Insight Enterprises Inc (NSIT) 2009 Q4 法說會逐字稿

Ladies and gentlemen, and welcome to the fourth quarter and full year 2009 results Insight Enterprises Inc.

conference call.

I'll be your coordinator for today.

(Operator's Instructions)

I'd now like to turn the presentation over to our host of today's call, the CFO, Glynis Bryan.

You may now proceed.

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 and the full year ending December 31, 2009.

I am Glynis Bryan, Chief Financial Officer of Insight Enterprises, and joining me is Ken Lamneck, President and Chief Executive Officer.

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

Today's call including the question and answer session is being webcast live and can be accessed by the investor relations page of our website at insight.com.

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

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today February 10, 2010.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the consent of IE is strictly prohibited.

In today's conference call, certain non-GAAP financial measures will be referenced as we discuss fourth quarter and full year 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.

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 and analysts because they allow for greater transparency, facilitate comparisons to prior periods and competitors results and assist them 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 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 ending December 31, 2008.

With that, I will now turn the call over to Ken to walk you through an overview of our 2009 operating results, and to share his initial perspective on the business after his first six weeks as Insights CEO.

Ken?

Thank you, Glynis.

Hello everyone, and thank you for joining us today to discuss our fourth quarter and full year operating results.

Closing out a year that most agree represented one of the most challenging economic climates seen in many decades, we are very pleased to report that much stronger IT demand in the fourth quarter and operating leverage across our leaner cost space, resulted in fourth quarter financial results that exceeded our internal expectations.

As we reported earlier today, consolidated net sales for the fourth quarter were $1.2 billion, reflecting an increase of 2% from last year's fourth quarter sales.

Gross profit was $155.5 million, down 1% from the $156.9 million reported last year.

Gross margin was 13.2%, down from 13.5% in the fourth quarter of 2008.As a result of the leverage we gained from cost reduction efforts from late 2008 and early 2009, non-GAAP earnings from operations increased 31% to $29.3 million or 2.5% of net sales.

Compared to $22.4 million or 1.9% of net sales for the same period last year.

And non-GAAP earnings and diluted earnings per share from continuing operations were $20.1 million and $0.43 in the fourth quarter of 2009 compared to $7.2 million and $0.16 reported last year.

These results reflect a tax benefit of $3.3 million in the fourth quarter of 2009 which Glynis will discuss in a few minutes.

While the fourth quarter 2008 results reflect foreign currency losses net of taxes of $4.3 million.

The results I just discussed exclude certain items that we consider to be outside of continuing operations including severance and restatement expenses that occurred in the fourth quarter of 2009 and the severance expenses good will impairment charge and foreign tax reserve increases in the same quarter of 2008.

These items are outlined in detail in the press release we issued this afternoon and are also available on our investor relations site.

We are pleased that an overall improvement in market demand coupled with the leverage created by the cost reduction actions taken in 2009 led to a strong close to an otherwise very challenging year for our company and our industry.

With just over six weeks in the CEO role, I want to take a few minutes to you my initial perspectives on our business and then take you through our short term operational plans.

I will then hand the call over to Glynis to discuss the operating segment results and other financial highlights in the fourth quarter and full year of 2009.

Coming from the distribution part of this industry, I was in a unique position to observe Insight as well as its reseller and bar peers over the past six years.

One observation that attracted me to this role was the strength of portfolio of offerings that Insight brings to the industry as well as its many talented teammates.

I believe that Insight's capabilities are unique, particularly in the areas of Networking and Lifecycle services.

We also have real opportunities ahead of us to improve our execution, gain market share organically and ultimately improve returns for our shareholders.In May our business was challenged in 2009 by a tough economic climate and significant publisher program changes in the software category.

Given our long term plans for growth in the region, we chose not to cut costs aggressively which hurt our short term financial performance.

However, in May our team was successful in winning and building its share of middle market and public sector clients, primarily with sales of hardware.

We will continue this initiative across all product categories in 2010 if market conditions improve.

In addition, in 2009 we invested in development of a new IT system and you may add that we plan to deploy in the beginning of 2010.

This new system should enable us to offer certain hardware and services capabilities in key markets in Europe.

The roll-out is planned to occur in phases and we expect a positive contribution to our financial results beginning in 2011.

Asia Pacific, which focuses almost entirely on our sales of software was also challenged by publisher program changes and a tough market in 2009.

As we head into 2010 this team will be focused on increasing its share in the middle market and public sector client sets so that we are aligned with our software partners in the region.

In North America, through costs reductions and tight expense management our North America business performed well on the bottom line, despite full year over year declines in sales and a tough market environment and significant publisher program changes once again in the software category.

This segment, particularly the U.S., is where we have the most opportunity to improve our execution and grow organically in 2010.

We have a complete suite of hardware, software and services offerings in North America and we believe the market environment is recovering.

In order to execute efficiently in 2010 and realize the market share opportunities available to us, we'll be focused on the following initiatives.

We plan to align and simplify our go to market model in the U.S.

such that we have geographic and client segment clarity.

What do I mean by that?

Today Insight might have a sales person sitting in Boston managing a client located in California.

We are in the relationship business that didn't want to disrupt any client relationships without thorough planning and implementation, but over time I expect our regional sales team to be focused on that regions clients.

And the way Insight defines the tiers of clients within the market is different than how our partner defines the tiers, which makes it difficult for us to ensure strategies are in sync with our vendor partners.

This is important to optimizing our sales model and maximizing the investments from our partners.

So part of this initiative, we will plan to redefine tiers and ensure our engagement model is much more directly aligned.

These changes will not occur overnight.

We currently have a cross-functional team of executives in sales and operations working on a road map that we plan to implement in the first half of 2010.

We will also focus on bringing organic growth back to the business by investing in sales efforts to win more S&B and public sector clients vending.

I believe there's an opportunity to gain more profitable share in the S&B segment and our partners through a program and funding changes have clearly told us that this is where they want us to focus.

I also believe that the Federal, State, Local and Education markets will continue to invest dollars in emerging technologies and we must solidify our long term management and strategy to drive our growth in these markets.We must also continue to increase our stickiness with our clients, particularly in the large and mid tier space by bringing out differentiated Networking and Lifecycle services to this group.

Bringing value added service to these clients will ensure that we maintain the scale in our sales while enhancing the relevancy to the clients in our profitability.

And finally we'll be focused on improving our operational discipline.

You'll hear me talk a lot about basis points in the business.

As you all know this is an industry where margin of improvement is achieved through changes in efficiency that drive and accumulation of small moves and basis points.

In 2010 we intend to continue our expense management efforts including being very disciplined about any reinvestment as the market improves, and we plan to review our operation processes and improve our management tools to gain efficiencies and thus basis points.We will also institutionalize key operating metrics, like return on working capital at the operating level while increasing our focus on invested capital at the enterprise level.

We have quite a bit of work ahead of us for 2010 and beyond.

I believe we have the right strategy a robust set of offerings and talented teammates.

2010 will be all about execution.

I will now hand the call over to Glynis who will discuss the fourth quarter and full year operating results of our business segments.

Glynis?

Thank you, Ken.

Starting with North America, net sales were $781 million down 2% from the fourth quarter of 2008.

Gross profit decreased 3% year over year to $104 million while gross margin decreased to 13.3% from 13.5% in the prior year.

These results reflect another quarter of strong contribution from out higher margin services business which saw sales increase 17% year over year, and contributed an additional 27 basis points to our margin performance during the quarter.

The increase in services contribution is primarily due to the large professional services engagement we discussed starting in the second quarter, and that was completed in the fourth quarter.

Gross profit and margin also benefited approximately $1.6 million from the elimination of certain restatement related trade credits during the quarter through a negotiated settlement or other legal relate.

These benefits were offset by decreases and fees generated from Software Enterprise agreement as a result of lower volume and partner program changes and decreases in credit margin which include (inaudible).

Our net sales in our hardware category were down 4% year to year but up 11% from the third quarter, reflecting the third consecutive quarter of growth in this category.

Southwest sales were flat year to year, but increased 25% sequentially.

These results were driven by the overall improvement in demand and higher than expected client budget releases in the quarter.

Selling and administrative expenses in North America in the fourth quarter include approximately $1.1 million in professional fees and comps associated with the (inaudible) mediation and ongoing litigation.

Excluding the effect of this item selling and administrative expenses were down $12 million compared to last year, or 12% primarily due to the reduction initiatives we implemented in early 2009.

As a result, earnings from operations on a GAAP basis in North America were $17.8 million in the fourth quarter, and non-GAAP earnings from operations increased 78% year over year to $18.8 million, demonstrating the operating levels we achieved on a lower cost structure.

Moving on to EMEA, our EMEA operating segment reported net sales of $351 million, up 7% in U.S.

dollars.

In constant currency terms, net sales were consistent with last year.

Sales of hardware grew 18% in constant currency terms during the quarter due to the seasonal effect of client budget releases and our enhanced focus on the mid market and public sector segments.

Southwest sales declined 7% in constant currency, driven largely by lower volume and partner program changes.

Gross profit in EMEA was up 4% in U.S.

dollars and down 4% in constant currency terms, while gross margin decreased to 13.1% from 13.5% in prior year.

The decline in gross margin is primarily related to decreases in product margin, including vendor funding year over year due to a decrease in average selling prices and partner program changes, and a reduction in fees associated with Enterprise Software agreements.

Selling and administrative expenses in EMEA in the fourth quarter were up 9% or $3 million year over year in U.S.

dollars but in constant currency terms were up only 1% year to year.

Also, this segment recorded approximately $1.1 million in severance expense in the fourth quarter from which we expect annual cost savings of approximately $1.2 million.

EMEA reported non-GAAP earnings from operations of $8.8 million, a decrease of 13% year over year.

In our Asia Pacific operating segment, net sales of $46 million were up 18% from the prior year in U.S.

dollars and down 7% in constant currency terms, primarily resulting from lower volume in the Software category.

Gross profit was $5.9 million an increase of 7% in U.S.

dollars but down 17% in constant currency.

While gross margin was 12.7% down from 14.1% 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.

Lower incremental sales of products and lower true-up sales licenses for existing clients, as well as the partner program changes mentioned previously.

Selling and administrative expenses in APAC increased 12% year over year in U.S.

dollars but decreased 12% in constant currency terms.

As a result our Asia Pacific segment reported non-GAAP earnings from operations of $1.7 million which was down 4% from the prior year quarter.

Moving on to our tax rate.

Our effective tax rate for the quarter was 23%.

The lower effective tax rate in the current period compares to our usual range of approximately 36% to 39% and is primarily due to tax benefits of $3.3 million recorded in the quarter related to a recapitalization of one of our foreign subsidiaries and the (inaudible) of certain foreign tax assets.

Comparatively in the fourth quarter of 2008 our tax expense of $5.5 million on a net loss of $74 million was primarily the result of the incurrment of non-deductible goodwill for tax purposes as well as the impairment of certain foreign tax assets.

A few comments about the full year 2009.

On consolidated basis of full year 2009 our net sales and resulting gross profit declined by 14% while gross margin declined less than 10 basis points to 13.7%.

Non-GAAP earnings from operations declined to 21% or $21 million to $80.3 million for the full year.Within these results North America reported a decline in non-GAAP earnings from operations of $1.8 million for the year.

On a year to year sales decline of 16% gross profit declined only 13% while gross margin improved by 30 basis points reflecting the benefit from the large professional services engagement I discussed earlier and also partially offset by the effects of lower sales volumes and program changes in the Software category.

In addition, the effects of aggressive expense management on our cost reduction actions nearly offset this reduction in gross profit.

We are pleased with these results in a very challenging year and will continue to be disciplined about the expense management throughout 2010 as the market environment generally improves.

For the full year of 2009, EMEA business declined 12% in U.S.

dollars and 2% in constant currency terms.

Gross profit declined by 17% in U.S.

dollar terms and 7% in constant currency, these results reflect the change in client Mix, which now includes more public sector business and the effects of partner program changes.

Our non-GAAP earnings from operations in EMEA declined $18 million, in U.S.

dollars, and $15 million in constant currency.

We expect that possibility improvements in EMEA will largely come from improved market conditions in 2010 and beyond and the investments we have made in the small medium business and public section markets and through the extension of our capabilities in key markets planned in the second half of 2010.

In Asia-Pacific, non-GAAP earnings from operations declined $1.6 million and excluding the effects of currency movements, declined by approximately the same amount.

On the tax front we successfully completed several strategic tax initiatives in 2009 that resulted in a lower effective tax rate for the year and real economic benefits to the company.

Specifically, in 2009 we recorded $4.8 million in tax benefits from (inaudible) projects, which led to an overall effective tax rate for the year of 26.3%.

In addition, we reported lower interest expense and lower debt balance and experienced less foreign currency gains due to less market volatility and our implementation of a limited hedging program in 2009.

As a result non-GAAP diluted earnings per share from continuing operations were $1.08, as detailed in our press release today, compared to $1.10 as we reported for 2008.

Now moving on to cash flow, for the year ended December 31, our operations generated $123 million of cash, compared to $142 million for 2008.

We invested $15 million in capital expenditures during the year, primarily for maintenance of existing infrastructure and our IT systems development project in EMEA.

We also paid approximately $22 million towards an earn-out related to the Calence acquisition and paid down debt by $81 million during the year.

As a result we ended the year with $68 million of cash and $147 million of debt outstanding on our revolving credit facility.

Tight cash management and a focus on continuing to improve our working capital metrics, will be a key initiative for us to continue into 2010.

I will now turn the call back to Ken for our closing comments, Ken?

Thank you, Glynis.

I'd like to discuss the outlook for 2010, for the full year we expect diluted earnings per share for cartoon operations for the full year for 2010 will be $0.95 and $1.05.

This outlook reflects the following, continuing uncertainly in the economy and our view that market demand will improve gradually throughout 2010.

The full-year effect of partner program changes that were effective beginning in the second quarter of 2009, a decline in the sales of services in 2010 due to the completion of a significant service engagement in 2009 that is not currently expected to be replaced fully in 2010.

And an effective tax rate of approximately 36% to 39%, for 2010 compared to 26% in 2009.

This outlook does not include the impact of any severance and restructuring expenses or expenses associated at the restatement remediation or ongoing related litigation.

In summary, my first six weeks on the job I've been very pleased to get to know the team at Insight and also to learn more about our differentiated portfolio of offerings and begin making plans for our long-term future.

As I stated earlier a focus in 2010 will be about our strategic priorities and improving our operational execution.

This concludes my comments and I will now open up the lines for your questions.

(Operator Instructions)

I have the first question from the line of Brian Alexander with Raymond James.

Please proceed, sir.

Thanks, good evening, everyone.

Welcome, Ken.

Ken, you mentioned the realigning of the sales teams to be focused more regionally than they are today, so how extensive of an effort is this given?

I thought you were already organized along regional lines.

Maybe give us some perspective on what percentage of your North American revenue stream is ultimately going to be effected by the change in relationships?

Because I recall when your competitor CDW did this a few years ago across their business it created a lot of disruption in their sales efforts for several quarters and I'm just trying to get a sense for how extensive your efforts are going to be here.

Thanks, Brian.

Yes, I certainly recall exactly what CDW went through there about three years ago.

We certainly will be very cautious and careful there, we will not do anything to impact specific relationships with current clients at this stage of the game.

There are many clients that we do have that are on sales peoples lists that have minimal to no revenue coming from those, so those are the accounts that will obviously be easiest to move to get geographical coverage, and then we will work our way up.

It'll probably take, in my mind, a couple of years to really get it pure.

Brian, but we are as you know in the relationship business so we don't want to jeopardize that as you mentioned.

You know one of our competitors did it and there was certainly some loss of revenue there that they experienced when they did it initially.

So we're not going to rip the band-aid off on that, we're going to certainly do that in a very cautious measured manner.

What portion of your business is being addressed in the example you gave where you have a sales person in Boston calling on somebody in California?

Is it a minor piece of the business or are we talking more than 50% of the business has these cross border relationships?

It certainly doesn't approximate the 50% level, but what it does of course, it creates confusion for our partners when we are aligning with somebody like Cisco in the market place, and we got reps that are covering other accounts in other geographies, and they can't get good alignment with this.

So that what its behind to try to get better alignment with are partner base of primarily and then of course it just good business practice to make sure that we are serving a client in the right time zone.

Okay.

And then, just addressing the guidance.

I appreciate the range if we just use the midpoint of the earnings guidance using the dollar roughly per share and applying your tax rate expectations suggest operating income growth in the low double digit range.

Could you just talk a little more about what top-line growth assumptions you're assuming to get to that earnings range and how should we think about gross margin trends in 2010 given your comments about mix shifting away from services to hardware?

Certainly Brian, when you looked at the tax effect you certainly have that, I'm sure, detailed out at close to $5 million dollars.

Then we have the situation on the publisher program changes for the full-year effect.

As you know that went into effect last May, so that's in the range of $3-$5 million dollars.

So when we looked at the modeling as far as what revenue growth will be, to get specific to your question, we basically look at it like most folks, we think it'll be in that low to mid single digit range.At this juncture we still remain a little bit cautious as some of the markets are a little bit squishy still, certainly in Europe, and we're just trying to see it in a more measured fashion what that's going to be.

So we've modeled that low to mid single digit range as far as that growth is concerned.

Glynis, why don't you just touch on that question that Brian asked on gross profits?

Brian, I'm sorry.

I didn't -- I don't recall your question.

Basically, just trying to get a sense for what you're expecting gross margins to trend year-over-year, you don't have to be too specific but about the comments about services declining due to a big project would make one believe that you might see some gross margin decline and I'm just trying to get a sense of that.

So we anticipate that there will be some gross margin decline because we have the benefit of that services contract that essentially will knock North American operations, and I will answer this question by geography.

The services contract for North American operations essentially meant that we ended the year flat with regards to where margins were in North America, but the reality is underlying that from a product margin perspective we had about a 30 basis points deterioration in our hardware business.

Specifically and then edging on the South West side we had a deterioration in the overall EACs that we talked about with the program change from May.

So for North America we anticipate that we're going to have a little bit of improvement in our hardware margins, however, with the impact of the large services still going away given the differential end margin between hardware and services.

We're anticipating with the mix change that we will have a lower gross margin in 2010 than we had in 2009 in North America.

If I think about that and talk about that from an EMEA perspective, the story is similar in EMEA with regard to lower gross margins albeit for different reasons.

So in EMEA they are actually growing out the public sector segments of the business which is actually a fast growing segment for us but it is at lower margins, they are continuing to invest in SMB et cetera, so they will see some expansion on the revenue line but they will actually see a slightly deterioration also in their gross margins associated with higher public sector business and a little bit lower EACs in terms of what we know to be out there for 2010.

Okay.

And just one last one if I could on the trade credit resolution process.

Was there any benefit to gross margins this quarter from resolving previously accrued trade credits?

and on top of that I know you're not baking into your earnings guidance fee expense associated with professional fees and related costs or interest expense which for this quarter was $3 million, so I'm just wondering should we assume it could be roughly $3 million a quarter throughout 2010?

Or how can we get a sense for what those ultimate cash costs might be?

Absolutely not.

You should not assume it's going to be $3 million a quarter on a go-forward basis, so in the fourth quarter we have $1.6 million associated with the benefit from trade credits and actually flowed into a P&L.

In the third quarter, which was the first quarter that we actually had this occurring, we had about a $2 million of benefit, $1.9 million benefit that flowed into a P&L in Q3 as well.

I don't think that on a go-forward basis that the answer's going to be somewhere in the $1.9 to $1.6 million range.

We were actually in 2009 working through what is the process that we are going to be using as we actually file with the states what is the legal due diligence process that we have to through.

So the $1.9 million in Q3, was a little bit of a catch-up for the first two periods, two quarters as well as we work through the methodology and the process we're going to use to settle these.

So I would say on a go-forward basis, we are not actually going to give a forecast out there.

But given the fact that $1.9 million was a little bit of a catch-up for two quarters and that the$1.6 million in the fourth quarter also related to the fact that we were going through a due diligence process.

And there was some clients that we sent letters to, where we said we owe you X dollars and they said, no you don't, we don't want it, it's not ours, we got a little bit of that benefit in the fourth quarter.

That's not going to happen on a go-forward basis because we've completed all of that, we are filing the DDAs or have filed the DDAs as we speak.

So on a go-forward basis, the benefit is going to be less than that $1.6 million on a go-forward basis.

We will be disclosing it in Q1 and in Q2 but starting in Q3 just FYI for everybody it's going to be included in the base on a go-forward basis we won't be disclosing because it's going to be occurring on a regular quarterly basis going forward.

And the cost side of that equation, professional fees and interest?

For the professional fees and costs and interest we will disclose so in Q4 we had $1.1 million associated with professional fees and the ongoing litigation pieces associated with that.

We also had a $2 million charge associated with interest in two particular states as we completed the PDA process with those states and determined what was going to be owed to the state versus owed to the clients.

But the $2 million charge that we took associated with interest that we have carved out from a non-GAAP basis when we quote you the numbers that we're talking about, it's on a non-GAAP basis and those numbers are not included in what we're talking about.

On a go-forward basis, as of right now we don't anticipate based on where we are with the PDA process that we will have more of those, but if we do then we would call it out as well, on a go-forward basis.

That was very helpful.

Thank you.

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

Please proceed, sir.

Thanks, Ken.

You gave a pretty good read on how you think things play out in 2010, but could you give us color on what you're seeing this quarter?

You see seasonal trends in hardware, it looks like you had better than expected hardware demand in the fourth quarter, you're expecting it to be seasonal again in March?

Or maybe a little bit less as customers digest what they just consumed?

Yes, thanks, Matt.

Just on Q4 certainly in all the results received from the companies out there, we certainly experienced this as well, the continued momentum that was occurring in the market.

I could say from an early stage of what we're seeing, we're seeing some continuation that it's a little bit lumpy dependent upon the geography at this stage, but it looks to be that the data that I see from companies like MPD and so forth is that the market is still continuing to accelerate and improve, which is a good sign.

We don't see it pulling back when we look at the weekly data.

Okay.

So does that mean that you are expecting just seasonal changes in the March quarter then?

That's pretty much what we see at this point, correct.

Okay.

And on the hardware business, I know the margins were down in North America.

Was that because of mix and could you talk about strength in enterprise versus SMB?

Yes.

Certainly across the board, I think everybody saw that Q4 had a pretty healthy dose of public sector business and that certainly impacts the margins negatively, but that business still continued to be pretty strong for Q4.

As far as the enterprise business, we did see some nice increases, especially on the software side of the house.

There were certainly some dollars that got flushed through so we saw a little bit more than just seasonal increases there on the software front which I'm talking very specifically now more towards the larger enterprise type of client base.

And I'd say that like many companies are seeing, we're still seeing a little bit of slowness in the SMB uptick.

As you know they've certainly been the most impacted by the unemployment numbers and so forth that we've seen and that still hasn't really come back yet.

Okay.

Okay.

And on your software business you talked about the negative impact of the margin support from certain vendors, as you continue to focus on SMB, do you think you'll be able to get some of those margins back either this year or next year?

Yes, That certainly is the plan and the software publishers certainly are creating more incentives for us to drive our business that way so you'll see certainly our continued focus to really get to the SMB space in a much more proactive fashion than we have in the past.

Okay.

And on that big service engagement that you talk about, how many of those engagements do you have out there and is there any risk of losing any of those projects this year?

No, actually we see a pretty good increase.

This one just happened to be a pretty significantly large one and it worked out very well for us.

We did a great job and we'll see little bits of it this year as we've completed the full rollout for that engagement, but we're actually very pleased with our services business and the growth that we're seeing in that business.

Just this one happened to be a particularly large one that's difficult to completely replace at this stage, but we're more committed than ever in growing the services business and continuing that so you won't see any significant pullback at all from us on that front.

Okay.

And just lastly on operating expenses, it was up, I assume, because of the seasonality and for supporting that higher level of volume and commissions, et cetera -- how should we be thinking about OpEx in the March quarter and then going through the year?

I think, Matt, that you should be thinking about it relative to a little bit the guidance that we gave you last year.

We indicated that we're going to be taking out $65 million out of our OpEx in 2009, if you actually look through the numbers on a non-GAAP basis so excluding the life plans that we did, excluding the restatement related expenses, and excluding any severance we actually came within $7 million of that number.

The difference between 65 and where we actually ended up at like 58 is actually related to two things.

One is actually increased variable costs in the fourth quarter associated with a higher revenue base that we generated and high GP base that we generated as well as one relatively large customer that we had in Q4 that we took a bad debt reserve on as well, that would've been unusual in the quarter.

So short of that, I think that the trending that you've seen in our OpEx in 2009 [goes] into 2010.

There are three things that will change.

One is we have merit increases that are going into effect in April which we didn't have in 2009 because we didn't have merit increases.

The second thing is that we have a slight increase in our medical costs as it relates to that on a go forward basis, and then clearly depending on the revenue assumptions in your model there's a flow through for variables associated with that and that is around the 20% range, all other beings being equal, of GP.

So the 20% is not of revenue, it is of GP in terms of the variable component.

Okay.

But the cost cutting that you did is pretty much out, right?

So we're basically at the run rate --

Cost cutting is out.

We're at the run rate, yes.

Okay.

Got you.

So short of bad debt, which was unusual in the fourth quarter, we'll have that run rate.

Medical expenses, they kick in, the March quarter?

Yes, they start in January.

Is that in the low single digits and millions?

Or is it a low number?

Big number?

It is consistent with I guess medical increases in general, which are in the 7% to 9% range.

7 to 9%.

Okay.

Of medical costs.

It is not a huge number over in the relative scheme of overall scheme of P&L.

Okay, thank you.

(Operator Instructions)

The next question is from John Lawrence with Morgan Keegan.

Please proceed.

Good afternoon.

Hi, John.

Ken, would you -- you made some comments about go to market strategy and some metrics at the enterprise level and how you wanted people, I guess, to think about the business.

Can you dive into that a little bit and talk about how that changes and maybe an example of what you see there?

Yes.

Thanks, John.

A couple of things.

We're doing quite a bit of work right now on just the whole data analytics of the marketplace and every specific geography and working closely with our partners as well so that's certainly the first base that we're spending a great deal of time on to make sure that we have our sales organization aligned to the greatest opportunity.

So that's one of the most specific things and you can imagine there's a lot of moving parts in there so that part is what we're really doing and of course really installing some very specific metrics for each of those regions down to those markets, down to those managers, down to those reps to really ensure that we're getting the penetration that we need to be getting for our business really specifically at those account levels.

So it is a major change of, for example, who people are calling on, those types of things?

I mean we're certainly not disrupting where we're currently calling on.

What we're doing is we're taking some of the resources that we've had that maybe were not as being productively deployed on specific areas and making sure we're deploying them against specific opportunities that make a lot more sense for us in the company.

So again, applying the resources to where the best opportunities are.

And secondly, Ken, with your engineering background, et cetera, as you look at the process as it relates to, and you overlay your experience at hi-tech data, when you look at all the processes involved with selling a product and moving it out, are there any things that you see now obviously that you think that really are not in the 2010 numbers, but some things you obviously look at going forward that you think can be vastly improved.?

Yeah, there's no question, John, as I'm digging into it and we're looking at complete end to end processes in a few big areas right now we think of course will help us to get better operational efficiency and better service levels to our clients, but also to take costs out of the system.

So we've lined up quite a few of those now and are digging into those where we think there's the greatest benefit.

Too early to look at operational sort of operating income targets for long-term at this point?

Yes.

It is a little bit.

And certainly we'll be spending more time with all of you here during the year as we discuss that, and we'll be rolling out a much more specific plan for that.

Great.

Good luck, thank you.

Thanks so much, John.

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

Please proceed, sir.

Thanks, I was going to ask that last question.

So, I'll just ask one other one.

Working capital, I know you guys talk about that as a continuing source of opportunity for you.

How much lower do you think working capital can go either as a percentage of sales or in terms of your overall trade cycle?

I know it jumps around quarter to quarter, but maybe on an annualized basis if you could talk about that and then how should we think about seasonality throughout the year?

Obviously over the last few years you've had pronounced seasonality given the software dynamics, but with some of the changes with your vendor funding I'm not sure if the seasonality in your profitability is going to be less exacerbated going forward so maybe if you could talk about that?

Okay.

So I think that we made great improvement this year with regard to our working capital metrics in terms of the programs that we had in place across all the various geographies.

We do have various initiatives in place this year with regard to continuing to drive those, but we were able to do a couple of things last year that actually helped those working capital metrics in terms of new programs that we put in place that we don't anticipate that we're going to see as much of an incremental lift this year in 2010 that we saw in 2009.

So we don't have a target as a percentage of sales.

I think you've asked us that question before so I can't actually give you some guidance with regard to where we think our working capital metrics would be as a percentage of sales, but we do anticipate that we would be driving some nominal or small improvement relative to where we ended up the year this year.

As it relates to the second part of your question, seasonality, I think that what I would say is that despite the reduction in the fees, we do still anticipate that the second quarter is going to be a stronger quarter of us in the year.

Maybe not to the same mini-guide that we've seen historically in 2007 or '08 to use those as better gauges, but we do still anticipate that we will see some uplift with regard to just the volume of software contracts that currently are sitting that are going to renew in the second quarter.

There's a higher volume of those contracts in the second quarter than there is in any other quarter so we will just get some uplift from that as it stands today.

We are going to be pushing to do more public sector business.

That public sector business sometimes peaks in the third quarter.

I don't think that you should see that dramatic of a difference, but I would say overall the second quarter is probably still going to be the strongest.

The fourth quarter is probably still going to be second strongest, and the first and third quarters will be a little bit different, will be a little bit softer.

It's the first half/second half story.

I have a question coming from the line of John Lawrence with Morgan Keegan.

Please proceed, sir.

I'm sorry.

I'm sorry, just wanted to come back and get back to the point of Ken talking about some of the ideas of the basket and the software sort of metrics of selling that alignment of all of the products, when Calence was acquired and Software Spectrum, the idea was to combine those accounts.

How well do you think you've done there as far as matching those accounts up and I guess the alignment is what you're talking about?

Good question, John.

I think up to this stage you'd probably give us a B- grade would be my sort of assessment, but we are actually very actively working on that.

That's part of the whole program of our sales engagement model that we're assessing and we'll actually start rolling that out much more fully in Q2 so we will definitely see significant changes.

We'll take advantage of the specific reps on the Calence front, on the software spectrum front, and to basically start to indoctrinate them to make sure where they've got those strong relationships that they're selling the full portfolio of products that we have as a company.

The other thing of course we'll be doing is taking advantage of those specialist resources that those specific groups have and making sure that we can extend those specialist resources across the entire country to make all the other reps that we have more successful in selling those specific engagements on the higher-end networking front as well as the software front.

So look to good progress to be made here in Q2 to take that B- up to certainly a B+ to A-.

And on that, are there any kind of compensation structure differences or incentives along those lines?

No.

No.

That will be addressed at some point later, John, but from experience I've learned, you don't want to have too many moving parts there and we really got to get that right.

So there's nothing that will be inhibiting our teams from being successful, but we will create mechanisms in the future that will encourage people to make sure that they're selling the full portfolio of products, but we won't tackle that here initially.

We'll wait until we get all the moving parts well established and then that will probably be something we'll look at later on maybe later this year, could be early next year even.

Yes, and then the last question to follow Brian's question on the guidance, if you take the midrange and you walk through all the numbers, is it safe to say that the guidance is basically made up of what you're seeing today with the differences in the year-over-year comparisons in those trends with not of a lot of other improvement in the model?

I think that the guidance is made of -- you are right.

Just to go over the things we called out, the change in the tax rate back to the standard kind of 36-39, the impact of the program changes in the first four months of 2010 that we didn't have last year, and that one large services engagement that we called out.

We have a general view with regard to the economy and when we talked about a low to mid-single digit growth in hardware, that actually is something that we think the market environment improves over the year.

Okay.

So it's stronger in the second half of the year than we think it's going to be in the first half of the year just to clarify that.

So I would say that there is some growth that is included in our model based on our view of what's happening with the demand environment.

It is somewhat moderated overall by the fact that the services contract is not going to be replaced, less so on the revenue.

It does actually have a bigger impact on GP.

Great.

Thanks for that.

Appreciate it.

At this time, ladies and gentlemen, that concludes the question-and-answer session.

Insight Enterprises would like to thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.