Insight Enterprises Inc (NSIT) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Insight Enterprises, Incorporated earnings presentation.

(Operator Instructions).

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

Glynis Bryan, Chief Financial Officer of Insight Enterprises.

Please proceed.

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 June 30, 2009.

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

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

Today's call, including all questions and answers, is being webcast live and can be accessed via the Investor Relations page of our website at www.insight.com.

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

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, August 5th, 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.

In today's conference call, certain non-GAAP financial measures will be referenced as we discuss second quarter 2009 earnings and diluted earnings per share results.

You will find a reconciliation of these non-GAAP measures to our actual GAAP results posted on our website on the Investor Relations page.

These non-GAAP measures are used by us to evaluate financial performance against budgeted amounts, to calculate incentive compensation, to assist in forecasting future performance, and to compare our results to competitors' financial results.

We believe that these non-GAAP financial measures are useful to investors because they allow for greater transparency, facilitate comparisons to prior periods and competitors' results and assist them in forecasting our future performance because we typically exclude items we believe to be outside of normal operating results.

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 our 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, 2008.

With that, I will now turn the call over to Rich to walk you through our second quarter 2009 operating results.

Rich?

Thank you, Glynis.

Hello, everyone.

Thank you for joining us.

We are pleased to be here today to report on our second quarter financial and operational results.

Despite the challenging demand environment for IT products globally that resulted in year to year declines in sales and profitability in our business, we are pleased to report that we executed well in the quarter.

For the first time in seven quarters, we saw sequential quarter organic growth in our North American hardware category in both sales and gross profit.

We also took further actions to reduce the cost base in our EMEA and Asia Pacific businesses to better align those businesses with the current demand environment.

In addition, we continued to focus on improving our cost efficiency metrics and strengthening our overall capital structure.

Highlights of our results include; consolidated net sales for the second quarter were 1.04 billion, down 26% from last year but up 9% sequentially.

Gross profit declined 26% to 147.8 million, while gross margin was 14.3%, down 10 basis points from last year.

Net earnings from continuing operations were 16 million, and diluted earnings per share from continuing operations were $0.34 before the effect of the following one-time items.

Severance and restructuring expenses of 2.1 million, 1.5 million net of taxes; and professional fees associated with the trade credits investigation that was concluded in mid-May of 2.6 million, 1.6 million net of taxes.

And on a very positive note, we generated over 95 million of cash flow from operations during the quarter, paid down debt by 51.5 million and ended the quarter with 119.5 million of debt outstanding, which is down over 100 million since the beginning of the year.

Moving on to our operating segments, in North America, net sales were 714 million, down 25% from the second quarter of 2008 but up 8% sequentially.

Gross margin on these sales held steady at 14%.

While net sales were down year-over-year, we are encouraged by 13% sequential quarter growth in sales in the hardware category in the second quarter.

We believe the demand environment for hardware offering is stabilizing, and are hopeful that this trend will continue through the second half of 2009.

Additionally, we saw increased demand for our value-added networking and services offerings in the second quarter.

A key part of our strategy is to continue to increase the mix of services as a percent of our total net sales and profit.

By way of example, in the second quarter, we executed against several unique services engagements, including the integration of IT hardware in hundreds of branch locations for our key clients, and the design and implementation of the networking infrastructure for a large cruise ship.

Our financial performance in the quarter validates that our strategy is working, as our services business increased its net sales by 24%, which has a greater impact on our gross margin, contributing an additional 120 basis points of total gross margin in North America in the second quarter compared to last year.

Net sales and gross margin from our software category in North America declined in the second quarter, driven by the impacts for program changes by a key partner and the overall demand environment.

While the effects of the changes in our key partner's program were in line with our expectations, we also experienced softness in overall demand for new licenses and other software products during the quarter.

Selling and administrative expenses for North America in the second quarter include 2.6 million of professional fees and costs associated with the trade credits investigation.

Excluding the effect of this item, selling and administrative expenses were down 23 million compared to last year or 21%, primarily due to the cost reduction initiatives we have implemented over the last several quarters and to a lesser extent, the effect of lower variable costs on lower sales.

As a result, earnings from operations in North America in the second quarter were 16 million excluding the one-time items.

Moving on to EMEA, our EMEA operating segment reported net sales of 281 million, down 26% in US dollars but up 4% sequentially.

In constant currency terms, net sales were down 12% versus last year and down 2% sequentially.

Our UK-based business saw a decline in sales in the hardware category of 8% in local currency, reflecting continued softness in this market; but doubled its sales of services year-over-year, primarily due to the acquisition of MINX in July 2008.

Across the rest of EMEA, which is almost 100% focused on our software category, net sales decreased 17% in local currency, driven largely by lower volume and vendor program changes.

We believe the demand environment across EMEA has not yet stabilized, so we will continue to be very focused on driving operational efficiencies to maximize our profitability in this region.

Gross profit in EMEA was down 26% in US dollars and down 12% in constant currency terms, while gross margins stayed steady at 14.9% compared to the same quarter last year.

Selling and administrative expenses in EMEA in the second quarter were down 7.6 million year-over-year in US dollars; and in constant currency terms, selling and administrative expenses in EMEA decreased by approximately $600,000.

As the demand environment continues to be very challenging in EMEA, we have and are taking steps to reduce the base cost of this business.

As a result, this segment recorded 1.9 million in severance and restructuring expenses in the second quarter.

We expect annualized cost savings from this headcount reduction to be approximately 2.5 million.

Excluding the severance charge, EMEA reported earnings from operations of 8 million.

Our Asia Pacific operating segment reported net sales of 42 million, down 28% from the prior year and down 15% in constant currency terms.

Gross profit was 6.3 million and gross margin was 14.9%, down from 9.5 million and 16.2% in the prior year quarter.

These declines are primarily due to the increased mix of public sector business, which is typically transacted at lower margins, as well as lower overall volume and program changes.

In response to lower financial performance and the market environment, we are taking steps to reduce our costs in this region.

In the second quarter, we recorded 200,000 in severance expense related to these actions.

Excluding the severance charge, Asia Pacific reported earnings from operations of 2.2 million.

To summarize, we believe the demand environment for hardware in North America is stabilizing, while there is still some continued softness in the software category.

We are executing better in this region, and we have a clear opportunity to continue to leverage our networking and services capabilities as growth drivers.

As it relates to EMEA and Asia Pacific, we have taken and will continue to take actions to better align our cost structure to the demand environment.

Glynis will now take a few minutes to highlight certain other areas where we are making good progress in 2009.

Thank you, Rich.

Starting with cash flow, in 2009, we have been highly focused on improving our operating cash flow metrics and paying down debt to insure we have the financial flexibility to grow our business as market conditions improve.

In the second quarter, our business generated over $95 million of cash flow from operations, with positive contributions coming from improvements in our DSO and DPO metrics for the quarter.

As Rich mentioned earlier, we paid down debt by 51.5 million in the second quarter, and ended the quarter with $119.5 million of debt outstanding.

We have also ended the quarter with $120 million of cash on the balance sheet, of which approximately $114 million was residential (inaudible) subsidiaries.

Subsequent to quarter end, a material portion of this foreign cash balance was used to make a large scheduled payment to a supplier that historically would have been made in the June quarter.

In addition, because of routine seasonal working capital needs, the third quarter of each year typically requires a greater use of cash in our business.

As a result of this dynamic and the scheduled timing of a similar supplier payment in the US, we currently expected our debt balance will increase by up to $80 million as of the end of the third quarter.

However, we do expect to end the year with a debt balance below the seasonal spike as we continue to realize the benefits from our cash management initiatives.

Also of note during the quarter, we were able to conserve approximately $5 million of cash as a result of a favorable settlement of an arbitration proceeding related to the 2006 sale of a subsidiary.

Moving on to our capital structure, as we have discussed on previous calls we have a 364 day asset based financing facility, with an expiration date of September 2009, which we have been working to renew in advance of the scheduled expiration.

On July 24th, we completed the renegotiation and amended this facility for a new 364 day term through July 23rd, 2010.

We were very pleased to have secured the amendment in this still uncertain credit environment.

The primary changes for this facility include the inclusion of additional accounts receivable to the pool of receivables eligible for borrowing under the facility, resulting in a borrowing capacity of approximately 115 million, up from 57 million that was available under the facility as of June 30th.

The addition of a co-purchaser to the agreement, modifications of various other definitions and maintenance covenants; however there was no change to the primary financial covenants in this agreement.

And finally, pricing changes include increased borrowing rates and upfront transaction fees.

The increased cost of this facility are expected to result in approximately $1.6 million of incremental interest expense over the next 12 months.

Our intention going forward is to use this funding source as a back up to our 300 million primary revolving credit facility given the differential in funding pricing of the two agreements.

One last item of note.

Just a couple of days ago we received notice that the staff of the Securities and Exchange Commission had concluded their investigation into the Company's historical accounting treatment for aged credit -- aged trade credit -- and is not going to recommend any enforcement action to the Commission.

We are very pleased with the staff's decision and are focused on continuing the administrative work to resolve the restatement liabilities.

I will now turn the call over to Rich for his closing comments.

We continue to believe that with demand levels where they are today and with the resources and other actions we have taken over the last several quarters that diluted earnings per share from continuing operations will be between $0.80 and $0.87 for the full year of 2009.

However, given the typical seasonality of our software business and our anticipation of continued softness in the EMEA market, we now believe that diluted EPS from continuing operations in the second half of the year may be lower than the first half of the year.

This outlook does not include the impact of any severance and restructuring expenses, expenses associated with the restatement investigation and administration or related litigation, or other one-time charges.

Overall, we are pleased with our first half operational performance in this challenging new demand environment and believe we are well-positioned going into the second half of the year to compete aggressively.

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

(Operator Instructions).

Our first question comes from the line of Brian Alexander of Raymond James.

Please proceed.

Thanks.

Rich, on your annual guidance, I just want to make sure I have this right.

If you are reiterating $0.80 to $0.87 and the second half is going to be lower potentially than the first half, and I'm showing the first half you did $0.42.

But maybe there are certain charges that I am not factoring in correctly.

So I just wanted to see if that is the case that you did $0.42 in the first half and the second half is going to be lower, I guess I don't see how you would be able to do more than $0.84, and I would expect the range to be $0.84 or lower.

Yes.

Brian, actually, if you do the rounding on the first half, the first half is actually $0.43 versus $0.42; so on the guidance of $0.80 to $0.87, which as you know is the same guidance we gave on the last quarterly call, included in that is now an assumption that we'll see typical seasonality on the software business in terms of -- as you know, the third quarter will the lowest quarter of the year relative to software; and then the new news relative to the last call is the European marketplace is continuing to be quite soft -- softer than we had anticipated last time, because as you'll remember, on our last call we said we anticipate the second half of the year to be greater than the first half.

Two things drove us to position it the way we positioned it.

One is, we had a very strong second quarter, which is good news; and two is, the EMEA market place is softening, and we are concerned about that going into the second half of the year, which is why we're trying to be more aggressive as it relates to our cost structure.

That's helpful.

I appreciate the color on the first half as well.

So as I look through the press release and listen to the call, it just seems a little bit different in terms of transparency and disclosure, specifically around product mix breakouts, hardware versus software versus services, which in the past was always helpful given the different growth rates in margin dynamics associated each of the segments.

So I guess I'm just curious, why pull back on that disclosure?

You did provide some additional color on the call, but it was a little hard to follow in terms of whether the trends were sequential or year-over-year.

So I guess the first question is, why not provide that in the press release?

Specifically around your initiatives in software, services and networking, is it possible to just give us on the call the revenue breakdown by category?

Sure.

And the interest in terms of the change that we made was not to go decrease transparency, but it's more to adequately reflect in our releases kind of how we look at the business.

And we look at our business not necessarily -- I mean, not that we don't look at the sub-details of all the hardware categories; but we really look at our business as a hardware, software and services business, so those three categories.

So you can anticipate as we go forward to bring back something in the disclosure that lays out hardware and software and services specifically as categories, because again, that's how we are running and managing the business.

But let me give you those numbers right now just so you have a perspective on that.

And by the way, they are in the 10-Q for the second quarter, so there is detailed data there.

But going forward, we plan on breaking out hardware, software and services in revenue terms, and eventually even GP terms so you get a sense for how the gross profit contribution is migrating as we continue to go drive specifically the services aspect of our business.

But let me give you some more details.

If you look at our year to year performance in hardware in North America, it was down 27%.

Software was down 29%.

Services was up to 24% that we referenced in the call.

That supports the overall view that our North America sales are down 25%.

And it relates to EMEA, in constant currency terms -- which I think is a more appropriate way to go think about the business -- our hardware was down 8% year to year.

Our software was down 15% year to year, and our services business was up 30% year to year -- which is down the negative 12% in constant currency terms.

In Asia Pacific, which is mostly just software, that was down 29% in US dollars and 15% in constant currency in the year to year basis.

Okay, that is very helpful.

Just lastly and then I will get back in the queue, as you think of your services business -- and you had good growth in both North America and Europe -- could you kind of boil it down for us in terms of what specific services are you seeing a lot of success in, what specific services make up the majority of that revenue stream?

Because it's such a big category, and I'm just trying to get a better sense for where you guys are gaining traction.

Thanks.

Sure.

And there is really three major buckets relative to our services business.

There is one, what we call life cycle services, which one of our biggest differentiators in the US today, as an example, is we have about 750 or so field services resources across the United States who are on site daily at clients doing IT projects for them.

And specifically, when I say life cycle services, that is helping our clients to manage the life cycle, the IT asset, in their environment.

That's everything from the initial deployment of that IT asset in terms of getting it to the locations they wanted to get it to, the setting up of those IT assets, and then eventually the disposal of those assets when they become old and new ones need to come in there.

So we reference in the script, just to give you example of two engagements we had in the quarter that we are quite excited about, one is helping a large -- one of our clients deploy upgrades from a technology perspective in their branch offices -- so we literally have resources in each of the branch offices.

After we consolidate and do all the image loading in our Chicago facility, we ship all the assets into the branch offices.

We set them up.

We configure them, and then we move out and take the old assets with us.

That's an example of life cycle services.

So think about it as helping manage the flow of assets for our client.

Another example that we called out in the script was we literally built the networking infrastructure in our labs in Chicago for a large, large cruise ship that was being built.

We built the infrastructure, we burned it in for six months.

We then boxed it all up and sent it overseas to be installed on the actual ship, as an example of leveraging our expertise from a lab and configuration capability to take work that our client used to do in-house to now do it through our facility and go leverage our expertise and capabilities.

So the first aspect of our services business which was very successful -- and by the way, 1Q, 2Q, and we see it going in the second half, is our life cycle services.

The second major aspect of our services business is our professional services, specifically around our networking business and the Calence acquisition that we did in April of last year, and that is going in and helping our clients do the design and build of what their network needs to look like.

So this is higher paid consultants who are actually coming in early in the sales cycle and helping design the networking infrastructure for our clients, then eventually selling the hardware pieces that make up that configuration, and eventually helping set that up, leveraging our life cycle services capabilities.

That was a very successful part of our business in the second quarter as well.

The third aspect -- which is the smallest but to me one of the most exciting, because it represents an annuity stream -- is the managed services aspect of our business, where we remotely manage the network infrastructure.

Again, we picked up this capability through our Calence acquisition, where we remotely managed the networking infrastructure for our clients, leveraging the NOC, the network operations center that we have here in Tempe, Arizona.

We support clients around the world through that NOC and help manage and provide remote monitoring services to our clients in terms of just the quality and the security, as well as the up-time of their network.

That, I would tell you, is the fastest growing part of our services business and represents a nice annuity stream.

So those three pieces -- life cycle services, professional services and consulting specifically around the network today, and managed services, those are the three components that make up our services business, which is what grew 24% in North America in the second quarter.

Great, thanks, Rich.

You bet.

(Operator Instructions).

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

Please proceed.

Yes, thank you.

Rich, if you can talk about the hardware trends that you are seeing in North America.

You talked about that sequential growth.

Could you talk about end markets, SMB versus enterprise product areas, and then also the trends you see going into September and the back half of the year in North America?

Sure, Matt.

Thanks for the question.

As you think about the hardware category, obviously we talked about the sequential growth that we saw, 13%.

I would tell you where we are seeing -- which is a little bit different than what I am reading in terms of some of our competitors -- we are seeing strength coming strongest from our SMB business in terms of sequential improvements, as well as year to year improvements.

Because quite honestly, I think we are fixing some of the things that we had broken inside of that business.

So SMB is a key contributor to our growth, and as well as the public sector is a key contributor to our growth.

Enterprise is kind of the laggard in terms of sequential growth, as well as the year to year performance, which I think is tied just to the overall market environment.

All of them helped in the sequential growth, but actually we're getting more of the sequential growth coming from our SMB business and public sector versus enterprise.

Relative to the overall demand trends, clearly we are pleased with the sequential growth in 2Q versus 1Q, and as we referenced in the script, we talked about the market stabilizing.

What does that actually mean?

I mean, clearly if you look at that sequential growth, I think two things drove it.

One is, I do believe we are executing as a Company better.

And two is, I think, companies are spending more money on IT in 2Q versus 1Q.

We believe that level of spend that we saw in 2Q will pretty much carry out into Q3 and Q4.

So as we think about our business coming out of the market situation that we've been through, we are starting to think of our business on a sequential basis.

We overall view that the demand environment in terms of how much spending is going on in 2Q should hold out relatively consistent to Q3 and Q4 relative to our hardware business.

Okay.

And that's a North America statement.

Clearly, in Europe we're not seeing -- we didn't see the sequential growth, as well as we don't anticipate necessarily sequential improvements in Q3 and Q4.

We think that market is going to be slow and kind of like we saw in Q2 continue through the second half of the year.

And on the software side, do you think that will remain soft until we start to see the adoption rate for Windows 7 start to accelerate into next year?

Yes, I mean, I do believe -- I mean, as you look at the software category, clearly we experienced the impact of the program changes that we've talked about on these calls before pretty much to the expectation that we had.

But we also saw lower renewals, as well as just a lower number of new agreements being put in place.

We do anticipate in terms of how we looked at that guidance, that that trend continues through the second half of the year, so we don't see material improvements relative to the software business.

Obviously, we'd love to see it happen, and we're obviously focused on trying to go make it happen; but our assumption is it kind of plays out that way for the second half of the year.

Clearly, as you think about the category, I am optimistic as I think about Windows 7, specifically talking about the Microsoft business we do, and the other product line refreshes as well as new enhancements they have coming out between now and, say, mid-2010.

So I'm hoping that does act as a catalyst for renewed interest and growth again in the overall software category.

One of the points that we've talked about -- and I just want to give some want clarity on -- one of the things we've talked about that may have happened in the second quarter is some of our transactions in our software business, specifically around Microsoft, may have gotten deferred higher than typical because of Microsoft's year-end being July 3rd versus ours being June 30th.

I just want to go let you know how that played out.

We actually were very successful working with Microsoft to get our transactions prioritized and executed in the second quarter so it met our June 30th deadline.

So we did not see what we though could have happened, which is transactions more so than normal moving into the third quarter.

Okay, great.

That's helpful.

And just back to the hardware commentary, as enterprise volumes start to come back, wouldn't that have a negative impact on your gross margin?

Or will the service business pick up commensurately to offset that?

We -- I mean, we would hope just what you said would happen.

And clearly, our enterprise business as compared to our SMB business and product margin runs at a lower rate; so right now we're getting some benefit from just the mix change of SMB being greater than it's been historically as it's coming back stronger.

But over time, if enterprise has a big spike, that does come to lower product margins, which is why, obviously, we are as focused as we have been in terms of growing the services business just so that hardware product margin isn't such a large percentage of the total; and having 24% growth is an example of a strategy that is working, and obviously our effort will be to continue to go drive that through the second half of the year, and then get ourselves ready for what we would hope -- it would be good news from my perspective to see an enterprise spike, and I do believe when you talk about refresh cycles, that not many clients are doing refreshes, especially in the enterprise segment.

That will change.

Whether that changes in the first half of 2010, second half 2010 -- there's a lot of different points of view on it -- but I think we're going to be well-positioned to participate in that for two reasons.

One is, obviously, we have strong long-term relationships with many enterprise clients.

Two is, we have very deep capabilities in what I covered earlier, which is life cycle services, to help clients deploy and manage the deployment of that technology at a more cost efficient point than they can do internally.

So I think we can go leverage with this refresh cycle that will happen, not just selling the hardware but also leveraging our services capability.

Okay.

That's helpful.

Thanks a lot.

You bet.

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

Please proceed.

Good afternoon, Rich.

Hey, John.

Can you talk a little bit about -- obviously you made some cost -- cut some costs in EMEA, the process of what you have been able to do in the first half in terms of cost cuts; and as things turn back around, what kind of capital would you need to ramp back up, or are you in a pretty good leverage position on cost?

Yes, talking about cost -- and I'll see if Glynis wants to add anything relative to the capital and cash needs associated with that growth -- but relative to cost, as you know, and it's shown up in our results pretty clearly, all the hard work to get the costs out of our North America structure is paying dividends, where the second quarter we were down 21% versus the second quarter of last year, and we've been very aggressive there.

Relative to EMEA, our costs were down about 2% in local currency compared to last year's second quarter.

They're down 3% sequentially first quarter to second quarter.

So some progress in terms of reducing costs.

Some of the things that makes the optics or the actual cost dollars not show up as clearly in terms of -- because we actually have taken more actions.

At the same time, we are making some investments.

We are making some investments from an IT systems perspective.

We've also made some decisions in mid-2008 relative to facility upgrades for some of our facilities.

Those higher run rates are showing up in our actuals now, which kind of moots some of the cost reduction actions we're having to make it look like we only have a 2% reduction on a year to year basis.

With that said, as we go into the second half of the year, we all know the cost and complexity of getting cost out in some of the European countries is much more difficult than in the US.

With that said, we are going to continue to focus on fine tuning our cost structure in the second half of the year to go make sure we are in line to what we anticipate to be the demand environment.

Okay.

Great, thanks.

Thank you.

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

Please proceed.

Thanks.

Just on the cash flow, you guys did a great job again on the operating cash flow, and particularly around DSOs, which I know normally would be up quite a bit in the June quarter -- although your software business was probably not as strong as you thought.

I guess my question is, what should we be thinking about a sustainable kind of annualized net trade cycle or working capital as a percent of revenue, however you want to describe it?

I know it's going to move around from quarter to quarter; but annually, what can we expect to see there, and how much more improvement do you have left?

I think, Brian, what you've seen so far is that we've had cash flow from operations of about 190 million.

As I said in my portion of the call, we are going to be using cash in the second half of the year.

So I think from an overall modeling perspective, we anticipate somewhere in the region on an annual basis of about $100 or so million in cash flow from operations.

Does that help you?

Yes, for the year.

But just longer-term, what would your targets be around working capital?

I mean, I think that on average, what we've said is that we want to be able to generate cash -- cash flow from operations that is in excess of our net income.

Clearly, with our net income at this low -- at the level that it is at right now, we are doing significantly better than that.

As our net income improves, we're going to actually -- and as our revenue grows, we will actually end up using working capital.

You'll remember that in the first quarter for sure; we did have sequential growth in the second quarter.

We actually were generating a lot of cash in the first quarter.

We started to use a little bit more cash to fund our operations as we started to see some growth in hardware.

We'd anticipate that we're going to continue to see that going forward in terms of as volumes grow and business picks up.

We are going to have more working capital requirements put on our business, specifically from the hardware perspective.

And I don't think that we have a target with regard to working capital out there right now.

Okay.

But Brian, let me add one point to your question about DSO, because I do think it's important to highlight.

I mean, we clearly are pleased with the improvements we are seeing in terms of just how we are managing our collections processes and our team.

I mean, they were down two days compared to the second quarter of last year, which is good things; and we still continue to see improvement opportunities from a DSO perspective.

And the overall cash generation is a combination of that effort -- which is really sales and finance working closer together -- and two, is also managing our inventory dollars.

You'll see our inventory dollars have been reduced substantially on a year to year basis.

So there's been a lot of focus that has come out of the market environment we've been competing in around our cash management cycle.

And I think the progress is showing up pretty nicely.

And then just given the need for capital as you reinvest in working capital going forward -- and there's the use of cash in the second half, as Glynis just pointed out -- just tie into that kind of your appetite for acquisitions, and just where you stand on that.

And strategically, if you were to pursue acquisitions over the next several quarters, what parts of the portfolio do you think you need to enhance the most?

Yes, Brian, we are in the midst of our strategic planning process; in fact, we are having meetings over the next month with the Board of Directors doing your typical five-year strategic planning.

I mean, I'll be honest, our primary focus is the organic business and how we strengthen and improve the organic business, perhaps opportunistically looking at acquisitions down the road.

As we scale out our capabilities, some of the key countries in Europe would be clearly a logical place as we think about acquisitions.

So it is really a secondary strategy versus a primary strategy.

Now with that said, we are in a much stronger capital structure situation than we were say a year ago at this point in time.

But with that said, that's kind of how we are thinking about it right now.

As we kind of finalize that strategic plan and we schedule our upcoming analyst meetings, which will be the early part of next year, we will take you through that and we'll probably give more clarity on that specific questions of how does M&A play into the strategy.

And then just finally on the IT platform, I know you've a couple of quarters removed from the completion the North American hardware portion of the IT migration.

Just remind us and update us on plans from here, particularly as it relates to the software business and the networking business that you acquired.

Yes.

No, I mean, as it relates to our North America IT platforms, we continue to run SAP for the majority of our business and fine-tune and optimize it.

We are, as you said, running part of our software business on the legacy Spectrum system, and we're running our networking business off the Microsoft Dynamic system.

The actual integration of those in terms of time frame, it is not anything that is going to be happening in the short-term.

As we view that, quite honestly, the systems are supporting the business quite well today.

It does represent an opportunity down the road, but there's no immediate plans to go integrate those systems together into one platform.

Does that at all impede your ability to cross-sell, Rich, from an operational standpoint in getting sales people aligned?

And just kind of update us on the whole sales force reorg that I know happened not too long ago.

It does, Brian, have -- it makes it more challenging.

We believe there's other ways versus just merging this -- I mean, don't get me wrong.

Longer-term, our plan is to merge into one platform.

But the question is, just when is the right timing, given the market environment, given the investment, things of that nature.

So we will -- as we finalize our strategic plan, we will be coming back and crystallizing that aspect of our strategy.

But to say that -- I mean, we are cross-selling today.

We are seeing some improvements in our business.

Could we be better in one system?

I think the answer to that is yes.

I think there's other things we can go do, that we are doing, to drive improvements without having just one system in our business.

For example, common CRM practices across the different aspects of our business, how we compensate people and bring people and force them together, as well as just how the leadership team operates in the daily management system activity tracking.

So we have got activities underneath all those areas to go drive improvements in cross-selling so we don't have to wait for the one IT system to arrive one day.

Great.

Thank you very much.

This concludes the question and answer portion.

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

Glynis Bryan for closing remarks.

This is Rich.

I will help Glynis out on that.

Just one point I wanted to highlight, though.

We talked about Europe a lot on this particular call in terms a softer market and not clearly stabilizing to the extent that we are seeing the hardware business in North America stabilize.

With that said, in local constant currency, that team was down in revenue terms 12% versus last year.

I think when you compare that to some of the large distributors' European results and their year-to-year declines in constant currency, I think you will find that we executed quite well from a comparison perspective.

So that team continues to go operate in a tough market, I believe, well.

So I just wanted to go make sure everybody is aware of that point.

In total, as we exit now the second quarter, we are pleased with the improvements we have seen in our business; and we do believe, specifically in North America, that we are executing better as a team, and we believe the actions we're taking on our cost structure in North America and will continue to take in EMEA and Asia Pacific will continue to allow us to go drive towards our profitability goals and achieve the annual guidance of $0.80 to $0.87 as we go into the second half of the year.

We look forward to sharing with you our success in our third quarter and our upcoming earnings call.

Thank you very much for joining.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.