Insight Enterprises Inc (NSIT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Insight Enterprises, Inc.

earnings conference call.

My name is Shemikah, and I will be your operator for today.

At this time, all participants are on a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(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 ended September 30, 2007.

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 & Exchange Commission on Form 8-K, you will find it on our website at insight.com under our investor relations section.

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

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

Today's call, including all questions and answers, is being webcast live and can be accessed via the investor relations section of our website at insight.com.

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, November 1, 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.

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 in our annual report on Form 10-K for the year ended December 31, 2006.

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

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

Rich?

Thank you, Stan.

Good afternoon, everyone.

As we discussed on last earnings call, we are anticipating pur third quarter to be our lowest of the year from earnings share perspective, given the significant seasonality within our software category which represents about 40% of our net sales.

As it turned out the seasonality impact exceeded our expectation, especially pronounced this year, driven mostly by our record performance in second quarter, and delay of several software transactions into the fourth quarter.

So while we had a good performance within our hardware and services categories in the quarter across each of our operating segments, the positive performance in these categories did not offset the seasonal decline of our software category worldwide.

Given this is the first year following the acquisition of Software Spectrum, we are clearly still getting our arms around forecasting the core dynamics of the software business, particularly among our large enterprise clients.

That said, I'm pleased to say that both the company and specifically our software category are overachieving our original year-to-date profitability expectations.

Additionally we expect the fourth quarter will be seasonally stronger and in line with original expectations.

Specifically from Q3 our consolidated quarterly net sales were $1.11 billion, a 29% increase over the third quarter of 2006 while gross profit dollars grew an even stronger 32%.

Net earnings from continuing operations were $9.1 million and diluted earnings per share from continuing operations were $0.18, a decrease of 47% compared to $0.34 in the third quarter of last year.

This decrease is due primarily to Software Spectrum being included for only part of September of 2006, the highest volume month of the quarter for the software business given the higher concentration of sales in the last month of each quarter.

In addition, the Q3 '07 results include expenses of approximately $2.5 million, $1.5 million net of taxes for professional fees associated with our stock ops review and related restatement.

Overall, the software business is generally not profitable in the third quarter, as noted in the pro forma disclosures and our Q3 2006 Form 10-Q.

Including Software Spectrum results for the entire third quarter of last year, would have resulted in $0.07 diluted EPS compared to the $0.35 we reported for the quarter.

Year-to-date, our consolidated net sales for the nine months ended September 30, 2007 were $3.52 billion, a 48% increase over the nine months ended September 30, 2006 while gross profit dollars grew an even stronger 56%.

Net earnings from continuing operations were $48.2 million and diluted earnings per share from continuing operations were $0.97, an increase of 3% compared to $0.94 for the nine-month period last year.

These year-to-date results are a result of strong year-to-date performance across all operating segments, as well as growth in software, hardware and services.

Our September 2007 year-to-date results include expenses of approximately $12.5 million, $7.6 million net of tax for professional fees associated with our stock option review, and $2.8 million, $1.7 million net of tax for severance expense.

We continue to have some expenses over the next several months associated with curing certain tax implications resulting from the stock ops review and the ongoing SEC informal review.

However, at this time we estimate those to be less than $1 million.

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

First, though, I would like to emphasize a few key aspects of our quarterly performance.

First of all, within North America, our software category grew 64% year-over-year largely due to the acquisition of Software Spectrum which is only included for 23 days of Q3 2006.

On a sequential basis, our software business was down 34%, again, reflecting the seasonality of our software category.

Our hardware category grew 5% year-over-year, and our services category grew 42% compared to last year.

Within EMEA, our software category grew 183% largely due to the acquisition of Software Spectrum which, again, is only included for 23 days of Q3 2006.

On a sequential basis, our software business was down 37%, again, reflecting the seasonality of the software business, as well as extended holiday schedules typical in many countries throughout Europe.

Our hardware category grew 16% year-over-year and our services category grew 226% compared to last year.

Lastly, our Asia-Pacific segment continues to perform very well and continues to overachieve against internal expectations.

Another key activity of our quarter relates to our mySAP upgrade in the United States hardware and services business.

As of the end of the quarter, we had migrated approximately 85% of our client accounts, although the remaining 15% of our client accounts that have not migrated typically generate approximately 25% to 30% of our annual net sales in North America.

Toward the end of the quarter, we made a decision to extend into the first half of 2008 the rollout of mySAP to our largest SMB and enterprise clients that conduct a material amount of their business with Insight via our customized e-commerce tools.

This decision was made based on feedback we received from our clients that migrating their new web experience was too disruptive to their businesses within the time frame we had originally planned.

While this deferral of the final migration is disappointing, it is the right decision for us as we to work ensure we maintain client satisfaction with our largest Web clients.

It also helps to ensure that the mySAP upgrade has not caused any disruptions to the fourth quarter which, seasonally, will be another strong quarter for our business.

Another highlight of the quarter is that we hired Steven Andrews as our General Counsel and newest member of the Insight's senior executive team.

Steve brings his extensive regulatory, transactional, litigation and strategic management expertise to Insight.

I'm pleased to have Steve on board, and I am confident in his ability to help guide Insight in all business and legal aspects, particularly as we continue to expand our global footprint.

A final highlight relates to our stock repurchase activities.

By the end of October, we have repurchased $50 million of common stock representing approximately 1.96 million shares at an average price of $25.57.

Additionally, at the upcoming Board of Directors meeting, we plan to discuss additional stock repurchases as we move into 2008.

We continue to believe our stock represents excellent long-term value, and our recent stock repurchases reflects our confidence in the company's business strategy and growth prospects.

In summary, even with more of a seasonal decline in our software business than we had expected, I believe we had a solid quarter.

Year-to-date, our results are very strong, and we feel good about our business across all segments and categories, including software going into the fourth quarter.

Now I'll ask Stan to provide more detail on our third quarter 2007 performance across each of our operating segments.

Stan?

Thank, Rich.

Our North America net sales increased 18% from $694.3 million for the third quarter of 2006 to $817.7 million for this quarter due primarily to an increase in software sales attributable to the acquisition of Software Spectrum but also to a 5% increase in our hardware sales.

Additionally, gross profit grew 20%.

Again, given that certain products and services such as software, maintenance contracts, and third-party warranties have recorded a net revenue under GAAP.

and that 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.

Gross margin during the third quarter increased to 13.3% from 13.1% in Q3 2006 and decreased from 14.5% last quarter.

The increase in gross margin from the third quarter of 2006 was due primarily to increases in agency fees for Microsoft Enterprise Software Agreement renewals partially offset by decreases in product margin, which includes vendor funding and decreases in freight margin.

The decrease in gross margin from last quarter was due primarily to decreases in agency fees for Microsoft Enterprise Software Agreement renewals, decreases in product margin, which includes vendor funding, and increases in inventory writedowns.

Selling and administrative expenses as a percentage of net sales were 11.5%, up from 10.9% last quarter, and up from 10.1% in Q3 2006.

Compared to Q3 2006, we have seen an increase in salary and wages, primarily resulting from the acquired business in September 2006, $2.5 million of professional fees associated with our stock option review, and amortization of acquired intangible assets.

Compared to Q2 2007, selling and administrative expenses decreased 7.3% to $93.7 million from $1101.1 million, however increased as a percentage of net sales due primarily to the decrease in net sales resulting from the seasonal decline in our software business and a lower percentage of selling and administrative expenses that very directly in proportion to net sales.

Overall, North American earnings from operations decreased 25 % to $15.3 million for Q3 2007 compared to the same period last year.

Our EMEA operations recognized net sales that were up 69% from $157.1 million in the third quarter of 2006 to $264.7 million for this quarter, due primarily to an increase in software sales attributable to the acquisition of Software Spectrum, but also a very strong performance from our hardware and services category which also helped drive gross profit growth of 67%.

Our third quarter gross margin in EMEA segment decreased to 13.5% from 13.6% in both Q3 2006 and last quarter.

The decrease in gross margin from third quarter of 2006 was due primarily to decreases in product margin which includes vendor funding, and decreases in freight margin.

These decreases in gross margin were offset partially by increases in agency fees for Microsoft Enterprise Software Agreement renewals.

The decrease in gross margin from last quarter was due primarily to decreases in agency fees from Microsoft Enterprise Software Agreement renewals.

This decrease was offset partially by increases in product margin which includes vendor funding and increases in sales of services.

Selling and administrative expenses as a percentage of net sales were 12.5% in Q3 2007, an increase from 11.1% in Q3 2006, and 10.1% last quarter.

The increase from Q3 2006 was due primarily to increases in salary and wages and expenses related to additional facilities, predominantly resulting from the acquired business in September 2006, increases in sales incentive plans and bonus expenses due to increased overall financial performance, amortization of acquired intangible assets, and costs associated with the initial stages of our mySAP upgrade in EMEA that were not capitalized.

Compared to Q2 2007, selling and administrative expenses remain flat at $33.2 million.

As a result -- As a percentage of net sales, selling and administrative expenses increased from last quarter due primarily to the decrease in net sales resulting from the seasonal decline in our software business and a lower percentage of selling and administrative expenses that very directly and proportional to net sales, as well as the initial mySAP upgrade cost in Q3 2007 noted previously.

Overall our EMEA segment achieved earnings from operations of $2.5 million in Q3 2007, down 31% from $3.7 million in Q3 2006.

Our APAC segment, which was added as a result of the acquisition of Software Spectrum, recognized net sales of $27.3 million, gross profit of $5.1 million, and contributed $1.2 million to earnings from operations in Q3 2007.

Our gross margin and operating margin in APAC were 18.7%, and 4.4% respectively for the third quarter.

The effective tax rate on continuing operations for Q3 2007 was 40.6% compared to 32% for the third quarter 2006.

The increase in the effective tax rate was due primarily to a tax benefit recorded in Q3 2006 related to the reversal of accrued income taxes resulting from the determination that they reserve previously recorded for potential tax exposures was no longer necessary.

Additionally, the effective tax rate is higher in Q3 2007 due to an increase in nondeductible expenses related to Executive Compensation.

Our net foreign currency exchange loss was $849,000 in Q3 2007 compared to a gain of $214,000 in Q3 2006 and a gain of $3 million last quarter, which result from foreign currency transactions, including inner company balances that are not considered long term in nature.

The net foreign currency exchange loss in Q3 2007 is due primarily to foreign currency transaction losses incurred in our APAC segment, including losses resulting from the weakening of the U.S.

dollar to the Australian dollar on the U.S.-.dominated receivables for our Australian operations.

As compared to last quarter, there was a significant decrease in intercurrency transactions in EMEA and Canada, which had driven the prior quarter gain.

That concludes my comments.

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

(OPERATOR INSTRUCTIONS) You have a question from the line of Jason Gursky.

Please proceed.

Hey, guys, good afternoon.

Hey, Jason.

I guess just a real quick bookkeeping one for you, Rich.

Can you just give us a quick update on the CFO search?

Sure.

The CFO search continues, so we have had some great candidates we have looked at.

But at this point we have not selected one that meets the criteria that we put in place, so it continues, and at this time nobody to report that we have selected.

Okay.

Secondly, I was wondering if you could just kind of walk us through, Richard, your current thoughts on the demand environment here in the States, particularly with the SMB and enterprise clients, and perhaps talk about those two separately.

Sure.

Overall, from an advantage perspective which is what we saw in the third quarter, my view is that it has been stable to what we saw in 2Q and 1Q, so nothing major changes.

Clearly there's -- based on what has been going on in the paper and the debt markets, we have been watching it very closely, specifically the United States, but at this point in time I would say in the third quarter it was definitely very stable to what we have seen back in Q2 and Q1.

If you look to Europe, specifically the U.K., which, we've talked on the previous calls are just some of the struggles in that market, we're actually seeing strength over Europe which has helped us to drive some good results, which obviously you saw the 16% revenue growth that we had in our hardware business in U.K.

is an example of that.

But overall, I discovered a stable environment to what we have seen over the last couple of quarters.

Okay.

And just two last questions.

Is there any change, or what are your current expectations about the timing of , and the amount of cost saves that you are expecting to get out of the SAP rollout here in the States next year, particularly as it relates to the back office, functions, the finance type things you had planned on getting some saves related to the Software Spectrum acquisition?

And then the second question and the last one.

I'll hop off here.

Rich, as you look at the business as it sits today, X any kind of cost saves that you are planning on getting, how do you think about OpEx growth relative to sales growth, and how you think about managing the businesses?

OpEx growth going to run it at a much slower rate than revenue growth as you look at kind of the organic business that you have

Sure, let me both -- get into both of those.

First of all, as it relates to how we think about expenses going forward.

Clearly, the goal on a year-to-year basis is to try just to grow variable expenses with growth in revenue and growth in gross profits.

So, typically, we plan from a budgeting perspective somewhere between 20% and 25% of incremental gross profit on a year-to-year basis what the expense growth would be.

So, that's just how we think about it.

But clearly, what we have been experiencing over the last year-and-a-half at least and going into next year is obviously a higher level of expense growth just given the fact we have had the mySAP upgrade going on in the United States, we have the integration of two companies, and now, obviously we have another rollout of that system going into 2008.

So, originally, when we had talked about expense going into 2008 before we have said, hey, we think as we complete the integration of bringing these two companies together on an annualized basis, we'll have about $10 to $40 million of annual cost savings.

As we are right now in the midst of our budgeting process, a couple of things play against that number.

First of all, clearly the mySAP upgrade being delayed in terms of not being completed until the end of the first half of next year has some negative implications from an expense perspective because we have basically two back offices here in the United States, which is our biggest geography, that is impacting some of the expense savings.

By impacting it, I don't mean taking the expense savings away, just delaying the benefit of when we are going to recognize those expense saves.

So, as we go in to next year, our modeling is to try to go -- do two or three things from a expense structure perspective.

One is, try to go grow just on the variable line outside of specific investments which we'll be taking you all through, so you would understand why we are doing them, that we think we want to go make that would drive higher levels of growth than we have seen historically, and outside of the savings or integration savings we're going to get inside of our long-term infrastructure from an IT infrastructure which have some investments on the front end so actually recognize those.

So, as we go into next year, again, we're finishing up the budgeting process right now, but that's kind of how our thought processes go relative to the expense infrastructure.

Just to make a quick follow-up to make sure that I have got my numbers correct specifically as it relates to this SAP thing.

The $10 to $14 million.

First question would be, how much have you realized of that today?

And then secondly, you suggested that it was going to get done in the first half of next year but it's going to get pushed because you pushed the rollout of it.

Does it get pushed into '09 now, so it finishes up sometime in '08, and you'll get the full benefit sometime in '09?

Yes, the 10 to 14 number was really tied to the integration of bringing the two companies together which was more the concept of the number we talked about when we were in Chicago last year.

And the integration of Software Spectrum and Insight into one company, we said, when we do that, when we close down the two systems into one system, we're going to have $10 to $14 million of annualized savings.

Right now, as it relates to SAP, and now, not completing the integration of SAP until the first half, there are some expense implications, but those are actually two different discussions.

So, overall, as it relates to expense going into next year, our model is trying to go reduce the SG&A percent as we grow revenue, but in terms of the being able to reduce the raw dollars next year to the level that we originally had hoped for, that's going to be the challenge that we're working on through our budgeting process.

So, right now, the way to think about it from a modeling perspective, we're going to attempt through our budgeting, which are not final yet, to reduce the overall SG&A expense inside of our business.

The magnitude of that, I'm not prepared yet to give you a point of view on that.

But as it relates to the raw dollars, it will be a little bit less than originally planned, just given the fact of we have the SAP project not done yet in the U.S., as well as some of that has now implications in getting some of the integration savings that we thought sooner in the year versus later in the year.

Okay.

Great.

Thanks, guys.

Your next question comes from the line of Matt Sheerin.

Please proceed.

Yes, thank you.

First question is in regard to the hardware growth.

It was 5% year-over-year in North America.

Looked like decelerated a little bit from June where I think it was 8%.

Does that have anything to do with any disruptions from the mySAP rollout?

Or did you see things softer?

Or was it not a big difference?

Yes.

No, overall the 5% growth that we saw in the quarter, we definitely did see some falloff in our web transactional business in the quarter that impacted the number growing faster than the 5% level.

We feel good actually about the hardware business outside -- and the growth we experienced outside of the web transactional business which -- but the impact of that brought the total down to the 5% level which was better than we did in 1Q, not as good as we did in 2Q, but clearly we believe, overall, growing with the market from an overall hardware growth perspective in 3Q.

Let me be specific in terms of what is going on in the SAP rollout and some of the things that hit us in the second quarter.

Specifically, the last part of the mySAP upgrade has always been, because it's one of the most complex pieces, is upgrading the websites in the e-commerce tools that directly touch our clients.

And inside of our clients, that we have a set of clients that are just heavy, heavy users of our e-commerce tools which is a good thing because that basically means that we're completely ingrained in their business and we're involved in the work flow for other purchasing functions of work, and it is very complex for them to go make any changes to how they utilize our tools.

We have some assumptions in our overall SAP upgrade of how long it would take to go migrate their websites to the new websites that we created to bear tides around mySAP upgrade.

What we found is that, captive in the SMB segment, to do a bulk upgrade, where you basically took a whole group of customers at one time and change their web experience.

And what we found out is that it caused disruptions to our clients, and hence, we saw a decline in the amount of business they were transacting electronically with us.

Some of that was picked up, and through the business, they started now transacting by the phone with us, but overall, it raised enough concern for us that says, that way of migrating the client isn't working, and we basically looked and said, hey, that will definitely not work inside of our enterprise clients who are doing a material amount of business with us through these e-commerce tools.

So, what we concluded to do is we literally got to do account-by-account migration training, say, okay, here is your old experience, here is the new experience, here is what has changed, here is why it is better, and help them move into that new experience.

And instead of doing it in any kind of bulk fashion, again, we have to do it account by account.

And when we do it account by account, unfortunately, it just takes longer.

The issue we have here is just working with our clients in helping in the interest of client satisfaction not cause too much disruption with them, but work with their schedule to go migrate to the new SAP web experience that we created, which we believe, long term, they are going to say is the better experience.

It is just how you get from Point A to Point B.

So, based on the learnings and the initial impact we saw in 3Q of some of the web business from a hardware perspective and SMB go down, we said we need to slow this down, and we need to come up with a new way to migrate our clients, which is why we came up with this account by account methodology, which, again, just adds time to the process, which is what pushes us out into the first quarter -- first half of 2008 until we believe we'll be done with kind of upgrading people's web experiences.

Okay.

What percentage of your SMB customers have been upgraded so far?

We'll say about 85% of our clients, and by far, the majority, 90%-plus of our SMB clients are all moved over to the new environment.

So, the 15% that are remaining which, again, represents somewhere between 25% and 30% of our annual sales are really those customers who are really heavy users and basically do all of their transactions by our e-commerce tools, and those are the remaining clients that are moving over.

The majority of those are enterprise clients.

There is a handful now of SMB clients that are still in that category because we have made a lot of progress because it's almost on a day-to-day basis that we're moving new clients over.

We are getting a lot of our SMB business moved over now.

It's just those remaining 15% of our clients is what we're focused on that takes us out to the first half of 2008.

Okay.

And the clients that you are in transition with now that you, in other words, haven't pushed out to the first half, do you expect to see any disruptions?

In other words, will the growth rate continue to be relatively sluggish compared with what it was earlier in the year because of this?

My belief is it's not a function that -- the issue we ran into is more a function of how we migrated, not what we migrated to.

So, the reality is we believe, as we migrate them in an effective way, that business should go on as business as usual assuming we did a good process of change of management with them of moving them from the old site to the new site.

So, I don't anticipate, with this new approach that we are implementing from a migration perspective, that we will see any slowdown from a web -- That's the whole goal .

That's why we changed the plan is we can't afford to have any kind of disruption in the business volume.

We haven't seen any disruptions for those clients that are transacting by the phone or transacting by a face-to-face engagement.

That aspect of the migration works great.

85% of our clients are now moved over to the new environment.

Our whole sales team, for the most part, has moved over to the new environment.

It is just the clients who are still using the e-commerce tool that are outstanding.

Some of them, the ones that are just mild users, have been migrated, and just now those heavy users that we are now working on migrating, but I believe that the way we are approaching it now account-by-account, it should disrupt -- It should prevent any kind of disruption from a business perspective as we move them to the new

Okay.

Great.

Thanks for that explanation.

And then just regarding fourth quarter, you talked earlier, Rich, about expecting normal seasonality.

So are we to assume that the breakdown or that operating profits will represent the 30% to 35% range that you have talked about in the past in the future fourth quarter?

Yes.

As you look at it from a full-year perspective, clearly as we go into the fourth quarter, by definition, it will be a seasonally stronger quarter for us.

And actually, there will be some benefits in the fourth quarter on the positive side of some of the key transactions on the software that we thought we were going to close in 3Q that actually moved into the fourth quarter.

But I tell you, it kind of equally gets offset in terms of we will also have, on the negative side, some [duplicative] costs that were not in our original budgeting assumptions relative to the fact that we haven't completed the SAP upgrade, so we believe the positive and the negative kind of balance out at this point in time.

So we're back to kind of the quarter we originally had in mind when we set the targets back in the beginning of the year, actually late last year, is kind of how we see the fourth quarter playing out.

And the good news, again, it's going to be seasonally a much stronger quarter than what we just saw here in the third quarter.

Okay.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Brian Alexander.

Please proceed.

Thanks.

Rich, can I just pick up on that last question?

So if we're still expecting 30% to 35% of the earnings of the full year to come in Q4, you're expecting to be somewhere between $0.50 to $0.60 for the fourth quarter.

Can you just confirm if that math as accurate?

The -- I trust that you did the math right.

I haven't done that calculation.

I guess the bigger picture of the question is you are still expecting Q4 to be 30% to 35% of the full year, or are you adjusting that because of what happened in Q3?

Hey, Brian, this Karen.

It's 30% to 35% of our original target, so what we're saying is, when we gave that guidance at the beginning of the year, that our original budget for Q4 is still where we think what our expectations are for Q4, acknowledging that year-to-date, we're actually above expectation.

Okay.

Because Q2 was so strong.

I see.

So it may not be $0.50 to $0.60.

Just shifting gears, relative to your internal forecast, is there a way to help us understand how much of the shortfall in the third quarter, which I assume Q3 was below your budget even though you are tracking above for the full year?

In Q3, how much of the shortfall was related to software versus hardware if you had to just ballpark it?

I can do more than ballparking it.

In terms of as you look -- obviously in every quarter, you have some good news and not-so-good news that impact your results.

I will tell you over 100% of the sequential decline that we saw in gross profit dollars came from our software category.

So as we looked at it versus our internal budgets, clearly the seasonality that we had expected when we set our internal expectations was much less than what we actually saw in the quarter.

So, and if you go tie it back to what drove the -- The biggest issue we had in the quarter is gross profit.

[That actually did] quite well against the internal expense budget.

It's really gross profit dollars, and it is really those gross profit dollars we were thinking we were going to get from the software category that we did not get.

So, really, the primary factor driving the third quarter performance is the software seasonality that was greater than we had expected driven by -- And to some extent, good news that we had extremely strong second quarter, as well as we saw some of our key clients in the large enterprise base migrate some of their key transactions into the fourth quarter of this year.

So that leads to my next question.

Perfect segue.

What percentage of the shortfall in the software business in Q3 do you think will get recaptured in Q4?

Overall, as I said earlier, I think it was the second question that came across.

Clearly, we have seen some upsides as it relates to some of the transactions that we thought were going to close in Q3 closed in Q4 in terms of gross profit dollar generation in the quarter.

But at the same time, as I highlighted earlier, the expenses in the fourth quarter will be higher than our original expectations given some of the non-planned IT costs associated with maintaining a dual infrastructure in the fourth quarter for the U.S.

hardware and service business that we thought we would be out of going into the fourth quarter.

I believe those two actually wash out to each other in terms of why you have them upside.

Basically, the transaction is moving.

We also have some [duplicative] costs that offset some of those GP dollars in the quarter.

Finally, Rich, you might have answered this already, I apologize, but I understand your comments about delay in some of the enterprise customer upgrades on mySAP to next year.

Did you also say when -- how much of a delay you'll have in migrating Software Spectrum business to mySAP?

Fortunately, that plan is a separate plan.

They are running in parallel versus serial.

Our original expectations wherein the first half of next year, we would close down the software application set and move those into the mySAP platform, and that continues to be our internal plan.

And, again, we actually have two different teams working on it.

One who is working on finishing up the mySAP deployment across the software and services base, and then by leveraging our relationship that we talked about last time with Wipro, our outsource partner, we're doing all of the coding work to move the software application capability in to the mySAP platform.

So fortunately the two projects are running in parallel.

So then I'm confused why we're having such a delay in the cost synergies.

As you laid out in Chicago, $10 to $14 million is where you thought you would be in '08, and I thought the bulk of that was contingent upon integrating Software Spectrum, not necessarily migrating the legacy North American customer base.

Yes.

Again, that was annualized savings versus the current year savings.

You are right.

If you want to start adding thoughts together, and that's probably just about as confusing, on Jason's question earlier, the concept is, you are right, the original $10 to $14 million in savings when we close down the platforms between the two companies is still the overall planning assumption.

By the way, we already recognized some of those savings.

So, some of the overachievement we have seen so far in our results on a year-to-date basis are some of the cost synergies that we had originally planned on that.

We recognized, which is why we are overachieving our internal targets third quarter year-to-date for our software business, as well as our company in total.

But as you look at it, assuming we meet the first half deadline in terms of migrating the software applications, that's when you start the clock in terms of seeing that $10 to $14 million of annualized savings that you are only going to see over a six-month period.

The thing that works against that benefit on a full-year basis is we will have some higher cost in the first half of the year from an IT perspective associated with the fact we thought we were going to be done with the hardware services upgrade, which won't be done.

It will just be in the finishing stages.

Those two thoughts kind of get connected, and I [tried to delineate] them when Jason asked the question upfront.

No problem.

My final one.

Just how much above plan are you year-to-date relative to your original budget?

I don't think we would disclose that, but I will tell you we are ahead of budget across our geography units, as well as each of our product categories.

So overall on a year-to-date basis, we still feel very good about the business, and as we go into the fourth quarter, we feel good about EMEA, as well as North America, as well as the hardware, software and services categories going into the fourth quarter.

So what we really have here is we have a third quarter seasonally that dropped off more than we originally planned.

So in terms of being able to forecast that, we got starter, so as we go into our budgeting process next year, we'll be smarter about how we go anticipate the third quarter performance that we'll see given our client set which is heavily weighted towards enterprise.

One of the questions obviously -- One of our major software partners published his results, or their results, recently, and you say, well, gosh they grew extremely well.

Why didn't you not even grow as strong?

Well, really, the answer comes down to client mix.

If you look at it, our SMB and public sector business actually, in the U.S.

specifically which is the largest part of that business, grew very much in line with what results we saw from them.

But as it relates to the enterprise segment, which is where we saw the disconnect, we really saw the fact that we -- our enterprise business is built on a few hundred clients and inside of those few hundred clients we had an outstanding second quarter in terms of -- in that second quarter, they are signing up new agreements, as well as renewing agreements that were expiring by June 30th.

And we also saw across the client set some deferrals, some of the transactions that we thought were good into Q3, into Q4.

But when you really try to define what happened in 3Q, you really have a situation where, based on our client mix and based on when those clients chose to go transact close their transaction, we saw a heavier weighting than we anticipated in 2Q, as well as some movement into 4Q.

Does that make sense?

It does.

Thank you.

I might sneak in later.

You have a follow-up question from the line of Jason Gursky.

Please proceed.

Hey, there.

Sorry about that.

Hey, Rich, just a couple of more questions related to the integration of Software Spectrum and Insight.

I guess first question is maybe a little bit of an update on how the cross-selling efforts are going.

Maybe you can put some numbers behind how that is going thus far.

You talked a little bit before about the number of clients that you had overlap, with didn't have overlap with, et cetera.

Related to the SAP rollout, and how it affects your long-term plans related to being able to sell hardware in Europe, if you could just give us an update there on what your renewed expectations might be for being able to sell hardware in Europe.

The -- sure.

I'll deal with the cross-selling point first.

I will come at it in two different sections.

First of all, in the past like the last call we had, we talked about, for example, I don't remember the numbers off the top of my head, 8,800 of our SMB clients that has currently bought from Insight had not bought software from us prior -- previously, as the result of the acquisition and the new capabilities through the second quarter.

We were able to go get, I think it was 17% of those clients, to now start to buy software from Insight.

So, that data point that really supported, that were really starting to draw this cross-selling activity.

We -- I don't have at my fingertips that data point through the third quarter.

But I would tell you our SMB business, from a software perspective, did well in the quarter ,so my view is that cross-selling effectiveness is continued.

In the enterprise segment, we, too, had several wins as you would imagine with clients that used to be just software that are now looking at us from a hardware and a services perspective, which is one of the reasons why, for example , our services business which grew 42% in North America was as strong as it was.

We were able to leverage some of these relationships now from a services perspective.

Longer term, I still don't believe we have provided as much clarity on a very important topic, which is how is cross-selling going inside of our company?

We have created -- one of the reasons why we have data in seven different systems today inside of our company because we don't run off of one platform.

We have created some new tools and some new ways to go explain cross-selling effectiveness, which hopefully -- and right you, we're working through making sure everything is coming together correctly in terms of how the data is being pulled, but what we're trying to accomplish is be able to tell tell you a simple perspective, which is, here is how many of our accounts as percentage of the accounts are buying just one category from us, whether it's hardware stuff or services.

This is how many of our accounts are buying hardware, software, services, plus one other category.

So they are doing two categories with us.

And these are how many of our accounts doing all three categories from us, which is hardware, software, services, and how that metric, those three simple metrics, have changed from the previous quarter.

So you start to see our effectiveness of upgrading the relationship with our clients actually being more than just one category, which is a demonstration of our effectiveness of increasing client loyalty, getting a greater share of their wallet.

I think we'll be in a position, for sure, by the analysts meeting in March, to start introducing that set of metrics to you.

We're just trying to go make sure that we all understand how the data is coming together and that it is obviously correct, as well as we have the management system in place to go improve upon the metrics for our disclosure of taking you through that in the March time frame.

Relative to your question on mySAP, so again, the big picture from an IT perspective, we have three things we are trying to accomplish.

We want to go get the U.S.

hardware and services business on mySAP.

We got 85% of our clients there.

We have 15% left.

We're close to the goal line, but we need to get over the goal line to move them over to that platform.

We will have that done into the first half of 2008, hopefully sooner than later, and we obviously have a lot of people working on that to get that accomplished.

The second key activity is to close down the software legacy systems in the United States and merge them onto mySAP, so that we have then one platform, one back office in terms of supporting one set of IT systems, and that plan is really also tied out to try to get that do done through the first half of 2008.

The third play is then taking that combined set of code that supports our hardware, software and services business, then internationalizing it and turning it on in Europe and turning it on Asia-Pacific, so then we have an IT infrastructure that allows us to sell hardware, software and services.

That plan will start getting deployed.

We'll start writing the code in terms of internationalizing what we have deployed in the U.S.

in the second half of 2008, and we'll start the deployment of that in 2009, In our current view, we should have that done by the end of 2009, which is very much in line with what we have said historically.

It's about a two-year project to kind of upgrade our infrastructure to one platform around the world supporting hardware, software and services.

So I think, while we have had some hiccups in terms of the longer time on this first play, which is getting mySAP into the U.S.

hardware, software and services business, I believe it does not necessarily impact play two and play three, and the overall goal by the end of 2009 having one platform to support our business

Okay.

Great.

Thanks, guys.

I would now like to turn the call over to Mr.

Rich Fennessy, Chief Executive Officer.

Please proceed.

Okay.

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

I appreciate the opportunity to share our third quarter results with you, and I obviously look forward to sharing with you our fourth quarter results on our next earnings call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.