Good day, ladies and gentlemen, and welcome to the Insight Enterprises Incorporated's third quarter 2013 earnings conference call. (Operator Instructions) It's now my pleasure to turn the floor over to Glynis Bryan. Ma'am, the floor is yours.

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, 2013. 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 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 call and the associated webcast contain time sensitive information that is accurate only as of today, October 30, 2013. 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 2013 financial results. You will find a reconciliation of these non-GAAP measures to our actual GAAP results posted on our website on the Investor Relations page. 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, 2012. With that, I will now turn the call over to Ken, to give you an overview of our third quarter 2013 operating results. Ken?

Thank you, Glynis. Hello, everyone. Thank you for joining us today to discuss our third quarter 2013 operating results. In the third quarter we saw mixed results across our operating segments. In North America we saw better sales execution and improved profitability, and believe that recent investments and the operational discipline we have been driving are beginning to show in results. We're disappointed with financial results of EMEA and are highly focused on improving our performance in this segment over the coming quarters. For the third quarter of 2013, gross profit increased 1% and gross margin expanded 50 basis points to 14.7%. Consolidated net sales were down 3% year-to-year to $1.15 billion. SG&A increased 3%. And earnings from operations, excluding severance expense decreased 8% to $28.7 million. On a GAAP basis, earnings from operations increased 14% to $26.3 million. Within these results, the North American business delivered improved results in the third quarter, as it made a topline performance was more than offset by focus on profitability. Net sales declined 1% year-over-year, while gross profit grew 5% and gross margin was very strong at 14.3%, up 80 basis points over last year. We saw gross margins expand across all categories. Our team executed well in third quarter by optimizing funding and programs with our strategic partners. This was achieved through disciplined program management and selling more complex solutions, expanding our software sales and delivering double-digit growth in fees earned in software enterprise agreements and improving the profitability of our services category with a solid execution expansion of higher margin service offerings. We've been working actively in North America through our 2013, to get a solid foundation in place for growth. We are pleased that the leadership team is now in place and our execution is improving in key focused areas…

Thank you, Ken. In North America net sales were $858 million in the third quarter, down 1% year-over-year. Hardware sales declined 5% year-over-year, but increased 3% sequentially. By client group year-over-year, we saw doubled-digit increase in earnings in state and local markets in the U.S., offset by continued softness in spending by large clients. In the software category, net sales declined 9% year-over-year due to particularly strong sales of business productivity products to U.S. federal government clients and higher sales of software enterprise agreements in the commercial space. While these services sales decreased 5%, services gross profit improved nicely in this third quarter compared to the same period last year. Overall, gross profit in North America increased 5% year-over-year to $123 million. Gross margin increased 80 basis points to 14.3%, due primarily to the effect of increased vendor funding earned from a certain strategic partner, an increase in fees from enterprise agreements and higher services gross profit year-over-year. These increases were partly offset by the effective lower hardware sales volume in the period. Selling and administrative expenses for North America in the third quarter increased $5.3 million year-over-year to $93 million. The increases in year-to-year is primarily due to increased headcount expenses of approximately $1 million, higher health benefit claims of about $900,000 and higher legal and professional fees of approximately $3.4 million year-over-year. Please recall, that in last year's third quarter we received reimbursement of $2 million in legal fees that we had incurred in prior periods. And in this year's third quarter, we incurred project specific professional fees that will not recur in Q4 and beyond. We also recorded $530,000 in severance and restructuring expenses in North America in the third quarter compared to $916,000 at the same period last year. On a non-GAAP basis, excluding severance expense…

Thank you, Glynis. Moving on to our outlook for the fourth quarter of 2013. We currently expect diluted earnings per share to be between $0.49 and $0.54 in the fourth quarter. For the full year 2013, earnings per share is expected to be between $1.80 and $1.85. This outlook includes an effective tax rate of 39% for the fourth quarter. This outlook excludes severance and restructuring expenses incurred during 2013. 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 the line up for your questions.

(Operator Instructions) Our first question in queue will come from the line of Brian Alexander with Raymond James.

Glynis, maybe could you go over the gross margin improvement again? In North America, it was up almost 100 basis points, I believe, year over year. And I think you had a lot of factors that you talked about. It sounded like just a lot of really good blocking and tackling, but I think you alluded to vendor funding and better mix, better software margins. Maybe if you can just kind of isolate the most important variables, quantify them if you can, but also what is the sustainability of this gross margin result aside from the software vendor issues, that I'll ask about separately? Is this a level that you can build from or where there was some anomaly to help you with the performance?

I think that in Q3, I'm not sure that we're share the details about the composition of the numbers, but I would say that were not anomalies. We had some spending in software that occurred in the very last days of the quarter that was higher than we had anticipated in EAs that helped us from a Microsoft perspective, because that's the vendor that has enterprise agreement. That's not unusual. It usually comes in the end of the quarter. This Q3 was a little bit stronger than normal, but I wouldn't say that's an unusual activity. We talked in the second quarter call, as well about increased [ph] SR related to certain strategic vendors that we had partnered with where we hit some thresholds, and hence got higher rebate dollars as a result of that. We were successful again this quarter in terms of driving that activity. So I think that in general, I would say when we look our results for North America, and I think Ken may have touched on this in his comments, we think that we're seeing a strengthening in the business. We had anticipated that we'll see that earlier, but we are starting to see that business, we talked about in the second quarter call that we saw some strengthening in July. And I'd say that bore fruit for us in the third quarter, albeit that we were still down 1% in total, but that was an improvement from prior year. So I think we're seeing strengthening on the fundamentals based on the prevalence that we've put in place. And I wouldn't say that it was one-off activity.

And then on the Microsoft issue, I think you quantified it as a $15 million to $20 million gross profit headwind, if I heard that correctly, in 2014. But I think you also alluded to some immediate impacts in the fourth quarter. So can you quantify what the fourth quarter impact might be? And is that $15 million to $20 million incremental to whatever that might be or is it inclusive of the Q4 impact? And do you think there will be any lingering effects beyond 2014 that we should talk about as well?

Brain, so the impact in Q4 will be $2.5 million.

That's included in the guidance.

And that's included in the guidance that we provided. And then as we mentioned in 2014, again, calendar year $15 million to $20 million impact. And in that it's built in the course through remediation program that we have in place that we think are sort of moderate remediation activities that we believe we can deliver on for that. As far as beyond 2014, we're now in a position to really give you what that might be. As historically, we've proven that we have done a reasonable job at remediating, so it would be premature for us to tell you what that might be in 2015 and 2016. But some of the programs, as you know our three year program, so there is certainly some impact in 2015 and 2016. But at this stage I think it would be premature for us to try to put a financial impact on those.

Do you think the actions you're taking, Ken, will just pour us profit or do you think they can almost entirely offset? I'm just trying to get a sense for, if we look at 2014 if there's modest growth in the overall industry and you're fighting this $15 million to $20 million headwind, what's the likelihood that you could actually grow earnings in that kind of environment?

Yes, so we're projecting a good point, Brian, for 2014 as we'd still with these program changes be able to deliver low-to-mid-single digit year-over-year earnings growth for 2014.

That's EPS growth?

Correct, as well as EFO.

And then final one for me and I'll jump back in the queue. Just on the sales execution that you highlighted, which sounds like it helped you this quarter. Your hardware business in North America was up sequentially and it sounded like you were fairly confident on bookings patterns quarter-to-date, which is different than what we've heard from some other competitors and suppliers about just overall demand trends still being a bit difficult. So if you could just talk about the demand environment in North America specifically and tie-in how much of the improvement you've seen do you think is macro? How much is specific to the actions you've taken? And within that, what actions have you taken that you think are really starting to pay off?

So I think we've certainly watched all the reports and so forth in projections for Q4 that are little bit muted, maybe a little bit more conservative as you stated. We believe that we are executing better and that we will have, as we stated topline and then bottomline growth in Q4. And a lot of you just think it's just a program that we've been executing on this year, as far as just the basic sales execution. And of course, as you stated we've been validating this, of course through our bookings that we track on a daily basis as well as, where the current trend of the business is now that we're almost through the month of October as well. So we have a certain degree of confidence that we'll continue to execute through the quarter.

Can I just one clarify one part of Ken's comment. I think he answered the question to you, Brian, about the incremental impact on the Microsoft program changes in the fourth quarter of this year being $2.5 million. That is correct. For the new program changes that weren't effective October 1, the total impact of program changes in the fourth quarter is $6 million to $8 million, as we're anticipating for the fourth quarter of 2013. In total, the combination of the new and the old ones is all of those into the guidance that we gave.

Right, so the incremental is 2.5 in the quarter?

That's correct.

And the incremental for 2014 is 15 to 20 above 2013?

Correct.

And it looks like our next question in queue will come from Nikhil Kumar with Stifel.

This is Nikhil Kumar for Matt Sheerin. So just want to touch base on EMEA side. I mean if you can share what steps you are taking to improve the operation and if there is timeline to see the margin improvement in the region?

The European business, I think you've just seen from other reports, so far has been it's just up a quarter from a topline point of view from the people that we track. So the business environment is certainly from a revenue point of view is negative. We think across the board for IT spending, for what we saw for hardware and software. And we were pretty much in line with that at being at minus 6% from al the analysis that we've done, so maybe a little bit worse, but pretty much in line with that. So the action of course that we're taking just to make sure that our operating costs are in line, but with that make sure we've doing that throughout the year. And we're importantly looking at how do we continue to get key drivers going for both, the hardware business, the software business, and services is executing well over there as we indicated that that part is growing nicely, but in the hardware side, definitely opportunity for us to execute better in our U.K. business as well as in Germany. Those two areas represent a big opportunity for us to execute better on the hardware side. And then on the software side, certainly we were navigating some of the program changes that we have probably made a little bit better in Europe that we didn't in the quarter. So that certainly had a negative for us. To answer your last question, when do we think that will come back? As I mentioned in my comments, I think it will take probably a few quarters before we see year-over-year earnings growth for our European business.

And just wanted a clarification, a question, I mean in the EPS guidance, that are baking net impact from share repurchases or not?

No, there is no impact from share repurchases, as you don't believe that. It's too early for us to estimate how much would actually been done in Q4, so now we have nothing in guidance built in for the share repurchase that we just got authorization for.

Our next question will come from Brian Alexander with Raymond James.

I guess maybe a little bit more commentary on product categories within the hardware business that you found to be a little bit better than expected, maybe a little worse than expected, mostly focused on North America, but also some color on Europe. And then I just have one more follow-up?

Brian, so in networking we did see some nice positive growth in that part of the business, so that was very good to see. The notebook or desktop was relatively flat, down just a slight bit, so that was reasonable I think from what we're seeing in the market area. Certainly, I know there is more pressure on desktops and notebook overall, but that was reasonable to see. And the quality area that and that we're watching closely, the server market, definitely saw as probably a little bit a steeper decline than we would certainly like to have seen for the business. And then we certainly see prints continuing to decline and we're starting to move pretty aggressively towards managed print in that business throughout the year. So we are benefiting from that on the services side, but from the actual traditional prints and ink and toner business that definitely is still decline.

And then I think you said in your prepared comments large enterprise was still relatively weak. How would you contrast that with SMB? Would you say SMB was better than expected? And I'm sure that probably relates a little bit to the sales execution that you have, but just trying to get a sense for whether that market is improving or would you call it stable, and I don't think you have much federal exposure, but any comment on federal?

We definitely, we saw the SMB market improve for us. And I think some of that is probably better execution on our side as that is an area that we haven't yet performed, and as greatly as we should have been, so I think we're starting to catch-up there so we definitely saw some nice activity there in growth there. And you're correct, on the large enterprise side it's still little bit more conservative bit, little bit more muted. In that regard, they're starting to trend when we think in a positive direction now on the enterprise side. On the public sector, we really didn't see much impact from the whole, sort of October 1, sort of initiative with the government. We didn't really see any kind of negative impact there. As we look to Q4, there is still some concern about when our new budgets really going to be set in place. Obviously, I think everybody is confident that they will get done, but I don't think there is any real assurance as that could get pushed out, so a lot of them are operating, of course under some of the prior dollars that they have, so that's one that we're watching closely.

How much of your North American business, Ken, remind me is federal?

It's like 4% is federal.

4%, but are you suggesting it wasn't down materially? I know some of your suppliers, one of your storage vendors talked about it being down 40%, and I'm just wondering, it doesn't sound like you saw that kind of precipitous decline?

No, not at all. No, we didn't see that in all.

And then the last one, Glynis, on the buyback, I know you didn't necessarily factor it into the EPS guidance for Q4, but I couldn't tell from your earlier comments whether you would start to act on that buyback in Q4 or was that in Q1?

No. We would start to act on the buyback in Q4, but just based on the timing of purchases and the amount and the averaging that occurs with the [indiscernible] for the quarter, so it can have an impact in Q4. If all bodes well and we execute it and we complete the buyback program in the first quarter of 2014, we anticipate we'll have somewhat in the range of maybe $0.10 impact on our EPS that was not included in the range that Ken gave you when he said low-to-mid single-digit growth on a year-over-year basis.

So into the low-to-mid single-digit growth is true, its earnings growth?

It's earnings growth.

And then we would have share buyback on top of that?

Correct.