrum, developed and initiated detailed integration plans across all aspects of our business and started the rollout of mySAP upgrade.

Specifically our consolidated quarterly net sales grew by 11.5% over the third quarter last year.

While non-GAAP net earnings grew 18% year-over-year.

Additional non-GAAP diluted earnings per share grew to 18% year-over-year to $0.40 from $0.34 in the third quarter of last year.

The non-GAAP numbers for Q3 2006, referred to in the earnings release and this conference call exclude non-cash equity compensation expense and restructuring expenses.

Please note that our consolidated results from operation include software Spectrum for the last 23 days of September.

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

First, I will provide some highlights of our quarterly performance.

The Legacy Insight business achieved net sales of $821 million in the third quarter, which is approximately equal to what we achieved during the third quarter of 2005.

It was clearly a challenging demand environment in the quarter, especially within our Enterprise clients and the U.K. market.

However, because the market is still growing, we are disappointed with our last net sales growth in the quarter.

As a result, we are focused on driving improvement actions throughout the fourth quarter to most significant being the implementation of our crop selling plan between the Insight and software spectrum client base.

While we experience challenges within our Legacy Insight business with topline growth, we are very pleased with our performance in growing our quarterly earnings.

In North America non-GAAP earnings from operation grew 14%.

In the U.K., non-GAAP earnings from operation grew 7% over the prior year.

Regarding software spectrum, we recognize approximately $98 million in net sales and $2.4 million in earnings from operation after the close of the acquisition on September 7.

As an aside, similar to the Legacy Insight business, the third quarter was also a challenging quarter for software spectrum pre acquisition business, driven primarily by a very week month of July.

This weak start to the last quarter was largely due to the fact that software sales continue to be seasonally pulled into Microsoft fiscal year which ends in June.

Finally, critical to our growth strategy is our continued focus on driving improvement in our client, teammate, and partner relationship.

Across each of these key relationships, we've been making good progress.

Our third quarter year to date client satisfaction results show 8 to 10 point annual improvement across each of the three key client satisfaction indicators on a 100 point scale.

These indicators are overall satisfaction, willingness to recommend and likelihood to repurchase.

Related to teammate satisfaction, we just completed our annual teammate satisfaction survey process, an overall satisfaction results are up seven points versus 2005, again on a 100 point scale.

Lastly, we're schedule to conduct annual partner satisfaction survey during the fourth quarter to ensure we are making progress with our valued partners as well.

Now, I'd like to provide you an update on our integration of Software Spectrum into the new Insight.

Many of you attended or listened to our analyst day presentation September 14.

Where we discussed in detail the strategic and financial synergies we expect from the combined business.

We also share the comprehensive approach we are taking to ensure the effectiveness of our integration.

Which includes working with Pritcher Consulting and the development of a discipline project management approach.

This will ensure we efficiently work through the hundreds of action items and decisions that are associated with this integration.

Over the last eight weeks, we've clearly have made a lot of progress.

Some of the highlights of our projects include these five items, one, we've integrated the two organizations into one team.

Upon closing we immediatly announced our executive structure for the new organization.

Over the last several weeks, we've made several internal announcements to layout the details for integrating the individual functions within the organization, like marketing, people in development, IT, and finance.

As an example, just last week, we announced the integration of the AMEA software and the Legacy Insight U.K. organization into one cohesive organization.

I am please to announce that we have promoted Stuart Fenton to the position of President Insight Amea.

Stuart is now leading all aspects of the combined business activities within AMEA.

Point two, we have implemented opportunity desks in both North America and the United Kingdom.

Which provides our sales team with a central location to facilitate cross selling.

So far we are extremely pleased with the level of teaming between the two organizations.

We've seen nearly 1,000 leads come through our opportunity desk and to date have already closed dozen of deals as a result of leveraging Insight's new capability.

These are early success stories and they are providing proof that our strategy is working relative to our client and that we are very much differentiating in the marketplace.

Three, we rolled out our Unified health and medical plans for North America and UK based teammate effective October 1, 2006.

As we move into the fourth quarter we are aligning compensation plans and career paths to ensure we are structurally aligned to operate as one team.

Four, we have just completed the development of an integrated marketing plan for 2007.

We are presenting the plan to our US partners at our annual partner forum tomorrow, November 7.

By integrating marketing plans, we are optimistic that we'll further strengthen our partnership and leverage their investment in Insight.

Finally, we are very pleased to announce the opening of Insights new office in China, we've been granted Microsoft [LAR] status, making Insight the one of the only international [LAR] in that country.

China provides an enormous opportunity and we are now positioned to capitalize on this market.

So, while we still have a lot of work ahead of us to complete the integration of these two companies into the new Insight, we are moving fast in the right direction.

One last topic I'd like to cover is the status of our plan mySAP upgrade.

During the quarter we successfully launched the initial phase of mySAP.

Which, included the teammate portal.

The teammate portal is a single log on tool that will eventually be configured for each teammate unique job role at Insight.

By logging onto the portal each teammate will be able to access the tools and applications needed to more effectively complete their job task.

During the fourth quarter we expect to complete the remain development and quality assurance testing on mySAP.

The U.S. rollouts for a Legacy Insight business can be completed as schedule during the first half of 2007.

In summary, we are making very good progress in implementing our strategies for the new Insight.

I'm pleased with overall third quarter earnings performance and remain committed to our goal of gaining profitable market share.

Now I'll ask Stan to provide more details on one third quarter financial performance across each of our operating segments.

Stan?

Thanks, Rich.

Because Software Spectrum results are included for 23 days this quarter we've disclosed those results through earnings of operation separately.

In our discussions about our North American and the United Kingdom operating segment will be Legacy Insight results of operations only.

During the fourth quarter, Rich and management will re-evaluate the operating segment and determine how separate financial information will be reviewed in the future.

We expect to discuss results of operations for the combined business in the following operating segments.

North America, AMEA and Asia Pacific.

Therefore this is the last time we'll be breaking out the Software Spectrum results separately.

Our Legacy North American sales declined less than 1% from $699 million for the third quarter of 2005 to $694 million for this quarter.

We saw slight growth in sales to our small to medium size client and strong growth in sales to public sector segment.

However, sales to large enterprise clients declined during the quarter.

Sales by product category compared to Q3 2005 remain fairly stable.

The number of account executives in the North America operations was 1,033 at September 30, 2006.

Down from 1,069 at the end of last quarter as we continue to focus on productivity improvements.

Specifically gross profit per average account executive in the third quarter increased 8% over prior year, almost net sales per average account executive decreased 1%.

In Q3, 2006 our gross margin increased to 12.2% from 11.2% in Q3 2005, and from 12% last quarter.

The increase from Q3 2005, was due primarily to increases in sales of services, increases in supplier reimbursement and decrease in the reserve for vendor receivables.

These increases to gross margin were offset partially by decreases in freight margin and increases in write-downs of inventory.

The increase in gross margins compared to last quarter was due primarily to increases, sales of services and freight margins, offset partially by a decreases in product margin and a seasonal decrease in referral fees for Microsoft Enterprise software agreement renewals.

Non-GAAP selling and administrative expenses as a percentage of net sales were 8.9%, up from 8.8% last quarter and 8.4% in Q3 2005.

The non-GAAP selling and administration expenses excludes stock compensation expense of $2.5 million as detailed in the earnings release.

Selling and administrative expenses in Q3 2006, includes approximately $720,000 of accelerated depreciation.

As noted in prior quarters, there are certain portions of our current operating system that will not be utilized after the AMEA safety upgrade.

Accordingly we are recording additional depreciation expense from Q1 2006 through Q1 2007 at the rate of approximately $720,000 per quarter.

Compared to Q3, 2005, we've seen increases in sales incentive plans, increased bonuses expenses due to increased overall financial performance, accelerated depreciation and integration related expenses, offset partially by a decrease in marketing expenses.

Compared to Q2, 2006, the increase in selling and administrative expenses as a percentage of net sales is due primarily to the decrease in net sales, increases in integration related expenses and increases in sales incentive plan.

Overall our Legacy Insight North America business posted non-GAAP earnings from operations of $22.5 million in Q3 2006 up 14% from non-GAAP earnings from operations of $19.7 million in Q3, 2005.

In addition to the exclusion of stock compensation expense of $2.5 million discussed previously, non-GAAP earnings from operations for three months ended September 30, 2006, excludes severance and restructuring expenses of $508,000, as detailed in the earnings release.

The restructuring expenses relates to severance expenses associated with eliminated Insight positions as part of our integration and expense reduction plan.

In British Pound Sterling Legacy Insight United Kingdom operations posted net sales that were down 3.2% compared to third quarter last year, but posted a 2% increase in non-GAAP earnings from operations.

As a result of a weaker U.S. dollar, Insight UK quarterly net sales were up 1.8% in US dollars and non-GAAP earnings from operations grew 7% compared to third quarter last year.

Insight U.K. has slightly fewer account executives compared to the prior year, although they successfully increased the number of account executives sequentially from 276 to 291.

Given the overall challenging U.K. market, we continue to be satisfied with the results of our UK operation.

In Q3, 2006, our gross margin in the United Kingdom operations increased to 14.3% from 13.3% in Q3, 2005.

But decreased from 15.1% last quarter, the increase from Q3, 2005 was due primarily to increases in product margin, increases in sales and services, increases in referral fees for Microsoft Enterprise software agreement renewals and a decrease in the write-down of inventories.

These increases to gross margin were off set partially by a decrease in supplier reimbursement.

The decrease in gross margin compared to last quarter was due primarily to seasonal decrease in referral fees for Microsoft Enterprise software agreement renewals, decreases in product margin and decreases in supplier discount.

The decreases to gross margin were offset partially by increases in supplier reimbursement and increases in sales of services.

Non-GAAP selling and administrative expenses as a percentage of net sales were 11.2%, in Q3 2006, an increase from 10.3% in Q3 2005, but a decrease from 12.3% last quarter.

The non-GAAP selling and administrative expenses excludes stock compensation expense of $249,000 as detailed in the earnings release.

The increase from Q3, 2005 was due to primarily to increases in sales compensation plans and facility costs related to our new London facility.

Off set partially by a property tax rebate recorded during the quarter.

The decrease from last quarter was due primarily to increases in net sales.

Overall our Legacy Insight United Kingdom business posted non-GAAP earnings from operations of $3.9 million in Q3, 2006 up 7% from non-GAAP earnings from operations of 3.7 million in Q3 2005.

In addition to the exclusion of stock compensation expense of $249,000 discussed previously, non-GAAP earnings from operations for the three months ended September 30, 2006 excludes severance and restructuring expenses of $221,000 as detailed in the earnings release.

The restructuring expenses relates to severance expense associated with eliminated Insight positions as part of our integration in expense reduction plans.

The non-GAAP effective tax rate for the three months ended September 30, 2006, was 33.1%, compared to 38.2% for the three months ended September 30, 2005.

The decrease in the affected tax rate was primarily the result of a benefit recognized during Q3 of 2006 for the reversal of accrued income taxes of $1.4 million resulting from the determination during the quarter that a reserve previously recorded for potential tax exposure was no longer necessary.

As we disclosed in our press release on October 19, 2006, the filing of quarterly report on form 10-Q, for the quarter ended September 30, 2006, will be delayed past the November 9, 2006 filing due date.

The Company's Board of Directors has recently appointed an option subcommittee composed of independent directors conduct a review of the Company's stock option practices.

And the sub option committee has retained independent outside legal counsel.

Certain present and former directors and executive officers of the Company have been named as defendants in a derivative lawsuit related to stock option practices from 1997 to 2002, filed in Superior Court, County of Maricopa, Arizona on September 21, 2006.

The Company has been named as a nominal defendant in that action.

In addition, on October 27, 2006, the Company received an informal inquiry from the Securities and Exchange Commission requesting certain documents and information relating to the Company stock option grant practices from January 1, 1996 to the present.

At this time, the option subcommittee has commenced its review, but hasn't reached any conclusions about the Company's stock option practices and the Company is cooperating with the SEC in its inquiry.

As a result, we will not be in a position to file the form 10-Q by the filing deadline, but will file the form 10-Q as soon as practical after completion of this review.

We are unable to provide any additional comments regarding the progress of the review or details about the pending litigation.

That concludes my comments.

At this time, Rich and I are happy to answer any questions

[OPERATOR INSTRUCTIONS] Ladies and gentlemen, if you wish to ask a question, please press star 1.

If your question has been answered or you wish to withdraw your question, press star 2.

Questions will be taken in the order received.

Please stand by while we compile a list.

And your first question comes from the line of Jason Gursky with JP Morgan.

Just a couple bookkeeping ones.

Stan, you have handy what your sales in Asia were for this quarter?

Help us build out some of the modelling?

Roughly when you look at the business, roughly speaking, 62, 63% is roughly in North America.

About third over in AMEA and 3 or 4% in Asia.

It is a very small portion total, however, it is rapidly growing and certainly one that's poised for the future that we expect a lot of success from.

It's a very small portion of total sales.

Okay, great.

And then the operating margin profile and Software Spectrum that you reported this quarter, is that what we should be expecting on an annualized basis or is there something, peculiar or plus or minus this quarter that is going to lead us to a different operating margin for that business on a full year basis?

Well, first of all, Jason, because of the typical waiting of sales towards the end of the quarter the 23 days which were at the shouldn't be put extrapolated to another period of time, quarterly, annualized or whenever.

Let me explain a little of what we did in order to give the P&L.

Sales were recognized based on actual sale date.

We benefited from that because most of the sales comes at the end.

Cost and expenses directly associated with those sales such as cost of sales rebait commissions were also based on the date of sales.

For any costs and expenses not directly attributed to a specific sale of date of occurrence, they were allocated pro rata basis, basically based on the number of days in the quarter.

So consequently, we benefited this quarter because we took the last 23 days of the quarter and sales are heavily waited toward that.

So that's why I said that you really can't take and extrapolate those 23 days and think that's how it's going to be every quarter or every year or whenever.

Okay, perfect.

I thought it looked a little rich this quarter.

And one here for you, Rich.

Looking at this quarter year-on-year and perhaps the trailing 12 months versus the 12 months that go back into the 05 time period.

North America has grown in the 3 to 4% range and U.K. is flat to down.

Given that you are working with a few less salespeople, than you had been in prior periods, is that the fix here to get the revenue growth going is just adding head count on the sales?

It seems like both regions are growing slower than the market overall.

I'm trying to get a sense from you on what are the near term issues that you're working on today to reaccelerated this revenue growth?

Sure.

Couple comments.

I do not believe it's entirely at sales growth or at sales head is the answer to the question how to get revenue sales at a faster level.

We still, in our belief have a lot of opportunities for driven high level of productivity from our existing sales organization.

Third quarter, I think we ended up in North America as $2.6 million on an annualized basis per sales head.

Our focus is to continue to drive that number up.

We have a number of activities in place from training and management system we have in place between the sales manager and salesperson.

Our number one strategy in terms of getting a higher level of sales is continue to focus on productivity.

If we look over that same 2-year period, we've had nice progress in terms of overall sales productivity especially on GP dollars for sales rep.

I think the third quarter, North America was up 8% and U.K. from GP dollars were up like 21%.

So in terms of driving higher sales growth going forward, first activity were are very focused on is getting the productivity levels high, second thing is we've called out in several quarters in the past, third quarter was an anomaly because we had strength in the enterprise segment.

I think part of it is demand statement in terms of demand environment out there and large account customers.

Our strategy of acquiring software spectrum and integrating that with Insight business to me gives a stronger value proposition inside those large accounts.

As we go forward, as we talked at analyst meeting in September, it's really about trying to drive client synergies.

There are a lot of clients in the past that have had deep relationships with.

And visa versa.

So the activities we have in place for the fourth quarter, which I think we just started in the third quarter, we only had 23 days to focus on, it will help into 2007, is the whole selling focus we've put in.

We've literally set up an opportunity desk, account by account, we're looking, what's the relationship at each side of the organization and how to grow that business and for example, take the existing software where Insight doesn't have a relationship, how to work with the existing software spectrum salesperson to build the account plan to penetrate that relationship.

So if you ask me kind of the top two actions to drive higher sales growth, one is continue to focus on productivity, but increasing the cross selling activities between the two companies as we go into the fourth quarter and next year.

Okay, great, thanks guys.

And your next question comes from the line of John Lawrence with Morgan Keegan.

Would you comment more on the enterprise business?

Some of the changes you're making there and what you think is sort of the answer to that business at this point?

Sure.

Overall, I mean the biggest challenge we have, I think there is, and we see this from some other public announcements recently, a tough demand in that large account space.

Big action from an insight perspective are a couple things I covered with Jason.

Higher productivity against the existing population of sales resources, two, try to get cross selling activities so Mark McGrath who leads the North America business is doing a lot of work to get the two sales teams integrated into one sales organization.

We're probably a few weeks or months away from integration of those sales organizations in the enterprise space.

We think it'll give additional leverage to get the client activities and cross selling activities going the way we want them to go.

As we look at third quarter, there are leadership changes we need to make to make sure we have the right players on the bus driving the business to the next level and we're taking those actions as well.

Yes, and flip to the other side.

Obviously the government business was a positive, what do you think you've done internally to make that work better?

Yes, I would tell you the, I mean clearly in the third quarter, obviously third quarter was a buying period for the public sector.

We had a very strong quarter.

I would tell you, as you look, we made organizational changing, new leadership leading that business for us, we've got a crisp strategy both at state and local government levels, as well as federal focus as well.

I think it's a statement of execution.

We had several nice wins inside the state of California, one we referenced in the past, state of Texas, I think what's helped us there is higher buying in the third quarter, just by the nature of how public sectors buy, but strong execution and strong leadership bonds on behalf of the Insight team on the field within that customer step.

Great, thanks, good luck.

Thanks, John.

And your next question comes from the line of Andy Hargreaves with Pacific Crest.

Please proceed.

Thanks.

Wondering, touching back on integration after a month now of actually executing on it, there's anecdotal things that are worse than expected and along with that I'm assuming there's no changes to accretion guidance that you gave?

I'm sorry the second part of your question broke up.

No changes to accretion targets you gave at analyst day?

Sure, let me break that into two.

In terms of integration overall, I feel good about where we are from integration perspective.

Clearly, as we close September 7, we're not that far into it, we're in the depth of it as we speak right now, I would tell you, those two teams are coming together nicely.

Fortunately we had a very discipline due diligence process as we came into the closing and then the integration.

I wouldn't say there were a lot of surprises on the negative side, thanks to, again, a good due diligence process.

On the positive side, I mean, I continue to be very pleased with the depth of experience and capabilities of the teammates that were part of the Software Spectrum in the past, who are now Insight's teammates.

I continue to be very impressed and have an opportunity to spend a lot of time talking to their client base and the level of relationships they've built up over the years with their key clients and Enterprise segment are very strong and look to leverage and build upon as we go into the future.

One of the things that I, I was hoping for but not expecting was the general willingness and enthusiasm of the teammates of Software Spectrum to join Insight.

That has made the last two months a very positive experience because you got two parties who are very excited about coming together which is really helped us drive our integration activities at a much faster level and we are clearly making a lot of progress against all the detailed project plans we put in.

To get progress, you need to have people excited about doing the work.

Both teams are excited about coming together.

On the negative side, thanks for the due diligence process, there haven't been a lot of surprises.

One thing we did uncover, a little less expense management focus within the media geography to what we would have expected.

However, we actually look at that, and that could actually represent an opportunity for us as we go forward and put in tighter controls, and tighter management around our cost structure to make sure were hitting our profitability target.

I'm excited about the assignment and promotion of Stuart Fenton, the President of our Insight Amea business I think many people on the phones have gotten to know Stuart over the years, he is a very strong operator.

I have a lot of confidence he'll be able to assemble a strong team and we have already made several organizational announcements underneath him that will strengthen the business and allow to pull that business into one business, as we are now in the fourth quarter and going into 2007.

So I think some of the issues we saw in AMEA can get tightened up.

Stronger leadership focused on to drive the kind of results we expect out of each of our geography teams.

Okay, and then on the opportunity desk, I realize it's a limited sample set, but are there any patterns emerging in terms of what type of clients cross selling is working on and/or what deals you're not able to cross sell?

I'd tell you from a reference, there's good activities.

What the process is, if you're a salesperson out in the field, you have an opportunity where you think you need your colleague and you don't know who that colleague is, call the opportunity desk, register the opportunity and we'll make sure the right resources get assigned to work with you to leverage the new capabilities that Insight can offer to clients.

Having a thousand opportunities come into that into the last eight weeks, have been a great statement of the opportunity that sits out there for us to leverage the combine selling proposition.

Underneath that, the math almost works out perfect, 50/50.

Leads coming in from Insight salespeople and leads coming in from Software Spectrum sales force are about 50% of the leads.

Of the deals that we've closed so far, there's been several, most are inside the S&B customer set.

It doesn't surprise us.

It's a relatively short period of time to close.

We've had a dozen of winds inside the S&B customer set.

If several opportunities in the pipeline from the large account space, but given the nature for how large accounts make their purchasing decisions, those will be a longer decision process.

We're working through that.

Thanks.

Yes.

As a reminder, press star 1 to ask a question.

And your next question comes from the line of Brian Alexander with Raymond James.

Please proceed.

Good evening, guys.

Rich, follow-up on a question I'm not sure was completely answered -- --

You're right.

I forget the second part.

What we called out in the analyst meeting on September 14 is that we thought the accretion from the acquisition would offset the sale [inaudible] for calendar year 2006.

We also believe it would drive an additional $0.25 to $0.30 in 2007.

That's still our view as of right now.

We're in the midst of budgeting process for 2007 and learning about the business, but we have nothing to have us change that point of view at this point in time.

And then, if you were to look at the spectrum business over the full September quarter, can you just talk about growth rates, I trying to get a sense giving the weak July that you mentioned if they grew on a year-over-year business, I know it's tough to look at the top line given accounting, but maybe give us sense for how gross profit dollars turns its?

We don't-- when we took over the last 23 days, that's really the only data that we worked with.

We didn't work with anything prior to that so I really don't have an answer to that question.

But the assumption going forward is you still expect growth for the fourth quarter and next year?

If you look overall, clearly as you look to the fourth quarter, it is starting stronger than last quarter.

We had a very weak first month as well.

The fourth quarter, we expect to be a challenging demand environment, expect it to be stronger.

As we look at it though, fourth quarter, seasonally one of our stronger quarters in North America.

We're looking forward to year to year growth.

Though, obviously given the results in terms of ability to drive growth, we have our work cut out for us.

We're optimistic because we had a little stronger finish in the first month.

We clearly have our work cut out for us.

Key actions is obviously really trying to drive that cross selling activity and we believe that the opportunity's real based on the opportunity desk level as well as the deals we've already closed.

We've got to drive that into results in the fourth quarter.

And to clarify on the S&B portion of the business, can you give a sense for whether that accelerated or deaccelerated from the second quarter?

Overall the S&B business was not as strong in the second quarter and third quarter.

It's positive and grew on a year to year basis.

S&B was not as strong as 2Q.

Our effort in 4Q is to get back to the same growth level that we saw and enjoyed back in Q2.

If you could just elaborate more on what drove the vendor incentive increase, which I think was the first thing you mentioned when taking about gross margin improvement in North America.

Just thinking that giving that the sales were below expectations, usually that's not accompanied by stronger than expected vendor incentives.

Were there unusual one-time programs that occurred that helped you with that, I am trying to get a sense for sustainability and then along with that give us a sense for what helped you on the service side since that was also something you mentioned.

I tell , obviously we're very pleased by, about 100 basis points of improvement on a year to year basis both from the North America business as well as the U.K. business.

In North America, I'm going to lead with services, because that's the thing we're most pleased about.

The services business was up about 30% on a year to year level.

We saw strong results on 2Q, 1Q.

The leadership team we have in place gives us confidence that we really know what we're doing now from a services perspective and our goals are to continue to grow at that level.

If you look at it, that represents a significant portion of the year to year improvement in gross profits from our services organization.

As it relates to SR, there was no specific one-program that moved us over the top.

The nature of the beast, in terms of how the SR programs work is usually we'll have hundreds of different activities and programs that are maybe product specific or manufacturer specific or whatever and our execution against those really is what drove the results.

I would tell you, we are pleased based on the activities we put into calendar year 2006, in terms of marketing plan and our engagement model with our partners is that we've seen investments go up and as we go into the, and we believe that they're going up because they like the strategy, they like where we're going, they like the value we represent for them out in the market place, the whole solutions/provider strategy versus just selling their product.

As we sit down with our partners tomorrow at the partner forum, we're presenting them a one partner marketing plan for 2007 which is the combine company coming together.

We're optimistic those partners are going to like where were going and continue to go and make the level investment that made with us in calender year 2006.

And then I guess, finally, I know you're not providing operating margin targets anymore given the inclusion of spectrum, but given the moving parts, changes in accounting et cetera that impact the spectrum results, are you reconsidering at all given any quarterly revenue and/or EPS guidance?

No, at this time we are not looking to provide any forward guidance. and as you commented as it relates to operating margin percent and we've had so much focus on that, and we're pleased with improvements been made this year on the operating percent but given some of the changes in terms of the nature of the revenue from software spectrum, there are some built in decreases planned on large accounts going more to a fee structured, it becomes harder to predict those operating margin percent.

So as we go into calendar year 2007, the majority of our focus will be driving earnings from operations, dollars growth versus percentage growth as we bring the two companies together.

Thank you.

Thank you, Brian.

There are no more questions in queue.

I would now like to turn the call over to Rich Fennessy, CEO for closing remarks.

Please proceed, sir.

Thank you all for joining and thank you to our valued teammates, clients and partners for helping us execute a solid earnings quarter.

It is obviously a very exciting time at Insight as we work on integrating businesses and excelling the transformation of those businesses into a global IT solution provider.

Thank you again for joining today's call.

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