Scansource Inc (SCSC) 2003 Q3 法說會逐字稿

Good afternoon. My name is Tracy and I will be your conference facilitator today. At this time, I would like to welcome everyone for the ScanSource Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark, there will a question-and-answer period. If you would like to ask a question during this time, simply press star then the number "1" on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Bryson, you may begin your conference.

Thanks very much. Welcome to the ScanSource conference call to discuss results for the quarter ended March 31, 2003. My name is Jeff Bryson and I am VP of Administration and IR of ScanSource. With me today is Mike Baur, President and CEO, and Rich Cleys, CFO.

We will provide you some short remarks to recap the quarter's key market issues and our operating results and we will then takes your questions.

This conference call contains certain comments, which are forward-looking statements that involve risks and uncertainties. These statements are subject to the Safe Harbor creative by the Private Securities Litigation Reform Act of 1995. Any number of important factors could cause actual results to differ materially from anticipated results.

For more information concerning factors that could cause such a difference, see the company's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities Exchange Commission.

I will now introduce Rich Cleys, CFO to comment on overall sales and operating results.

Thank you, Jeff. Good afternoon. The company recorded sales of $227.5m for the quarter ended March 31, 2003, an increase of 8% over sales of $211.5m from March 31, 2002. Measuring sales based upon our product groups shows year-over-year growth of 22% in AIDC and point-of-sale and an 8% year-to-year decline for telephony for the quarter ended March 31, 2003. That produced a 59-41 mix of AIDC and point-of-sale versus telephony sale.

Our next discussion will focus on consolidating operating result. Gross margin was 11.2% for the third quarter of fiscal 2003 versus 10.9% for last year, which was comparable to margins in the past two to three quarters.

Operating expenses were $16.8m and 7.4% of sales compared to $14.6m and 6.9% of sales last year. Operating income increased by 2% to $8.6m, which is 3.8% of sales compared to $8.5m and 4% of sales for the March 2002 quarter end. Due to the reduction in both the average usage of our line of credit and interest rates net interest expense was only $126,000 versus $285,000 for the same period last year.

As we told you on our last call, our overall effective tax rate continues to be higher than our historical 38% rate. Since we cannot tax affect foreign country operating losses. If those country units begin to turn profitable, the overall effective tax rate will then drop as net operating loss carry forwards are used in those countries.

To help you forecast our result, we will try to predict our tax rate one period in advance. For the March quarter, the actual tax-rate blended to 45.6%, which was higher than the 42-43% we expected. In the current quarter, the tax impact of forecasted restructuring cost and year-to-date losses in Europe adversely impacted diluted earnings per share by $0.03 per share.

We expect our blended tax rate for the upcoming June quarter to continue to be between 41 and 43%. If we didn't have the belief that we could begin to utilize the NOLs against future European earnings in the coming fiscal year, we would be looking at alternative tax saving strategies.

March quarter-end net income decreased 13% to $4.5m and 2% of sales compared to $5.2m in March 2002. Earnings per share were 14% lower at $0.36 per diluted share versus $0.42 split adjusted for the same quarter last year.

We will now discuss the two things that affect comparability to last year. Last year's March 2002 quarterly net income benefited from a temporary change in our effective tax rate. As you remember from our call at that time, during that quarter, we completed one phase of a tax consulting project that allowed us to capture state incentive tax credits for developing a South Carolina headquarters and for Tennessee and South Carolina jobs creations.

The tax expense savings offset by the cost of those consulting services caused net income to be $263,000 higher than expected or $0.02 per share split adjusted, and caused the overall tax rate to be 36% for that period. On January 6th, 2003, we declared a 2-for-1 stock split which was effected as a 100% stock dividend of the common stock paid on January 28th to shareholders of record of January 17, 2003.

Without the net effect of the tax savings and after adjusting for the 2-for-1 stock split, March 2002 net income and diluted earnings per share would have been $5m and $0.395 respectively. Our return on invested capital this quarter was 23%, which is slightly above our target range.

I will take time out to discuss the new accounting pronouncement and its negligible impact on ScanSource's financial statements. Effective for the quarter ended March 31, 2003, ScanSource adopted the provisions of emerging issues task force 02-16 accounting by customers for cash consideration received from a vendor, which had no impact on ScanSource's earnings. This pronouncement requires a consideration from vendors to be accounted for as a reduction to cost of sale unless certain requirements are met.

If these requirements are met, the consideration is accounted for as a reduction in the related expense category, such as selling, general, and administrative. ScanSource receives consideration to fund certain employee positions, which generally accepted accounting principles previously allowed to be offset against salary expense.

Under EITF 02-16, a portion of that consideration received for an employee position for which ScanSource would have incurred the cost in any case is now required to be shown as a reduction of cost-to-good sold. The reclassification of vendor consideration raised SG&A expense and gross margin by one-tenth of a percent of sales.

We'd now like to discuss balance sheet metrics and cash issues. Inventory turns with our ChannelMax inventory improved to 5.9% at the end of March 2003 compared to 5.4% turns in the June 2002 quarter. The number of outstanding accounts receivable base with our ChannelMax was 44 days at March 31, 2003, which is slightly higher than the June 30 quarter at 42 days, but inline with our experience in December.

Our line of credit can fluctuate depending upon the role of vendors wish for us to play in the distribution channel. Cash of $14.4m was provided by operations this quarter primarily from a decrease in accounts receivable. After cash use for capital expenditures, our line of credit balance dropped to $28.5m at quarter end.

We ended the quarter at 5 days of paid for inventory meaning that a significant portion of our investment in inventory was offset by our interest free trade payable to creditors. I will now turn it over to Jeff Bryson to comment on each of our operating segments.

Thanks Rich. Our business consists of three reporting segments, North America distribution, International distribution, and ChannelMax.

North America distribution sold throughout the U.S. and Canada from a single centrally located distribution center in Memphis, supported by the head quarter staff in South Carolina. North America distribution includes sales by three sales units. The ScanSource sales team to sell automatic identification and data capture products, AIDC and point-of-sale equipment. The Catalyst telecom team to sell voice, data and converged communications products from Avaya and the Paracon sales group to sell converged communications products from Intel.

Now we would provide sales result and update you on each reporting unit. First, we will cover North America distribution and the ScanSource sales unit. North America distribution sales were $208m a growth rate of 4% over last year. The North America distribution segment has 3 sales units, the first of which sells AIDC and point-of-sale equipment for manufacturers such as IBM, Symbol, Zebra, NCR, Intermec.

AIDC products include all types of mobile data collection computers, bar-code scanners, wireless products and bar-code label printers. Point-Of-Sale equipment includes those computer-based systems that have replaced electronic cash registers and grocery retail and hospitality environments.

The AIDC product segment was our strongest grower this quarter while the POS business was steady but had no large deals that we had in the December quarter.

At our last call in January, we were concerned that since several of our vendors had new management teams and were implementing new business partner programs, we were unsure of the impact that might have on our business model. Since January, we have been involved strategic meetings and had discussions with these vendors about the role of the channel and the value-added distribution model going forward. Those discussions have renewed our confidence in our value our vendors. We also, believe the new business partner programs will be beneficial to our growth over the next few quarters.

Next we will talk about the Catalyst telecom sales unit. Avaya has two voice products, product units relevant to Catalyst telecom. The first is the converged systems and applications group CSAG which markets definitive TV access on the Avaya multi advantage IP telephony solution for larger enterprises.

CSAG products generally require more value added services and are continuing to be sold under a closed distribution model. Over three-fourths of Catalyst's Avaya voice sales are for CSAG products. We believe that Avaya will continue to require our value added distribution model for this products, while we are not happy with the lack of sales growth, we believe we maintained our market share while continuing to provide outstanding service to our customers.

The second Avaya group is called the small and medium business systems unit, SMBS and it markets the magic's partner and all the office solutions, which are targeted to a broader market place.

The SMBS group began an open sourcing program effective October 1, 2002, where dealers are no longer tied to only one distributor. SMBS products account for less than one-fourth of Catalyst Avaya voice sales.

With more competition in the SMBS market, we have responded by reducing SG&A expenses in the Catalyst telecom business while maintaining our value add model. There has been no fundamental change in Avaya's strategy in using the indirect channel. The channel would continue to be important to Avaya because it helps them reach new markets at a lower cost than a direct sales force would.

Now we will talk about the Paracon sales unit. The Paracon team continues to focus on the Intel based communications product. Paracon sales this quarter were disappointing even though we gained market share within Intel's distribution channel. Paracon and Catalyst continue to be challenged by an overall lack of demand in the telephony industry.

Our second reporting segment is International distribution. International distribution, which includes Latin America and Europe posted sales of $16.9m which is higher than last year's quarter of $4.4m.

Our international business segment is focus on the AIDC and electronic point of sales or EPoS as it is known in Europe products at this time. The ScanSource Latin American team completed its staffing and hiring from Mexico in the March quarter, which is usually, is seasonally slowest of the year. Also the partner programs being implemented by Intermec and Symbol should begin in the June quarter for the Latin America region.

In the March quarter in Europe we implemented many of the changes we discussed with you on the January conference call. We made headcount reductions related to consolidating our UK distribution center into our Belgium facility. We changed our sales structure and centralized our accounting and credit functions in Belgium. We also went from 2 IP systems to one, which is the same as the one we used in the US.

Our European incremental direct expanses and restructuring costs this quarter were $0.05 per share, which was within our planned range. We believe that the cost savings affected in the March quarter should bring our loss from incremental direct expenses between $0.02 and $0.03 per share for the quarter ended June 2003.

We reiterate our desire to reduce this loss under $0.015 per share by June 30. We believe the model we now have in place will allow us to successfully scale our business in Europe as revenues develops and we continue to be committed to Europe as a growth opportunity for our AIBC and EPoS business.

Our third recording center is ChannelMax, ChannelMax posted $2.1m in sales this quarter compared to $6.1m for the same quarter last year. Some of this was expected however we like to think that if the economy improves, ChannelMax's customers would use this outsource program more.

We will conclude this part of the call with our expectation for the June 30, 2003 quarter. Looking ahead for the June 2003 quarter we think total revenues that ranged from to $230m to $250m which could provide a growth rate of up to 7% compared to the prior year. Earnings per share could range from $0.34 to $0.41 per share for the quarter ended June 30, which would be after our investment in Europe.

At this time we will attempt to answer your questions.

At this time I would like to remind everyone in order to ask a question please press star then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. At this time our first question comes from Reik Read.

Hi good afternoon. I want to ask you guys a little bit more about the Avaya and what the opportunities would be there and if we look at the results that they posted this afternoon if you look at it on the trailing basis, you know, they are down 20% year over year a little bit more than that and I guess the question that I would have is if they are going to continue to be down at that rate and if we go with that assumption the question becomes, you know, how quickly can revenue come over from a direct-to-indirect mode.

And I'm just wondering how you guys think the penetration is that Avaya today versus where it can be and if we look at the numbers in where you are at this point kind of suggest that the penetration within Cseg and SMB is probably pretty close to 40% so what is the Avaya telling you that they might get up to.

Hi, Reik. Its Mike, I'll try to tackle that one. You know the conversations I've had recently with the Avaya's management team were focused on exactly those issues is what happens with growth overtime within the channel.

And the concern we had back in January was frankly we had a new management team primarily in Cseg that started looking at channel program only in October of last year to be honest and so they have -- they are still working on that and I think they are still trying to figure out what's the most optimum way to utilize the channel relative to their growth strategies and what I anticipate would happen overtime there will be some markets where the channel be used to drive products and opportunities more effectively than we had a direct sales force but they haven't communicated that this time.

There is no specific direction they have given us right now, relative to that we have continued to that dialogue. We have started that again in this quarter we expect to have those conversation again between now and June and -- hopefully be able to give you guys a better update at the next call.

I think the challenge obviously for Avaya is they are trying to get their cost modeled in line with their revenue. And their year, of course as you know, ends in the September. And so it may be until October before we have a real fix on that, but we will continue to have a dialogue.

Do you guys internally, Mike, assume that they will continue to be down in the 20% range?

We don't model for their numbers. I really don't know. Because they have so much of their business that's a direct model, you know, I have no clue on that. But clearly, we feel like that their -- the business that we are doing with Avaya is certainly one-half would be in down, but we feel like we got a strong dealer base.

We feel like the program that Avaya has continued to roll out in this environment to generate demand, have been the right ones, and we believe some of those will start helping the channel.

And just, if I can shift over to one other program, NCR has been a vendor of yours for quite some time and really hasn't move forward. They do have a new management team there. Is there anything new from an NCR perspective in terms of their willingness within the retail segment, which is very direct oriented to do some of that shift with you guys given the new management team?

Yes, NCR has tried to implement a new program. It just started. They have a hired a team of people whose job is to work as a liaison between their direct sales force and the channel. And this is something that we have just implemented in the last 45 days.

The plan is to have the direct sales force focus more on larger accounts as typically this thing happens, and that will leave some smaller accounts that will not be covered in the same way they were last year. So, these hunters that have hired to go out and work with the direct sales force are not going to be sales people per se. They are not going to be closing end user business. They are going to be finding opportunities and then handing them off to business partners. So, we are -- encouraged by that direction. So that is a recent change for NCR.

And -- that's within the last 45 days. Are you seeing any benefit right now or how long you think that will take to ramp up?

I think it will take a little while, and I think right now it is too early to call. I think the -- the strategy though is sound. I think it's something that they are committed to, going on adding headcount to support the channel is something they are were not doing before. So, I think that is a signal to me that they believe the channel is the right way to go to expand their reach - or extend their reach and lower their selling cost to reach certain markets.

Great. Thanks a lot, Mike.

Okay, thanks a lot.

Our next question comes from Chris Guilty.

Well, it's Quilty.

We know you are not guilty.

Anyways. Question for you on Europe, from the press release it wasn't clear. Obviously, you had year-over-year growth but did you get sequential growth?

We don't break out year, but the international business had just -- small growth sequentially. You know, our challenge was -- and we have spent a lot of time to listen in the call so far.

In Latin America, seasonally it struggles in this quarter. Their best quarter is the December quarter, so they were in the middle of challenges as they -- they have been in Latin America plus. We are putting in new IT system and new warehouse in Mexico City. So, don't forget Latin America is part of that too. So, just minor growth sequentially.

Okay. Are you still going to keep that sort of bifurcated stock share with the main distribution in Mexico and then satellite facilities in Miami?

Yes, I would say here is the way it works is that Miami is to service all of Latin America outside of Mexico. So that's where we export product into the Columbia, Brazil, and Venezuela, etc, rather than have any in-country presence, and then Mexico City warehouse will just service Mexico market. But it's going to have just a small amount of inventory just the high movers and it will be filled -- backfilled from Memphis, which we were doing last year.

Okay. And in terms of the European structure now, are you totally out of the UK and totally in Belgium?

I would say it like this is that while the UK will become, it is not completely there yet, is a large sales office. We have some technical support people that will remain ongoing, but primarily our sales office like we have had in the US and they'll be supporting the UK and possibly a few other English-speaking countries.

And Belgium will be our headquarters location where you have all the back office functions as well as a sales force and additional technical people as well. But, the key was we wanted to get on one IT system, which we had not done. We put that off for a while which caused us a lot of inefficiency between the sales people who were primarily -- the bulk primarily in the UK and get over our merchandise and marketing and product people sitting over in Belgium.

So, we have a lot of communication challenges and efficiency challenges and we've solved that now with one IT system, one email system. We really think that the structure we've got now allows us to build the right kind of model. And our challenges to continue to educate vendors on that is that the model that we got is the type of model that they would want to have that has a value added structure, but also a lower cost than the model that exists in Europe today.

Okay. And have you been doing inactive hiring in terms of getting some more feet on the ground or is that a part of the new structure?

Oh! What we did was we actually we had enough feet on the ground we think in total. We decide to focus some of those field resources just like in US at specific vendor initiatives.

So the reps in the US, we have business development reps who focus, you know, primarily on symbol. We have an Intermec business development team. We have an IBM team. We're using that same field model in Europe.

So what it amounts to is we took basically the same number of people and we're focusing them on certain vendor's product lines and then where we've added head count is in merchandising creating a stronger product management and marketing group. Also added headcount in the technical area, continue to do that.

We just added a German speaking technical person just last week. So our real goal there is to add people in the positions that we think match up with our long-term business model like we have in US.

Okay. And one final question now I guess a clarification, you'd said that you think the loss in the June quarter will be $0.02-$0.03, and as you exit the quarter, you'd like to be at a 1.5 cent loss rate?

Yes, that's right. You know, last quarter we talked about it, but we weren't clear on that. We think that by the end of June we ought to be at that breakeven to 1.5 cents.

Okay. So as you progress through your fiscal first quarter could assume that it will be a breakeven quarter?

Yes, that would be my hope, absolutely.

Okay, and a question I don't know if you gave an indication on the Paracon unit as to whether that was suffering through the same fate as you were seeing on Avaya sales or performing a little bit better?

It's basically the same situation as the weakness overall in the telephony business is the same issues in Intel. I was just meeting with the Intel executives today and they were basically saying the same thing that overall in most of their products, Chris, either IP based some new stuff, which people are putting in pilots, but not in big demand yet.

And also it's working with a lot of developers who are specking in into our products. So you don't really get a lot of big hits in that market. And they're anticipating that this year it looks to be a challenge for them at Intel in that division.

So our opportunity is to number one is do some direct business that they're doing and they continue to say you know we'd like to tutor model. And number two they have about eight distributors believe or not in that Intel product group and they are telling us that you know we certainly gained some market share and they really value our business there. So we hope to see that unit continue to be able to grow even in a tough market.

Okay. And a technical question here as Symbol moves to you know in the future use for fulfillment of direct orders that they generate themselves, does that end up getting rolled into the ChannelMax in sort of a e-based business or does it operate under the distribution type model?

Look today we don't have a program of resale to Symbol other than ChannelMax.

Okay.

So the answer is that we'd go under the ChannelMax program, which is a fee-based program, yes.

Okay.

Yes, you got it.

And final question, I just missed it. What was the mix between Paracon point-of-sale and telephony for the quarter?

59:41.

59:41.

Yes.

Thank you gentlemen.

Thanks Chris.

Our next question comes from Jeff Rosenberg.

Hi. Mike, on the last call, I think you kind of put the revenue guidance that you gave for this quarter in the context that even though January was sort of seasonally weak, you were sort of assuming real pickup as the quarter unfolded. And so yet you still kind of came in below the low end of that original range.

So can you talk about where the weakness was greater or where things got worse as the quarter progressed, if that -- if I'm right in terms of how I characterized how you guys were thinking at that time?

Yes, the real question mark for us back then was telephones. I mean, we weren't sure then what would happen in the quarter because if you remember historically, we had always characterized the January-March quarter as a historically good Catalyst quarter because it is coming off their fiscal quarter, and historically that was always little bit of a pickup for us, and we felt like we might not get that pickup, and indeed we didn't.

So I think that is where our caution was, and it certainly proved to be the case where our overall telephony business was down 8% year-over-year. Obviously that was where we were expecting it to come.

I think the bar code and the POS business also, what was not clear to us then, Jeff, was what would happen with some of the new vendor programs. They were just talking about them really as far as what date they would roll out in January whether -- the question for us was will they start in March or will it be April, or May or June. And I think originally, some of the dates were in March, and they didn't happen. I think most of those days got moved to this quarter, so that is also what happened to us.

If I could, let me follow up on each of those. On the phone side, if my numbers are right, you are down 25% over the last 2 quarters. And your guidance would suggest that that is stabilizing because it doesn't sound like that you are looking for any real hockey stick on that bar code point of sales side. So can you talk about why you are confident that your slippage there is not going to get worse?

Well, I think we do feel like after -- talking to our -- the management team at Avaya, after talking to our business partners that there are deals being quoted, there are things in the pipeline for our resellers. It is not like people aren't buying anything.

So we do feel like there is some demand out there that has to be serviced whether it existing PBXs where you already have Avaya systems in there, they are adding or moving or changing. So we do think there is a core level of business still there that we can respond to. So I think our confidence is still cautious.

But I do believe that with Catalyst, we have gotten enough information over the quarter from Avaya and our partners that we can maintain the market share we got and that the market might improve somewhat. So we are trying to be careful how we characterize any opportunity there.

It could be that -- and this is typical. We typically have a strong June in this quarter. And so we will it probably end up happening as we are closer to the June, we will have a better feel for that.

Okay. And then on the bar code point of sales side, you are suggesting that there has been disruption except if you look at what Symbol did in their own portal business and some others in the sector. It seems like things were a little bit more normal seasonally, whereas you had a pretty -- more than you usually see it fall offing your business quarter-on-quarter, in the March quarter.

Anything particularly, the channel that is -- that is really been disruptive in how this program is going, are there people sort of being tied up in meetings and things like that? Anything more that's really kind of causing people to not buy from you as much as you expect them to, once this program gets rolled out?

No, I think the difference is POS. I think the difference in the quarter, quarter-to-quarter, was POS was just down, and we saw some strength in the December. We characterized that with some large deals.

We just didn't see any of that that might have transition that didn't close into the first quarter happen or into the January quarter happen. So that is where I was disappointed. I think the AIDC business and the bar code printer business was strong. I mean we felt good about this. So really POS is what contributed to a quarter-to-quarter weakness, Jeff.

Okay great. And the last thing I will ask is the gross margins, it sounds like partially this was going to be a mix issue I mean -- that they were relatively healthy and your working capital was down. So just -- I am just asking is that sort of level of working capital that you're at, sustainable or is there something that is going to be in the kind of the way that that can be volatile for you? Or what should we look for there?

I will turn it over to Rich to answer that one. Are you talking about our line of credit?

Well, I am talking about how receivables were down, payables were up. And I know sometimes that can be a function of how vendors are working with you relative to pricing, and all that sort of things. So I am just wondering whether or not sort of where things have gone to, is something that we should expect and that is where you're at for now? Or was there something unusual that caused the movement in payables, I guess, or that sort of thing?

I think it's just the timing issue. There was nothing unusual. Rich, you want to comment.

Basically, yes -- I mean there is nothing changed in the quarter.

Yes. No new programs, no changes in programs from vendors, inventory dollars were actually down quarter-to-quarter. With a lower sales volume, we are going to have higher receivables -- I mean higher cash coming in. So that was actually predictive.

Okay, great.

Okay, thanks Jeff.

Our next question comes from Hasnan Kareem(ph)

Hi folks just another question on bar coding side actually. You mentioned that point of sale was weakness in the quarter. Is that something specific to buying pattern I guess people are up grading the frontal store but the back of the store seems to be okay and then going forward if Avaya is fairly stable let say flat for the June quarter is most that worse from the bar coding side I just want to know get that right.

On the POS side I think the -- we continued to see weakness in POS for about 18 months. We were -- I guess we felt good about December when there were some larger deals that happened and frankly happened with some stronger as we have learned later from stronger retailers that we find retailers out there who are growing at least profitable those few guys are actually up grading stores or adding a few stores and I think in general that's what a lot of POS growth historically was tied to.

There are some old stores out there with old technology, and we do expect there will be some replacement business that will happen and as we listen vendors, NCR, IBM, and the rest have them that's certainly what they expect to so we really weren't too surprised.

I guess, December, historically for us we have little uptick if the manufacturers decide to try to make some really attractive buying deals through these retailers. The retailers don't install them in December. They still like to buy if the price is right.

So we may have seen some business that we might have got in this quarter. We actually may have gotten in December instead and then the second question was about Avaya, I am sorry.

All right so you mentioned that you think Avaya feels a bit more stable going forward. So can we expect that to be flattish and so based on the guidance that you have given on your press release that bar coding segment will be seasonal stronger in the quarter?

Well, I'd say on the catalyst side with Avaya, we are certainly hoping that we can still grow that business this quarter; we are not going to given up on it. So we are not going commit; it is going to be flat.

We are going to try to find ways to get market share where we can and improve with Avaya some of the promotional ideas that can graft and generate some [inaudible] demands. So we hope that it will go upward.

Typically, our strategy is to be cautious just because we can't dictate what vendors programs might happens so there might be some program of Avaya would implement during the quarter that might encourage some additional buying and so we will just wait and see how that plays out.

From a bar code standpoint historically, June has been a good month for us in this quarter. I think a lot of manufacturers are focused on that. So, historically this is been a good quarter the quarter. The quarter we just ended in March is historically our second worse. So we are optimistic about that but again we want to stay a little conservative just because there is always moving pieces to our whole business. The manufacturers can control the as you know the pricing and the programs, and we will see how it works out.

Thank you.

Thank you.

Our next question comes from Gary Sniro(ph)

Hi guys.

Hi Gary.

On the follow up on Avaya. In the last call, you had been cautious regarding their channel strategy and now you are saying now with them you're a little more comfortable. I was hoping if you could just give a little bit more color on that, on why you are feeling more comfortable?

Well I think the issue, Gary, was whenever a new management team comes in Avaya is one of the vendors that had a new team over the last 9 months. Historically, what happens is they come in, they analyze, they roll the channel's plan, the cost of the channel versus direct sales, what is the right percentage of business that should flow to indirect versus direct, and generally it takes some time for most of these manufactures to get comfortable again with that dependent on where the management team came from.

In this case I think they got a really strong channel team there they are trying to sit down in their environment and figure out and how did they do it and not if they wanted to promote more businesses to the channel how do they not lose any revenue along the way, because obviously they are in that challenging time where they are trying to match their expenses with their revenue.

When you're growing real fast, it is easy to take some chances on some channel programs. So I'd just characterize it if there be a more deliberate and they might in different environment but after my meetings with them there was nothing that we discussed that made me nervous about their view of our value and our need to have similar margins and our need to be a big player for them.

They believe that catalyst brings values that we are the strongest distributor in the channel today and that we should see growth as this market expands. So we felt good about that but sometimes these conversations, go, well, explain to us again why we need you, and that is not the conversation we had. We had a very good conversation.

Okay, great and regarding your forecast for the fourth quarter. Is your thought process similar to this past quarter where -- since there is not much I guess, visibility you are not expecting a big sequential increase month-over-month-over-month relative to quarter?

Yes, I would say that is it. I would say we are trying to be cautious right now. And give the best guidance we can based on what we know right now, you know, today and as we get into this just like we do every quarter. There always is one month in our history that has played a bigger role than others -- in this case it is going to be the June month, and we will see what happens there.

But you are really counting on that as much as you have in the past?

That is correct.

Okay. Great, thank you.

That is correct.

Thanks.

Thanks, Gary.

At this time there are no further questions.

Great. We appreciate everybody tuning into our call. Thank you very much.

This concludes today's ScanSource earnings release conference call. At this time, you may now disconnect.