Glynis Bryan - Chief Financial Officer Ken Lamneck - President and CEO.

Matt Sheerin - Stifel.

Good day, ladies and gentlemen, and welcome to the Insight Enterprises Third Quarter 2014 Operating Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference Chief Financial Officer, Ms. Glynis Bryan. Ma’am you may begin..

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, 2014. I am Glynis Bryan, Chief Financial Officer of Insight 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 our Investor Relations section.

Today’s call, including the question-and-answer period, is being webcast live and can be accessed via 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 contain time-sensitive information that is accurate only as of today, October 29, 2014. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.

In today’s conference call, we will refer to non-GAAP financial measures as we discuss the third quarter 2014 financial results. You will find a reconciliation of these non-GAAP measures to our actual GAAP results, included in the press release issued earlier today.

Finally, let me remind you about forward-looking statements that will be made on today’s call. All forward-looking statements that are made in this conference call are subject to risks and uncertainties that could cause our actual results to differ materially.

These risks are discussed in today’s press release and in greater detail on our Annual Report on Form 10-K for the year ended December 31, 2013. With that, I will now turn the call over to Ken to give you an overview of our third quarter 2014 operating results.

Ken?.

Hello, everyone. Thank you for joining us today to discuss our third quarter 2014 operating results. In the third quarter, consolidated net sales were $1.24 billion, up 8% year-over-year in U.S. dollars and up 7% in constant currency.

We’re pleased to report that we saw top-line growth in all three of our geographic operating segments in each of our major product categories of hardware, software and services. Gross profit increased 2% year-over-year to $172 million while gross margin of 13.9% decreased 80 basis points.

This gross margin performance was driven by the previously announced partner program changes in the software category and lower vendor funding from the data center product sales in the hardware category.

Consolidated selling and administrative expenses increased 2% year-over-year in the third quarter, reflecting investment in sales; technical and services headcount in North America business.

All of these resulted in consolidated earnings from operations excluding severance and restructuring expenses of $28.7 million consistent with the same quarter last year.

On a GAAP basis, earnings from operations increased 8% to $28.4 million and diluted earnings per share excluding severance and restructuring expenses increased 10% year-over-year to $0.43. On a GAAP basis, diluted earnings per share were $0.42 in the third quarter.

Within these results, the North America business reported top-line sales growth of 4% year-over-year in the third quarter. We saw sales growth across large enterprise, mid market and the public sector with particularly strong performance with the federal government clients at the fiscal year-end.

In the hardware category, notebook and desktop sales continue to show strong growth. An increased demand for business productivity, virtualization and security software solutions drove a 5% increase in software sales for the quarter.

Finally, services sales increased 6% year-over-year driven by more consulting service arrangements, multi-site deployments and new projects running through our integration labs. In EMEA, we continue to see improved sales execution in discipline which drove top-line improvement of 19% year-over-year in U.S. dollars and 15% in constant currency.

Our EMEA team delivered double-digit top-line growth across each of the hardware, software and services categories in the third quarter. Higher sales of notebooks, desktops, tablets and servers, as well as increased demand for business productivity products drove the sales performance year-over-year.

By country, we saw nice top-line growth in the UK, Germany and France and even stronger growth in smaller markets like Italy and Spain. In Asia Pacific, net sales increased 11% year-over-year reflecting higher software sales volume with public sector and mid-market clients.

I’ll now hand the call over to Glynis who will discuss our third quarter financial results in more detail..

Thank you. Starting with North America. Net sales in North America were $891 million in the third quarter, up 4% year-to-year. Sales in the hardware category increased 2% year-over-year and 7% sequentially. Software and services sales increased 5% and 6% respectively year-over-year.

Gross profit in North America decreased 2% year-over-year to $120 million and gross margin decreased 80 basis points to 13.5%. This decrease in gross margin was primarily driven by lower fees earned on software enterprise agreement and lower vendor funding on the certain hardware programs in the quarter.

Selling and administrative expenses for North America in the third quarter were up $1.3 million year-over-year and on a non-GAAP basis were up $5 million sequentially to $94.4 million. This increase is primarily due to the addition of sales and related headcounts in the business.

As Ken noted earlier, we have been investing in headcount to our North America business in 2014. In addition, we have been experiencing significantly higher health benefit expenses so far this year, a trend we expect to continue going forward.

As a result, we expect our operating expenses in the fourth quarter will increase slightly from levels seen in the third quarter in this segment. In the third quarter, we reported net severance expense of $102,000 in this segment, down from $530,000 reported in the same period last year.

Earnings from operations in North America were $25.8 million in the third quarter of 2014, down 13% from $29.9 million in the same quarter last year excluding severance expenses in both periods.

We also expect to report a decline in earnings from operations year-over-year in the fourth quarter of approximately the same amount seen in the third quarter driven by the increased SG&A investments I mentioned a moment ago. Moving on to EMEA, our EMEA operating segment reported net sales of $314 million, an increase of 19% year-over-year in U.S.

dollars. In constant currency, net sales increased 15%. Also in constant currency, hardware sales increased 10% year-over-year due to continued strength in our UK business. Sales of software increased 19% reflecting higher growth with large and public sector clients and services sales increased 14% year-over-year also in constant currency.

Gross margin -- gross profit in EMEA was $45 million, an increase of 14% year-over-year in U.S. dollars and an increase of 11% in constant currency with gross margin declining 60 basis points to 14.3% year-over-year.

This decrease in gross margin is primarily due to partner program changes resulting in lower vendor funding and fees from enterprise agreement in the comparable quarter. Selling and administrative expenses in EMEA in the third quarter were up 4% in U.S. dollars and flat year-to-year in constant currency term.

In the third quarter, we reported net severance expense of $209,000 in this segment, down from $1.9 million reported in the same period last year. Excluding severance expenses, earnings from operations in EMEA were $2.2 million in this third quarter, up significantly from the operating loss of $1.9 million reported in the third quarter of last year.

Moving on to Asia-Pacific. Our Asia-Pacific operating segment reported net sales of $33 million, up 11% year-over-year in U.S. dollars and up 10% in constant currency. Gross profit was $6.7 million, increasing 5% in U.S. and 4% in constant currency.

Gross margin in APAC decreased 110 basis points due to the relative mix of software business transaction in the quarter. And selling and administrative expenses in APAC increased this year’s third quarter due to investments in headcount.

Earnings from operations in Asia-Pacific were $646,000 in the third quarter, down from $730,000 from last year’s third quarter. With respect to our tax rate, our effective tax rate in the third quarter was 34.1%, down from 37.8% in the third quarter of last year, due to the release of certain tax reserves in the quarter.

Moving on to the cash flow performance. In the nine months ended September 30, 2014, our operations generated $48 million of cash, down from $67 million in the same period last year.

This decrease is due to investments in inventory to support specific client engagements occurring over the next few months and higher working capital requirements and higher sales this year.

We invested $8 million in capital expenditures in the first nine months of 2014, down from $14 million in the same period last year, reflecting lower IT investment. We also spent $30 million to repurchase approximately 1.3 million shares of our common stock.

We ended the third quarter with a cash balance of $127 million of which $108 million was resident in our foreign subsidiaries and we had $25 million of debt outstanding under our debt facility. This compares to $135 million of cash and $88 million of debt outstanding at the end of the third quarter 2013.

From a cash efficiency perspective, our cash conversion cycle was 30 days in the third quarter, down 1 day from last year due to lower sales of -- lower days sales outstanding, primarily in EMEA. One last item before I turn the call back over to Ken.

As announced today, our Board of Directors has approved an additional authorization to repurchase up to $25 million of our common stock. This $25 million authorization is in addition to the $12.6 million remaining under previous authorization. These share repurchases will be made in the open markets through block trades or through 10b5-1 plans.

We intend to commence this buyback program in the fourth quarter of 2014 subject to market conditions. I’ll now turn the call back to Ken..

Thank you, Glynis. Moving on to our outlook for the fourth quarter, we currently expect diluted earnings per share to be between $0.54 and $0.60 in the fourth quarter. For the full year 2014 earnings per share is expected to be between $1.99 and $2.05. This outlook includes an effective tax rate of 38% for the fourth quarter.

This outlook does not reflect severance and restructuring expenses incurred during the year or the non-cash charge related to our Illinois real estate recorded in the second quarter. Thank you again for joining us today. I want to thank our teammates, clients and partners for their dedication to Insight. That concludes my comments.

We will now open up your line for questions..

(Operator Instructions). Our first question comes from Matt Sheerin of Stifel. Your line is open. .

Hi guys, thanks. Good afternoon everyone. Just a question regarding the SG&A expected to increase in the December quarter.

How much related to expansion to investments in your resources and adding folks versus those healthcare costs you talked about? And could you give us an idea of how many account managers or sales folks you’ve added this year and plan to add this quarter?.

Okay. So just talking about the split between the increase; I will say it’s about 60-40; 60% to 65% related to sales related resources sales and technical resources and about 30% to 35% associated with healthcare costs.

In terms of the number of sales people that we have added, we’ve added about 160 or so, in excess of 150 this year, I’m not sure that we’re commenting on the number that we’re hiring this quarter..

Okay.

What’s the total headcount within your sales organization in North America, roughly?.

1,300..

1,300. Okay..

That’s including the sales supports, the technical resources....

Got you. Okay. And you obviously see opportunities either for share gains or you see IT spending environment so fairly stable, right. Ken, I mean you wouldn’t be putting these resources in place if you didn’t.

Right?.

That’s exactly right, Matt. We definitely see that there is certainly we can add more capacity to take advantage of the IT spending. We want to obviously grow the services business faster as well and then of course there is resources being applied to the opportunities around specific verticals, as well as the cloud..

And Ken what’s your take on the corporate PC refresh that we’ve seen in the first half and a lot of concerned about a drop-off there because of the Windows XP supports sort of having come and gone.

But what’s your sense of investments from customers and in the PC cycle here?.

Yes, but it’s not a question that of course this past year was a catalyst with XP. So, we’re certainly I don’t think going to see that same degree. And now we’re in just sort of a normal sort of full year cycle of refresh I think for clients.

Of course there is continued growth in lot of those numbers you’re seeing there around K-12, which continues to spend quite a bit of money on notebooks and tables for students. So, that’s been an acceleration as well.

I do see that continued outlook for the next couple of years on the K-12 side, but I expect to get back to more normal levels in regards to commercial PC desktop notebook sales that was accelerated because of XP migration..

Okay. And then as you -- just lastly from me, as we look into next year and your operating margins are sort of flattish this year with a little bit of revenue growth, but as you’ve talked about some headwinds and some investments. So looking into next year, can you see sort of a normal IT spending environment in the low to mid single-digit.

Are you expecting to finally could start to see leverage in your model kick in?.

So, I think that we’re doing some investments now, Matt, with regard to driving revenue growth in 2015. I think that some of that would translate through to the bottom-line, but I am not sure that I would say we’re going to see significant margin expansion.

And we’ll be updating you with regard to the guidance and the impact of the share repurchases in our February call when we wrap up the 2014 and give you the guidance for 2015..

Fair enough. Okay. Thanks a lot..

Thank you. And our next question comes from [Adam Tendo of Raymond James]. Your line is open..

Hi, thanks for taking the question. Just curious can you bridge us from your old EPS guidance of $2.02 to $2.10 to the new guidance of $1.99 to $2.05.

Just more specifically are you expecting lower results from a quarter ago, is it mostly due to the increased investments in North Carolina or North America? And if so, can you quantify that?.

Okay. So, we have seen higher investments and spend in North America related to investments in sales and technical and support resources to drive higher sales. We’ve also seen the higher cost in our healthcare cost about $1.5 million to $2 million sequentially in terms of an increase.

We’re also looking to see what happened with our certain hardware categories in the third quarter, we didn’t get the velocity sales that we had anticipated with regard to getting and hitting some partner thresholds. So, we had lower partner income than we had anticipated.

So, I think that it’s a combination of those pieces that are driving the change in our outlook going forward for the rest of this year..

Thank you..

At this time, I see no other questions in queue. Sorry, we have a follow-up from Mr. Sheerin. Your line is open..

Thanks. Just your commentary about the lower vendor support you got on the data center products.

Was that specific to one vendor and the weakness that you saw there or was it across different vendors? And was that a demand issue, just trying to figure out what exactly happened there?.

It’s really just a couple of partners, Matt that impacted it. And the programs of course do change from quarter-to-quarter, you’ve got to pretty nimble. And I think we could have executed a little bit better on the course always higher demand would certainly always help mitigate that.

So, I think it was not lamming force, but it was certainly was something that impacted us in the quarter..

And are you resetting your rebate thresholds quarter-to-quarter where you’ve got reasonable targets to hit this quarter or next quarter so that you should be able to get the margins backup?.

Yes. I mean we always spend on a weekly basis, we actually review that data point. So we stayed pretty close to that because it’s an important part of our business. So, we’re constantly tweaking those looking at those and look at where the real incentives are for us to make sure that we contribute to those areas..

And Matt, the partners have very right, some are quarterly programs, some are half year programs. So it really depends on the partner with regard to if it’s a quarterly or a half year program..

Got it. Okay, thanks..

(Operator Instructions). And we have a follow-up from Mr. [Tendo] as well. Your line is open sir..

Yes, thanks. Just want to follow-up there a little bit more specifically on what drove the acceleration in North America sales, as well as Europe. I know the Windows XP upgrade, it was mentioned that you do think that’s behind us going forward.

Can you talk a little bit more, do you see any uptick from the PC refresh cycle this quarter and expect that to continue at all or drop off?.

Yes. Adam, this is Ken. So, in North America and in Europe it was pretty much across the board as far as hardware, software and services in regards where we saw the growth that was pretty well balanced. As far as specific commentary around the PC refresh cycle, our sense is that we weren’t that heavily sort of skewed towards that business.

So as that starts to decline, we don’t think that’s going to be a significant sort of a headwind for us in regards to that refresh cycle starting to diminish going forward. So we think there is -- we’ll go back to a little bit more normalcy with that and we don’t think that that will have an impact to us..

That’s helpful. Thanks guys..

Thank you. Ladies and gentlemen, thank you for your participation in today conference. This concludes your program. You may all disconnect. Everyone have a great day..

Thank you..

Thank you..