Insight Enterprises, Inc. Reports Third Quarter Results

Insight Enterprises, Inc. (Nasdaq: NSIT) (the "Company”) today reported results of operations for the three and nine months ended September 30, 2007. Third Quarter and Year-to-Date Highlights Net sales for the quarter increased 29% to $1.11 billion, and year-to-date net sales increased 48% to $3.52 billion. Gross profit for the quarter grew 32% to $149.8 million, and year-to-date gross profit grew 56% to $487.8 million. Net earnings from continuing operations decreased 46% to $9.1 million, while year-to-date net earnings from continuing operations increased 6% to $48.2 million. Diluted EPS from continuing operations decreased 47% to $0.18, while year-to-date diluted EPS from continuing operations increased 3% to $0.97. Q3 2007 results include expenses of $2.5 million, $1.5 million net of tax, for professional fees associated with our stock option review, while year-to-date results include $12.5 million, $7.6 million net of tax, for such professional fees and $2.8 million, $1.7 million net of tax, for severance expense. "Even with more of a seasonal decline in our software business than we had expected, I believe we had a solid quarter,” said Rich Fennessy, President and Chief Executive Officer. "Year-to-date, our results are very strong, and we feel good about our business across all segments and categories, including software, going into the fourth quarter.” FINANCIAL SUMMARY TABLE (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)   Three Months Ended September 30, Nine Months Ended September 30, Insight Enterprises, Inc.   2007         2006       % change         2007       2006     % change   Net sales $ 1,109,705 $ 857,919 29 % $ 3,517,129 $ 2,371,089 48 % Gross profit $ 149,846 $ 113,329 32 % $ 487,834 $ 312,581 56 % Earnings from operations $ 19,026 $ 24,389 (22 %) $ 86,091 $ 68,002 27 % Operating margin 1.7 % 2.8 % (1.1 %) 2.4 % 2.9 % (0.5 %) Net earnings from continuing operations $ 9,096 $ 16,710 (46 %) $ 48,201 $ 45,321 6 % Diluted EPS from continuing operations $ 0.18 $ 0.34 (47 %) $ 0.97 $ 0.94 3 % Net earnings $ 9,096 $ 17,240 (47 %) $ 53,173 $ 57,951 (8 %) Diluted EPS $ 0.18 $ 0.35 (49 %) $ 1.07 $ 1.20 (11 %)   North America Net sales $ 817,747 $ 694,284 18 % $ 2,518,847 $ 1,972,186 28 % Gross profit $ 109,018 $ 90,924 20 % $ 355,123 $ 255,155 39 % Earnings from operations $ 15,276 $ 20,393 (25 %) $ 62,677 $ 57,542 9 %   EMEA Net sales $ 264,679 $ 157,115 69 % $ 923,958 $ 392,383 135 % Gross profit $ 35,714 $ 21,413 67 % $ 119,225 $ 56,434 111 % Earnings from operations $ 2,549 $ 3,711 (31 %) $ 20,579 $ 10,175 102 %   APAC Net sales $ 27,279 $ 6,520 318 % $ 74,324 $ 6,520 1,040 % Gross profit $ 5,114 $ 992 416 % $ 13,486 $ 992 1,259 % Earnings from operations $ 1,201 $ 285 321 % $ 2,835 $ 285 895 % Effective Tax Rate Our effective tax rate from continuing operations for the three months ended September 30, 2007 was 40.6% compared to 32.0% for the three months ended September 30, 2006. The increase in the effective tax rate from continuing operations was due primarily to a tax benefit recorded in the three months ended September 30, 2006 as a result of the reversal of accrued income taxes resulting from the determination that a reserve previously recorded for potential tax exposures was no longer necessary. Additionally, the effective tax rate is higher in the three months ended September 30, 2007 due to an increase in non-deductible expenses related to executive compensation. OPERATING SEGMENTS We operate in three reportable geographic operating segments: North America; EMEA (Europe, the Middle East and Africa); and APAC (Asia-Pacific). Currently, our offerings in North America and the United Kingdom include brand-name IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC currently only include software and select software-related services. North America North America’s net sales for the three months ended September 30, 2007 increased 18% to $817.7 million compared to net sales of $694.3 million for the three months ended September 30, 2006. "Although we experienced significant seasonality in our software sales, we were pleased with our 5% growth in hardware sales and our 42% growth in services over the prior year,” said Fennessy. For the three months ended September 30, 2007, our North American gross profit increased 20% to $109.0 million from $90.9 million for the three months ended September 30, 2006. North America’s gross profit as a percentage of net sales was 13.3% for the three months ended September 30, 2007, compared to 13.1% for the three months ended September 30, 2006. "The increase in gross margin from the third quarter of 2006 was due primarily to increases in agency fees for Microsoft enterprise software agreement renewals offset partially by decreases in product margin, which includes vendor funding and decreases in freight margin,” said Stanley Laybourne, Chief Financial Officer. North America’s selling and administrative expenses were 11.5% of net sales for the three months ended September 30, 2007, compared to selling and administrative expenses as a percentage of sales of 10.1% for the three months ended September 30, 2006. "Compared to Q3 2006, we have seen increases in salaries and wages, primarily resulting from the acquired business in September 2006, professional fees associated with our stock option review and amortization of acquired intangible assets,” Laybourne said. North America’s selling and administrative expenses for the three months ended September 30, 2007 include expenses of approximately $2.5 million for professional fees associated with our stock option review. North America’s earnings from operations for the three months ended September 30, 2007 decreased 25% to $15.3 million from $20.4 million for the three months ended September 30, 2006. North America’s earnings from operations as a percentage of net sales decreased to 1.9% for the three months ended September 30, 2007 from 2.9% for the three months ended September 30, 2006. EMEA EMEA’s net sales for the three months ended September 30, 2007 increased 69% to $264.7 million, compared to net sales of $157.1 million for the three months ended September 30, 2006. "Our EMEA segment was also affected by the significant seasonality within our software category,” said Fennessy. "Even so, EMEA exceeded our internal expectations for the quarter and posted strong results across the hardware and services categories.” In Q3 2007, our EMEA gross profit was $35.7 million, a 67% increase over the prior year. EMEA’s gross profit as a percentage of net sales was 13.5% for the three months ended September 30, 2007, compared to 13.6% for the three months ended September 30, 2006. "The decrease in gross margin from the third quarter of 2006 was due primarily to decreases in product margin, which includes vendor funding, and decreases in freight margin. These decreases in gross margin were offset partially by increases in agency fees for Microsoft enterprise software agreement renewals,” said Laybourne. For the three months ended September 30, 2007, EMEA’s selling and administrative expenses were 12.5% of net sales compared with 11.1% in the same quarter of 2006. "The increase from Q3 2006 was due primarily to increases in salaries and wages and expenses related to additional facilities, predominantly resulting from the acquired business in September 2006, increases in sales incentive plans and bonus expenses due to increased overall financial performance, amortization of acquired intangible assets and costs associated with the initial stages of our mySAP upgrade in EMEA that were not capitalizable,” Laybourne said. EMEA’s earnings from operations decreased 31% in the three months ended September 30, 2007 to $2.5 million from $3.7 million in the three months ended September 30, 2006. EMEA’s earnings from operations as a percentage of net sales decreased to 1.0% for the three months ended September 30, 2007 from 2.4% for the three months ended September 30, 2006. APAC Our APAC segment, which was added as a result of the acquisition of Software Spectrum in September 2006, recognized net sales of $27.3 million, gross profit of $5.1 million and contributed $1.2 million to earnings from operations for the three months ended September 30, 2007. "Our APAC segment continues to perform very well and continues to overachieve against internal expectations,” said Fennessy. CONFERENCE CALL AND WEBCAST We will host a conference call and live Web cast today at 5:00 p.m. ET to discuss the quarterly results of operations. A live Web cast of the conference call (in listen-only mode) will be available on our corporate Web site at www.insight.com and a replay of the Web cast will be available on our corporate Web site for a limited time. FORWARD-LOOKING INFORMATION Certain statements in this release and the related conference call and Web cast are "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statement. Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements, include, but are not limited to, the following, which are discussed in "Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2006: changes in the information technology industry and/or the economic environment; our reliance on partners for product availability, marketing funds, purchasing incentives and competitive products to sell; disruptions in our information technology and voice and data networks, including the upgrade to mySAP and the migration of Software Spectrum to our information technology and voice and data networks; the integration and operation of Software Spectrum, including our ability to achieve the expected benefits of the acquisition; actions of our competitors, including manufacturers/publishers of products we sell; the informal inquiry from the SEC and the fact that we could be subject to stockholder litigation related to our historical stock option granting practices and the related restatement of our consolidated financial statements; the recently enacted changes in securities laws and regulations, including potential risk resulting from our evaluation of internal controls under the Sarbanes-Oxley Act of 2002; the risks associated with international operations; sales of software licenses are subject to seasonal changes in demand; increased debt and interest expense and lower availability on our financing facilities; increased exposure to currency exchange risks; our dependence on key personnel; risk that purchased goodwill or amortizable intangible assets become impaired; our failure to comply with the terms and conditions of our public sector contracts; risks associated with our very limited experience in outsourcing business functions to India; rapid changes in product standards; and intellectual property infringement claims. Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the SEC. In addition, these forward-looking statements include statements regarding the informal inquiry commenced by the SEC and a stockholder’s demand to inspect our books and records pursuant to Section 220 of the Delaware General Corporation Law. There can be no assurances that forward-looking statements will be achieved, and actual results could differ materially from those suggested by the forward-looking statements. Important factors that could cause actual results to differ materially include: adjustments to the consolidated financial statements that may be required related to the SEC informal inquiry; and risks of litigation and governmental or other regulatory inquiry or proceedings arising out of or related to the Company’s historical stock option granting practices. Therefore, any forward-looking statements in this release should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others. We assume no obligation to update, and do not intend to update, any forward-looking statements. We do not endorse any projections regarding future performance that may be made by third parties. INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended September 30,   Nine Months Ended September 30,   2007       2006     2007       2006   Net sales $ 1,109,705 $ 857,919 $ 3,517,129 $ 2,371,089 Costs of goods sold   959,859     744,590     3,029,295     2,058,508   Gross profit 149,846 113,329 487,834 312,581 Operating expenses: Selling and administrative expenses 130,820 88,211 398,902 243,850 Severance and restructuring expenses   -     729     2,841     729   Earnings from operations 19,026 24,389 86,091 68,002 Non-operating (income) expense: Interest income (1,509 ) (1,650 ) (5,803 ) (3,658 ) Interest expense 3,937 1,264 14,463 2,333 Net foreign currency exchange loss (gain) 849 (214 ) (2,807 ) (190 ) Other expense, net   428     422     1,141     742   Earnings from continuing operations before income taxes   15,321 24,567 79,097 68,775 Income tax expense   6,225     7,857     30,896     23,454   Net earnings from continuing operations 9,096 16,710 48,201 45,321 Net earnings from discontinued operations   -     530     4,972     12,630   Net earnings $ 9,096   $ 17,240   $ 53,173   $ 57,951       Net earnings per share - Basic: Net earnings from continuing operations $ 0.18 $ 0.35 $ 0.98 $ 0.94 Net earnings from discontinued operations   -     0.01     0.10     0.26   Net earnings per share $ 0.18   $ 0.36   $ 1.08   $ 1.20     Net earnings per share - Diluted: Net earnings from continuing operations $ 0.18 $ 0.34 $ 0.97 $ 0.94 Net earnings from discontinued operations   -     0.01     0.10     0.26   Net earnings per share $ 0.18   $ 0.35   $ 1.07   $ 1.20       Shares used in per share calculations: Basic   49,530     48,411     49,213     48,230   Diluted   50,711     48,658     49,801     48,375   INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) September 30, 2007     December 31, 2006 ASSETS Current assets: Cash and cash equivalents $ 53,086 $ 54,697 Accounts receivable, net 814,444 994,892 Inventories 102,232 97,751 Inventories not available for sale 17,414 31,112 Deferred income taxes 19,550 20,770 Other current assets     20,508   32,359 Total current assets 1,027,234 1,231,581   Property and equipment, net 156,893 145,778 Goodwill 305,006 296,781 Intangible assets, net 82,276 86,929 Deferred income taxes 396 927 Other long-term assets   18,832   18,269 $ 1,590,637 $ 1,780,265   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 477,322 $ 611,367 Accrued expenses and other current liabilities 93,385 136,401 Current portion of long-term debt 15,000 15,000 Deferred revenue 25,697 40,728 Line of credit   -   15,000 Total current liabilities 611,404 818,496   Long-term debt 152,000 224,250 Long-term deferred income taxes 26,121 25,517 Other long-term liabilities   28,911   21,652   818,436   1,089,915 Stockholders’ equity: Preferred stock - - Common stock 495 489 Additional paid-in capital 391,571 363,308 Retained earnings 335,219 297,664 Accumulated other comprehensive income – foreign currency translation adjustment     44,916   28,889 Total stockholders’ equity 772,201   690,350 $ 1,590,637 $ 1,780,265 INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)   Nine Months Ended September 30,   2007         2006   Cash flows from operating activities: Net earnings from continuing operations $ 48,201 $ 45,321 Plus: net earnings from discontinued operations   4,972     12,630   Net earnings 53,173 57,951 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 25,960 14,819 Provision for losses on accounts receivable 1,725 2,101 Write-downs of inventories 5,744 6,892 Non-cash stock-based compensation 8,927 10,101 Gain on sale of discontinued operations (7,937 ) (15,122 ) Excess tax benefit from employee gains on stock-based compensation   (445   ) (1,035 ) Deferred income taxes 2,355 22,035 Changes in assets and liabilities: Decrease (increase) in accounts receivable 186,033 (10,538 ) (Increase) decrease in inventories (2,509 ) 25,399 Decrease (increase) in other current assets 12,704 (16,627 ) Increase in other assets (1,944 ) (20,953 ) (Decrease) increase in accounts payable (142,794 ) 20,885 Decrease in inventories financing facility - (11,819 ) Decrease in deferred revenue (15,175 ) (3,193 ) (Decrease) increase in accrued expenses and other liabilities   (26,788 )   24,762   Net cash provided by operating activities   99,029     105,658   Cash flows from investing activities: Proceeds from sale of discontinued operations 28,631 46,500 Acquisition of Software Spectrum, net of cash acquired - (323,009 ) Purchases of property and equipment   (27,611 )   (26,383 ) Net cash provided by (used in) investing activities   1,020     (302,892 ) Cash flows from financing activities: Repayments on short-term financing facility - (45,000 ) Borrowings on long-term financing facility 540,000 202,000 Repayments on long-term financing facility (601,000 ) (20,000 ) Borrowings on term loan - 75,000 Repayments on term loan (11,250 ) - (Repayments) borrowings on line of credit (15,000 ) 691 Excess tax benefit from employee gains on stock-based compensation 445 1,035 Proceeds from sales of common stock under employee stock plans 24,342 14,140 Repurchase of common stock (22,336 ) - Decrease in book overdrafts   (23,856 )   -   Net cash (used in) provided by financing activities   (108,655 )   227,866   Net cash provided by discontinued operations   -     129   Foreign currency exchange effect on cash flow   6,995     5,165   (Decrease) increase in cash and cash equivalents (1,611 ) 35,296 Cash and cash equivalents at beginning of period   54,697     35,145   Cash and cash equivalents at end of period $ 53,086   $ 71,071   INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY SELECT OPERATING SEGMENT STATISTICS (UNAUDITED)   Three Months Ended   September 30,     North America   2007       2006   Change Number of shipping days 63 63 - Number of account executives 1,362 1,033 (c ) 32 % Net sales per account executive (a) $ 606,188 $ 613,175 (c ) (1 %) Gross profit per account executive (b) $ 80,814 $ 81,814 (c ) (1 %) Sales mix (as a % of net sales): Notebooks and PDA’s 12 % 13 % 10 % (d) Desktops and servers 12 % 14 % - (d ) Networking and connectivity 12 % 13 % 7 % (d) Storage devices 6 % 8 % (12 %)(d) Printers 6 % 7 % 5 % (d) Memory and processors 4 % 5 % 1 % (d) Supplies and accessories 4 % 6 % (14 %)(d) Monitors and video 5 % 5 % 21 % (d) Miscellaneous   7 %   7 % 31 % (d) Hardware 68 % 78 % 5 % (d) Software 29 % 20 % 64 % (d) Services   3 %   2 % 42 % (d)   100 %   100 % EMEA Number of shipping days (e) 64 64 - Number of account executives 530 291 (c ) 82 % Net sales per account executive (a) $ 517,457 $ 446,166 (c ) 16 % Gross profit per account executive (b) $ 69,823 $ 63,929 (c ) 9 % Sales mix (as a % of net sales): Notebooks and PDA’s 11 % 15 % 26 % (d) Desktops and servers 9 % 12 % 24 % (d) Networking and connectivity 5 % 7 % 14 % (d) Storage devices 4 % 7 % 12 % (d) Printers 4 % 6 % (2 %)(d) Memory and processors 2 % 3 % - (d ) Supplies and accessories 4 % 6 % 12 % (d) Monitors and video 5 % 7 % 19 % (d) Miscellaneous   3 %   5 % 16 % (d) Hardware 47 % 68 % 16 % (d) Software 52 % 31 % 183 % (d) Services   1 %   1 % 226 % (d)   100 %   100 %   (a) Calculated as net sales for the quarter divided by the average number of account executives. The average number of account executives is calculated as the number of account executives at the end of the quarter plus the number of account executives at the beginning of the quarter divided by two. (b) Calculated as gross profit for the quarter divided by the average number of account executives. The average number of account executives is calculated as the number of account executives at the end of the quarter plus the number of account executives at the beginning of the quarter divided by two. (c) Excludes Software Spectrum account executives and 23 calendar days of Software Spectrum’s results during the three months ended September 30, 2006. (d) Represents growth/decline in category net sales. (e) Represents shipping days for the United Kingdom as it makes up the largest percentage of net sales in our EMEA segment. INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES OPERATING SEGMENT STATEMENT OF EARNINGS INFORMATION (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, 2007 North America   EMEA   APAC   Consolidated Net sales $ 817,747 $ 264,679 $ 27,279 $ 1,109,705 Costs of goods sold   708,729   228,965   22,165   959,859 Gross profit 109,018 35,714 5,114 149,846 Operating expenses: Selling and administrative expenses   93,742   33,165   3,913   130,820 Earnings from operations $ 15,276 $ 2,549 $ 1,201 19,026 Non-operating expense, net   3,705 Earnings from continuing operations before income taxes 15,321 Income tax expense   6,225 Net earnings from continuing operations 9,096 Net earnings from discontinued operations   - Net earnings $ 9,096   Total assets $ 2,198,755 $ 393,211 $ 39,393 $ 1,590,637 (a) (a) Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $1,040,722. Nine Months Ended September 30, 2007 North America   EMEA   APAC   Consolidated Net sales $ 2,518,847 $ 923,958 $ 74,324 $ 3,517,129 Costs of goods sold   2,163,724   804,733   60,838   3,029,295 Gross profit 355,123 119,225 13,486 487,834 Operating expenses: Selling and administrative expenses 289,605 98,646 10,651 398,902 Severance and restructuring expenses   2,841   -   -   2,841 Earnings from operations $ 62,677 $ 20,579 $ 2,835 86,091 Non-operating expense, net   6,994 Earnings from continuing operations before income taxes 79,097 Income tax expense   30,896 Net earnings from continuing operations 48,201 Net earnings from discontinued operations   4,972 Net earnings $ 53,173   Total assets $ 2,198,755 $ 393,211 $ 39,393 $ 1,590,637 (a) (a) Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $1,040,722. INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES OPERATING SEGMENT STATEMENT OF EARNINGS INFORMATION (CONTINUED) (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, 2006 North America   EMEA   APAC   Consolidated Net sales $ 694,284 $ 157,115 $ 6,520 $ 857,919 Costs of goods sold   603,360   135,702   5,528   744,590   Gross profit 90,924 21,413 992 113,329 Operating expenses: Selling and administrative expenses 70,023 17,481 707 88,211 Severance and restructuring expense   508   221   -   729   Earnings from operations $ 20,393 $ 3,711 $ 285 24,389 Non-operating income, net   (178 ) Earnings from continuing operations before income taxes 24,567 Income tax expense   7,857   Net earnings from continuing operations 16,710 Net earnings from discontinued operations   530   Net earnings $ 17,240     Total assets $ 1,909,860 $ 327,299 $ 32,466 $ 1,536,585 (b) (b) Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $733,040. Nine Months Ended September 30, 2006 North America   EMEA   APAC   Consolidated Net sales $ 1,972,186 $ 392,383 $ 6,520 $ 2,371,089 Costs of goods sold   1,717,031   335,949   5,528   2,058,508   Gross profit 255,155 56,434 992 312,581 Operating expenses: Selling and administrative expenses 197,105 46,038 707 243,850 Severance and restructuring expenses   508   221   -   729   Earnings from operations $ 57,542 $ 10,175 $ 285 68,002 Non-operating income, net   (773 ) Earnings from continuing operations before income taxes 68,775 Income tax expense   23,454   Net earnings from continuing operations 45,321 Net earnings from discontinued operation   12,630   Net earnings $ 57,951     Total assets $ 1,909,860 $ 327,299 $ 32,466 $ 1,536,585 (b) (b) Consolidated total assets include corporate assets and intercompany eliminations for a net reduction of $733,040.