Insight Enterprises Inc (NSIT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insight Enterprises incorporated fourth quarter 2007 earnings release.

My name is Lisa, and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS) I would now like the turn the presentation over to your host for today's call, Ms.

Glynis Bryan, Chief Financial Officer.

Please proceed.

Thank you, Lisa.

Welcome everyone and thank you for joining the Insight Enterprises conference call.

Today we will be discussing the company's operates resulting for the quarter and full year ended December 31, 2007.

I'm Glynis Bryan, Chief Financial Officer of Insight Enterprises and joining me is Rich Fennessy, President and Chief Executive Officer.

If you do not have a copy of the earnings release which was posted this afternoon and filed with the Securities and Exchange Commission on form 8-K, you will find it at our website at insight.com on our investor relations section.

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

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

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

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

This conference call and the associated web cast contained time sensitive information that is accurate only as of today, February 6th, 2008.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited.

Finally, let me remind you about forward-looking statements that will be made on today's call.

All forward-looking statements that remain in this conference call are subjects to risks and uncertainties that could cause the actual results to differ materially.

These risks are described in today's earnings release and also in greater detail in our annual report on form 10-K A for the year ended December 31, 2006 and subsequent reports on form 10-Q.

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

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

Rich?

Thank you, Glynis.

Hello everyone.

Thank you for joining us today.

I am very pleased to announce that the overall performance of our geographic operating segments produced a solid fourth quarter which provided a strong ending to a successful 2007.

As expected, our business delivered seasonally stronger fourth quarter and for the full year our overall financial results exceed our own internal expectations.

Specifically, our consolidated fourth quarter net sales are $1.28 billion, a 5% increase over fourth quarter of 2006.

While net earnings were $23.8 million, a 29% increase year-over-year.

Additionally, diluted earnings per share from continuing operations grew 30% year-over-year to $0.48 from $0.37 in the fourth quarter of last year.

Our acquisition of Software Spectrum closed in September of 2006, so our fourth quarter 2007 and 2006 consolidated results reflect a full quarter of that business on the year-over-year business.

Our strong financial results in the quarter benefited largely from the strength of our AMIA and APAC geographic performance as well as our software and services category performance across all geographies.

Our North America hardware category struggled with growth in the fourth quarter, primarily driven by a challenging demand environment within our client set and some internal sales execution issues.

For the full year 2007, our consolidated net sales were $4.8 billion a 34% increase over 2006.

While gross margin on these sales on these sales increased to 13.8% from 13.1% reporting in 2006.

Earnings from operations increased 25% to $126.1 million from $100.5 million in the prior year.

And reported net earnings from continuing operations grew 13% to $72 million from $63.7 million in 2006.

Please recall that these 2007 results include expenses of approximately $15.6 million or $9.4 million after tax related to stock option review and severance and restructuring charges that we occurred in 2007, while the 2006 results reflect $2.3 million or $1.5 million after tax in stock option review and severance and restructuring charges.

We are very pleased with the overall financial performance of our business in 2007.

Year-over-year, our North America segment grew its net sales by 18% and its earnings from operations by 6%.

Our AMIA segment grew its net sales by 87%, and its earnings from operations an even stronger 93%.

For our Asia-Pacific segment more than tripled its earnings from operations 260% increase in net sales.

he reported earnings from operations of our AMIA APAC segments accounted for more than 30% of our full year consolidated results for 2007, up from 18% in 2006.

We believe that this is clear proof point that our strategies to diverse our profitability profile by capitalizing on global demand is working quite well.

Before I take you through our key initiatives for to 2008, I would like to take a moment to reflect on the progress we have made over the last three years, to realize our global trusted advisor or GVAR strategy, and in fact those steps have had on our financial performance.

As I noted on our last conference call, execution of our GVAR strategy continues to focus on growing profitable market shares, expanding our global footprint, and continuing to build VAR-like solution capabilities by gaining deep expertise in high growth areas of Enterprise software solutions, high performance servers and storage and networking and communications.

I would like to make a few comments about our progress in each of these areas.

First, we have been growing profitable market share, through a combination of organic and inquisitive growth, our business has grown significantly the past few years.

On both the top line and most notably on the bottom line.

Net sales have increased from $2.7 billion in 2004 to $4.8 billion in 2007.

While gross profit margins have increased from 12% to 14% over the same period, from 12% to 14% over the same period.

Earnings of operations have nearly doubled from $67.6 million in 2004 to $126.1 million in 2007.

These results reflect our transformation from a pure product fulfillment business to global technologies solutions business that includes a more profitable mix of sales from both a product category and geographic perspective.

Next, we have been expanding our global footprint.

In 2007, net sales outside of North America were approximately 30% of our consolidated net sales up from 19% in 2004.

With the acquisition of Software Spectrum in September of 2006, we now operate in 22 countries around the globe and as a result we have a broader international footprint than most of our competitors.

As we experienced in 2007, our global footprint enables us to gain profitable market share by meeting the needs of our global clients and benefiting from the higher growth regions across the world.

Finally, we have been developing VAR-like solution capabilities in key solution areas.

In order to deepen our relevance to our clients and secure more of their annual IT spend, we have pursued a focused strategy to develop or acquire deep expertise in high growth areas of Enterprise software, high performance systems and networking and communications.

While we continue to sell a wide array of products to our clients, the basic core of our business, we have taken very specific steps to secure more expertise in key IT solution areas.

Over the last three years, we have created a service organization within Insight of more than 600 IT trusted advisors.

These Insight teammates are dedicated to providing technical expertise from the beginning to the client engagement all the way through the deployment of the IT solution within our clients' businesses.

In 2007, our services business generated approximately $108 million in net sales, up from $54 million in 2005.

I think you can clearly see that Insight has undergone a significant transformation the last three years and throughout this change -- throughout this change has delivered very strong financial results.

So let me take this opportunity to thank the 4,700 plus teammates in the company for their hard work and commitment to positioning Insight as a leader in our industry.

As we now head into 2008, we believe our business is healthy and well positioned for continued success.

Our strategic and operational goals for 2008 will remain consistent with those we have been pursuing the past several years.

Specifically, we will continue to build our VAR-like solution capabilities, both organically and through targeted acquisitions like the one we announced a few weeks ago.

[calance] is a leading provider or CISCO networking solutions in the United States, including networking products, professional services and managed services.

This strategic acquisition will significantly enhance our technical capabilities around networking and will enable us to capture a leading position in the fast growing networking category.

Additionally, we will continue to leverage existing client relationships.

Over the past few quarters, we have been building metrics and tracking the progress of our efforts to cross-sell into our existing client base across our solution set of hardware, software and services.

Early results indicate when a client buys across multiple categories, the net sales and profitability of that client increases significantly.

So we find these early results promising and expect to continue to establish cross-selling as the mantra of our sales organization.

Next, we will develop and implement a strategy to extend our reach to new client segment.

Specifically, the small business segment.

Historically our S&B client set was comprised of primarily of clients with over 500 feet.

We have created a special team of account executives focused solely on the 50 to 500 feat small business market with metrics, methodology and offers that is will address the unique needs of this client set.

This market provides incremental opportunity for Insight ,specifically in the United States.

Also in 2008, we will work to expand our global capability by expanding our services capabilities in key countries in Europe as well as Asia-Pacific to leverage existing software client relationships and enhance our profitability.

And finally, we will drive operational efficiencies in our business and improve our return on invested capital by continuing our IT systems deployment, streamlining key business processes and improving our working capital processes.

Additionally, we will continue to deploy capital in a very disciplined way as we execute our 2008 goals.

Now, I will ask Glynis to provide more details on our fourth quarter and full year 2007 performance across each of our operating segments.

Glynis?

Thank you, Rich.

Starting with North America, for North America, net sales decreased 4% from $880.8 million for the fourth quarter of 2006 to $844.1 million for this quarter, due primarily to a decrease in software and hardware net sales, partially offset by an increase in sales of services.

Software accounted for the largest portion of the decrease as we continue to see a shift to more Enterprise software agreements with only an associated agency fee being recognized in net sales versus gross revenue recognition.

As we have previously indicated, we expect this trend will continue and will probably increase going forward.

We also continue to see strong growth in our services category which grew by 37% year-over-year and as Rich noted earlier, our net sales in our hardware category declined 2% due to the challenging demand environment within our client set and internal sales execution issues.

Overall, gross profit grew 1% despite the decline in net sales during the quarter.

Please recall given that certain products and services such as software maintenance contracts and third party warranties are recorded as net sales of the GAAP and there's 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.

Our software and hardware categories performed well in the quarter and contributed to a gross soft improvement.

For the full year, North America net sales increased 18% from $2.85 billion until 2006 to $3.36 billion in 2007, due primarily to the acquisition of Software Spectrum in September 2006 as well as growth in organic growth in our hardware and services category..

Gross margin during the fourth quarter increased to 13.8% from 13.1% in the fourth quarter of 2006.

This increase was due primarily to an increase in agency fees from Microsoft Enterprise software agreement renewals and the higher margin associated with our services business.

For the full year, North America gross margin increased to 14% in 2007 from 13% in 2006.

Growth in services and software categories is due primarily to the acquisition of Software Spectrum was a primary driver of gross profit dollar growth, 27% year-over-year.

Selling and administrative expenses as a percentage of net sales were 10.9% up from 10.3% in the fourth quarter of 2006.

This increase was a predominately a result of the lower net sales base in the fourth quarter of 2007 and some duplicative costs associated with our back office operations, tied to our AMIA safety upgrade.

As we mentioned in our third quarter call, we believe that more deliberate and client specific approach to the deployment of AMIA AP will prove the most successful for our business over time.

The key objectives for 2008 are with client interruption incurred in our S&B client set in the U.S.

as a result of the migration and to improve those clients with experience.

We will not achieve the benefits associated with the system's implementation until we complete these objectives and we anticipate this will occur in the second half of 2008.

For the full year selling and administrative expenses as a percentage of nets sales were 11.3% in 2007, up from 10.1% in 2006.

This increase in selling and administrative expenses in 2007 was primarily due to higher salaries and wages, legal fees and commissions.

North America selling and administrative expenses for the three months ended December 31, 2007 and 2006 include expenses of approximately $0.3 million and $1.6 million, respectively, for professional fees and costs associated with our stock option review.

For the full year, such professional fees and costs amounted to $12.5 million in 2007 and $1.6 million in 2006.

Overall, North America earnings from operations for the two months ended December 31, 2007 remained relatively flat compared to the same period of last year at $24.7 million or 2.9% of net sales for the fourth quarter 2007.

For full year, our North America segment achieved a 6% increase in earnings from operation from $82.2 million in 2006 to $87.3 million in 2007.

As a reminder, full year 2007 includes professional fees and costs of $12.5 million previously mentioned, as well as approximately $3 million expenses.

Full year 2006 included the $1.6 million previously mentioned plus severance and restructuring costs of $508,000.

Our AMIA operations recognized excellent results during the quarter.

Net sales were up 28% from $317.

9 million in fourth quarter 2006 to [inaudible 5.7 million] for this quarter due primarily to a 36% increase in software sales, but also very strong performance from our hardware and services categories which grew 11% and 28% respectively.

The strong performance in AMIA includes higher sales across all categories and the benefit of currency exchange rates between the weakening U.S.

dollar year-over-year as compared to the various European currencies in which we do business.

AMIA's positive net sales growth in all three categories for fourth quarter 2004 -- 2007 helped drive a comparable increase in gross profit of 27% compared to the fourth quarter of 2006.

For the full year, AMIA net sales increased 87% from $710.3 million in 2006 to $1.33 billion in 2007 due to both organic growth and as a result of our acquisition of Software Spectrum in September 2006.

Our fourth quarter gross margin in the AMIA segment remained consistent at 12.2% for the three months ended December 31, 2007 and 2006.

For the full year, AMIA gross margin decreased from 13.4% in 2006 to 12.7% in 2007.

The decrease in gross margin from 2006 was primarily due to decreases in product margins which includes vendor funding and decreases in supplier discounts.

These decreases in gross margin were partially offset by increases in agency fees from Microsoft Enterprise software agreement renewal.

Growth in our software and services category is due in part to the acquisition of Software Spectrum as well as growth in our hardware category contributed to gross profit dollar growth of 77% year-over-year.

Selling and administrative expenses as a percentage of net sales were 9.1% in the fourth quarter of 2007, a decrease from 10% in the fourth quarter of 2006.

The decrease from the fourth quarter 2006 was primarily due to increases in net sales.

Selling and administrative increased by $5.4 million from the fourth quarter 2006 to the fourth quarter of 2007, primarily due to higher foreign currency exchange rates, higher compensation cost due to additional sales head count and increased bonus expenses due to overall financial performance in AMIA.

AMIA's selling and administrative expenses for the year ended December 31, 2007 include expenses of approximately $500,000 for professional fees and costs associated with our stock option review.

Overall, our AMIA segment achieved earnings from operations of $12.7 million in the fourth quarter of 2007 up 79% from $7.1 million in the fourth quarter of 2006.

Further, on a full-year basis, earnings from operations grew 93% to $33.3 million in 2007 from $17.3 million in 2006, a very impressive performance from our AMIA segment.

Additionally, fourth quarter 2007 includes the $606,000 benefit related to a reduction in AMIA's restructuring liability for the remaining lease obligation of a previously vacated office property following a successful renegotiation of a portion of the long-term lease during the quarter.

This amount was partially offset by $177,000 of severance expense during the quarter.

AMIA's 2006 earnings from operations include severance and restructuring expense of $221,000.

Moving on to APAC, our APAC segment recognized net sales of $33.5 million, recognized gross profit of $7.2 million and contributed $2.7 million to earnings from operation in the fourth quarter of 20 07.

These results reflect an increase of 43%, 84% and 222% as compared to the fourth quarter of 2006.

We continue to be excited about our APAC segment, which is performing very well, and continues to post strong results and growth in net sales and profitability.

In 2007, our APAC segment contributed $107.8 million in net sales, $20.7 million in gross profit and $5.5 million in earnings from operations to our consolidated results.

Moving on to our effective tax rate, our effective tax rate from continuing operations for the fourth quarter of 2007 was 37.5% compared to 37.7% for the fourth quarter of 2006.

Our effective tax rate from continuing operations for the full year of 2007 was 38.5% compared to 35.2% for 2006.

The effective tax rate for the full year is higher in 2007 due to an increase in income tax reserve.

Further, our 2006 effective tax rate reflects the reversal of accrued income taxes resulting from the determination that a reserve previously recorded for potential tax exposure was no longer necessary.

Our net foreign country exchange gain was $1.1 million in the fourth quarter of 2007 compared to a gain of $587,000 in fourth quarter of 2006.

These gains result from foreign currency transactions including intercompany balances that are not considered long term in nature.

The increase in the net foreign currency exchange gain is due primarily to increases in business transacted outside of the U.S.

and the continued decline in the value of the U.S.

dollar against currency as we transact business in specifically the Canadian dollar, the euro and the British pound sterling.

From a cash flow perspective, we generated very strong operational cash flows for the full year 2007.

Operating activities provided approximately $100 million in cash.

Our strong operating cash flows, along with $28.6 million from the sale of PC wholesalers, enables us to not only reduce our outstanding debt by $52 million, but also funded a $50 million repurchase of our common stock during the year.

Capital expenditures were in line with our expectations at $35.8 million for the year, a 4% increase over 2006 and primarily related to expenditures for the mySAP upgrade.

That concludes by comments, and at this time I will turn the call back over to Rich for a few additional comments before we take questions.

Rich?

Thanks Glynis.

I would like to wrap up today's call with a brief recap of the highlights in the fourth quarter of 2007.

We had very strong performance in both AMIA and Asia-Pacific which offset performance in our North America hardware category and contributed to overall net sales growth of 5%.

This clearly demonstrates the geographic diversification benefits of our global strategy.

Our software and services categories continued to deliver strong results across all geographic segments and help fuel our profitable performance.

This demonstrates the product category diversification benefits of our solution strategy.

We delivered growth in total gross margin dollars up 10% year-over-year and increased our gross margin percent by 60 basis points from 12.9% to 13.5%.

Total earnings from operation increased 23% and operating margin improved from 2.7% to 3.1% of net sales.

All this resulted in a 30% improvement in diluted earnings per share from continuing operations.

And we ended the year with a strong balance sheet with capacity to support our strategic objectives.

As a result of our confidence in our business model and the momentum we built in 2007, we are pleased to provide the following financial guidance for 2008.

We expect organic net sales to grow faster than the market growth rate which with we expect to be approximately 5% on a worldwide basis.

And 2008 fully diluted earnings per share are expected to range between $1.80 and $1.95 of which 50% to 55% is expected to be recorded in the first half of the year.

These expectations reflect the following assumptions: an effective tax rate of 37% to 39% for the full year; completion of the $50 million stock repurchase program authorized by the company's board of directors in November 2007 and cash outlays for capital expenditures of approximately $30 million to $35 million.

At this time, Glynis and I are happy to answer any of your question.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Bryan Alexander from Raymond James

Thanks, good evening, guys.

Rich, just a clarification, is there anything baked into your guidance for '08 for [calence]?

[Calence] from an EPS perspective is based into the guidance, because if you remember on that call, we said it is going to be neutral to slightly positive.

So from an EPS perspective that is baked in.

The in terms of the organic growth rate growing faster than the market, which we say the market's going to go out on a worldwide level, grow 5%.

The net sales that we'll pick from [calence] are are not included, obviously, in the organic statement.

And I understand your objective to grow faster than the market, but if we, if we kind of just look at how, you have been trending, North America is 70% of your business, and in the fourth quarter, hardware and software both declined.

And in fact, hardware didn't grow if all of 2007.

You talked about having some execution issues.

Maybe you can go into a little bit of detail on what those are and how quickly they will get fixed.

And we're probably going to have a more challenging economy in '08 than '07.

So I am just wondering what gives you the confidence that you can grow above that mid single digit range.

Yes, I mean, a couple of things Brian, but first of all, relative to the primary strategy, that is kind of on a geographic level, leveraging the footprint we have now, it has allowed us to grow 5% in the fourth quarter which is obviously very strong AMIA, as well as very strong Asia-Pacific performance.

We see that continuing, in fact, we're making investments to go insure that continues, and obviously, some of the sales executions issues that we ran into in North America, specifically in the fourth quarter, we believe are short term in nature, I mean, real simply, to kind of just boil down what sales execution issues boils down to is -- from the net new transaction perspective, in terms of winning new business, new hardware transactions, we were not as successful in the fourth quarter as we would like.

So as we go into 2008, from the first half perspective we are putting plans in place everything from sales incentives programs to some more aggressive bid disks to go out after the opportunity.

With that said, the hardware business is the only thing from a growth perspective in North America we are concerned about.

In the services business perspective, that grew extremely well in the quarter and from a software perspective, as you know, we look at GP dollar growth as the significant measure there.

And overall, from a software business performance both the North America as well as worldwide, we feel very good about our fourth quarter results.

I mean, one of the things coming off of the third quarter earnings call that you will remember, because I think you may have asked the question, was obviously, what happened in the third quarter, and really the conversation was, hey, we miscalled the seasonality of our software business.

As a result of that, we obviously had lower results from an earnings per share perspective than we would have liked, but we said our expectations are that that software business will return to strength in the fourth quarter, that we'll have a strong fourth quarter, that we'll overacheive our full year expectations for the software business, which is exactly what happened.

So, if you look to growth in total, how we're going to continue to grow faster than market which we believe is 5%, is returning to some growth in North America, but also leveraging the global footprint that we have, specifically with AMIA and Asia-Pacific, as well as continuing the growth we've seen off of our services business, which will help us go drive the EPS that we included in our guidance.

Hah sick to help us drive the EPS we included in our guidance.

Well, I guess back to the guidance, if we're looking at this range of $1.80 to 1.95, how would you -- how would you characterize the key swing factors that could put you at the low end versus the high end?

Is it more a function of growth or is it more a function of margin?

And I ask this because if I just plugged an 8% growth rate in for 2008, it is still appears like you are expecting anywhere from 20 to 50 basis points of margin expansion.

I am just trying to better understand where that would come from in terms of gross margin expansion or opex leverage.

If I look for all of 2007, all of 2007, it doesn't look like we saw any operating margin expansion in that period.

Yes, from a -- obviously we saw significant gross margin expansion but you are right, some of the cost that we had had specifically relative to our back office operations and some are IT upgrades, clearly didn't allow that gross margin that we saw to flow down to operative margins to the extent that we would like.

As we go Into 2008, clearly we see gross margins continue to improve as we continue to do what we did in 2007 which is change the mix of our business.

So as we continue grow services faster than we have historically, as we look to go -- continue to grow our software business, we see gross margin opportunities.

So that's the biggest factor, inside of the guide that's continued to drive gross margins.

Now, obviously there's an assumption there that we're also going to grow faster than the market at 5% and from our perspective, as we look to the comment we made earlier in terms of leveraging our geographic footprint, as well as driving some improvements in our North America business, we believe that's also reasonable.

And then I'll just -- just to go back to software and then I will get back in the queue, it sounds like you are pleased with how the software business performed.

I know it did very well in Europe, but even in North -- and in Asia.

But even in North America, it sounds like you view this as a bounce back quarter but we are still down 11% in terms of revenue versus a year ago.

I know there's some issues in terms of gross versus net I don't think we have an update as to look at gross profit dollar growth.

But, am I characterizing that right?

That you're pleased with the bounce back?

Because I am still struggling to understand why, if we're still down 11%, and we should be benefiting from cross selling relative to a year ago.

We are very pleased with the software results in North America, AMIA, Asia Pacific and on a worldwide level.

So it bounced back.

We saw strong results on the software business perspective and again, what you are seeing in North America, an 11% decline versus that statement is really the growth [inaudible] discussion that our growth profit growth and the agency fees that we recognize as a result of Microsoft transacting the business directly and hence, us not recognizing the revenue, but just recognizing GP dollars is exactly what happened in North America which is why you see that disparity between revenue growth and our confidence in how the business returned to strength in the fourth quarter.

And again, from a full year perspective.

As we called out at the end of the third quarter, we believe that we're going to go exceed our goals that we put in place from the software for the full year in the fourth quarter by coming back from what we missed in the third quarter and that's exactly what happened.

We did grow gross profit dollars in North America in software in Q4?

So we did grow gross profit dollars -- I should say you grew gross profit dollars in North America in software in Q4.

Yes.

Okay.

Thank you.

Your next question comes from the line of John Lawrence from Morgan Keegan.

Good afternoon.

Hey John.

Congratulations on the quarter, Rich.

Could you -- could you comment a little bit, Glynis, could you just give a sort of a break down on the CapEx for '08, please.

Sure, our CapEx for '08 is going to be in the range of about $30 million to $35 million, and most of that is related to the continued mySAP upgrade.

And Rich, would you take Brian's question just one step further.

On the execution issues, how much of that, as far as the goals for '08 of going back and getting those relationships squared away were those execution issues took place, that was part of the -- of the decision to delay that roll out.

Can you talk about that a little bit, who was effected and how difficult it is to reestablish those connections.

Sure John.

It really ties back to the -- what we call out in the last call is that what we experience in the third quarter was some impact to the web business, specifically with our S&B clients, given the way we were running the roll out.

In kind of bulk migration, we took them all to a brand new web site, and they didn't react too well to that web experience and hence, basically what we did in the fourth quarter relative to mySAP is we put everything on hold and basically had the whole organization focused questioned on closing out the year.

As we go into the first half of 2008, we are going to continue to apply those fixes from S&B web perspective which will be, for the most part, implemented here in the first quarter and as we go into the late part of the first quarter into the second quarter we [inaudible] get some return off of those fixes we put in place in terms of winning back some of those web clients.

As it relates to the overall mySAP program, we are -- as we kind of took the fourth quarter off to go make sure we focused on closing out the year strong, we have been re tooling our plan.

So basically at this point, we are looking to finish the roll out through the summer time of 2008.

So when we provided guidance of 50% to 55% of the full year in if first half, because if you go back and do the work you will see we did actually 58% in the first half of 2007 if you exclude stock option and legal expenses et cetera, basically one of the big -- two things are driving our view that the first half from a full year perspective will be less as a percentage of the total.

Those two things are, we do see a slower demanding environment in the first half compared to the growth rates we saw in the first half of 2007 as companies basically are going to be rationalizing and releasing perhaps slower their IT budgets given just the uncertainties in the U.S.

economy specifically.

Second, is some of the back office cost we have in, on board today that are still there in the fourth quarter will continue in the first half because we are still running our hardware and services business off two systems, the old SAP and the new mySAP, those costs are going to be there throughout the first half of the year, they're about $1 million to $2 million in the fourth quarter and those are going to continue in the first quarter as well as in the second quarter, and that's what drives that 50% to 55% kind of separation from a range.

And one of the things, because this is the first time we have given guidance, I want to provide my perspective on it.

We believe that the concept of providing guidance from a EPS perspective on a full year basis is very positive from an investor perspective because hopefully it gives our investors the confidence and understanding of where management sees the business playing out on a full year basis of 2008.

Our second positioning in terms of try to provide a first half point of view, is we believe our business as we now have a broader part of the business in software, it is probably more appropriate to look at our business on a half year cycle versus quarter by quarter.

So we believe going forward, it is more important this think about how the company do over a six month period than 1Q versus 2Q just because of some of the key transactions and how they can flow from one quarter to another quarter.

So that's why we come up with the guidance of trying to provide additional clarity, what we believe is going to true in the first half which again, will be 50% to 55% of the full year, the full year being a $1.80 to $1.95.

A just a couple of other housekeeping, as far as the -- feeding your internal guidance for the fourth quarter, would that be because of AMIA and APAC?.

Yes, I mean -- our fourth quarter performers in terms of the -- the star performers in the fourth quarter was clearly AMIA and Asia-Pacific.

They maxed out in terms of execution and just did a wonderful job.

And by the way AMIA, each quarter in 2007 maxed out and did a great job and Asia-Pacific, three of the four quarters did a great -- maxed out the bonus plans we put in place.

So, our international footprint, which is to me really showing that the strategy of diversifying geographically is really working for us was a big driver in our performance in the fourth quarter.

Which gives me the confidence as we talk about growing faster than the overall market growth or the 5% as we continue to get that growth out of those -- outside the North America geography.

Thanks a lot.

Good luck.

Thank, John.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Alberto Mann from Thomas Weisel Partners.

This is Alberto Mann calling in for Matt Sheerin.

Good day, ladies and gentlemen.

Can you tell us how much you have done so far to date?

Sure.

We actually have been in a black out period as a result of the calence acquisition and then leading up to this fourth quarter earnings release.

So we haven't started that program yet.

We anticipate starting it depending on market conditions as soon as we have out of this black out period.

Okay.

Great.

And then, in terms of Asia hitting up nearly 10% operating margin in the region last quarter, what is the sustainable operating margin for the full year in Asia going forward, it seems to be out performing the other region.

And the reason why it is outperforming the other regions, it is purely a software and services mix.

So what you see in AMIA is software, hardware and services with a very large percentage coming from software.

And obviously, you see all three also in North America.

So the biggest reason why you see the operating margin difference is just because of the mix of products, Asia-Pacific just being software and services, And overall as it relates to the fourth quarter results for Asia-Pacific, they did have a very strong result, not to say that every quarter they may run at that level but we have a lot of confidence in that business model going forward.

Is it for a full year, on a full-year basis, is it mid single digits or high single digits of sustainable model in that region assuming you don't add hardware?

I really don't have that actual number in front of me.

Okay.

But I mean, to me if you go back and look at the results that we published, I mean there's no reason to believe -- and you blended out that number, there's no reason to believe anything is unique there that says that model doesn't continue going into 2008.

Okay, great and then you just talked a couple of questions ago about your feelings on the first half being a little bit more sluggish and the outlook, obviously, in the economy is more cautious these days.

What gives you confidence that there will be sort of a rebound in the second half?

I mean, I'm -- not necessarily a rebound.

My personal view,and I think IBC date still -- and we look at IBC and well as Gardener as sources, is still pointing to go a worldwide growth of 5%.

They don't necessarily break out 1Q, 2Q versus the halves.

My editorial comment is the fact that I believe that we're going to see a slower first half versus the second half just from the pure, simple idea that as companies have CapEx budgets, are they releasing those under the same schedule they normally would.

My guess is, many, many companies aren't going to be because they're going to be looking at kind of what's going on in the overall economy.

So my sense is, 1Q and 2Q has a tendency to be lower slower than what we're going to see on the full year basis.

Okay, great.

And then, just lastly, I don't know if you can, but if you could quantify the approximate contribution of calence to the EPS guidance, that you provided, assuming the deal closes April 1st as you said.

Again as we called out in the calence call, it is neutrally --- neutral to slightly [inaudible].

So don't view that as basically contributing very little.

Okay.

Great.

Thanks.

Your next question comes from the line of Mike Hughes from Delaware Investments.

Yes, I was just wondering, what metrics will be used to determine management's compensation for '08, more specifically, is there a return on invested capital metric included in there?

Sure.

Let me just give you a quick summary of the comp plan in total.

So, from incentive bonus perspective outside of obviously base salary, 60% of people's incentive bonuses tied to hitting quarterly earnings from operations targets.

40% of their annual incentive is target is tied to an annual performance plan which has supporting financial metrics inside of which one is ROIC.

So every executive in the company will have return on invested capital in their annual performance plan for 2008, and it will be one of the metrics that we use to determine the 40% pay out at the end of the calendar year 2008.

As it relates to our equity program our equity program is tied to hitting earnings per share targets for the year.

As it relates to return on invested capital, clearly we have got some new leaders from a financial organization perspective inside the company, Glynis joined the team.

Her.

along with Kira McGinnis, our Chief Accounting Officer are going to take the work we we've already started on return invest in capital and continue that in terms of just a focus area for the company in 2008.

We actually believe we made some good progress in 2007 but with that said, we think there's a lot of opportunities for us.

Okay.

Two follow up questions.

The 60% of the comp related to quarterly EPS, that seems high to me.

You don't provide quarterly EPS estimates to the street.

Aren't you -- doesn't that kind of force your managers to run the business on a quarterly basis rather than for the long term?

I am just wondering why that number is so high.

And then second question, in your ROIC calculation, are you including goodwill in that calculation?

As it relates to the first part of the question, the 60% tied at quarterly results, as you know, our business is a daily business, so each and every day you have to come in and figure out how you're going to drive more sales and get the gross margins up off of those sales and how you'll keep your expense structure in line.

So we believe very strongly that having a quarterly aspect to our comp plan keeps people focused on not just the quarter but the day by day activities that drive the quarterly results.

So that the point in time, we don't see any change off of that.

Because I think it drives the right kind of results oriented behavior inside of the company.

Relative to your question, on return invest to capital, does it include goodwill or not --

Yes, it would.

Yes, it would.

Okay.

Thank you very much.

There are no further questions at this time.

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

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

Again we are very pleased with the results we were able to share with you today kind of puts into perspective for you what as a team we've accomplished from 2004 all the way up here to 2007.

I mean, the kind of growth we saw from a top line perspective of 2.7 going to 4.8, adding 200 basis points to our gross margin, and significantly growing our earnings from operations dollars, again we as a leadership team, and hopefully you have the same feeling, have accomplished a lot over the last three years in terms of transform our business.

And again, we're looking forward to that as we go into the future.

So again, thank you very much.

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.