Insight Enterprises Inc (NSIT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, And welcome to the second quarter 2010 Insight Enterprises, Incorporated earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I will now like to turn the conference over to your host for today, Ms.

Glynis Bryan, CFO.

Please 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 ended June 30, 2010.

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

If you don't 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 our Investor Relations section.

Today's call, including the question-and-answer period, is being webcast live and can be accessed by the Investor Relations page of our website at insight.com.

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

This conference call and the associated webcast contains time-sensitive information that is accurate only as of today, August 4, 2010.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.

Finally, let me remind 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, 2009.

With that, I will now turn the call over to Ken to walk you through an overview of our second quarter 2010 operating results.

Ken?

Thank you, Glynis.

Hello, everyone.

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

I'm happy to report that continued strengthening of IT demand globally, coupled with improved execution in operating leverage, led to a strong year-to-year growth in both sales and profitability in our business.

As we reported earlier today, consolidated net sales increased 23% in the second quarter to $1.3 billion, up from $1 billion last year.

And on a constant currency basis, consolidated net sales grew 25%.

Gross profit was $173.8 million, up 18% from last year, and gross margin was 13.6%, down from 14.3% in second quarter of 2009.

Earnings from operations increased 104% to $44.7 million, or 3.5% of net sales compared to $21.8 million, or 2.1% of net sales reported last year.

And net earnings and diluted earnings per share were $26.9 million and $0.58 in the second quarter of 2010, compared to net earnings and diluted earnings per share from continued operations reported in the second quarter of 2009 of $12.9 million and $0.28 per share.

We're extremely pleased with those results, and are proud of our team's execution during the quarter.

In North America, the sales momentum in our hardware category, that we began to see in the fourth quarter of 2009, continued into this quarter, with gross margins also improving year-to-year in this category.

Higher volume of sales of software products across several key publishers, and slightly higher fees from enterprise agreements, led to better-than-expected results in our software category, as well.

Services sales were down year-to-year as expected due to the effect of a large service engagement last year that didn't reoccur this year, and these higher sales combined with continued expense management allowed us to more than double the earnings from operations in this segment.

While delivering these good results, our North America team is also preparing for the rollout of the new sales engagement model that launched on July 1.

Now, about one month after the launch, I'm pleased to report that there have not been any big surprises.

Our planning team did a great job anticipating issues, and our implementation team has been working hard to ensure the launch and subsequent milestones are successful.

The new regionally-focused sales organization is now live, initial training has been completed, and the new management system has been adopted.

While there is more work to occur over the balance of the year, I'm pleased about what we have accomplished thus far in this key initiative.

In EMEA for the second consecutive quarter, we saw sales grow in constant currency across all product categories.

Our team there was successful in winning new clients during the quarter, particularly in large enterprise space, but also in public sector and middle market.

By product category, we saw increased purchases of PCs and servers, and software products from multiple publishers, including our largest software partner.

Demand in EMEA is beginning to improve, and we're encouraged by the results we achieved in the quarter.

In Asia Pacific, sales increased 25% in US dollars and 14% in constant currency, due to continued growth of public sector business and new sales wins in the middle market.

I'll now hand the call back over to to Glynis, who will discuss the second quarter operating results of our business segments.

Hello again.

Starting with North America.

Net sales were $866 million, up 21% from the second quarter of 2009.

Sales in our hardware category sales increased 27% year-to-year, reflecting higher demand across all client groups, but particularly in the very large account space.

Software sales increased 21% compared to last year, due primarily to higher volume with multiple publishers, and higher true-ups from key public sector clients.

Sales of services declined 15% due primarily to a large client engagement in 2009 that did not reoccur this year.

Gross profit increased 20% year-over-year to $120 million, while gross margin decreased to 13.8% from 14% in the prior year.

Increases in client margin of 97 basis points, driven primarily by sales in our hardware category, were more than offset by declines in margin contributed from lower services sales and fees from software enterprise agreements.

Gross profit and margin also benefited approximately $1.2 million from the elimination of certain restatement-related trade credits during the quarter through negotiated settlement or other legal release.

Selling and administrative expenses for North America in the second quarter were flat at $86 million compared to the second quarter 2009, but as a percentage of sales, decreased to 10% compared to 12%.

The team continues its disciplined cost management efforts in the quarter, holding non-variable employee costs steady year-to-year while variable compensation costs increased $4.5 million on higher sales.

These results also include the $2.9 million benefit from the reversal of a reserve for bad debt taken in the fourth quarter of 2009, which has now been collected, and approximately $225,000 of professional fees associated with the trade credit remediation compared to $2.6 million in the same period, same quarter 2009.

And, as part of the rollout of our sales engagement model in North America, and plans to add new leadership in key areas, we recorded severance and restructuring expenses of $943,000 in the second quarter.

There were no such charges in North America in the second quarter of last year.

As a result, earnings from operations in North America were $32.3 million, or 3.7% of net sales in the second quarter of 2010, more than doubling from the $13.8 million reported in the second quarter of 2009.

Moving on to EMEA.

Our EMEA reporting segment reported net sales of $359 million, up 28% in US dollars.

In constant currency, net sales increased 36%.

Also in constant currency, sales of hardware grew 18%, software sales increased 44%, and sales-of-services increased 39% compared to last year, due primarily to higher volumes with new and existing clients.

Gross profit in EMEA was up 11% in US dollars and up 19% in constant currency terms, while gross margin decreased to 12.9% from 14.9% in the prior year.

The decline in gross margin resulted from lower product margins, which include lender funding, due primarily to price competition in the region, increased sales to enterprise and public sector clients, and a lower mix of gross profit from fee-based enterprise agreements.

Selling and administrative expenses in EMEA in the second quarter were up 8%, or $2.7 million in US dollars, and in constant currency were up 14%.

This increase year-over-year was primarily driven by higher variable compensation and sales incentives on increased sales.

EMEA also recorded $375,000 in severance expense in the quarter, compared to $1.9 million in severance expense recorded during the second quarter of 2009.

As a result, earnings from operations in EMEA were $9.6 million in the second quarter of 2010, up from $6.1 million reported last year.

Our Asia Pacific operating segment reported net sales of $53 million, up 25% from the prior year in US dollars, and up 14% in constant currency terms.

Gross profit was $7.7 million, an increase of 22% year-to-year in US dollars, and up 10% in constant currency, while gross margin was 14.6%, down from 14.9% in the prior-year quarter.

Selling and administrative expenses in APAC increased 22% year-over-year in US dollars, or approximately $900,000, and 8% in constant currency terms, as a result primarily of higher available compensation and sales incentives on increased sales.

As a result, our Asia Pacific segment reported earnings from operations of $2.7 million, which was up 35% from the $2 million reported last year.

Our effective tax rate for the second quarter was 36.4%, compared to 35.6% in the prior year, and in line with our expected normalized tax rate.

Moving on to working capital metrics and cash flow performance.

Days of sales outstanding were 71 days, down from 77 days in the second quarter of last year, due to the effects of a large public sector contract recorded in the second quarter of last year that did not reoccur this year, and also improvements in our collection cycle.

Days of payables outstanding decreased to 66 days from 75 days last year, due to the effect of this same public sector transaction, and increases in sales of hardware for which suppliers are typically paid in advance of collections from clients.

In both periods, DPO benefited from the timing of a scheduled supply payment that was deferred to early in the following quarter.

As a result, our cash conversion cycle was 12 days, up one day from last year, and due to the payment timing differences, was well below our targeted range of 20 to 25 days.

With regard to cash flow in the second quarter, our operations generated $19 million of cash compared to $97 million for the same period in 2009, reflecting increased working capital requirements and higher sales, and the payment of approximately $6 million to various states as part of our compliance with their unclaimed property programs.

During the second quarter, we also invested $5.5 million in capital expenditures, and paid $5.1 million to the former owners of Calence in final satisfaction of our earnout agreement.

As a result, we entered the quarter with $98 million of cash, and $81 million of debt outstanding under our revolving credit facility.

In 2010, as market conditions continue to improve, we expect that more working capital will be required to fund our growth.

In fact, in the third quarter, given the seasonality of the cash flows in our software business and improved sales of hardware, we expect we'll use approximately $100 million in cash to fund operations.

Also, on July 1, we amended our $150 million asset-backed securitization facility, and extended the maturity to April of 2013.

We're pleased that we're able to obtain a multi-year commitment at lower cost and with increased borrowing availability through the amendment, and believe that we have sufficient capacity under our current debt agreements to support organic growth over the intermediate term.

I will now turn the call back to Ken for his closing comments.

Thanks, Glynis.

We wanted to talk about our 2010 outlook.

Given our stronger-than-expected financial performance in the first half of the year, we now anticipate that diluted earnings per share for the full year of 2010 will be between $1.30 and $1.40.

This outlook reflects the following assumptions.

Continued strong demand for hardware technology in North America, partially offset by a decline in sales of services in 2010 due to the completion of a significant service engagement in 2009 that has not yet been fully replaced in 2010, and an effective tax rate of approximately 36% to 39% for 2010, up from 26% in 2009.

In closing, I'm pleased with our progress in the second quarter, as we work diligently to position ourselves for long-term growth in sales and profitability.

With market conditions improving globally, we look forward to carrying this momentum to the second half of the year.

That concludes my comments, we will now be open for questions.

(Operator Instructions).

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

Please proceed.

Thanks, and good evening, and you guys had a very strong quarter, so congratulations.

I guess maybe to start out, what surprised you in the quarter?

Was it really just the demand strength that you saw in North America that surprised you?

And how much of the strength that you saw in the second quarter, Ken, would you say is driven by changes that you have made to the organization since you have been aboard versus really just the strength of the cyclical recovery.

And, I guess, related to that, what I was struck by was just the operating expenses, which were flat sequentially despite growing gross profit dollars 20% in a business that has a fair amount of variable costs.

So, maybe you could just talk about the ability to hold expenses, and then I have a couple of follow-ups.

Thanks, Brian, I appreciate it.

I'd also like to mention, too, that Stuart Fenton, who's the President of our EMEA and Asia-PAC region has also joined us on the call, too.

So if you have any specific questions related to those regions, he can provide some color to those.

Brian, to answer your question in regards to the overall market and what we saw, I think, certainly, you have been seeing lots of announcements for the market.

Certainly has had continued strength, and we've been able to certainly participate fully in that growth that we are seeing in the market.

So, that certainly has assisted us.

As far as what surprised us, certainly I think the continued hardware growth we're seeing in North America, 27%, that that continued from the prior quarters being strong as well.

We hadn't anticipated that fully, as you would suspect as well.

In the software, we had some very good strength in software as well, as a key publisher of ours ends their year, and we certainly saw continued strength there in pretty much all three regions on the software side of the house.

So, that was certainly a pleasant surprise that we certainly partook it as well.

On the operating cost side of the house, Brian, we have had certainly some good discipline in and around to make sure that we have got our costs in line.

We still think we have more opportunity there as well.

And then to answer your question in regards to change that we've made, I would say I would certainly give the credit to the team and what they have been working towards for quite some time.

At this stage there's a lot of things we're currently working on.

We're not going to fully see the benefits for a little bit of time, as you well know.

But I think the team overall executed extremely well and we're very proud of the team for what they have accomplished in Q2.

Is there anything specific that has changed over the last six months inside the organization that you can elaborate on, that perhaps contributed to the results that we saw this quarter?

I'm trying to get a little bit more specifics around what the team was doing differently now versus six to nine months ago that led to this impressive quarter.

Well, I think there is certainly, as we have discussed in the last call, there has been a lot of heightened focus and awareness of the opportunity that exists, specifically in the US market and in and around our sales motion, our sales model and how we basically are tracking that on a weekly basis.

The accountability we have put in place to really make sure that we're looking at all opportunities and exercising the right judgment from a profitability point of view on those.

So, I think that continues to be part of the process.

That continues to get stronger.

We have not fully arrived by any means there.

There is still ample opportunity, but I think there's a good sense and good awareness of what we're doing in that regard.

The sales leadership team, I think, is really coming into play in a nice fashion as far as how we structured that.

As we discussed last time, we were actively recruiting for an SVP of sales, so we have made some changes in that regard, and I am currently heavily engaged on that side of the business and really look forward to getting somebody in place to fill that role, and I think it will take us to further momentum going forward.

Okay.

And then if I just were to focus on your guidance for a second for the year.

I think it implies for the second half of the year about $0.52 to $0.62 in EPS, if I'm doing my math right, versus consensus of about $0.52.

I think previously your full-year guidance implied closer to $0.45 to $0.55 for the second half.

So, you're slightly raising the back half of the year despite just beating most people's expectations for the second quarter by $0.15 to $0.20.

So, I guess my question is, why aren't we seeing the magnitude of the upside from the second quarter flow through to Q3 and Q4?

It doesn't sound like you're any less enthusiastic about the demand.

In fact, it sounds like perhaps you're as enthusiastic, if not more.

So, what are you assuming in your outlook that doesn't reflect the continuation of the strength in Q2, specifically.

Is it more about gross margins being unsustainable at current levels?

Is it more about stepping up the pace of investment going forward or are you just being conservative?

Thanks.

Brian, this is Glynis.

I will take a stab at answering that one.

So, we talked a little bit about the large services engagement that we had.

It turns out that in Q3 and Q4 last year, those were the big quarters with regard to that specific services arrangement, so the impact in the second half of the year is significantly greater than it was in the second quarter and in the first half of the year.

Last year, what we said was that that engagement contributed 90 basis points to the improvement in Q3 last year and 27 basis points to the improvement in Q4 of last year.

Also, as you look at our EPS guidance on the range that we're giving, we had a tax benefit in the second half of last year that we're not going to see repeated this year.

So, the tax rate last year was roughly for the full-year about 26% and this year we're anticipating it's going to be in the range of the 36% to 37%.

That is a more normalized tax rate.

The other thing, I guess, is that we do anticipate that hardware is going to continue to improve strongly.

Hardware, we had a very strong fourth quarter at the end of 2009.

So, we don't anticipate that on a year-over-year basis we're gong to see the same magnitude of an increase from a hardware perspective, specifically on the fourth quarter, that we've seen for the first two quarters of this year so far.

And then finally, we have been pretty transparent with regards to disclosing the impact of trade credits as we have gone through and settled those, and in the second half of last year we had a $3.5 million benefit from the settlement of trade credits in 2009, and we're not envisioning anything of that magnitude in the second half of 2010.

But it sounds like most of the stuff you just talked about it relates to year-over-year changes, and I am really just concerned more about how the new guidance compares to the old guidance because, presumably, the old guidance would have included all the items that you just mentioned.

And so, I'm assuming that you build your forecast sequentially off of most recent results, and we just saw a quarter where you put up $0.58.

And I guess what I'm asking is, again, just comparing the new guidance for the second half versus the old guidance for the second half, which was only given three months ago.

It seems like you're only increasing that by $0.07 or so for the second half, despite just beating the second quarter by $0.20.

So -- I'll let you finish, Brian.

I guess that is just the question.

Why are we not seeing the upside in Q2 flow through to Q3 and Q4?

When we gave our guidance the end of the first quarter, we gave full-year guidance for the year.

And we're raising that full-year guidance from $1.05 to $1.15.

Right.

To $1.30 to $1.40.

Right.

As you know.

Several of the things that I talked to about were already built into those numbers.

As we have gone through the year, we made some assumptions with regard to how we were going to recover from a services perspective with regard to backfilling that large contract we spoke about.

We've not been as successful in that as we would have hoped, so there is a change that occurs as a result of our view with regard to what we're going to be seeing from a services perspective as we continue throughout the quarter.

As you know, our services businesses are very profitable from a margin perspective.

So, even though we're anticipating that we're going to see continue strength in hardware, it's not of the same magnitude of margin contribution in flow-through to the bottom line that we'd anticipate coming through from services engagements that have not as yet materialized.

Okay, and then just a final question from me.

It sounded like your product margins performed quite well -- product gross margins in North America.

I think you might have said earlier 90-basis-point increase.

Can you just talk about what drove that?

Was that driven by better performance in back-end because of the sales growth that you saw, or was it more of a function of the mix within the hardware?

That is a very large increase on a year-over-year basis for the product margins, and I just wanted to better understand it.

Thanks.

It actually is both of those, so it is a function of just better absolute product margin, as well as because of the magnitude of volume that we achieved in hardware actually hitting some gates with regard to our partners, such that we received higher back-end dollars, as well, related to that.

So, it's a combination of both, absolute just pure product margins being higher as well as incremental backhand dollars that we received.

So, going forward, is there any reason to believe why North American gross margins can't remain around these levels?

So, there are a couple of things.

One, it's a big software quarter, which always helps with regard to margins overall.

So we have -- it's a big EA quarter, which is 100% margin and this flows through as we go into the third quarter, and why you see that big drop off from an EA perspective with regard to -- what happens with regard to EAs in the third quarter.

We get a little bit of a pick-up again in the fourth quarter, but not of the same magnitude that we saw in the second quarter.

And also in the third and fourth quarters, not to beat a dead horse, but the large services engagement that we had actually ended up contributing 90 basis points, as we said, to the improvement last year and 27 in the fourth quarter and we're not envisioning that we'll have that this year.

Right.

Okay.

And also, in general, overall services, as I pointed out earlier in this outlook, is going to be more muted than in our prior outlook.

Okay.

Impacting margins.

Great.

I will get back in the queue.

Thank you so much.

And the next question comes from the line of Matthew Sheerin with Stifel Nicolaus.

Please proceed.

Yes, thank you, and hello, everyone.

So, just a follow-up on Brian's question about the guidance.

So, when you look at -- you factor in the tax rate and the EPS guidance, that implies -- and if you just look at normal seasonal trends in your business in September and December, that implies operating margins in the 1% to 2% range.

And I understand on a year-over-year basis the service agreements having an impact and some other factors having an impact.

But just -- you're still off of a significantly higher revenue base than you were, so in end, it sound like you're getting very nice leverage off of your expenses.

So, either gross margins are expected to decline significantly from the levels of the last couple of quarters, or SG&A is expected to go up in actual dollar basis significantly in order to get to those numbers.

That is the way I see it.

Does that make sense, or am I missing something?

I guess what I would say, Matt, is that we envision that our gross margins are going to be declining in the second half of the year.

So, I think when we gave the guidance originally, back in the first quarter, what we ended up saying was that we envision for 2010 that our gross margins were going to be below 2009.

That is actually still the case.

I think that if you look across the various businesses, when we told you that we thought APEC was going to normalize around that 13% to 14% range in the last quarter, we think if you look at the run rate or what's happening in EMEA as of this point in time, that the run rate in the first half for EMEA as it relates to gross margins is indicative, given the mix business over there with regards to what is going to be happening the rest of the year.

And from a North America perspective, in the second half of the year, given the mix of our business now, which is more heavily weighted towards hardware and software, but primarily hardware, than it is towards services, we envision the margins in North America in the second half of the year are also going to be down.

We envision we're going to be controlling expenses also, so we're not just assuming the margin shortfall is going to flow all the way through to the bottom line, but it is more of a margin driver than it is a growth and G&A driver, to answer your question.

Okay.

That is very helpful, Glynis.

So, on the expense side then, as you are ramping business.

And I know also, Ken, last quarter you mentioned that you had planned to invest in people and add some sales or account managers.

So, what should we be expecting in terms of those kind of investments offset by any further cost-cutting you have, and how should we think about the expenses for the next couple of quarters?

Yes, so we're going to, as we mentioned, Matt, we did talk about adding specifically 30 or more sales reps per quarter, and we're actually on track for that.

So, we've got that one class, actually, being trained as we speak for the start of the first group here.

And they will actually, within a month's timeframe, be on the sales floor, and we've got the next group being hired as we speak.

So, we'll actually go through that cycle here on a quarterly basis, because we think that is the amount that we can add and train and actually indoctrined to the business in the most efficient manner.

And we really -- obviously, we'll see expense to that, and we'll start to see, towards the end of 2011, we'll actually start seeing the benefits of those classes where there won't be any net negative impact to us.

We'll see the positive impacts going forward because we'll have had enough classes in place, so even the ones that are coming in will be offset by the increased GP dollars.

So, it will be a little bit of a drag here, certainly for the rest of in this year and for the first half of next year as well.

Okay.

And are there any other expenses that you would expect to be incremental?

For the remainder of this year?

Yes.

Nothing out of the ordinary.

No?

Okay.

Okay.

And looking at Europe and the issue of the gross margin and the change of the business environment and the relationship with vendors.

What -- how do you see that playing out, Ken, over the next few quarters, and how are you structuring or changing your business to adapt to that environment?

Yes.

Let me ask Stuart Fenton, our President of EMEA, to actually address that for you.

Stuart, why don't you handle that one?

Hi, Stuart.

Hi, Matt.

Certainly, there is some seasonality quarter-to-quarter in our gross margins, and given the change in our mix of business, which now includes a little bit more public sector transactions, which are typically at lower margins, we believe the run rate margin you see today is indicative of the gross margins you should expect to see going forward.

From that perspective, we would anticipate to continue to get the growth in those segments.

Okay, but are you looking at changing the business, or changing the make of the business so that you can improve your margins?

We certainly have initiatives.

If you notice that our software growth in the second quarter was pretty strong.

We had an aggressive focus on winning new accounts in that mid-market space, and we had a good few wins in the enterprise space.

And those are fee-based initiatives, and so we'll continue that activity.

And as you know on that, Matt, the public sector piece doesn't come in at the fee-based level, right,.

It comes in as revenue.

So, that is what certainly mutes the gross margin percentage.

We did see good significant wins there in the public sector space in both Europe and Asia.

Okay, great.

And then on -- it's still in Europe, I know that there is talk about some IT integration or upgrade in Europe.

Could you give us the progress on that?

Sure.

The project -- we're still on track.

We're expecting the rollout to begin in the fourth quarter of this year, and it will continue through 2011.

And that will unable us to sell hardware in a bunch of other countries, starting with a couple of countries, and we're anticipating the contribution from that to begin next year.

So, we're pretty excited about that.

Okay.

And there are costs associated with that rollout?

There are costs, yes.

Okay.

All of which is included in our guidance.

And that is included?

Okay, so that is -- okay, so in addition to some of the investments in North America, the IT investments are also to be factored in?

Yes.

So, to date, as we've been doing the development, a lot of the IT investments, a large -- greater than 50% than have been capitalized.

Because we're actually in development.

As we start the rollout, it's actual hard dollars and actual costs hitting the P&L, and those are incorporated in our guidance going forward.

The rollout's starting the fourth quarter, as Stuart said.

Well, could you give us an idea of what are we talking about?

The low single-digit millions of dollars, or a couple million a quarter?

It's nowhere near that magnitude.

Oh, okay.

It's nowhere near that magnitude.

Okay.

That is helpful.

I think that is it for me.

Thanks very much.

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

Please proceed.

Good afternoon.

Ken, would you discuss just a little bit, maybe, since you started the sales engagement process in July 1, just give us a little more there of, number one, what you're trying to accomplish, what you saw there, and as that continues on, maybe some examples of is it more on the top line it progresses as a result or just streamlining and cuts expenses through the income statement?

Yes.

Thanks, John, to the question.

So much of the hard work, of course, was done back in the latter part of Q1 and Q2 and getting prepared for it, so the launch on July 1, as I mentioned, went very, very smoothly for us.

It's basically given us better alignment on a regional basis with our partners.

It's also giving us the ability to have many of our reps in the US who sold primarily software, coming from the software spectrum world and from the Calence world only selling networking products to now having the ability, of course, to sell the full product line of portfolio.

So, we certainly anticipate that that will contribute going forward with obviously added revenue, top line of growth for us.

Additionally, we really spent a good amount of time enhancing the support structure to get much better alignment of how our sales reps get support for these specific technologies that we're heavily focused in, areas like virtualization, data center, networking and collaboration and what we're doing in software.

And I won't go into all of the details there, but that gives us the capabilities now where the sales rep can get a very quick line of sight to the support that they need and the support they need and to go out and make a joint sales call, if necessary, with the kind of technical proficiency that they need in order to provide the right solution.

So, a lot of work was done around that, and the engagement model really does that.

But overall, as we say with the whole engagement model, our goal is one team aligned to grow market share and enhance the client experience.

So, that really is the goal and objectives that we put in place, so I -- what you'll really start to see is us to penetrate accounts further with our partners.

And you will certainly see more top-line, and we certainly don't anticipate doing that at the expense of margins.

Certainly whenever you do anything, it's got to be profitable growth.

So, on that -- the way you would monitor that is if that particular salesperson would have assumably more line-items on the order.

Is it that simple?

Yes, certainly we do monitor and measure our sales reps to make sure we're getting multiple lines of business from that specific client.

In the past, we weren't structured for the vast majority of reps to actually even enable them to do that, and the engagement model now enables them.

Now, that is not going to happen overnight.

We've also got alongside this, of course, lots of training that's going alongside to make sure that our reps can make this transition and sell effectively.

And last question from me.

You mentioned several other things going on to help with the cost structure over the second half.

Can you elaborate at all, or is it too early?

I would just say, on the cost structure side, John, it's really just continued discipline in our business of making sure that our costs are aligned as efficiently as possible.

And that is just something that we have to do day in and day out.

Really, independent of what the market conditions are, it's something we have to be diligent about.

Great.

Thanks, and congratulations.

(Operator Instructions).

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

Please proceed.

Okay, thanks, just a couple of follow-ups.

On the 3.5% operating margin target that you talked about earlier in the year, we were, I think, hoping to get some more clarity around the path to that and the key milestones that you hope to achieve to get there.

Is that something you still plan to articulate later this year?

Yes, very much so, Brian.

I think we do have -- we're close to a date being set, if I'm not mistaken, in December, we will actually do that.

So, we definitely look to give you much more clarity on that.

Okay, and I assume at this point your confidence level, Ken, in getting to that level is still as high as it was, if not higher?

Yes, I would say that has not changed, I think we're progressing according to the plan, and certainly our team was pleased that in this current quarter that we could achieve that goal.

The key, of course, is to be able to do it on a consistent basis, long-term.

Okay.

And I think you mentioned earlier that you saw strength in large enterprise in North America.

I was wondering if you can just comment a little bit on the S&B sector and what you saw there.

And also just product segments that you felt particularly were strong in the second quarter and what you're seeing so far in Q3.

Yes, Brian, on the growth side, we definitely saw a good continued growth on the enterprise side as well as across the SMB side of our business, as well.

So, all areas were certainly contributing well in regards to the growth that we were able to achieve.

On the product side, certainly there is continued robustness in the notebook and desktop category that continues to do very, very well.

I think the core networking infrastructure business, we also continue to see very, very solid strength.

Virtualization continues to grow very well.

And, of course, you can see in the software categories, we did well, certainly with our lead publisher in the industry did very well and we certainly participated.

And we also saw certainly strength from some of the creative products out there in the software category, as well as I mentioned, virtualization was very strong.

And is hardware availability an issue for you at all?

No, it's really not, Brian.

We keep seeing issues, that comes up, but it is very, very minimal where we might see here and there an issue.

But certainly marked improvement from where we saw maybe at the start of this year.

And then Glynis, you said you would use about $100 million in operating cash in the third quarter.

What did you say about cash flow for Q4?

We didn't say anything specifically about cash flow for Q4.

But I think as of right now what we're envisioning is that we will end the year with probably positive cash flow from operations in the range of $30-ish-plus million.

Okay.

And debt down marginally from the level of last year.

Okay.

Great.

Thank you again.

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Ladies and gentlemen, this concludes the presentation for today.

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