Insight Enterprises Inc (NSIT) 2008 Q3 法說會逐字稿

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

third-quarter 2008 earnings conference call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms.

Glynis Bryan, Chief Financial Officer.

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, 2008.

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

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 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 period.

This conference call and the associated webcast contains time-sensitive information that is accurate only as of today, November 6, 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 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 in greater detail in our annual report on Form 10-K for the year ended December 31, 2007.

Insight Enterprises assumes no obligation to update any forward-looking statement.

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

Hello, everyone.

Thank you for joining us today.

In the third quarter, the demand environment for IT solutions continued to be very challenging as the overall economy worsened, especially in September.

Our third-quarter consolidated net sales were $1.2 billion, up 5% year over year, and gross profit grew 3%.

Earnings from operations were $15 million, down 22% from $19 million recorded in the prior-year quarter.

Net earnings from continuing operations were approximately $7 million, down from $9 million recorded in the prior year.

Please note that our third-quarter 2008 results include $3.3 million pretax of net foreign currency losses, resulting primarily from the strengthening of the US dollar against the Euro and the British pound sterling during the quarter, and the volatility during the period of those exchange rates, compared to $849,000 pretax of net FX losses in Q3 2007.

These foreign currency losses in Q3 2008 were offset partially by a $1.1 million tax benefit recorded during the quarter.

Diluted earnings per share in the third quarter were $0.15, versus $0.18 last year.

Our EMEA segment continued to execute well during the third quarter, which resulted in very strong financial results for this segment.

Net sales increased 6%, to $281.4 million.

And local currency net sales grew across all categories and in all countries in EMEA, except Germany.

Gross profit dollars grew 17% and for the third consecutive quarter, we saw gross margin increase over 100 basis points year over year.

As a result, earnings from operations more than doubled versus last year.

So again, we are pleased with the results within this operating segment.

We believe we gained market share in the third quarter, which will help better position us to continue to grow profitably in the face of a more challenging economic environment.

In Asia-Pacific, while net sales increased 20% to $32.8 million in the quarter, earnings from operations decreased year over year due to a decrease in fee-based enterprise agreement sales and increased SG&A expenses we have added to support long-term growth in the region.

Now onto North America.

Net sales in North America segment increased 5% to $855 million in the third quarter.

The net sales result of Calence more than offset the high single-digit decline in sales in our legacy hardware business.

The software and services categories are performing well, reporting growth of 2% and 126%, respectively, in the third quarter.

As we saw in the first half of the year, pricing continued to be pressured in the third quarter, particularly in our hardware category.

As a result, we saw gross profit dollars decline by 2% while gross margin decreased approximately 80 basis points.

Selling and administrative expenses were 11.5% of net sales, consistent with the third quarter of last year.

As a result, earnings from operations were down 43%, or $6.5 million in the quarter.

We are very pleased to report that, on October 20, we completed the migration of all of our US hardware and services business to our new IT system.

The transition went well, and we are currently going through a normal post-implementation stabilization process.

As we close out this year and head into 2009, we can now focus on optimizing the system and leveraging it to improve efficiency in our front and backoffice operations, and our bottom line.

In this environment, we must continue to be aggressive in insuring we decrease our base cost infrastructure and discretionary spending levels going into next year.

As a result of actions we took earlier in the year, expected efficiencies from our systems upgrade project, and additional actions planned for the fourth quarter, we are targeting a year-over-year decrease in the net operating expenses of our legacy North America business in 2009 of approximately $20 million, or about 6%.

We do expect the demand environment to continue to be soft in the fourth quarter.

As a result, we expect fourth-quarter 2008 diluted earnings per share to be between $0.27 and $0.34 before severance, restructuring, or any other nonrecurring charges.

The reason for such a wide range is that, worldwide, the current environment is quite unprecedented, making predictions more difficult.

Having said this, we are confident that Insight's value proposition is compelling to our clients, which positions us well to compete and to grow as we move through these challenging times.

Now I will ask Glynis to provide more details on our third-quarter 2008 financial performance across each of our operating segments.

Starting with our North America segment, net sales grew by $37 million, or 5%, to $854.7 million.

This includes the benefit of the Calence acquisition, which we closed on April 1.

Hardware sales were up 1% year to year, as sales from Calence offset decline in our legacy hardware business.

Software sales grew 2% during the quarter and our services sales were up 126%, reflecting double-digit growth in our legacy services business and the addition of Calence to our portfolio.

Gross profit decreased $1.8 million, or 2%, to $107.2 million.

Gross margin decreased by 80 basis points to 12.5%, from 13.3% in the third quarter of 2007, primarily due to market pricing pressures which have driven down product margin, including vendor funding of 94 basis points and decreases in agency fees from Microsoft Enterprise software agreement renewal of 44 basis points.

Additionally, increased transportation costs that were not able to be fully passed on to clients resulted in further decrease in margin generated by freight.

These decreases were offset partially by an 87 basis-point improvement in gross margin resulting from increased sales of higher margin services primarily -- from our Calence acquisition.

Selling and administrative expenses increased $4.7 million, or 5%, to $98.4 million, compared to $93.7 million reported in the prior-year quarter.

The 2007 third-quarter results include $2.5 million in expenses associated with the Company's stock option review.

The benefits of the cost reduction efforts implemented earlier this year reduced performance-based compensation expense resulting from our year-to-date financial performance and lower commissions, were offset by increased SG&A from the addition of Calence to our business.

Note that Calence generally has higher SG&A as a percentage of net sales than our legacy business.

The North America business reported earnings from operations of $8.8 million, which was down from $15.3 million reported in the third quarter of last year.

Moving on to results for EMEA and APAC.

Net sales in EMEA increased 6% during the quarter of this year.

These results include software and services net sales that were up 13% and 67% year over year, respectively.

Excluding the effect of foreign currency changes during the quarter, net sales increased 7%.

We saw a positive growth in local currency across all categories, including hardware, and another great quarterly performance by our EMEA team.

Gross profit in EMEA grew $6 million, or 17%, while gross margin increased 140 basis points to 14.9%, due primarily to an increase of over 90 basis points in product margin, including vendor funding, as well as an increase of 50 basis points in agency fees for Microsoft Enterprise agreement renewals.

Selling and administrative expenses in EMEA increased by $3.3 million year over year.

The increase is primarily due to increased salaries and wages and other employee-related expenses of approximately $3.5 million, due to increases in sales incentive programs and employee head count.

Earnings from operations in EMEA increased 114% to $5.5 million for the third quarter.

As Rick highlighted, our Asia-Pacific segment increased net sales by 20%, to $32.8 million.

Earnings from operations declined year over year due in part to a change in the mix of business, driven by a decrease in enterprise -- Microsoft Enterprise agreement renewals and higher SG&A.

Moving on to the tax rate, our effective tax rate for the quarter was 22.2%, compared to 40.6% last year.

The decrease in the effective tax rate was due primarily to a $1.1 million benefit from federal and state research and development credits, recorded during the quarter, as well as an increase in the percentage of taxable income in countries with lower tax rates than the US.

That concludes my comments, and we will now open up the line for questions.

(Operator Instructions).

Brian Alexander, Raymond James.

Just starting with the demand picture in North America, Rich, you mentioned that it worsened in September.

I'm wondering if October continued that trend, where you saw continued deterioration year over year, or have you seen any signs of stability?

And if you could also just discuss the general trends in North America between SMB and enterprise.

As we commented on the scripted portion, clearly July and August were stronger than what we saw in the month of September, specifically the middle part of September.

With all the activity that was going on in the marketplace, we saw our business really slow down considerably.

Going into October, what we see is it continues to be, in terms of our run rate business, kind of very choppy, and in relation to the big projects, which really goes to your enterprise question.

Clearly, we're seeing some of those projects still go through, but many of them are also being delayed or reduced in some set.

So as you look at demand right now, in the fourth quarter, which is kind of what we've taken in consideration as it relates to the guidance we put out there, we anticipate the run rate business to be choppy throughout the quarter.

And as it relates to the big projects, I think those are going to be less in the fourth quarter.

I think you're going to see a lot of deferrals of those or, in some cases, cancellations.

As it relates to our business today, in SMB versus enterprise, our SMB business -- because as you all recall, we saw softness in our SMB business back in the fourth quarter of last year, in the third quarter of last year relative to our SAP upgrade.

We're actually seeing improvements relative to that business as a result of having the system be now more stable and now fully deployed.

So our SMB business, while it's not booming given the overall market situation, is doing okay.

And as you look at the enterprise business, we obviously are seeing softness in that.

And again, it goes back to my comment about the big projects and -- because, obviously, inside the enterprise, you have a subset of a run rate business, but you also have a lot of significant projects that drive that business, and again, what we see is a deferral of those, cancellation of those in some cases, or, at least, reducing some of those key projects.

And just to make sure I understand on the IT, it sounds like you're complete with the bulk of that work as of the 20th of October.

Have you seen any fallout from that with respect to lost sales, or is that basically a nonissue at this point in going forward for the rest of the year?

Yes, on October 20, we literally moved 100% of our clients and 100% of our business as it relates to the hardware and services business onto the new platform.

The warehouse moved over, all of our inventory moved over, so now we are transacting 100% of that business off the new system.

And since then, we have not seen any fall-off of our business.

So, while we still have some work to do in terms of just stabilizing aspects of the experience and doing some final customizations for some of our clients, the transition went well.

A heck of a lot better than it did last time when we did it in the third quarter, fourth quarter of last year.

That's great news.

On the cost-savings side, your previous actions, as I recall, were $4 million to $5.5 million that you are expecting to realize beginning in the third quarter, and I think $3 million of that was for North America.

Are we going to see an incremental $17 million next year in North America, or is it an incremental $20 million?

And if you could break down that $20 million into buckets, that would be helpful in terms of how much of that is coming from the systems wind-down versus additional headcount cuts and other things that you're doing there.

Sure, it's a combination -- first of all, what we try to do is make it easier for everybody, and give a net perspective that says, hey, this year we are going to end up with a certain level of spend inside of our business.

We project that spend, that absolute number, will be $20 million less next year in our legacy North America business.

That excludes the Calence business.

So we try to go -- bring all the cost-savings initiatives we had into kind of one easy number for everyone to get an understanding around.

Inside of that number, in terms of how that number is made up, clearly it takes into considerations actually about $5 million to $7 million of actions that we've already taken in the first half of the year, as well as -- we've talked about on these calls -- $1 million to $2 million of extra costs that we've had each quarter inside of our infrastructure supporting two systems -- that leaving our business, as well as additional actions that we have teed up here for the fourth quarter.

The summation of all those is what gives us the ability to go take $20 million, which is a substantial amount of our infrastructure, out as we go into calendar year 2009.

So it's really bringing all three of those together and trying to give you a summary view for what we anticipate the cost structure to look like as we go into calendar year 2009.

And I assume that excludes any potential decline in variable expenses related to any potential sales declines next year?

This would be all incremental to that.

Correct.

Final one from me, just on -- on your liquidity situation, everybody is obviously very worried about the credit environment right now.

And as I look at your balance sheet, I think you had $330 million in debt.

I think your revolver and AR facilities, Glynis, provide you with the maximum of $450 million in capacity.

So maybe, if you could kind of walk us through your situation -- and I notice your inventory is down quite a bit as are your payables at the end of the quarter.

So I'm just -- tying into that, wondering if you have sufficient borrowing capacity to buy what you need, or perhaps some of the sales weakness you've seen is due to lack of available inventory.

No, I would say we have sufficient availability to buy what we need.

We actually renegotiated a new agreement and renegotiated two of our existing credit agreements, made minor modifications to them, in -- in September.

And we got a $90 million inventory financing line as a result of that.

So that has helped out.

And we have about $137 million of availability under existing lines as of the end of the quarter, which would be sufficient to meet our working capital needs over the next year.

I'm sorry, so the inventory of facility is a $90 million facility --

The $90 million line, yes.

And then, the other two --

Are still existing at the 450 level.

Great.

As it relates to the inventory reduction, because if you go back out for several quarters, we were running our business somewhere around $100 million of inventory in North America.

And actually, now we've been running at a rate of around $65 million.

I would attribute that to the deployment of our SAP system and the implementation of the MRP module, which lets us automate how we plan inventory based on sales trends and order histories, so the reality is, I think that's just an example of us running a much more efficient operation as a result of upgrading and automating our systems.

Thank you.

I'll get back in the queue.

(Operator Instructions).

Matt Sheerin, Thomas Weisel Partners.

My first question is in regards to your guidance.

Rich, I know you've just given EPS guidance, but to back into that, just trying to get a sense of the hardware revenues, specifically North America.

Sequentially, your last year, you were down slightly, and I know part of that was because of the SAP hiccups.

In past years, you have been up a little bit sequentially.

But based on the tone of your commentary, specifically as it relates to the enterprise, it sounds like maybe it's best to model it flat to down again.

Yeah, no, I think that what we saw sequentially in the third quarter versus the second quarter in North America, just to go specific to North America, about flat -- actually, I think it was down 1% in terms of hardware, as an example.

And that really came from a pretty decent July and August and, obviously, a weak September.

As we think about the fourth quarter, I think we anticipate flat to negative in terms of the hardware business, based on what we're seeing in just the overall demand environment and the lumpiness we talked about in terms of the run rate as well as the big projects.

So our mindset going in, which is why we took into consideration the guidance that we did, is that we anticipate softness continuing throughout the fourth quarter as it relates to the hardware business.

The software business -- obviously, this is a big software quarter again.

So the first -- second quarter's our big software quarter.

And then, the second biggest quarter is, obviously, the fourth quarter.

Our software business continues to do well.

I mean, it's not as great as we would like it to be, but overall, it's doing well.

But we have a lot of work to do here in the fourth quarter in terms of closing new agreements with our clients, so, obviously, we're looking to go have that happen in the fourth quarter like it has in the past.

Whether there will be a little bit softer than we've seen in the fourth quarter, more likely it will.

So we try to take that into consideration as well as we put together our guidance.

On gross margin, obviously, it should be up because of the Microsoft relationship and the seasonality there.

But if you look at just gross margin of the hardware business on apples-to-apples, and also considering that you have Calence now, and I know they get better margins.

And I would think that there would be some seasonality in Calence's business.

Correct me if I am wrong there.

But -- so should we assume that gross margin sort of flattish in your core hardware business, or is there -- does there continue to be pricing pressure and you might have to give up a little bit of margin to get some share.

What we've seen, as we've called out, is gross margin deterioration over the last couple quarters.

Actually, all three quarters this year, right?

I think it was down 80 basis points in the first quarter year to year, I think it was 130, from memory, in the second quarter, 80 again in the third quarter.

So, as we look at it, we anticipate gross margin percents being down again in the fourth quarter on a year-to-year compare perspective.

On a sequential basis, third quarter versus fourth quarter, it should be up again given the software mix.

And how that plays out from a gross margin perspective.

Calence business really doesn't have seasonality to it, anything near what we have experienced and enjoy today in our software business, so there's really nothing -- a little bit tied to Cisco's year-end, which is July, so a little bit tied there.

But, for the most part, we don't see a fourth-quarter spike in the Calence business.

Thanks, that's helpful.

And then, just regarding the gross margin and the pricing pressure, at what point are you walking away from deals where you're seeing competitors come in, really try to undercut on pricing, where it just doesn't make sense from a profitability standpoint or from a return standpoint?

I mean, there's clearly that activity going on out there.

It's a combination of really two factors.

It's one, that, us just looking at the deal and just saying, this doesn't make sense for us to go do this deal based on the margins that would be -- come out of the deal based on how our competitors are pricing.

Other aspect of it is the vendor contributions to our business.

As you know, the supplier reimbursement inside of our gross margins are important to us.

And they set -- they all have different types of programs tied to revenue, clip levels, things of that nature.

As you have a -- struggles in terms of getting topline growth, you see less supplier reimbursements.

And that's another negative factor that drives your gross margin down.

So I think it's a combination of pricing pressures in the market, as well as just less supplier reimbursement flowing.

Understood.

And then, just turning to Europe for my last question, it sounds like you're taking share and doing reasonably well.

Of course, we're hearing from a lot of suppliers and competitors that Europe has fallen off pretty dramatically, as well.

So what are your expectations for Europe, and why have you been unable to increase margins, even on the hardware side, in Europe?

Yeah, no, overall, we are pleased with our European business.

The team continues to go execute very well.

You really have got to break it down into pieces.

As you look at our UK business, the UK hardware business is not very dissimilar to what we've seen in terms of overall demand in the US, so that's clearly softening.

What's happening on the positive side for our business is the software business.

And what we're seeing across pretty much all the countries is some strong growth in our software business and you've got to really go back to what we bought.

When we bought Software Spectrum back in September of 2006, we bought an enterprise large account software licensing business.

Really, no small, medium business penetration at all.

What the team in Europe has been doing has been investing in each of the key countries, and building a telesales capability to go penetrate the small and medium business segment.

And that strategy has worked out very well for us for two reasons.

One, it's given us very strong growth.

Two is it's -- it also comes along very strong margins, especially as compared to the enterprise business.

So, what's helping us as compared to some of our competitors in Europe is one, outside the UK, we're not selling hardware today and I think the hardware segment is the one that's feeling the most strained in many of these key countries.

Two is we had a business that was working very well inside the enterprise segment that -- it was really all net new opportunity for us in the SMB segment as it relates to selling software to small, medium companies.

And we have been able to successfully pull off a strategy and an investment plan in that geography to go see some growth.

The combination of that is why I think that business is doing quite well for us.

So we're actually, I mean, basically doubling our earnings, as you look at what we just did here in the third quarter on a year-to-year basis.

That's pretty substantial performance.

So I would say -- I think you made a comment, you're doing pretty good in Europe.

I think we're doing very good in Europe and really -- very pleased with the team.

Going into the fourth quarter and going into 2009, I do anticipate, on the hardware side of the equation, challenges to remain.

What we've got to do is continue to go leverage our portfolio over there and continue the strength to run our software business to offset that.

Fair enough, and I do agree with you there.

And then, just a quick question for you, Glynis, on the taxes.

What kind of tax rates should we be modeling going forward?

I think you should be looking at what our normal standard is, which is around the 38%, 39% range.

37% to 39%, I guess I would say, because we have a little bit higher mix of European and APAC this year.

Thanks very much.

(Operator Instructions).

John Lawrence, Morgan Keegan.

Could you comment a little bit about -- obviously, you called out some of the savings and everything for next year.

And you also talked about APAC, where you'd made some investments and sort of leaned on the operating expenses a little bit.

Now as you look into '09, obviously you have some capital allocations that you're looking at.

Has that changed at all as you look across segments for capital allocation next year in '09?

We are in the middle of the budgeting process right now.

So we're not final.

But I would expect it will.

I mean, as we think about 2009, and obviously, it's difficult to predict the overall market environment, just given the kind of unprecedented environment we're living in today.

But, based on what we do know when we look at the marketplace, there are clearly going to be geographies, there are clearly going to be technologies that are going to growing faster than others.

There's going to some technologies that are going to be shrinking on a year-to-year basis.

So, as we think about our business going into 2009, we're trying to be very smart and very targeted of how did we go put our investments around those areas that can go drive growth, and where we anticipate weaknesses from a market perspective, how do we go manage our cost infrastructure so that, even in a down market, we can still go drive profitability growth on a year-to-year basis.

So there will be some changes next year as it relates to how we distribute our capital spending across our geographies to go ensure that we go drive the growth.

As an example, for two reasons.

One is because we're done with our SAP upgrade in the US, but we clearly will have much less CapEx in the North America geography next year than we had this year.

We will probably have more in Europe and Asia Pacific as we try to go make sure we have the right tools and infrastructure to go support the growth that we want to go after in those geographies.

But again, those final details and plans are what we will be working out over the next 60, 90 days, and one of the things we'll be highlighting as we kind of launch into 2009 in -- by our fourth quarter earnings call, taking, too, some of the priorities for 2009.

Thanks for that detail.

Just to add onto that, would you -- obviously, with the business being as soft in certain geographies, would you go to the next step, and you may have sort of addressed it, but would you look at entering another country on weakness here?

Right now, as we've looked to the -- the geographies and -- for the most part, because -- I think we highlighted in the last call, we briefly entered Russia.

And that business is actually doing very, very well for us.

We have looked at some other countries, and at, right now, our mindset is we probably will not enter any new countries in calendar year 2009 from what we are in today.

As you look at the countries that we're in today, I think we're in some -- the key markets.

There's a couple emerging markets that are the obvious ones.

Some people would say, what's your plan to be in, like, Brazil, like, India.

We're in those countries today in a partnership model where we get a profit-sharing based on the partner and us passing leads over to them, so we're participating in those markets.

But not in as broad a way as perhaps we could.

As we look at managing our investments and making sure we're prepared to go deal with whatever the market environment plays out to be next year, we probably will not be making investments that should change that model in those countries.

Just -- we will look, though, how do we go grow those markets with the partners that we have, serving those markets today.

Great.

Thanks.

Brian Alexander, Raymond James.

Just a follow-up on the foreign currency losses.

Could you just kind of walk through the dynamics there in terms of what generated those losses, and whether there is hedging policies that are being implemented to minimize that in the future?

And given that the dollar has, I think, appreciated about another 10% since the end of your quarter, are you baking in more currency losses into your fourth-quarter earnings guidance?

So, I guess the reason for the FX losses in the third quarter were related to coming off of the big software quarter in Q2, and the mismatch between receivables and sales that the EMEA team had in Euros versus payables that they had relative to Microsoft in US dollars.

So that was the big driver in terms of the mismatch in their liabilities between those two.

And you're correct, that is something that, in hindsight, we could have hedged, and we did not hedge in the third quarter.

We are looking at hedging on a go-forward basis, and they're two different types of hedges.

You know, one which requires you to comply with the FAS 133 accounting rules, which make them somewhat more complicated, so we're going through the process of getting that done.

And then, some simpler, non-designated hedges that we can implement more in a more timely manner.

So we're going through the process.

I will just remind you that when you hedge, you're taking out an insurance policy and you're making a bet with regard to what you think is going to be happening with currencies, one way or the other.

And if I knew that very definitively, I wouldn't probably be in this job.

But we're looking at that and we will make our bet with regard to what we think and hedge appropriately with that.

We have some continued FX exposure built into the forecast.

Not at the same level.

Just on the gross margins in Asia, they've been very volatile.

In some quarters, up a couple hundred basis points and in the current quarter, down about 350 year-over-year.

What's the right way for us just to think about the gross margin structure in Asia going forward?

First of all, what drives that in terms of -- it's really the law of small numbers.

Given the fact that we have 100% of a software business there with majority of the profitability being driven by EA's fees, which, as you know, is 100% gross margin, when you have a good quarter -- I mean, a great gross margin percents, and when you have an off quarter, you have a substantial decrease in those gross margin percents.

So what we saw in the third quarter's -- and it wasn't unusual, is just a softening of the big EA fees, not having them slow just like they did in the third quarter of last year.

And that just flows through in the gross margin percent.

As you think about that business going forward, I mean, really -- you really do need to plan it, quarter by quarter, so you can't just go apply a flat percentage -- just given the nature of the second quarter or the fourth quarter.

And I think, as you go look at the third-quarter results year to date, this year, I think those are probably pretty good planning assumptions as you look at just trying to model out what the gross margin percents are going to be.

One of the things that also worked great for us in second quarter, as you will recall, we made a decision to invest and get new resources to go after the public sector part of the Australia marketplace in the first quarter.

Drove great results in the second quarter, but given the fact that it's an off quarter in the third quarter in Australia from a software perspective, that SG&A also [in play], which then obviously drove the EFO percentages down.

That, obviously, will reverse itself a little bit as we go in the fourth quarter because, that again, that should be another bigger quarter, especially as compared to the third quarter.

I know you're not breaking Calence out of your business anymore, but maybe if you could talk qualitatively about how you think the overall networking part of your business is doing.

It looks like, if I try to back into their revenue, it looked like it was on target from my perspective.

So maybe any qualitative comments on how that has gone, and maybe tie that into your overall sales force reorganization and how you think that has gone, and whether that's had any impact on productivity.

Sure.

The -- let me, two different questions there.

So overall on networking, Calence, as well as MINX, which obviously we closed in the quarter, are both doing well as compared to our expectations that we put in place as it relates to the acquisition plan.

The commercial part of the Calence business is doing very well.

We did see some softening in the third quarter relative to public sector, which, as you read in the paper, just some of the state and local governments cutting budgets and things of that nature, it's probably not unexpected.

So we are seeing some really strengthened commercial part of the business, public sector softening a little bit in the third quarter.

Our organic networking business, both in the UK as well as North America, did very well outside of the pulling together of Calence.

So overall, as we look at networking, we're still very bullish in that segment.

We view it as one of our growth opportunities as we go into calendar year 2009.

As it relates to the sales reorganization, obviously we did that in July.

So it's only been about three months now in terms of implementation.

But I would tell you, we are very pleased with how we've realigned our sales organization, for two reasons.

One is we think it's just a smarter way to cover the marketplace in terms of our existing clients, in terms of getting generalist resources in front of them, to own the relationship and bringing in the specialist, whether it's the networking specialist from Calence or whether it's the software specialist or the services specialist, so over time, go drive the greater share of wallet.

But the second thing that we're really starting to see come out of it, which is -- was one of the design points, is a much greater focus on driving net new clients.

Because Insight, historically, has done an incredible job of retaining and maintaining client relationships.

I mean, in our enterprise business, we're 90%-plus in terms of client retention, which I would tell you is outstanding.

And our business model has lacked in the past from being as good as we need to be in terms of getting net new clients.

The new reorganization with a dedicated business development team overlaying a geographic footprint, market by market, identifying net new opportunities, and going after them in a very coordinated way -- well, that's only about 90 days, 120 days into the reorganization.

We've already started to see some very positive signs from that.

So the sales reorganization, we think, as we go into next year, will be one of the catalysts for driving improvements in our business on a year-over-year basis.

The other catalyst will be the SAP system being done.

I mean, there is no doubt there's been a huge amount of internal focus throughout this year as it relates to my time to Mark McGrath's time to everybody in the organization's time, quite honestly -- getting the system done.

Having that done and now being able to go focus more aggressively in terms of growing the business will be another positive catalyst as we think about our business going into next year.

So, sales reorganization going well and Calence and the networking segment overall, going well.

Still a little softening in the public sector side of their business.

And you're not planning any follow-ons to the IT enhancement as it relates to migrating the software business or the networking business over to the new system, or international efforts, as I understand it, as we go into '09.

That's basically not going to happen.

As it relates to North America, correct.

We are going to continue to go run our North America hardware services business off now the new instance of SAP and we're going to optimize it, fine-tune it throughout calendar 2009.

We're going to run our software business off this system we purchased through Software Spectrum.

It's called Eyecare and we're going to let Calence continue to go run off of their system.

We are starting the planning in Europe in terms of upgrading net infrastructure and we're still working through those final plans and what that actually means from an implementation perspective and timing of that.

But, as it relates to North America, it's all about optimizing what we have versus integrating and bringing those systems together.

Final one from me.

As I look at your product mix, it was interesting to me to see that your desktop business was up 17% in North America, your notebook business was down about 15%.

And as we look at Europe, your desktop business was up 11%, your networks were down 11%.

So, I guess, pretty inverse with what's going on in the industry and I'm just wondering if there's any story behind that or if it's more coincidental than anything.

No, it does jump off the page at you.

No, I would tell you it's really being driven in North America, but also in the UK, off a couple key transactions.

Actually, all within public sector, which has a pretty big third quarter.

That all flowed through in the third quarter and they're all desktop opportunities that really inflated that percentage.

Thanks very much.

(Operator Instructions).

Thank you all very much for joining today's call.

Clearly, interesting times we're all living in, and obviously, as we look at Insight's business, we share with you today our results for the third quarter.

We share with you our guidance for the fourth quarter.

As we think about our business going forward, we are obviously very pleased with the fact that we diversified geographically, because that is helping our results as it relates to our European business really driving some positive momentum inside of our overall business.

We're also pleased with the diversification we've driven strategically in terms of moving into the software category and moving into the network category.

One of the things we can all expect in today's environment, and I spend a lot of time talking to clients and CIOs and directors of IT, what they're going to do in today's environment is they're going to cut costs, they're going to look for efficiency.

The question is how are they're going to do it.

One way they're going to go do it is they're going to consolidate suppliers.

They're going to look for somebody to come in as their trusted adviser and take over more of their IT spend so they have less people to work with so they become more efficient and get costs out.

I think Insight is very well positioned to take advantage of that situation, given our capabilities in the software space, the networking space, the services space, as well as our hardware heritage that we bring to the table.

So, as we think about our business going forward, we think we are the partners that our clients are going to consolidate their business around, and that's the opportunity statement that we see and that where we're going to be driving for inside of our business.

So with that said, thank you very much for listening to today's call.

Look forward to updating you on the fourth quarter early next year.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a great day.