Insight Enterprises Inc (NSIT) 2009 Q3 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen.

  • Welcome to the third quarter 2009 Insight Enterprises Incorporated earnings conference call.

  • I will be your coordinator for today's conference.

  • At this time, all participants will be in a listen-only mode.

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

  • (Operator Instructions).

  • At this time I will like to turn the call over to your host for today's conference.

  • Glynis Bryan, please proceed.

  • - CFO

  • Thank you.

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

  • Today we will be discussing the Company's operating results for the quarter ended September 30, 2009.

  • I'm Glynis Bryan, Chief Financial Officer of Insight Enterprises and joining me is Tony Ibarguen Interim President and Chief Executive Officer.

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

  • Today's call, including all questions and answers, is being web cast live and can be accessed by the Investor Relations page of our web site at Insight.com.

  • And 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 of time.

  • This conference call and the associated web cast contain time sensitive information that is accurate only as of today November 4, 2009.

  • This call is 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 third quarter 2009 earnings and diluted EPS results.

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

  • The non-GAAP measures are used by us to evaluate financial performance against budget amounts, to calculate incentive compensation, to assist in forecasting future performance and 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 competitor results and assist in forecasting our future performance because they 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 risk 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 Tony to walk you through an overview of our third quarter 2009 operating results and to share his initial perspectives on the business after his first 50 days or so in the Interim CEO role.

  • Tony.

  • - Interim President, CEO

  • Thank you, Glynis.

  • Hello, everyone.

  • Thank you for joining us today to discuss our third quarter operating results.

  • As we reported earlier today, consolidated net sales for the third quarter were $970 million, reflecting a decrease of 17% from last year's third quarter net sales of $1.2 billion.

  • Gross profit was $133 million, down 13% from $154 million, while gross margin was 13.8%, up from 13.2% in the third quarter of 2008.

  • And during the quarter we recorded the following one-time items.

  • Net severance and restructuring expenses of 4.0 million, 2.5 million net of taxes, related primarily to the departure of the Company CEO and professional fees associated with the restatement, remediation and ongoing litigation of approximately $560,000, 346,000 net of taxes.

  • Excluding these one-time items, earnings from operations increased 10% to 16.4 million from 15 million last year.

  • Net earnings from continuing operations increased to 10.1 million from 6.6 million and diluted earnings per share from continuing operations were $0.22 up from $0.14 in the prior year quarter.

  • These results reflect stronger than expected performance in our North America and Asia/Pacific operating segments that more than offset softer than expected results in our EMEA business.

  • With just over 50 days in the Interim CEO role, I want to take a few minutes to give you my initial perspective on our business and demand environment and then I will hand it back to Glynis to take you through the operating segment results for the quarter.

  • Over the short period I have been in this role, I met and talked with many key clients, partners and industry contacts.

  • The message from them is consistent -- that they believe in Insight's value proposition and have high expectations for our relationships in the future.

  • In addition, I spent extensive time with our management and teammates here in North America and abroad.

  • We have a talented team with great passion for Insight's strategy and potential and they are making progress on operational improvements.

  • For example, in early October we launched a new home page on Insight.com that includes enhanced navigation and purchasing functionality improving the ease and efficiency of our client's buying experience.

  • In addition, the new home page provides enhanced merchandising opportunities for our partners with an expanded number of product features and client segment specific web pages for small, medium and large businesses as well as public sector institutions.

  • Today, on average, only 40% of Insight's product transactions in the US are conducted through the web.

  • We believe there is a significant opportunity to increase this percentage with the improved website and we will continue to invest in functionality on the site as we move forward.

  • Our leaders and teammates also identified other areas where we need to improve our execution.

  • For instance, they have repeatedly talked about how the acquisition, financial restatement and economic challenges of the past few years resulted in management's attention being focused internally instead of on our client's and partners.

  • With those distractions behind us, we are focusing on aligning our go-to-market strategy with what our clients and partners need from us.

  • We intend to drive alignment and consistency throughout the organization culturally and operationally from goals and incentives to accountability and metrics.

  • With respect to the demand environment we continue to believe that hardware demand in North America is stabilizing as evidenced by the sequential quarter growth in our sales in this category in the second and third quarters of this year.

  • However, reduced average selling prices in competition have resulted in lower gross margins year-over-year.

  • We expect to gradual recovery in hardware sales in North America over the next few quarters and industry analysts are predicting a possible spike in growth from a corporate refresh cycle of IT products in late 2010 into 2011.

  • In the software category in North America, the market continues to be soft but our performance in this category so far this year has been generally consistent with our expectations.

  • And we anticipate returning to organic growth as the economy recovers.

  • Given the current market environment and the effects of publisher program changes, however, I want to point out that we do not expect to see the pronounced seasonal increase in software sales in the fourth quarter of this year that we have experienced in prior years.

  • As we close out 2009, we will continue to work diligently with our partners to ensure that we are aligned with their views of the opportunities and focus areas for 2010 and beyond.

  • In EMEA, despite failing to achieve our internal profitability targets for the third quarter, our team was able to drive sequential quarter growth in hardware and services sales as a result of market share gains in the public sector and middle market client segments, which we have actively focused on penetrating this year.

  • We are not able to call a bottom to the economic and IT spending declines in EMEA.

  • Despite the fact that we have performed reasonably well on the sales line in this environment, we have not had the flexibility to reduce our costs as aggressively as we have in North America.

  • Given the expense associated with resource action in this region combined with our strategy to pursue market share in key countries in 2010, we will look to improve our profitability in EMEA by continuing to outpace our competition in sales while controlling our costs and incremental investments as the market recovers.

  • Let me hand it back over to Glynis who will discuss the third quarter operating results of our business segments.

  • Glynis.

  • - CFO

  • Thank you, Tony.

  • In North America net sales were $686 million, down 19% from the third quarter of 2008.

  • Gross profit decreased 12% year-over-year to $93.3 million.

  • ^^ While gross margin increased 110 basis points to 13.6% from 12.5% in the prior year.

  • These results affect another quarter of strong contribution from high margin services business we saw sales increase 13% year-over-year and contributed an additional 90 basis points to a margin performance during the quarter.

  • The increase in services contribution is primarily due to a large professional services engagement during the quarter.

  • Gross profit and margin also benefited approximately $1.9 million from the elimination of certain restatement related trade credits during the quarter some negotiated settlement or other legal release.

  • Please note, that as we move forward, trade credit resolved in the ordinary course of business will be removed from the balance sheet in the period that the credit is either paid or the Company is otherwise released from its legal obligation.

  • Net sales in our hardware and software categories were down 24% and 15% respectively.

  • However, we continue to be encouraged that for the second consecutive quarter we sell sequential quarter growth of approximately 3% in sales of hardware while holding gross margin steady in this category.

  • Selling and administrative expenses for North America in the third quarter include approximately $600,000 of professional fees and costs associated with the restatement remediation and ongoing litigation.

  • Excluding the effect of this item, selling and administrative expenses were down $19 million compared to last year or 19%, primarily due to the cost reduction initiatives we have implemented over the past several quarters and to a lesser extent the effect of lower variable costs on lower sales.

  • We have recorded severance and restructuring expenses of 4.5 million in North America primarily for the departure of the Company CEO in early September.

  • As a result, earnings from operations on a GAAP basis in North America were 9.5 million in the third quarter and excluding these one time items earnings from operations increased 66% year-over-year to $14.5 million demonstrating operating leverage we have achieved on our lower cost structure.

  • Moving on to EMEA.

  • Our EMEA operating segment reported net sales of $248 million, down 12% in US dollars.

  • In constant currency terms, net sales were down 2% versus last year.

  • In local currency, our UK business reported an increase of 16% and 5% in software and services sales respectively and a decline in sales in the hardware category of 5%.

  • Across the rest of EMEA, net sales decreased 6% in local currency driven largely by a lower volume and vendor program changes in the software category.

  • Gross profit in EMEA was down 18% in US dollars.

  • And down 9% in constant currency terms while gross margin decreased to 14.3% from 15.3% in the prior year.

  • The declining gross margin is related to decreases in product margin year-over-year due to a decrease in average selling prices, reduced contribution from the services category, and a reduction in fees associated with enterprise software agreements.

  • Selling and administrative expenses in EMEA in the third quarter were down $3.1 million year-over-year in US dollars.

  • And in constant currency terms were flat year to year.

  • This segment also recorded approximately $300,000 in severance expense and reversed approximately 800,000 in other restructuring expenses in the third quarter primarily related to the determination that certain previously recorded facility lease reserves were no longer necessary.

  • Excluding the benefit of severance expenses and the reversal of the restructuring reserve, EMEA reported earnings from operations of 1 million, a decrease of 82% year-over-year.

  • In our Asia/Pacific operating segment.

  • Net sales of $36 million were up 8% from the prior year in US dollars and up 12% in constant currency terms primarily resulting from an increase in the (Inaudible) public sector spending in the quarter.

  • Gross profit was 4.8 million and gross margin was 13.4% down from $5 million and 15.2% in the prior year quarter.

  • Declining gross margin is primarily due to the increased mix of public sector business which is typically transacted at lower margins as well as program changes in the software category.

  • These results combine with tighter expense management resulted in the Asia/Pacific segment reporting earnings from operations of about $900,000, which was up 34% from the prior year quarter.

  • Moving on to the tax rate our effective tax rate for the third quarter was 21.6% compared to 24.4% in the third quarter of last year.

  • The decrease in the current period tax rate from our usual range of approximately 36 to 39% is primarily due to $1.5 million in benefit from the true up of certain foreign tax credits after filing our 2008 Federal Tax Return and the recognition of certain tax benefits from the settlements of audit.

  • Comparatively, in the third quarter 2008, our tax rate benefited from a $1.1 million of Federal and State Research and Development credit as well as higher percentage of taxable income being generated in countries with lower tax rates found in the US.

  • From cash flow perspective for the first nine months ended September 30, our operations generated $107 million compared to $62 million for the same period in 2008.

  • We ended the quarter with $69 million of cash and a debt balance of $158 million.

  • This cash flow performance was better and our ending debt balance was lower than we expected due primarily to the timing of certain key supply of payments.

  • I will turn the call back to Tony for his closing comments.

  • - Interim President, CEO

  • Thank you, Glynis.

  • Looking at the fourth quarter outlook, because of stronger than expected third quarter performance but moderated by our anticipation of continued softness in EMEA compared to our original fourth quarter forecast.

  • We are revising our outlook for diluted earnings per share for continuing operations to be between $0.83 and $0.88 for the full year of 2009, including $0.18 to $0.23 of diluted earnings per share expected in the fourth quarter of 2009.

  • 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.

  • For some closing comments.

  • In summary in my first 50 days in the Interim CEO role I have encountered few surprises.

  • And as I mentioned on our first call, the Board of Directors and I continue to believe that Insight has a sound business strategy and is well positioned for success in the future.

  • As we head toward the end of 2009 and into 2010, we will continue to focus on our strategic priorities and on improving our operational execution.

  • That concludes our comments.

  • And we will now open the line for your questions.

  • Operator

  • (Operator Instructions).

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

  • - Analyst

  • Thanks and good afternoon, everybody.

  • Could you just provide a little bit more detail on the Q4 earnings guidance specifically how do we get flat earnings sequentially?

  • I understand your tax rate may be going back up and that provides a head wind.

  • You talked about Tony, I think you aren't going to see as much seasonality in the software business as you would typically see.

  • So maybe expand on that point.

  • How much below seasonal do you think the software business will be and then what is driving that particularly as we have new software from your major publisher in that business.

  • And then I guess on to the earnings progression from Q3 to Q4 how much of that is additional gross margin weakness in your key segments.

  • Thanks .

  • - CFO

  • Brian, going back and addressing a point, you are right we have a couple sense of head winds coming from the tax rate impact.

  • I can't give you a precise percentage with regard to the reduction that we will see in a quarter-over-quarter basis -- year-over-year basis as it relates to software.

  • But the reduction is related to the program changes that we discussed and have discussed in each quarters that went into effect at the beginning of May of this year.

  • The impact in Q2 and Q4 will be larger than the impact in Q3 only because Q2 and Q4 are larger software quarters, but our Q4 quarter historically has not been trending as strong as our second quarter.

  • The other piece I guess in terms of the reverence I think to Windows 7 that you made is that that is not something that's going to impact corporate in the near-term with the lease that just came out.

  • I don't think we were envisioning that there will be an impact on the corporate segment specifically large enterprise segment until the second half of 2010 maybe going into 2011.

  • And that historically is related to the fact that large corporate's usually are late adapters after the first iteration of the changes have gone through the publisher.

  • And then also access to Windows 7 is imbedded in the large enterprise agreements so they can upgrade to Window 7 in the large enterprise agreements without having to buy it.

  • So there is not an incremental revenue flow in the large segment of our business coming from that.

  • - Analyst

  • Just follow up on software, why does the change in the programs affect your seasonality in Q4?

  • I thought that was primarily a change in compensation, your margin rate was compressed as a result of those changes.

  • Are you suggesting that you are just not looking to grow that business as aggressively as you have in prior years because of the difference in profitability and that's what's causing the seasonality?

  • - CFO

  • Not at all.

  • If you think about it we have a fee that we earn on large enterprise agreements as an example.

  • And what happens is that we have several of those large enterprise agreements that would normally have been richer fee for us in the fourth quarter of last year and in the fourth quarter of this year it's going to be a lower significantly lower fee than it was last year.

  • And the enterprise agreement flow through because revenue is margin in that regard for us and it's the reduction in the fees associated with enterprise agreements as well as reduction in some of the overall kind of discount structure related to hitting certain volume threshold that is driving the difference in the fourth quarter.

  • It's not --

  • - Analyst

  • I understand --

  • - CFO

  • Not any less.

  • - Analyst

  • I understand that it would be down on a year-over-year basis because the program changes were earlier in the year but why would that affect the sequential change from Q3 to Q4 if you are already operating under those rules in the third quarter?

  • - CFO

  • That's a fair question and I think the other part is that normally at the fourth quarter we get a lot more true ups where we actually go back and look at what has been used by the client and we get some incremental revenue associated with the fact that they are increasing the number of seats that they used this year.

  • Then the second quarter this happened in the second quarter as well, too.

  • We didn't see as big a sequential bump in the second quarter as we would have historically seen.

  • And it's related not less to the just EAs and the fees on the EAs but more so to the true ups that we are not getting because volumes with our large clients are down.

  • You don't get a true down or a true up either.

  • - Interim President, CEO

  • And you also asked about whether gross -- the underlining gross margin is deteriorating and the answer to that is no.

  • We think in North America that we have flattened out on gross margins.

  • I did comment that from a services standpoint I think Glynis has mentioned that we completed several large projects so we may not get the same bump we got in Q3 and although we have a good pipeline of new services projects, we don't expect to have quite the same performance.

  • In EMEA, we are not completely sure that we bottomed out.

  • We are hoping we are getting close to a bottom.

  • We have seen some margin degradation there.

  • You are picking up that while we are sensing a stabilization overall, we aren't quite -- we don't believe we will get the same pop we would normally get in Q4.

  • - Analyst

  • So is the biggest delta relative to what you expected before and what we had modeled for Q4 sequential growth in earnings is the biggest delta the software business or is the bigger delta the change in your European outlook?

  • - Interim President, CEO

  • One part is we did better in Q3 than you had modeled or planned.

  • So that's one piece.

  • And I think those are the elements precisely as you articulated.

  • We are not looking for the same sequential movement in software and there is still some uncertainty in EMEA as well as in the overall North American marketplace.

  • - Analyst

  • And then one follow up and I will get back in the queue on the CEO search, maybe I missed it during your comments, but what is the updated timing on that?

  • Can you talk about how close the Company might be to naming a permanent CEO.

  • Any more color on that might be helpful.

  • - Interim President, CEO

  • Sure, Brian.

  • And no, we didn't comment on it.

  • The Board initiated a search as we had announced on the day of the announcement of my Interim role and my change.

  • Initiated and they have been working diligently on that.

  • Board committee is formed.

  • They met with candidates and they are working to hopefully conclude that by the end of the year.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Yes, thank you.

  • So looking to the fourth quarter in North America, looks like you have some at least some return to seasonality in the hardware business.

  • Do you expect the same seasonality.

  • It sounded like things are a little cautious because you don't know how spending will play out.

  • But what are your expectations generally for North America and hardware?

  • - Interim President, CEO

  • We are encouraged by two quarters in a row of sequential growth in the hardware category and we are encouraged by the fact that our gross margins in the hardware seemed to have flattened out.

  • Granted they are still down year-over-year from Q3 of '08.

  • But the fact that we have stabilized and that we are growing sequentially is encouraging as we look at industry results, Cisco announced today and our competitors have announced recently we are generally feeling like the whole market is at least back to a reasonably normal pace.

  • Now where that goes, we are still in a somewhat uncertain economic environment as we talked to our customers.

  • They are planning on establishing budgets in the fourth quarter.

  • We were hopeful certainly as we look forward that they will be spending increases planned for 2010 at some point.

  • But going into this fourth quarter we are still very much in that mode of working for every nickel and dime and pressing hard to show growth.

  • - Analyst

  • And I know that you acknowledged losing market share in the S&B segment as you gone through IT transitions and other things.

  • Do you think that you're beginning to hold your own in terms of market share or even see opportunities to take share back?

  • - Interim President, CEO

  • That's an interesting question because we are actually seeing some improvement in the larger company environment, but we still have such a broad base of customers in the mid-market.

  • That's providing most of the growth sequentially in hardware.

  • We are encouraged by that.

  • We hope to continue to see that trend improve.

  • - Analyst

  • Okay.

  • And just some modeling questions.

  • You gave some guidance but given that you don't expect no see as strong a seasonal quarter in software, should we expect not to see the normal big increase in gross margin that you have seen in past fourth quarters?

  • - CFO

  • Yes, Matt.

  • I think that will be a fare modeling assumption.

  • - Analyst

  • Flattish to give or take.

  • Then on SG&A --

  • - CFO

  • I'm sorry, Matt, just to be clear, I think one, we indicated there was potentially going to be sequential growth in hardware because we had two quarters of that and while we said that the sequentially software was going to be not as large as it has been, we still expect it to be up slightly sequentially.

  • - Analyst

  • That's on revenue.

  • I'm trying to get how the gross margin shakes out.

  • - CFO

  • And I'm talking about gross margin as well, too.

  • The issue on software is primarily due to the EAs and we will see an uptick on margin there.

  • And the second thing that will be offsetting that to some extent could be the service business due to the large contract we talked about in Q3 and if that will repeat in Q4.

  • - Analyst

  • Okay.

  • So you think it should be up then?

  • Is that what you are saying?

  • - CFO

  • I think I confused you.

  • That's a fair question.

  • I think you should model what you started out which I think you indicated was flat and do your own modeling.

  • - Analyst

  • Okay, fine.

  • And with that contract, is that quarter by quarter contract that gets renewed every quarter?

  • - Interim President, CEO

  • It's a substantial contract that we started earlier this year.

  • Unfortunately it's a company that won't let us mention their name but it's exciting project that we did and did it very well.

  • There is a little bit left in the fourth quarter.

  • It's been ongoing but the biggest pop was in the third quarter.

  • And as I mentioned earlier we do have an expectation of growing year-over-year in services still but sequentially it won't be the same margin boost that we received in the third quarter.

  • - Analyst

  • Got it.

  • And then just lastly on expenses you did bring it down nicely quarter to quarter.

  • Is there much left in terms of your OpEx cuts or are you sort of at the bottom here?

  • - Interim President, CEO

  • Again, I have to say stepping into this I have to repeat what we said before that I have great admiration for the team's courage late last year in 2008, early 2009 for taking the actions early and promptly.

  • You look at our earnings in the third quarter being up year-over-year when everybody else is down.

  • That's largely the result of some very aggressive and courageous moves that this team made at that point in time.

  • So I think we have taken about as much as we can or as much as we need to at this point and now we need to focus really on aligning our go-to-market strategy to be able to recapture the growth momentum that we had in the past.

  • When we look at EMEA and that's a North American statement.

  • As we look at EMEA and in the statement it's more difficult to take cost out aggressively there and we think we seen the benefit of that at least the top line where we have maintained a position in the marketplace that relative to competitors is very favorable from a top line standpoint even though our earnings where not what we had hoped.

  • As we look at the market at this point in time, it doesn't make sense to incur that significant incremental cost in many of the countries in Europe to shed the expenses in light of the fact that we see the potential for growth in each of those markets in 2010.

  • - Analyst

  • Okay.

  • Makes sense.

  • Thanks very much.

  • Operator

  • And our next question comes from the line of John Lawrence with Morgan Keegan.

  • Please proceed.

  • - Analyst

  • Good afternoon.

  • Tony, would you comment just a little bit when you had to press release when you came into the job you talked about just doing some things with more speed and seeing some opportunities having had a couple of months in the role, what would you see from an execution standpoint, a couple things that might be more difficult than you expected and just -- maybe some before and after sort of thoughts on perceptions when you took the job.

  • - Interim President, CEO

  • Yes, great.

  • Sure, would be happy to.

  • Actually let me start with our EMEA and APAC teams, Glynis and I had a chance to spend time over there with our management team.

  • And I have to say I'm very impressed with our breadth of our team and capability that existed over there despite a very challenging earnings environment for them.

  • And to some extent dropping ASPs and they are able to maintain reasonable momentum particularly in the UK.

  • A good deal of that is that they have a reasonably mature and consistent management system in process and team in place.

  • They do make quick and good decisions and so the speed with which they move is really something that we think is a very strong point for the Company.

  • In North America, because of the disruption of having to shed a lot of cost and some the issues that were lingering from prior systems integration, multiple acquisitions, there are still opportunities for us to improve and the first and foremost is how we go to market and how we were positioned from a sales standpoint.

  • We have great opportunities there to become more efficient.

  • To be able to have more decision making capability in the field and we have a very talented group of people but we go to market in multiple ways and in my view that's the best opportunity we will have in the short-term for improving ourselves as going to be in that area.

  • And we are looking closely at that.

  • Again, a capable leadership team has been working on that for sometime prior to my arrival.

  • And one of the things I have been pleased with is the team is very forthcoming with acknowledging that there is opportunity and a real willingness to improve ourselves in the short-term.

  • - Analyst

  • So just to summarize that, if that's okay.

  • Just that strategically no changes from what you thought, economic challenges may delay that and EMEA and APAC and then to further clarification that you need is better alignment in North America?

  • - Interim President, CEO

  • I think that's probably right.

  • Also said if you remember some of Tim's comments as we look at it from a board standpoint, we continue to believe the Company well positioned strategically.

  • We have very significant differentiators from our competition as we go to market.

  • And the opportunity for us particularly North America is to execute the business plan that we have in front of us more efficiently and effectively than we have in the past.

  • - Analyst

  • Great.

  • Thanks.

  • Good luck.

  • - Interim President, CEO

  • Thank you.

  • Operator

  • And our next question comes from the line of Brian Alexander with Raymond James.

  • Please proceed.

  • - Analyst

  • Just a couple of follow-ups.

  • So Tony, as you look at the business longer-term not that you are providing guidance or even milestones, I thought it might try to pin you down on your thought process around long-term profitability, what would you characterize as the minimum acceptable level of operating margin for this company longer-term and specifically what regions and or segments or categories do you think offer the most potential in getting you to that goal.

  • - Interim President, CEO

  • Brian, it's a great question.

  • I will tell you seven weeks in or so it's too early for me to know precisely what we can realistically shoot for.

  • I understand the business model and the value model that says that margin expansion for us is probably our greatest opportunity to improve return on invested capital and show our share holders we know what we are doing.

  • That's very much the focus of a lot of our discussions and activity.

  • We are, like many companies going through budgeting cycles and planning cycles for 2010 and beyond.

  • And that is top of mind, I can tell you that.

  • I don't have a precise number for you though it would be our expectation and goal to continue to improve on that operating margin line going into 2010.

  • - Analyst

  • And just the discussion around restructuring actions you were clear on both of your major regions that at this point you feel that additional actions were necessary or in the cards and I wanted to clarify, is that decision a function of your role as Interim CEO and therefore a reluctance to make any lasting changes as Interim CEO?

  • Or a decision that you would stick to even if you remain permanent CEO?

  • - Interim President, CEO

  • That's a fair question.

  • Frankly I don't know that if you interviewed the time privately that they will say I'm acting like an Interim CEO.

  • I'm trying to do my best to understanding and very being transparent about the fact that we could have another change.

  • I have been trying to act like the guy thank will be here and they have been kind to treat me as such.

  • The fact is that as I look at the business we need to be able to plan on taking advantage of all the ditch capabilities we have and to extent for instance in North America that we were to cut deeper into some of the different capabilities that we bring to the table today.

  • That would limb our ability ultimately to strengthen our value proposition by having all those different services and capabilities that the differentiate us from the typical direct marketing-type reseller.

  • We just had our partner forum here in Arizona with 400 of our top partners in town.

  • I will tell you, the absolutely consistent feedback is we are well loved by that partner group that want to see us successful and growing in the future.

  • And they will all say you guys have things that nobody else has, you have capabilities.

  • We just need to operate more efficiently and effectively as we go to market.

  • The decision on EMEA separately is a call that says the market will stabilize, perhaps not as quickly as the North American market but it will stabilize.

  • We are going to grow strategically by adding capabilities in countries with a new systems implementation that are most of the way through.

  • And in 2010 we want to be able to further differentiate our capability of offering software and licensing services by having hardware and other capabilities in several countries.

  • In order to do that we have to invest in people and systems and process to position ourselves well.

  • I think in summary, my feelings about that, my comments are based on the optimism that we do have the right model and the right strategy that the markets will return perhaps never to great robust growth but more moderate and reasonable growth and we want to be well positioned to capitalize on that with our differentiated offerings in each of our markets.

  • - CFO

  • I guess if I could add on one thing we announced earlier maybe at the end of the fourth quarter call potentially that we were anticipating we will see a benefit of $65 million in reduction in our SG&A in North America.

  • And I think that to date we were tracking towards that.

  • We are actually if you back out the impact of Calence for the first quarter when we didn't own them last year we actually tracking closer to 77 to $78 million in reduction and SG&A on a year-over-year basis, which is primarily coming out of North America.

  • So I think that the back up Tony's point the reductions we have taken in North America have been significant and have helped us clearly in this quarter with regard to being able to report results on EFO line on decline of revenue and not sure there is a whole lot more there to cut and still be viable partner to our partners and also to our clients going forward.

  • - Analyst

  • Just to follow on that point do you actually think there will be a step up in investment that will be required to generate the growth that you think is needed that might ultimately depress operating margins in the short run and then accelerate them in the long run.

  • - Interim President, CEO

  • The good news is in North America at least we have opportunities to invest in areas, one example, in an area that I mentioned I was interested in back in September cloud computing and software as a service there is an opportunity for us to invest in that capability beyond what we have so far.

  • But to have it pay off in -- within the same period.

  • It wouldn't be degradation in anyway and it would position us well for the future.

  • As I look at our go-to-market team in North America, I think we have plenty of resources and capability in place today.

  • It's just how we were deployed currently.

  • There again I don't think it would be necessarily a degradation in our margins as we make those changes.

  • Now the comment on where we are investing is in fact in EMEA so while we have taken head count out in EMEA we have already this year reinvested in systems that we need to have in place next year in order to be able to expand our capabilities so most of that were effectively absorbing in 2009.

  • - Analyst

  • Great.

  • Thank you.

  • Very helpful.

  • - Interim President, CEO

  • Sure.

  • Operator

  • And there are no further questions in queue at this time.

  • Thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect and everyone have a wonderful day.