Insight Enterprises Inc (NSIT) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2008 Insight Enterprises, Inc.

earnings conference call.

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

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

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

(Operator Instructions).

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

I would now like to turn the call over to Miss Glynis Bryan, Chief Financial Officer.

You may proceed ma'am.

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

Today we will be discussing the Company's preliminary operating results for the quarter ended December 31, 2008 and the Company's decision to restate previously reported earnings.

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 press release that was posted this morning, you'll find it on our website at Insight.com under our investor relations sections.

This press release will be filed with the Securities and Exchange Commission on Form 8-K by the end of the day today.

Today's call including all questions and answers is being broadcast 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 time.

This conference call and the associated webcast contain time-sensitive information (inaudible) only as of today February 9, 2009.

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 press release and in greater detail in our annual report on Form 10-K for the year ended December 31, 2007.

In addition, I would like to reiterate that the Company's still working through its annual close process and audits and therefore all financial results today are preliminary and subject to final adjustment.

These results specifically exclude the effects of the proposed restatement and other final year [end tax].

Additionally, these results exclude certain possible non-cash adjustments resulting from a determination of the utilization of foreign tax credits and the completion of the Company's annual goodwill impairment testing.

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

Hello everyone.

Thank you for joining us today.

As you know earlier this morning, we issued a press release that contained three key announcements.

One, we announced preliminary financial results for the fourth quarter 2008.

Two, we have provided perspective on the 2009 market environment and the expected effect on our business.

And three, we announced that Insight intends to restate earnings for prior years.

Given these multiple topics, we have a full agenda today.

First I will discuss our preliminary results for the quarter and provide an overview of the key actions we took within our business in 2008 in reaction to declining demand.

Then Glynis will take you through some of the 2009 financial priorities as well as the details of the restatement.

Finally, I will come back to briefly discuss our business outlook for Insight in 2009.

Looking at the fourth quarter, while softening demand for IT solutions led to fourth-quarter results below management expectations, our successful efforts in 2008 to reduce our base cost infrastructure and refine our go-to-market model partially mitigated these results.

We expect to report fourth-quarter net sales of $1.2 billion and gross profit of $155.4 million which in both instances would be a decline of 10% year-over-year.

Consolidated net earnings from continuing operations for the quarter are expected to decrease to $5.4 million from $23.8 million in the fourth quarter of 2007.

As a result, diluted earnings per share from continuing operations are expected to decline to $0.11 from $0.48 a year earlier.

These anticipated results include $3.2 million in severance expense resulting from workforce reduction of more than 280 positions and $6.2 million of foreign currency exchange losses primarily resulting from the strengthening of the US dollar against the Canadian dollar and the euro against the British pound sterling as well as the significant volatility of those exchange rates during the quarter.

A highlight of the quarter came from the Company's focus on cash management initiatives which resulted in the paydown of $103 million in debt.

Key drivers of the increased cash flows in the fourth quarter included disciplined accounts receivable collection efforts, the rollout of the new Castle Pines inventory financing facility in November and the successful negotiation of deferred payment terms for certain suppliers at year end.

As we saw the deterioration of the market environment intensify in the second half of 2008, we aggressively took the necessary steps within our business to ensure our long-term success.

First in North America, to more effectively address client needs, we restructured our sales team into four client sets -- an integrated team focused on our top 300 clients, a corporate team focused on clients with more than 750 employees up to our top clients, an emerging business team serving clients with less than 750 employees, and finally a business development team focused purely on winning new business and handing that client onto one of our other sales organizations to nurture and grow over time.

To help drive our solution strategy, we also established specialty sales teams focused on our higher margin software networking and services categories.

These specialty teams are charged with growing Insight's margins by increasing the solutions content within each client.

To enable our sales teams, we consolidated our presale support resources into one organization called Sales 411 to provide higher service levels to our sales team and thus facilitate higher win rates and client facing time.

To help ensure the success of this new sales coverage model, we just launched a new sales compensation plan that strongly incents cross-selling across our sales teams.

Finally, we implemented a more disciplined opportunity management process to increase the visibility of our client demand.

This increased visibility is critical to our efforts to predict sales trends and thus better manage expenses and align resources to win.

In EMEA and Asia-Pacific, we also implemented changes within our sales coverage model to respond to today's environment.

First we focused on building a dedicated mid-market telesales team in key countries which leverage our existing infrastructure and support organization to offset our historic dependence on large enterprise accounts.

Next we expanded our capabilities in new markets including Russia and Portugal in 2008 and grew our business in China which we entered in 2006 to help offset softness in more mature markets.

All of these actions are focused on driving improvement in our sales results in enabling us to capture market share in a down market.

From an expense perspective, we have been aggressively decreasing our fixed costs.

In 2008 we implemented several workforce reduction programs and managed attrition such that we reduced our workforce in our organic business by over 425 positions by the end of the year.

Early in 2009 we continue to take action to decrease discretionary spend such as eliminating merit increases, reducing equity programs, foregoing recognition events, minimizing non-client travel, increasing the utilization of offshore resources.

And recently we hired a third-party consultant to help us reduce the cost associated with our third-party contracts.

As a result of these actions taken throughout 2008 and early 2009, we expect our operating expense in North America to decrease year-over-year by more than $35 million before giving effect to the expenses of Calence that are for comparative purposes were not in the Company's first-quarter 2008 results because the acquisition closed on April 1.

Now I will ask Glynis to provide details on some of our 2009 financial priorities as well as details on the (inaudible) restatement.

Thank you Rich.

We provided some preliminary financial details on our operating segments in the press release issued earlier today.

Rather than repeat that detail, in this section I'm going to focus on four topics.

Foreign currency losses in the fourth quarter and our strategies to address those going forward, cash flow and liquidity, the goodwill impairment testing currently underway and the proposed restatement.

Starting with foreign currencies.

As we highlighted in the press release, we had $6.2 million of foreign currency losses in the fourth quarter.

There were two key events that contributed to these losses.

In October, the Canadian dollar depreciated sharply against the US dollar and we had a higher than normal level of Canadian dollar exposure that was remeasured and drove a loss.

In December, the increased volatility in the euro exchange rate against the US dollar but more particularly against the British pound sterling also resulted in large losses as the Company remeasured and paid its intercompany liabilities between subsidiaries.

In late December we received authorization from the Board for and then implemented a hedging strategy.

This initial hedging strategy is specifically focused on reducing the volatility of foreign currency exchange movement on certain foreign currency booked assets and liabilities of the Company that when paid or remeasured give rise to gains or losses reported below the earnings from operations line in our income statement.

Given the high-volume nature of our business, we believe that this strategy will help us to minimize the volatility but will not eliminate it entirely.

Moving onto cash flow and overall liquidity.

We have been highly focused on cash flow generation and as a result generated sufficient cash in the fourth quarter to pay down $103 million of outstanding debt.

We expect to end 2008 with $228 million in outstanding debt, all of which will be classified as long-term.

As a frame of reference, we ended 2007 with $[102.3] million in outstanding debt.

So total debt increased just under $26 million in 2008.

As a reminder, in 2008, we repurchased $50 million of our outstanding common stock, we acquired Calence $140 million including the assumption of debt and we spent $27 million on capital expenditures during the year.

Despite the economic environment in 2008, particularly in the fourth quarter, we've demonstrated our ability to effectively manage and drive cash generation.

We also expect to report cash at December 31, 2008 of $49.2 million.

Our focus on cash flow will continue in 2009 and we have several Companywide initiatives around improving our working capital metrics by streamlining cash collection policies and procedures, optimizing our inventory management and more tightly managing our payables cycle.

On goodwill, we're currently finalizing our annual goodwill impairment testing which is performed in the fourth quarter each year.

You may remember that we also performed an interim goodwill impairment testing in the second quarter and we wrote off the entire goodwill balance in North America at that time.

Based on the preliminary results of the annual impairment testing, we have determined that additional goodwill of $9.1 million related to the Calence earnout and recorded in North America subsequent to the second quarter is also impaired.

This is a non-cash charge and does not impact our volume capacity or violate or change our compliance with any of our debt covenants.

We have not yet finalized the testing in EMEA or Asia-Pacific.

We do not anticipate at this time that there will be goodwill impairment charges in either of these regions.

Before we get into more detail about the proposed restatement, I would like to announce that we have worked with our bank group and other lenders and have received waivers of the default that resulted from management's conclusion that its previously reported earnings must be restated.

Our bank group has been very supportive and reacted quickly to our request for waivers.

In this credit environment, the high level of support we received from our lenders is both highly valued and appreciated.

Moving on to the restatement.

As we announced in our news release this morning, Insight management has identified errors in the way the Company historically accounted for certain aged trade credits generated in the ordinary course of business.

Consequently, management and the audit committee of the Board of Directors have determined that the Company will restate previously reported earnings.

Here's what happened.

Our internal management reviews determined that the Company's historical accounting treatment since 1996 of certain aged trade credits created in the ordinary course of business was in error.

Specifically, Insight released these aged trade credits from its balance sheet to the income statement prior to the legal discharge of the underlying liabilities under applicable US and international law.

Since first discovering these errors, Insight has been working with its auditors and external advisers to quantify the resulting liabilities and to establish new processes going forward.

Following this comprehensive review of trade credits since 1996, Insight is restating its financial results to correctly account for the release of aged trade credits only when such credits have been legally released which occurs when they're either paid or released in a matter of law.

The cumulative restatement is expected to be between 50 to $70 million before consideration of any tax effects.

The Company expects that it will restate financial statements which are included in the Company's most recently filed annual report on Form 10-K for the year ended December 31, 2007 and in the quarterly reports on Form 10-Q for the first three quarters of fiscal year 2008.

The Company also expects that the restatement of its financial statements will include a material reduction of (inaudible) earnings as of December 31, 2004 related to the accumulation of errors in prior periods.

We're committed to fairly and completely addressing the impact of these historical accounting practices.

The Company is in early stages of determining the administrative process it will pursue to settle with effective counterparties.

Given the high volume of individual transactions involved and the complexity of researching each item, we expect that the final settlement of these liabilities may take multiple years and may eventually be settled for less than the estimated liability.

Any difference between the restated amounts accrued by the Company and the final settlement with counterparties will be reflected in the period in which such resolution occurs.

The Company will not release final fourth-quarter results until it has completed its review and finalized its accounting related to the proposed restatement at which time it will file its 2008 financial statement with the SEC.

That concludes my comments and I will now turn it back to Rich to discuss our perspective on 2009.

Thank you Glynis.

Uncertainty around the depth and length of the global recession, anticipated volatility in the currency markets and continued tightness in the credit markets will combine to make 2009 a challenging year for most companies.

Insight's business will be further confronted by shrinking client budgets and reduced incentives from key channel partners.

As a result, the Company anticipates that net sales and gross profit will be down in 2009, partially offset by the resource actions and other cost reduction initiatives completed in 2008 and planned for in 2009.

As a result, the Company expects diluted EPS before severance and any other onetime charges will decline between 25 and 30% in 2009 with a larger percentage of decline in the first half of the year than in the second half, reflecting a more difficult year-to-year comparison and the effect of partner program changes in the software category.

We remain confident that we have the right business model in place and have taken or are prepared to take the appropriate actions to navigate this difficult environment and emerge as a better, stronger Company when market conditions improve.

Perhaps the greatest testament to our strategy is our strong, long-term client and partner relationships.

Additionally, we entered 2009 with broad geographic capabilities; an attractive mix of hardware, software and services capabilities; strong organic organic operating cash flows and an experienced management team.

That concludes my comments.

We will now open up the lines for your questions.

(Operator Instructions) Matthew Sheerin, Thomas Weisel Partners.

Thanks and good morning.

Obviously, a lot of moving parts here and a lot of questions.

Just to focus on the accounting issues for a second, when and how was this detected?

It was detected by an internal review that management conducted in 2008 just as it was going through its normal processes of closing out the respective quarters.

And this affected fiscal years '07 and '08 only?

No, it does affect '07 and '08 but it's a policy that has been going back to 1996 with regard to the movement of these aged credits from the balance sheet into the income statement.

So you have to review --

We're going to go back -- we're going to end up doing a restatement based on our 2007 which is our last 10-Q as well as the 10-K (inaudible) as well as the three quarters of fiscal year 2008 and we are going to be making onetime entry in December of 2004 and retained earnings to record all prior periods associated with the restatement.

December 2004 to cover the past years?

To cover the past years, correct.

And do you have any idea of what -- I mean have you brought in a third-party accounting firm and do you have a new auditor?

What are the costs involved here?

We haven't brought in a new auditor.

We're working with a third party to help us size the overall liability and also to put the procedures in place with regard to how we're going to address it on a go-forward basis.

As of right now the costs haven't been significant.

I guess if you were thinking about it in the context of the stock option restatement, it's not anywhere close to that level and we don't anticipate it getting there.

But the investigation is not finished at this point in time.

Okay and then you said you wouldn't be able to report your full 2008 earnings and numbers until you've resolved this situation but you also said it could take years.

So does that it's going (multiple speakers)

I'm sorry, let me clarify that.

We actually think the resolution with regard to affected counterparties etc.

could take years to resolve with regard to cash payments over time.

However in terms of filing our 10-K, we're working toward a schedule that would attempt to get the 10-K filed on time.

What we need to do is just be able to pin down in a little bit more precise detail the impact of the liabilities that we are talking about.

So we have a range of $50 million to $70 million in total.

Part of what we need to do in order to be able to file the 10-K is to actually go back and look at the impact in the years 2004 through 2008 ultimately so that that flows through the financial statement that would be reflected in the 10-K and then we have to also as a result of that pin down the number that would be the retained earnings adjustment.

That is independent from the actual cash settlement over time that would occur with the affected counterparty.

Okay but that 50 to 70, that is the estimated cash liability?

That is the estimated liability at this point time, yes.

We would anticipate as we go out and negotiate and as we do the research with regard to the underlying errors that maybe in the credit population etc.

that that number would come down.

But we don't have a split between that at this point in time.

Who are these counterparties?

Are these suppliers?

Are these customers?

It is a combination of suppliers and customers.

And have you been in touch with any of them?

To date we have not been in touch with them.

We're putting a process in place with regard to reaching out to affected clients, however, what I will say is that we came up with a range and we have disclosed our obligation based on coming up with that range that says we have to do it as soon as possible.

So that is what this release is about.

It's going take us a while to actually determine on an individual customer base the debits and credits that are outstanding for that customer over a period of multiple years.

So we're putting a process in place with a third party with regard to getting that addressed in a kind of timely manner but in an efficient manner and in terms of totally resulting the disputes that we may have with specific customers or vendors.

Okay, and then just a question for Rich just regarding the demand environment which obviously is tougher for everybody.

You said a couple of things.

You said one, something about incentives from vendors perhaps coming down.

So maybe talk a little bit about that.

And then also, maybe differentiate the environment for software spending versus hardware.

Sure Matt.

First of all the last question first.

I mean clearly, we have seen like you said, a tough macroenvironment and IT spend going down accordingly.

Clearly we have seen the most reduction coming out of the hardware category and we felt that in the fourth quarter in our US results.

We also felt that in our UK and Canadian results where we sell hardware because as you know, in the rest of the countries we just sell software and services.

With that said, software performed better than our hardware business but we still saw a decrease in a year-to-year basis in our software category but not to the same extent nearly to what we saw in the hardware category.

As it relates to my comments relative to partner incentives going down, so as we put together our perspective on 2009, clearly we took into consideration the biggest issue which is to try to understand the macroenvironment in terms of what it means from a topline spend perspective and that's the biggest factor that we took into consideration was giving the perspective that we did.

But the second factor is in the software category, our largest partner is contemplating and more than likely will implement changes to their incentive programs as it relates to them trying to go connect their incentive programs to the macroenvironment as well as to their priorities.

And as a result of those changes, we see an impact to our earnings per share outlook for the year.

The magnitude of those changes, we are still in the midst of working through with them.

It's relatively complicated.

There's a lot of different aspects to it.

But we do expect the reduction to be in the magnitude of 10 to $15 million a year.

So it's not insignificant by any stretch.

So we wanted to be able to call that out specifically and give our investors perspective on that change.

(Operator Instructions) Brian Alexander, Raymond James.

Thanks, good morning guys.

On the issue of restatement, I guess I'm not totally clear what exactly has happened here and how much of this is accounting, accrual related versus real cash cost.

From Matt's question it sounded like the 50 to 70 was a true cash cost.

But it might be helpful to give us an example of a transaction in question obviously leaving out affected parties.

Because I'm not exactly clear if we're talking about reversing accruals in reserves or if we're talking about something else.

If you could just expand on and provide an example of how this happened?

Sure.

In terms of an example on AR credit side, it would be a situation where a consumer orders a product from us, they pay us for that product, subsequently returns it and they're issued a credit memo for that product.

It could also be a situation where the customer pays us twice for a particular product or overpays an invoice and it could also be a situation where in terms of our cash application process internally, we have errors with regard to how we have applied the cash to one customer versus another.

So all the (inaudible) creates an AR credit that sits on our books that the Company had different policies in place throughout the years 1996 through 2008.

But essentially it ended up moving those credits that were sitting out on the books that were aged into the income statement as a reduction to cost of goods sold.

On the AP side, it would be related to if we didn't ever receive an invoice from a vendor with regard to product that they delivered to us as an example.

So I'm not -- does that give you enough of an idea of the background?

More than -- it's more expensive than I would have considered previously.

And, Glynis, when you talk about the 50 to $70 million, is that an accounting adjustment or is that all cash?

It is an accounting adjustment and it will be cash.

Some portion of it will be cash.

All of it could be cash but to be honest at this point in time, we're not able to break out the cash versus the non-cash impact at this time.

We do know that it's not cash that's going to be due all in 2009, as an example.

It is a multi-year process with regard to ultimately paying out the cash in terms of when actually it would be due to be paid out.

That's one.

And two, it's also a process of going back and looking at the very detailed transaction level information and trying to determine what the magnitude of errors are in the population.

That's something that we're going through that process of right now.

But until we have the results from that and look at individual customer or vendor transactions in total, we're not able to say.

(multiple speakers) I think it might be helpful to have a perspective.

I mean clearly since 1996, the Company has been a high-volume transaction Company.

We're talking about tens of thousands, if not hundreds of thousands of transactions here and the average value somewhere around $600.

This is little transactions that build up over time and once they aged, at some point they said eventually that liability doesn't exist and we dropped that into the P&L.

The reality is that that judgment was in error.

That's not (inaudible) should've been resolved.

So hence we're going back.

And the good news is new financial management came in, looked at the policies, determined that we needed to make a change.

We're now making that change.

But it is really -- ties back to just the high-volume transactions historically the Company has had and just all these invoices coming in, invoices or PO's going out and the reconciliation of those balances at an account-by-account level that we have now worked through.

And the point in terms of the time it's going to take to resolve it is really driven from that high-volume environment.

So there's a lot of transactions that we're to have to go back and reconcile and see if they're handled properly and in that reconciliation process if it is determined it was not handled properly, then obviously we will do exactly what we need to do in terms of resolving with those counterparties.

Given the high volume, it's sufficient to say that there's probably not a significant percentage of that 50 to 70 that would be owed to your top suppliers and/or your top customers i.e.

something that could potentially jeopardize your relationship with them going forward?

Yes, we do not believe that is the case at all.

This is just a lot of little transactions that need to get resolved.

In fact, we have policies in place with some of our key partners today as an example where we do this reconciliation process on an annual basis just because of that high-volume transaction on their side as well as our side.

So actually we've already had process in place where we reconcile with our biggest partners and now we're just talking about trying to go to it across our entire population.

Great.

On the guidance that you talked about for 2009, the 25 to 30% reduction, could you give us a sense off of what base that is?

Because I know that your 2008 earnings have been affected by severance costs, restructuring and some foreign currency losses and some of those get excluded for non-GAAP purposes.

So if you could just give us in sort of dollar terms what that range would translate to for 2009 because I'm not sure what we are comparing it to.

Yes, no if you look at -- I will deal with it off the 2008 financials.

So clearly what we included in this release is $0.11 and I think as -- like you do in your modeling, if you exclude the severance, that $0,11 which is around $0.16 for the quarter; if you add that to our third quarter year-to-date, it's right in the range of $1.16 to $1.17 in terms of what third-quarter year-to-date would be if you exclude the impact of goodwill and if you exclude the impact of severance as the baseline that we then give you the perspective of the 25 to 30% reduction off of.

Okay, so 25% to 30% off of $1.16 to $1.17?

Right.

Okay.

In terms of the gross margin performance in the various geographies, I think you had a big downtick in EMEA sequentially in the fourth quarter and a big uptick sequentially in North America, about 100 basis points up in North America and Europe down over 150, I believe.

Can you just give us some color on the sequential change and what might have driven that in each of those regions?

I think it's really just a mix statement in terms of just the software mix being greater in the fourth quarter and hardware going down.

So it's really a mix change on a sequential basis of what you see showing up the gross margin results.

Clearly on a year-to-year basis, the 30 basis point deterioration in North America talks to the fact that even though there were sequential improvements in terms of the software mix drive and higher margin as well as sequential improvements in terms of the services business driving higher margin, in total we're still seeing a reduction year to year.

Now that 30 basis point is less than we have seen throughout the first three quarters which is a good thing.

And the obviously on a year-to-year basis we saw some strong improvement in EMEA, though to your point, down sequentially.

And again, I think it really just goes back to the mix change between our hardware, software and services business.

Again in Europe as an example, software was stronger clearly in the quarter than our hardware business as well as our services business was stronger and that benefit is what is driving that 100 basis point improvement on a year-to-year basis from a gross margin perspective.

And then for the 2009 outlook, granted I realize things are subject to change.

But does that earnings range assume that you are breakeven or even slightly worse off in the hardware side?

Because I guess that's one way to get to the range that you are providing is that all the profits come out of the software business and the hardware business is close to breakeven.

I'm just wondering if that is the case.

No, I don't think we actually take it -- when you see breakeven, we only really look at our hardware business all the way down to a breakeven.

We really stop at gross margin and the gross margin contribution of our hardware business versus our software business versus our service business.

Now we clearly believe that the gross margin dollars contribution from hardware will go down as a percentage greater than that of our software business as well as our services business.

We actually anticipate we will be up on year-to-year basis as we continue to go partner with our clients to help them outsource their workforce, in some cases to leverage our lower-cost resources for their key services projects.

It's really more of a function of that.

Okay, then just finally for Glynis, it sounds like you have worked very effectively with your banks at least through this accounting issue.

But that aside as we go through 2009, how confident are you that you won't trip some of the key covenants that you have with your banks i.e.

your total leverage ratio which I think is required to at 275 beginning in October?

How confident are you we won't run into those issues throughout 2009?

And if we do, how confident are you that the banks will work with you on that?

I can't express any level of confidence with regard to the banks working with us on that because I don't know what would happen there.

What I will say is that I'm pretty confident that we're not going anywhere close to any of those leverage ratios based on (technical difficulty) that I'm looking at in the downside scenarios that we have done around that budget with regard to potentially getting to a leverage ratio that would approach anywhere close to 2.75.

So I'm relatively comfortable that we're not going to be needing to have those types of conversations with our banks in 2009.

Our bank group has been great to work with, however, this was a technical default.

If we didn't hit our leverage ratios, it would be a financial default and I can't comment on how they would react in that instance.

But it's not going to be an issue for us, I believe, in 2009.

Where did the debt stand at the end of the quarter?

At the end of December, it was $228 million, down from $231 million at the end of September.

$228 million and cash of $49 million, you said?

Cash of $49 million.

So we had a very good quarter with regard to ultimate cash flow from operations or cash flow from operations.

As we look at it, it started with actual cash flow from operations of about $86 million.

We had CapEx in the quarter of about $2.5 million.

And between CPC which is our trade financing facility and bank overdrafts which we also look at, we ended up with cash flow from operations of about $87 million.

So our cash flow in the fourth quarter was very strong.

Just one final one and I apologize if you guys touched on this earlier, Rich.

But any change in the tone in the demand environment as we have moved through January?

In other words, are things still progressively getting worse or would you say that we have taken a big step down already and we are kind of stabilized at a lower-level?

I would tell you January was a very tough month.

Obviously we don't disclose our individual month results but coming out of the fourth quarter, we definitely saw and I think you have seen that in some of the public announcements from some of our suppliers is they've talked about their January versus December and November.

But January was a very tough month in terms of just -- my speculation on that is clients are coming into the new year, in terms of releasing budgets and things of that nature, I don't think they're doing it to the extent they have historically and we have seen a significant decrease in year-to-year spend from IT categories.

Now how that plays out here in February and March, we're hoping the first month was just a situation of a slow first month of the quarter and then we will see some pickup here in February and March so the quarter won't be to the same extent year-to-year decline that we saw in January.

And those comments would apply to SMB and enterprise?

Yes, it's a pretty across the board view.

Matthew Sheerin.

Yes, thanks.

Just a couple of follow-ups.

Just one on the cost reductions, that $35 million that you hoped to take out.

Could you tell us -- and you talked about the headcount reductions.

Could you just tell us what the headcount ultimately will end up being versus where it was?

And at what point do you expect to get a full annual run rate or what quarter do you expect to get the full annual run rate of those cost reductions?

As many companies, we have looked at all aspects of our cost structure.

So in total we reduced 425 positions from the Company by the end of 2008.

So the benefit of that lower cost structure from a workforce perspective will be felt here January 1 because that was a statement of what we did in 2008.

As it relates to other actions, clearly coming in 2009 we have looked at like again many companies many different aspects in terms of reducing merit increases across our workforce, reducing client travel, reducing recognition events, reducing and leveraging offshore resources in a broader way.

So some of those things will come on as we go throughout time, the full benefit of those.

But the workforce reduction ones really were all done in 2008, a lot in the fourth quarter.

It is 280 positions of that 425 in the fourth quarter.

So we will see the full benefit of that here started in January 1.

Now, given the environment, we're committed to go continue to go look at our cost structure to make sure we are aligned to overseeing from a demand perspective.

So unfortunately I can't say we're completely done in terms of looking at the actions required inside of our business and we're going to be aggressive in terms of trying to go anticipate those and put actions in place across our cost structure to go address that, so we continue to go drive the profitability we believe we can drive even though it's going to be down on a year-to-year basis given what we saw in 2008.

Could you tell me what is the headcount now and where did those jobs come from?

Was it sales, support or across the board?

I don't have the ending year headcount right in front of me but we can follow up with you on that because we obviously had some acquisitions in there too.

So you have to go look at the net headcount.

But really where they came from, across the board.

We really looked at on the sales side reducing some positions there, simply the low performers from our sales organization, a lot of work on the back office.

A lot of it was driven off of our SAP migration and having that complete because we were as you will recall, we were running about 1 to $2 million dollars of incremental expense associated with tying out two systems inside of our US business.

Obviously in November we completed that migration.

So that was one of the catalysts for getting some back office cost outside of our business.

A majority of the headcount reductions were inside of our North America business but there were also some reductions inside of our EMEA business as well.

Especially as we started to see the UK hardware business start to slow down in the fourth quarter, we were very aggressive to jumped at that and go make some reductions inside of our workforce and inside of the UK marketplace as well.

The SAP upgrade, is that behind you now or is that still an issue?

No, it is behind us.

I mean, we finished in November and actually the system from the systems perspective is working out well with us and we've completed the migration for all of our clients and all of the initial startup issues you have when you put a new system in for the most part have been resolved.

So fortunately in this environment, one of the things we're not going to a lot of meetings on are talking about what's wrong with our system.

So I think we have the right kind of systems to support our business in '09 and going forward and now we need to go leverage those.

And I know that you lost some share because of that implementation.

Have you been able to get customers back or is it hard to tell because the business is so soft to begin with?

It's a little bit hard to tell.

You have got a moving target on you.

But clearly one of the biggest things we talked about historically -- because we really did not lose any clients fortunately inside of our large account business because we delayed the migration of them until the system was better.

Where we felt the most deterioration was in our SMB business specifically tied to our websites and the issues we had there back in late 2007 timeframe, early 2008.

We are now actively working to try to bring those clients back and we have had some successes and we will continue to go after that.

Okay, Glynis, I believe that you talked in the cash flow commentary that there was deferred payments or deferred payables pushed into the first quarter or maybe I misunderstood.

But could you elaborate on that?

Yes, going into the end of 2008, we negotiated with a couple of our key vendors with regard to just pushing our our payables a couple of days while maintaining the vendor discounts that we (inaudible) get from them and they worked with us on that.

So we effected that at the end of the fourth quarter and it was just a couple of days going into the first quarter of this year.

That was just to maximize the cash flow?

That's just to maximize the cash flow and just in general manage our cash on a go-forward basis.

To the extent that we can negotiate with vendors to extend payment terms while maintaining any payment discounts that we have, we think that's a good strategy to use in this environment going forward as we try to preserve cash.

I know Richard gave guidance or EPS guidance for the year which I appreciate is hard to do at this time.

But looking into the first quarter, you said January is off to a pretty tough start.

You have some costs coming out, maybe not all of them.

Is it possible that you could actually break even or lose money this quarter?

Without going into the individual quarterly guidance, clearly our goal is not for that to happen.

We did say the year-to-year decrease would be stronger in the first half just because of the difficult compare because the first half of 2008 was clearly different from a demand environment perspective than the second half of 2008.

But clearly our goal was to not allow that to happen not.

Okay, understood.

Okay.

Thanks very much.

John Lawrence.

Good morning.

First of all, Rich, can we walk through the hedging program currency, describe that a little bit to us?

And had it been in place -- I assume you've back tested it -- what would have been the result this quarter had that program been in place?

So I guess, John, the hedging program is designed to help us better manage the mismatch that we have between assets and liabilities of known transactions that have occurred in a particular quarter.

So it's lagged a little bit clearly because he have to know the transactions and we have to have some forecast with regard to what we think's going to be happening with transactions for the rest of the quarter.

So I just want you -- I want to be clear that the hedging strategy is never going to eliminate all of our foreign exchange exposure entirely.

We believe that will just help us manage what we have.

I actually can't give you a number that says had it been in place in the fourth quarter, it would have been X versus Y.

We do believe that we -- there was some periods of rapid volatility specifically in October with the Canadian currency and specifically in the second or third week of December between the euro and the British pound sterling.

Even with a strategy in place, it's possible with that rapid volatility and the fact that we hedge after the fact, that we would have still had some exposure albeit not at the $6.2 million level.

So it would cost some of it but not totally eliminated it?

Correct.

It would have minimized it but not totally eliminated it.

Okay and, Glynis, just to -- let me get my sort of questions in on this.

When we say an aged credit is out there, at what point does that credit become aged?

And whatever process was used to put that in that bucket, walk me through the timing of those transactions.

I guess most recently, the aging bucket would've been 18 months and so the aged credits would have stayed out on the balance sheet through 18 months and at the end of 18 months, the Company -- it made a determination that they didn't have a remaining liability even to customers or vendors or other counterparties and they took that into income at the end of an 18 month period would be the practice in 2007 and 2008.

Okay, would it be similar to gift cards that go bad for a retailer?

Yes, it's a similar concept; yes.

And, Rich, when you talk about -- I think there is a part of the securitization on the credit line that comes up for renewal.

Is that later this year?

Yes, so our ABS line which is $150 million structured inside our overall capital structure, $150 million program inside of our overall capital structure, that comes up for renewal in September of 2009.

Unfortunately as Glynis highlighted, as we aggressively worked our cash flow in the fourth quarter and was able to get our debt down to $228 million, we were actually able to get the debt down on our ABS line to zero.

So we were able to go minimize any of our short-term debt and it's all positioned as long-term debt because it's all off the $300 million revolver that we run our business.

So one of the things I think we really demonstrated on a positive side of the equation in a tough market is some really strong cash flow generation in the fourth quarter to be able to go down the debt to that level.

And clearly as we go in this environment, we're going to continue to be very aggressive in terms of managing our receivables balances with our clients because obviously there's a natural inclination by our clients to go push out receivables.

So we are obviously not -- that's not in our best interest.

So we will be aggressive on that as well as we are being very aggressive in other aspects of just how we run our business.

As an example, historically before the SAP migration, we used to run our business in the US with about 100 to $110 million of inventory at any point in time.

We now run somewhere in the range of $65 million of inventory prior to 2009 beginning.

As we look to now better manage our cash utilization in the Company, we actually plan to go get 10 to $15 million out of our annual inventory run that we run at.

So we're going to try to run our business more in the 50 to $55 million range.

I highlight that just as an example of things that we can do inside of our business in addition to driving operating results to go drive better cash management so we can have more flexibility in terms of paying down that debt and be able to go leverage a stronger balance sheet as we come out of what is clearly a slow market today and come out stronger on the other end.

Yes, and the last question can -- can you separate Calence out at all as far as performance in '08 and as we look to '09 compared to where it would have been nine or 12 months ago?

NO, I would tell you Calence is really -- in the fourth quarter started to slow down from what we had been seeing and from an overall networking category perspective and clearly I think it kind of aligns with what Cisco just announced recently that the networking category is starting to slow down just like we saw in other parts of our hardware business.

In terms of actually calling it out specifically in terms of the actual results, we have integrated those businesses and to some extent moved our business over into that business.

It's difficult for me to go give you specific numbers.

But I would tell you the networking business is not immune to the slowdown effect.

It's just right in the middle of what we are seeing today in terms of just people slowing down their hardware and their networking initiatives inside their enterprise.

Now hopefully as we come out of this thing, one of the nice things about Calence is they have some very unique things that they do to help clients in this environment.

For example, I'll highlight two.

One is telecom cost management.

They have a whole practice around helping clients manage and reduce their telecom spend which if you look at an IT budget, it's actually a meaningful line item for most CIOs.

So that is very relevant in this environment.

The second thing that's very relevant in this environment is they have very deep managed services capabilities.

So they can tell clients hey, instead of you managing your network, why don't you let me do it?

One is I can probably do it better.

Two is I can definitely can go do it cheaper than you are doing it today.

As we go into this environment, people may not be buying as much for the next couple of quarters of networking new gear but there are great things that we go offer them in terms of perhaps let us go manage it for you and perhaps it will be one of the drivers for you to go reduce costs inside your infrastructure.

As we think about the business model going forward, one thing that I think is pretty clear to anticipate is that many CIOs are going to look to consolidate suppliers and find ways to reduce cost.

As Insight has been successful in 2006 acquiring Software Spectrum and acquiring Calence and MINX in 2008, we think are very uniquely positioned to be that company that they consolidate with because we have great capabilities around supply chain of hardware.

We have got great capabilities around networking, great capabilities around software, great meaningful capabilities around services.

So the strategy is yes, IT spend is going down but how do we go take market share in a slower market by leveraging the breadth of our capabilities and being that partner that our clients want to go consolidate around.

That's what the sales team is running at every day and I think there's a good opportunity there and that's what we have got to go after.

Brian Alexander, Raymond James.

Sorry to beat this to death, but just still trying to understand kind of the nature of the audit.

When you say that there is a material reduction of retained earnings as of 12-31-04, just curious, why is the cutoff at 2004 and not some other year?

What is so special about that cutoff date?

And then when you talk about the $50 million to $70 million, just make sure I'm clear, is that the cumulative restatement to date or is that the cumulative through '04 and we don't know the rest of the impact from '04 onward?

Good question.

The 50 to $70 million is the cumulative to date.

So that goes all the way through 2008.

That is the total amount.

The importance of the December 31, 2004 date is that in our 2008 10-K, that is going to be the last year that we present -- that we have balance sheet data in the 10-K.

So there is a table in the 10-K that will have selected financial data for 2004 through 2008 and based on that, in 2004 in that table, we would record the entry to retained earnings to adjust 2004 on a go-forward basis that encompasses all prior years through 2004.

Okay, I understand.

And then the -- again the 50 to 70 is kind of the (multiple speakers)

The total.

The total impact max cash and there's a fair chance that maybe a lot of that won't result in actual cash payment from Insight.

Is that right?

There's a fair chance that some of that wont's result in a cash charge for Insight.

I hesitate to say a fair amount.

(multiple speakers) a large part I think was the word you used.

But it will be something less -- we believe the cash impact will be less than that.

On the currency, I'm just wondering, oftentimes when we record foreign currency gains or losses below the line, there is some offsetting effect higher up in the P&L.

I'm just wondering should we think of it that way or should we treat the currency loss in the fourth quarter as a true loss that is not offset elsewhere in the P&L?

You should treat it as a true loss that is not offset elsewhere in the P&L.

This concludes the question-and-answer portion of your conference.

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

Rich Fennessy for closing comments.

You may proceed.

Thank you very much for everybody who has joined us today.

Clearly we had a lot to cover and as we go into 2009, we have a lot to do to go drive our business performance for our clients, for our partners, our teammates and obviously for our investors.

So thank you very much for your continued support of Insight.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.