Insight Enterprises Inc (NSIT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Insight Enterprises Incorporated earnings conference call.

My name is Eric and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like 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 and year ended December 31, 2006.

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 posted this afternoon and filed with the Security and Exchange Commission on Form 8-K, you will find it on our website at insight.com under our investor relations section.

Since the 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 our conference call.

As a reminder, we integrated Software Spectrum into our operating segments during Q4 of 2006.

And today, we're discussing results of operations for the combined business and will no longer be breaking out Software Spectrum results separately.

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 at insight.com.

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

This conference call and all of the associated webcasts contain time-sensitive information that is accurate only as of today, January 30, 2007.

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 this conference call are subject to risk and uncertainties that could cause the actual results to differ materially.

These results are discussed in today's earnings release and also in greater detail in our quarterly report on 10-Q for 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 Security and Exchange Commission rules, we've 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 are now turn the call over to Rich for opening remarks.

Rich?

Thank you, Stan.

Hello, everyone.

Happy new year and thank you for joining us today.

I am very pleased to announce that Insight had a great quarter, which provided a strong ending to an exciting and successful 2006.

I'm proud to say we achieved record quarterly and annual net sales, record non-GAAP net earnings and record non-GAAP diluted earnings per share.

Specifically, our consolidated quarterly net sales were $1.27 billion, a 57% increase over the fourth quarter last year, while non-GAAP net earnings were $21.2 million, a 25% increase year over year.

Additionally, non-GAAP diluted earnings per share grew 23% year over year to $0.43 from $0.35 in the fourth quarter of last year.

For the full-year 2006, our consolidated annual net sales were $3.82 billion, a 20% increase over 2005, while non-GAAP net earnings were $76.7 million, a 20% increase year over year.

Additionally, non-GAAP diluted earnings per share grew 21% to $1.57 in 2006 from $1.30 in 2005.

The non-GAAP numbers for Q4 and 2006, referred to in the earnings release and this conference call, exclude stock-based compensation expense, settlement expense, severance and restructuring expense, the net gain on the sale of Direct Alliance and the direct -- and the tax effect of these items.

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

As I reflected on 2006, I've summarized the year into four key points.

One, Insight accelerated our trusted adviser strategy.

In 2005, we developed our five-year strategic plan for the Company, which included establishing a set of strategic priorities for the Company supported by a new vision, which is to be a trusted adviser to our clients, helping them enhance their business performance through innovative technology solutions.

With the strategy and direction in place, the focus of 2006 was on the execution of the plan.

One aspect of our plan was to align the entire Company's focus on our core business of providing IT solutions.

So in June 30, 2006, we completed the divestiture of our Direct Alliance operating segment.

A second aspect of our plan was to enhance the capabilities of the organization to establish the trusted advisory relationship with our clients.

Hence, we invested in our new skills development program called Insight World-Class, to enhance the skills of our teammates throughout the organization.

As a result of the successful deployment in North America, we experienced higher productivity, lower attrition and increased attach rates for services during 2006.

It will now be rolled out throughout the world in 2007.

To further support our plan to enhance capabilities, on September 7, 2006, we completed the acquisition of Software Spectrum, one of the world's leading providers of business-to-business IT solutions and services, with a particular expertise in the selection, purchase and management of business software.

Since closing, we have been integrating the two companies into one Company, by completing literally hundreds of action items and decisions throughout the organization.

Through the hard work of our teammates, especially our dedicated integration managers, we have made tremendous progress.

And we are currently expecting to call the majority of the integration complete on April 1, 2007.

Secondly, in 2006, Insight gained market share, through a combination of organic growth and the strategic acquisition of Software Spectrum.

While the overall market demand continued to be challenging during the fourth quarter, Insight executed very well in driving growth during our integration efforts.

I am very pleased with our software category performance.

We posted seasonably strong results in North America, EMEA and Asian Pacific, which certainly were a key contributor to our successful Q4 financial performance.

Our North American hardware and services categories performed well in the quarter with the year-over-year sales increases from SMB and public sector clients, while hardware sales to large enterprise clients declined compared to the fourth quarter of last year.

In addition, within EMEA, our UK hardware and services category performance was very strong in the quarter and grew faster than the market.

Based on our fourth quarter experience, we continue to be very excited about our cross selling opportunities, which will continue to position us as a trusted advisor.

As we mentioned last quarter, we have implemented opportunity desks in both North America and the United Kingdom, which provide our sales teams with a single location to facilitate cross selling.

We've seen over 1,300 leads come through our opportunity desk and to date have already closed nearly 100 deals, representing an approximately $10 million in revenue.

These early success stories are proof that our strategy is working and that we have a very much differentiated position in the market place.

And let me repeat, our efforts to grow revenue during the year resulted in a 20% increase in net sales over last year.

My third point is that Insight improved profitability by improving gross margin and increasing operational efficiency.

In 2006, we maintained product margin, increased vendor funding, improved our attach rate up for services, increased sales rep productivity, streamlined business processes, and increased the use of eCommerce tools with our clients.

Throughout the year, we made good progress in each of these areas.

As an example, Insight North America services business grew by 26% in 2006, while also improving its gross margins.

In 2006, we also made the necessary investments to upgrade our IT systems to the mySAP Business Suite to help fuel continued improvements in our operational efficiencies in future years, especially given the need to provide an ERP system that can support our acquisition and enhance our hardware, software and services business globally.

We expect the upgrade to be completed in our U.S. hardware business in mid 2007.

Again, the result of our efforts to improve profitability during the year was an impressive 21% increase in our non-GAAP diluted EPS over last year.

My fourth and final point is that Insight strengthened relationships in the overall Insight experience for our teammates, clients and partners.

Across each of these three key relationships, we made strong progress.

Client satisfaction strengthened across each of the three key client satisfaction indicators; overall satisfaction, willingness to recommend and likelihood to repurchase.

In North America, our overall client loyalty scores improved by nine points on 100-point scale versus client surveys completed in 2005.

Further, in October of 2006, [H.R.

Chelley Group], a third-party market research firm, awarded our North American sales force a world-class rating after interviewing clients and prospects of IT retailers and asking them to rate their IT providers.

Insight was the only company in its industry to be rated world-class.

Teammate satisfaction strengthened across the world.

We completed our annual teammate satisfaction survey process during the third quarter of 2006, and overall satisfaction results have improved by six points on 100-point scale versus 2005.

Additionally, in December of 2006, Insight was named one of the 25 best service companies to sell for in Selling Power Magazine, which ranks the largest sales forces in America.

Insight moved up from a ranking of 23rd in 2005 to 12th in 2006.

Lastly, partner satisfaction strengthened.

We completed our annual partner satisfaction survey in early January 2007, and overall satisfaction within North America improved by four points, again on a 100-point scale versus 2005.

As we now look to 2007, we are well-positioned for continued success.

Our 2007 goals have remained fairly constant with those for 2006.

They are, one, continue to drive a lasting competitive advantage by enhancing teammate, client and partner relationships.

Two, improve Insight's operational efficiency through process and systems best practices adoption.

This includes a successful upgrade to mySAP in our U.S. hardware business, as well as working on the eventual worldwide deployment roadmap.

Three, accelerate sales and services skills and capabilities to support our trusted adviser strategy globally.

Four, leverage a team-based selling model for Insight's portfolio of hardware, software and services to expand existing client share of wallet and increase new client acquisitions.

And our final 2007 goal is to gain profitable market share.

We are focused on winning in the market place.

We are focused on driving continual improvements in our daily execution.

And finally, we're focused on working closely as one team to ensure our success.

Win, execute, team, to gain profitable market share.

This is the mantra of the organization in 2007.

Let me explain that we have directly tied our executive complensa -- compensation plans to these goals, and we are driving complete alignment of these goals and objectives throughout the organization.

Our 2007 cash-based incentive compensation plan is based 60% on meeting quarterly earnings from operations target and 40% on an individual executive's success and executed against their individual annual performance plan.

Our 2007 equity-based incentive compensation plan issues only performance-based restricted stock units tied to attaining our 2007 non-GAAP diluted EPS targets.

So, we are celebrating 2006, and we are aligned, focused and motivated to ensure 2007 is a great year for our teammates, clients, partners and stockholders.

Now, I'll ask Stan to provide more details on our fourth quarter and 2006 performance across each of our operating segments.

Stan?

Thanks, Rich.

Our North American sales increased 33% from $702 million for the fourth quarter of 2005 to $931 million for this quarter, due primarily to the acquisition of Software Spectrum.

And we also achieved a 32% increase in non-GAAP earnings from operations.

Overall, our North American hardware and services categories perform well during the quarter, with sales from SMB and public sector clients growing faster than the market, while hardware sales to large enterprise clients declined compared to the fourth quarter of last year.

Overall, our software performance was also strong during the quarter, due in part to seasonal fluctuations, with gross profit growing faster than the market.

The number of account executives in our North American operation was 1,214 at December 31, 2006, up from 1,074 last year, due to the Software Spectrum acquisition.

We continued to see productivity improvements, as gross profit per account executive in the fourth quarter was $97,000, an increase of 32% over the prior year.

Again, given that certain products and services, such as software maintenance contracts and third-party warranties, are recorded as net revenue under GAAP and there is a continued shift to Microsoft Enterprise software agreements, for which we only receive an agency fee, we believe gross profit dollars is a more meaningful measure of growth in account executive productivity for all of our arc -- operating segments.

In Q4 of 2006, our North American gross profit was $117 million, a 49% increase over the prior year.

Gross margin increased to 12.6% from 11.2% in Q4 2005, and from 12.3% last quarter.

The increase in gross profit as a percentage of net sales from the fourth quarter of 2005 was due primarily to increases in agency fees for Microsoft Enterprise software agreement renewals, reductions in the reserve for vendor receivables, decreases in inventory write-downs and increases in sales of services.

These increases were offset partially by decreases in product margin, which includes vendor funding, and decreases in freight margins.

The increase in gross margin compared to last quarter was due primarily to increases in agency fees for Microsoft Enterprise software agreement renewals and decreases in inventory write-downs.

These increases were offset partially by decreases in product margin, which includes vendor funding, decreases in the sales of services as a percentage of net sales, and decreases in freight margins.

Non-GAAP selling and administrative expenses as a percentage of net sales were 9.5% ,up from 9.1% last quarter and 8.1% in Q4 2005.

The Q4 2006 non-GAAP selling and administrative expenses excludes stock compensation expense of $3.3 million as detailed in this quarter's earnings release, but includes approximately $720,000 of accelerated depreciation.

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

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

Compared to Q4 2005, we have seen increases in expenses related to the acquired business, increases in sales incentive plan, increased bonus expenses due to increased overall financial performance, accelerated depreciation, amortization of intangible assets, increases in professional fees associated with the stock-option review, and integration-related expenses.

Compared to Q3 2006, the increase from selling and administrative expenses as a percentage of net sales is due primarily to increases in professional fees associated with the stock-option review and increases in integration-related expenses.

Overall, our North American segment achieved non-GAAP earnings from operations of $28.9 million in Q4 2006, up from $21.9 million in Q4 2005.

Our EMEA operations, which included only the United Kingdom in the fourth quarter 2005, recognized net sales that were up 190% from $109 million in the fourth quarter of 2005 to $317 million for this quarter, due primarily to the acquisition of Software Spectrum.

And it achieved a 158% increase in non-GAAP earnings from operations.

We are pleased with the performance of our EMEA software category, which posted seasonably strong results.

In addition, as Rich stated, our UK hardware and services categories performance was strong in the quarter and grew faster than the market.

In Q4 2006, our EMEA gross profit was $38.8 million, a 156% increase over the prior year.

Our gross margin in the EMEA segment decreased from 12.2% -- to 12.2% from 13.8% in Q4 2005, and 13.6% last quarter.

The decrease in gross margin from the fourth quarter of 2005 and last quarter was due primely to decreases in product margin, which includes vendor funding.

These decreases in gross margin were offset partially by higher agency fees for Microsoft Enterprise software agreement renewals.

Non-GAAP selling and administrative expenses as a percentage of net sales were 9.9% in Q4 2006, a decrease from 11.2% in Q4 2005 and 11% last quarter.

The Q4 2006 non-GAAP selling and administrative expenses excludes stock-compensation expense of $307,000, as detailed in this quarter's earnings release.

The decrease from Q4 2005 and last quarter was due primarily to increases in net sales.

Overall, our EMEA segment achieved non-GAAP earnings from operations of $7.4 million in Q4 2006, up from $2.9 million in Q4 2005.

Our Asia Pacific segment, which was added as a result of the acquisition of Software Spectrum, recognized net sales and non-GAAP earnings from operations of $23.4 million and $835,000 respectively in Q4 2006.

We were pleased with the results of our Asia Pacific segment, as it achieved strong growth and results in line with its internal budget.

Although this segment represents a small portion of our consolidated results, we're excited about the growth opportunity this region brings.

The non-GAAP effective tax rate for the three months ended December 31, 2006, was 38% compared to 39.2% for the three months ended December 31, 2005.

The change in the effective tax rate was due to several tax planning initiatives, as well as the change in the percentage of taxable income being taxed in countries with lower tax rates than the United States as a result of the acquisition of Software Spectrum.

The filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2006, was delayed past the November 9, 2006 filing deadline.

And we expect the filing of our annual report on Form 10-K will also be delayed due to the ongoing review of historical stock option practices by the option subcommittee of the board of directors.

At this time, the option subcommittee has not reached any conclusions about the Company's stock option practices.

We will file the Forms 10-Q and 10-K as soon as practicable after completion of this review.

As previously disclosed, the Company had been named as a nominal defendant in the derivative lawsuit related to historical stock option practices.

In January 2007, the plaintiff asked the court to dismiss the lawsuit, and the court has dismissed the suit without prejudice.

The option subcommittee review of the Company's stock option practices, however, is continuing, and the Company is cooperating with the SEC in its informal inquiry.

We're unable to provide any additional comments related to progress of the review at this time.

Also, as previously announced, the NASDAQ listing qualifications panel has granted our request for continued listing on the NASDAQ stock market, subject to certain conditions.

Although we're not providing guidance for 2007, we would like to remind everyone that we do not -- that we do expect notable seasonality in our business as a result of our increased concentration in software sales, which are typically much stronger in the second and fourth quarters of the year.

As a result, we expect between 25% and 30% of our 2007 net sales and gross profit, as well as between 30% and 35% of our 2007 earnings from operations, to occur in each of the second and fourth quarters.

That concludes my comments.

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

[OPERATOR INSTRUCTIONS] First question from Jason Gursky from JPMorgan.

Please proceed.

Good afternoon, guys.

Hey, Jason.

Couple of questions here, Rich.

Maybe you can start out with some broader commentary on the corporate environment.

The latest and greatest that you're seeing out there, particularly as it relates to Microsoft Vista.

We've had some distributors that supply it to you as well as some of your competitors make some commentary here recently that perhaps we're seeing a bit of a pause here.

Just in light of the fact that you had some negative comps here year on year, what's your view here near term into this next quarter and how this all plays out over '07?

Sure, two questions there.

Just the overall demand environment and then also talk a little bit about Vista and how that's going to play out from an opportunity perspective here in 2007.

First of all -- and obviously, I think we all saw IDC market data for 3Q and then 4Q.

Overall, the demand environment continues, obviously, to be challenging, especially within those large enterprise clients.

Obviously in this type of environment, we believe the strategy that we have deployed of driving growth, both through organic as well as strategic acquisitions, makes a lot more sense and is translating into strong results for the quarter.

But from a demand perspective, clearly we are seeing challenges in the large enterprise space.

Now, whether that's tied specifically to delays with Vista or not, our data wouldn't necessarily support that one way or the other.

As we look in Vista, we do believe -- obviously our target market is companies with 100 employees or greater.

We do not believe there is an initial take-up of Cista in that audience.

What we are anticipating and what we're hearing from our clients there's a lot of interest in Vista, and I think some some of the press you've seen, just even recently, talks some very positively of the features and attributes of the products coming out.

But we see that's going to -- how that's going to translate into [the ban, I think we're] to see that start to show up in the second half of 2007 and into 2008 from a demand perspective.

And clearly the nice thing about the Vista opportunity is, yes, there's a great software opportunity, but we believe, based on some of the minimum requirements, everything from memory to screen size in your notebooks, is there's going to be a nice hardware opportunity associated with it, as well.

But, again,I think we're going to see that show up -- starting to show up in the second half of 2007, but more so a 2008 opportunity statement.

Okay, and then just one follow up then for you, Rich, and then a couple of bookkeeping ones for Stan.

I'll start with Stan.

What are your expectations for stock comp in '07, as well as CapEx?

And then Rich, maybe you could talk a little bit about long-term plans for Asia and when you might feel a little bit more comfortable talking about that in more detail with us?

Yes, I'll do the Asian one first and then I'll turn it back over to Stan.

From the Asia perspective, that geography, while it is small today in the total scheme of our revenue performance for the year, we did just an outstanding job in the fourth quarter.

Very strong growth.

They meet and exceeded their internal budgets, which is always a nice thing when you acquire a new company to have them actually make their budgets in the first quarter.

I just had a chance to travel through that region and went to Shanghai and saw our new office there, as well as travel to Sidney, Australia, and met with several of our clients, as well as some of our key partners.

And as I look at that, I do believe there is very nice opportunity for us to go after.

Our strategy there is specifically to continue to go grow the software penetration that we have, as well as build up a services capability around the software space, specifically around the area of software asset management, as an example.

We are not looking to go expand our hardware business in Asia Pacific in calendar year 2007.

We made a decision, both for EMEA as well as Asia Pacific, that while we believe there is a significant hardware opportunity outside of the UK and Canada and the U.S., to go after, we want it tied directly to our IT capabilities and our mySAP deployment.

So, in Asia Pacific for calendar year 2007, it's all going to be about how do we grow that services business, as well as the software business that we have there.

And as I travelled around, I saw a great opportunity for us to go do that in China, great opportunity for us to do it in other parts of the region and that's clearly what we're all about.

Okay.

Jason, to answer your questions, first of all on the equity compensation for 2007, this includes expense attributable to vesting of stock options and restricted stock issued in prior years, and we estimate it to be $13 million and $15 million.

The actual amount, though, will vary, either higher or lower based on certain factors because a lot of these are performance based, so consequently, they could go up or down.

The range that I gave you of $13 million to $15 million assumes we hit what we have targeted as EPS in that year.

So, hopefully that gives you a good round about on that.

On capital expenditures, we're still finalizing our CapEx budgets, but right now we expect that to be between $25 million and $30 million.

Let's expand that a little bit, also.

Depreciation in 2007 we also expect to be between $25 million and $30 million.

And there's another component of non-cash, which is the amortization relating to purchased intangible assets in the Software Spectrum acquisition, and we expect that expense in 2007 to be about $10 million.

And was it about $2.5 million this quarter?

It was -- it was a little lower than that, I believe.

I thought it was just under $2 million, but I may be remembering that wrong.

I think it was -- I thought it was right under $2 million.

Ok.

Great.

Thank you, guys.

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

Please proceed.

Thanks and good afternoon.

Rich, can you just talk a little bit about product category growth in North America?

If we look at what you provided here, besides obviously very good growth in software, it looks like you only grew in a couple of categories year over year; notebooks up five, networking up 13.

It looks like you were down in several legacy product categories like storage, video, printers, desktop server.

Are you concerned that the growth is unbalanced, I guess?

And what are you doing to drive more balance and kind of tie that into some of your strategic initiatives?

Yes, I will tell you the -- if you look specifically at North America, obviously as you called out there, the growth was the strongest in the networking category as well as the notebook category as well as some of the accessory categories.

The very good thing is, obviously, those categories, as you look at it from a profitability perspective, are some of the more attractive from a profitability perspective, along with the software category.

So I think that's why we saw such strong results from an overall profitability perspective.

Underneath that obviously, as we called out, we are -- we do say that we performed well in North America in the quarter, with strength coming from the SMB and the public sector clients.

Now that enterprise segment we said was down for the fourth quarter and the year-over-year basis, and that's where, quite honestly, we've seen a lot in the past of our server and desktop penetration, which is one of the big reasons why that category's down.

Right now, if you look at hot areas out there in the market, networking, Voice-over-IP, the whole software category, are hot categories and we're seeing that show up in our results.

Okay.

And then if I look at the geographies, at least relative to my model -- I know you don't give guidance -- it looks like the revenue was well ahead of my estimate for the European region, but a little bit below in North America.

I know you're not breaking out Software Spectrum, so I don't know how much you could help with the question, but can you just talk about organic growth in each of those regions, particularly in EMEA because that was clearly much stronger than I was looking for?

And I guess maybe one way to think about it, if we look at your product mix breakout, and we look at the software category in dollars -- and I'm just looking at North America right now -- on a quarter-over-quarter basis, it was up about $220 million.

Is that a pretty good proxy for the incremental contribution from Spectrum, or are there reasons why maybe the legacy software business would have impacted that?

That number is the combined software business from legacy Insight as well as from Software Spectrum, so that number, as well as the growth associated with that number, is the combined business.

Because, clearly, as we got into execution of the fourth quarter, we merged those two businesses together and are managing as one business.

Specifically on EMEA, as we called out, we're very pleased with -- all aspects, quite honestly, of our EMEA business in the quarter are -- and the way we're looking to business going forward, which hopefully over time, we'll all get used to, is we're looking at it from a category perspective.

And specifically, we're looking at a hardware category, services category and a software category.

Obviously today in EMEA, the hardware and services categories for the most part are only available in our UK business, and as we called it out, those both grew very nicely in the quarter.

We believe at faster than market rate.

Then, obviously, the software category which is the combined old UK software business as well as the acquired Spectrum Software business, obviously performed very well, as well in the quarter.

Ok.

Then final question, on Spectrum, I mean just some big picture thoughts.

Where have you been pleasantly surprised on the performance and the integration?

Where perhaps have you been disappointed?

I guess follow on where do you think we are in this whole EA renewal cycle?

Are you going to continue to see continued strength in '07 or did we get a lot of help ahead of the Vista launch and are you still confident in the previous EPS target that you gave for that at the analyst day, I think it was $0.25 to $0.30.

Yes, about two or three questions wrapped in there, so let me just kind of break it apart.

Overall, we did perform a very thoughtful and thorough due diligence process.

We've not seen a lot of material surprises, either on the positive side or the negative side.

On the positive side, one thing as I've travelled around, I had a chance to meet with our teammates, as well as our clients.

I am very impressed by the strength of the client relationships that are in place.

And also very impressed by the experience and the capabilities of the teammates that came over with the acquisition.

And probably the last thing, which is really something you never know how it is going to play out, is their generaling -- the teammates genuine interest in terms of coming together and operating as one team and being part of one Company going forward.

Obviously, their interest in doing that makes the integration go smoother and better.

Quite honestly, that part of the integration's been going great, and we really are -- shen I said we're going to be done with the integration, or the majority part of the integration as of April 1st, I would say a big reason why that's true is some hard work by a lot of people.

But quite honestly, just a lot of willingness on both side of the equations to say, hey, we have a great opportunity to come together as one team.

Now on the negative side, some of the things that surprised us or some of the things that weren't exactly as we had expected is I think just across the organization, perhaps based on how the parent viewed the business is not as much expense management in terms of really managing the expense line of the business.

Obviously we introduced some discipline in the fourth quarter, which helped translate into improved performance in the fourth quarter.

As we go through now calendar year 2007, I think, obviously, Insight's historic perspective in terms of how we manage expense and try to grow only variable expense on a year-to-year basis will translate into good things for our new combined business.

But that was one of the things that we found out is we got into the details, just not as much focus on the expense side of the equation.

As it relates to the guidance we had given at our analyst meeting, about $0.25 to $0.30 of diluted EPS contribution from the acquisition, we still are comfortable with that perspective.

The one caveat that I would provide is that we are still sizing the cost associated with our IT conversion plan and what portion of those costs or expense will flow into calendar year 2007.

As you'd imagine, as you talk about bringing two infrastructures together, especially when you're talking about two global infrastructures together, there's a lot of work and right now where we are in the process is just doing all of the mapping out of how we bring this thing together.

We're still in the midst of doing the financial sizing.

As we finish up that work, we'll then have a better understanding of the financial impact of that and what costs are going to flow into 2007, and whether that'll have negative effect on that $0.25 to $0.30 perspective that we provided at the analyst meeting that we had.

Relative to the EAs and just the outlook on the overall success of the EA model and clients' interest in renewing their EAs or signing on new EAs, I would tell you at this point there's nothing that gives us any belief that that's going to change.

Quite honestly, that part of the business was strong in the fourth quarter as we go into the first quarter and obviously the second quarter being the big quarter.

And I think it's really important for everybody on the phone to really have a perspective on what Stan shared about the whole seasonality of the business is really is that EA renewal cycle has a very big chunk that happens in the second quarter and then the second biggest chunk happens in the fourth quarter.

But at this point in time, we see no reason why that won't happen.

In fact, we are very encouraged for how it played out in the fourth quarter this year.

Thanks for the detailed answers, Rich.

The next question comes from the line of Andy Hargreaves with Pacific Crest Securities.

Please proceed.

Hi.

I'm assuming you're not going to give us the EPS targets that are in your comp plans, but can you tell us if it includes both margin expansion and revenue growth?

Yes, I mean as we look -- when we say we want to gain profitable market share in calendar year 2007, implied in that statement is, obviously, growing profits and gross profit faster than the market and also growing revenue faster than the market.

Now, as you now talk about the categories underneath our business, as we look at the software category, we fundamentally don't look at that as a revenue growth part of our business.

No, obviously we like to drive revenue growth out of it.

We predominantly look at that as a GP growth business, just based on the characteristics of that business and how the contract works, specifically with Microsoft.

Now where we see revenue growth opportunities is leveraging that software business with our hardware business and our services business, and getting the top line growth off this hardware services business.

And that combined effect of bringing those three businesses together is what we're trying to accomplish by the statement of gaining profitable market share.

So we want to grow revenue faster in the market, which clearly we did in the fourth quarter, and we want to grow profit faster the market, which we clearly did in the fourth quarter.

Do you think there's any changes in the structure of your margin potential from prior to the Software Spectrum acquisition?

I think the biggest change is just in the seasonality aspect of how the margin's going to flow in a calendar year basis.

So you look at our performance in calendar year 2006, where you accumulated $1.57, and you look at how that came in Q1, Q2, Q3, Q4.

I think a very big, different part of our business now when you look at us is just the mix by quarter of how that's going to flow.

Obviously, software as a percentage of the total is a much greater percentage of the total, so that's going to change a different characteristic to our business, which is what's driving the seasonality mix.

Then my only other question is the UK gross margin, is there anything unique in there?

That was lower than I was looking for, what I was expecting.

The only thing, Andy -- this is Stan -- was a highly competitive market over there, which I think was affecting the product margin.

So, if that's what you're referring to is why it is down a little bit, it was just a competitive market.

While I've kind of got the line here, let me expand on a question that was earlier asked on the amortization in Q4.

Actually, the amortization in Q4 for purchased intangible assets was about $3 million.

The reason it was slightly higher than 25% of what we gave you as the annual is because we had one of the purchased intangible assets, specifically the trade name, that's being amortized over a much shorter period, and so it really impacted Q4.

So, it was $3 million in Q4.

Okay?

Yes, thanks.

Your next question comes from the line of Matt Sheerin with Thomas Weisel Partners.

Please proceed.

Yes, thanks, and I apologize.

I jumped on a little bit late here so I may be asking some questions that were covered in your opening remarks.

But just on the North American -- the core legacy business in North America, talked about some weakness in enterprise, but that SMB seems to be holding in there pretty well.

Should we assume that SMB business was growing at the same rate as it was in the September quarter year over year, or better or worse?

Overall, the SMB, as well as the public sector business grew better than what we saw in third quarter and again, as I called out, we believe overall, the North America geography's performing quite well in the quarter.

The only negative was the enterprise growth, and I think a lot of that is just being driven by the pure demand environment out there.

Okay.

And are you seeing normal seasonal trends in SMB so far this quarter?

From this quarter perspective, it's just a little bit early to go call out first quarter and what the view is.

Obviously we've got about a month under our belt, but at this point in time, no real perspective on the first quarter.

Okay.

Rich, and you talked about the strategy of having good market growth but profitable growth.

But as you try to accelerate those cross-selling opportunities, should we expect that you'll invest on the OpEx side in terms of building an infrastructure to support hardware sales in geographic areas where you currently don't play and to also include that in North America?

So, what should we be thinking about SG&A as we go through the year?

Calendar year 2007, we're going to try to go predominantly to manage our SG&A expense on a flat-type basis and try to just grow the variable aspects that are tied to commissions on the higher levels of GP that we were looking to go drive.

As it relates to the exceptions to that, we'll just be -- and we talked about it a little bit earlier is just as we bring the IT infrastructures together, the cost -- because that's clearly our goal and we believe there's significant cost savings once we do bring the infrastructures together -- the investments associated with bringing them together we're still trying to go size, as well as to kind of determine what aspect of that will flow into calendar year 2007, and any impact it may have on our original guidance of the whole $0.25 to $0.30 of EPS from the acquisition.

As it relates to turning on hardware capability and a broader services capability in EMEA and Asia Pacific, at this point in time, based on -- we already made the decision we're not going to do that on the existing IT systems that are out in those geographies.

So this point in time our budgets for calendar year 2007 do not include any incremental investment to go expand our hardware and services capability beyond some of the investments we're still trying to go size of just bringing the two IT. systems together.

As we get into calendar year 2008, there might be a different perspective there, as we go start to ramp up resources to support that combined business model, but that's for another conversation at a later day.

Okay, fine.

And could you tell us where you stand with the mySAP integration, how far along you are there and are you seeing any disruptions to the business because of that?

Yes, at this point in time, as we called out in the last earnings call, we've already started the deployment of mySAP, so in some of the back office operations we've already started, so the portal is up and running.

We are completing, as we speak right now, the final development stages of mySAP, and we are looking to go start and complete the deployment in the U.S. geography encompassing all of the sales teams by mid 2007, so we're moving on that type of time schedule.

Okay.

Okay, and just lastly, Stan, you talked about the contribution of gross margin, gross profit dollars and sales through each quarter due to the seasonality of Software Spectrum.

I didn't get the numbers.

Could you tell us again?

Certainly.

What we said is that between 25% and 30% of our 2007 sales and gross profit, and between 30% and 35% of the earnings from operations will be in the second and fourth quarter.

Okay, and that's for the whole business combined?

That's correct.

Okay.

Okay, great.

Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Dan Winsat] with AAD Capital.

Please proceed.

Good afternoon.

Afternoon.

Rich, I've got three separate questions.

Question one is you talked about the opportunity desk and 1,300 leads, 100 deals, on average, $100,000 a deal, $10 million.

I remember some discussion earlier.

We've had Software Spectrum in the family now for about five months, and there are almost 800 clients on that side that had not been involved on the hardware side.

Could you talk first of all about what you've learned so far in four or five months on the opportunity desk?

Is it bigger than a bread box?

What -- is the opportunity more on hardware versus software, et cetera?

What have you learned in the early going?

That's question one please.

Sure.

The opportunity desk stats that we shared were kind of just early days, bringing the two teams together and creating a process to go force people to come together.

As we've [inaudible] into that, I believe the opportunity actually -- if you look at the leads going back and forth it's almost 50/50 of hardware leads in software legacy clients and software leads in hardware legacy clients.

So the characteristics we're seeing as you dig into the leads gives us some strong feelings on ways it's a good opportunity in front of us.

That $10 million is literally business that we have already closed.

As you dig in -- there's a whole different perspective as you look at opportunities that the teams are now starting to work on and that will flow in calendar year 2007, and that is more just a, hey, I've got an opportunity with this client.

He's bought software from us the last three years.

I believe he's got an RFP coming out in the second quarter.

Let's start to get engaged and figure out how to win the business.

And I'll tell you, that pipeline is a actually stronger perspective on that cross-selling opportunity that's out there.

And obviously, as we now are into execution, we are looking to go close those opportunities in the pipeline.

We have announced and we're -- actually our whole sales organization is in Florida as we speak, a complete integration of our sales team.

So we now have one enterprise sales team that has both software and hardware and services specialists inside of it.

We have one SMB sales team with hardware, software and services specialists inside of it.

We have one public sector sales team with hardware, software and services specialists in it.

And now those teams with one leader are going out and figuring out how to go close the opportunities in the pipeline and go recognize that opportunity that we believe is very real out there in terms of cross selling across the different capabilities that Insight now has.

So the statement that I shared on the opportunity desk so far was quite honestly things have already closed in the fourth quarter, which is amazing me that, given the characteristic of some of the enterprise clients to already have things that are closing is even a stronger perspective when you start looking at future pipelines that are starting to build across those businesses.

Do you remember -- if it was 771 clients software not hardware, how many clients within the overall umbrella are hardware, not software?

Or that opportunity potentially exists?

There was 771 clients that -- in the U.S. we have not sold any hardware queue that have relationships with Software Spectrum.

And there's 8,800 SMB clients that Insight sells hardware to that we have never sold software to that we're now looking to go leverage that capability.

So, it kind of goes both ways in terms of the opportunity statement.

Got you.

Rich, you talked about teammate satisfaction, which I know was one of the key agenda items for you, and I think on a relative basis the improvement is 600 basis points on your measurement.

How is that going to show up to us as shareholders?

Is that -- is it an improvement in productivity?

And then what kind of numbers -- I'm trying to remember the peak -- the peak productivity for a typical Insight rep.

Is it going to show up on add or is it going to show up in lower turnover?

How do we -- what do we see the results -- quantifiably where do you think the metrics start to show up as a result of the satisfaction needle moving the right way?

Yes, it's shown up in two or three different really hard core measures, which is -- one is attrition is going down as we've been able to go focus on this.

The average productivity -- and we're looking at GP per salesperson -- is actually up 32% in the fourth quarter, so it's showing up in productivity.

And average tenure of our sales force is also increasing, so it's up from last year at 3.9 to 4.4 years now, which is critical because the reality is you can't be that trust advisor.

You can't invest in skills with somebody who's only been out there selling for a year or two years.

You've got to build up their capabilities, build up their confidence level in terms of being able to talk about technology and how technology can help companies run better.

So, where total investment in world-class training and this whole focus on teammate satisfaction has showed up the most is: One, to reduce your attrition; two is helping us get a higher productivity rate from our sales teams; and the last one is just getting the average tenure up to a higher level where they really have a high level of sophistication to go take on that trusted advisor relationship with their client.

Last question, big picture looking out four or five years, I think in round numbers now you're 60% hardware, 39% software, 1% services.

Can you remind us -- obviously it's a function of what your clients insist upon, but what do you think longer term you would like the mix to be?

And then, again in round numbers, the margin differential in each of those three broad categories?

Actually in terms of the mix, I'll provide a perspective end, because breaking up the margins by the individual categories really don't break up the margins, so I'll give you a perspective on it.

As you look at -- I mean clearly, the 1% -- or 1.1% of our business that is services today is too low of a number.

The opportunity that we have from a services perspective is significant out in the market place, so I would tell you the percentage that we are very focused on increasing -- and we obviously feel good about a 26% growth on the year-to-year basis, as well as improving gross margin on services business -- is we'd like to get that 1% of services business up in that 5% category, and we believe that's very real.

It'll take us a few years to go get there, but we believe that is a huge opportunity statement and a huge driver of profitability.

If you go look at the profitability off of a services business -- and it's not just ours, it's the industry in total -- it's not even comparable to the hard -- the gross margins that you make on a hardware business or a software business.

I mean it is 2X, 3X opportunity statement in terms of the margins you can have off of a meaningful services business.

So, we have a lot of focus inside the Company, as obviously we don't have the luxury, nor have we made the business decision -- which I think would be a flawed decision -- of saying we don't want to grow hardware, we don't want to grow software, we just want to grow services because I believe you've got to grow all three.

But we have a lot of folks inside the organization to grow the services business at a faster rate, which we did in fourth -- which we did in 2006, because of the margin characteristics of that business as well as the overall entanglement factor.

The reality is you can buy notebooks from us or servers from us or Voice-over-IP deployment, but when you start getting engaged from a services perspective with us, really that relationship becomes much more entangled and gives us a much greater opportunity to go back and cross sell other aspects of what we offer our clients.

Great.

Thank you.

Yes.

Well, I think that's an end of the questions in the queue.

I would just say thanks to our valued teammates, clients, partners. 2006 has been a very exciting year and a successful year, and we believe 2007 promises to be another rewarding year as we go to market with this new enhanced value proposition, better tools and improved capability.

So thank you very much for joining today's call.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect and have a good day.