Scansource Inc (SCSC) 2004 Q1 法說會逐字稿

Good afternoon. My name is Chris and I will be your conference facilitator today. At this time I would like to welcome everyone to the ScanSource Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press the star and the "1" on your telephone keypad; if you would like to withdraw your question, press the "#" key. Also as a reminder, this conference call is being recorded. Thank you. Mr. Bryson, you may begin sir.

Thank you Chris. Welcome to the ScanSource Conference Call to discuss results for the quarter ended September 30, 2003. My Name is Jeff Bryson and I am Vice President of Administration and Investor Relations of ScanSource. With me today, is Michael Baur, President and CEO and Rich Cleys, Vice President and CFO.

We will provide you some prepared remarks about the quarter's key market issues and our operating results and we will then take 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 created 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.

Good afternoon. The Company recorded sales of 276.5m for the quarter ended September 30, 2003, an increase of 6% over sales of 260.6m for the September 30, 2002 quarter. Measuring sales based upon our product groups shows a year-over-year growth of 17% in AIDC and point-of-sale which offset a 6% year-over-year decrease in telephony for the quarter ended September 30, 2003. That produced a 58-42 mix of AIDC and point-of-sale versus telephony sales.

Our next discussion will focus on consolidated operating results. Gross margin was 11.2% for the first quarter of fiscal 2004 versus 11.6% for the last year and is within our normal range compared to our most recent quarters. Operating expenses were $21.2m and 7.7% of sales compared to 19.6m and 7.6% of sales last year. In both the current and prior years, there were costs that do not occur every quarter. In the current year period the company took a charge of $2.3m to reorganize its ChannelMax unit and made a profit-sharing contribution of $800,000. In the prior year period, we had a profit sharing contribution of $1.4m and a charitable donation of $700,000. If each quarterly period is adjusted for those amounts, SG&A would have been 6.5% and 6.7% of sales for the periods ended September 30, 2003 and 2002 respectively. Operating income decrease by 8% to $9.7m, which is 3.5% of sales compared to 10.5m and 4% of sales for the September 2002 quarter-end.

Due to the reduction of both the average usage of our line of credit and interest rates net interest expense was only $182,000 versus $389,000 for the same period last year. Our overall effective tax rate has decreased to 37.1% from 39.6% for the year-ago period, since the company is now making use of net operating loss carry forwards available in its foreign units. We expect our blended tax rate for the upcoming December quarter to be between 37 and 39%, September quarter-end net income increased 2% to $6.1m and 2.2% of sales compared to $6m in September 2002. Given effect of the 2-for-1 stock split from January 2003, diluted earnings per share were the same as last year at 48 cents per share. Our return on invested capital this quarter was 21% which is near our target range.

We would now like to discuss balance sheet metrics and cash use. Inventory turns improved to 6.4 turns at the end of September 2003 compared to 5.9 turns in the September -- June 2003 quarter. The number of outstanding account receivables days was 45 at September 30, 2003, which is slightly better than the June 2003 quarter at 46 days. Our line of credit can fluctuate depending upon on the role our vendors wish for us to play in the distribution channel. Cash of $ 5.9m was used in operations this quarter resulting from an increase in accounts receivable. After cash use for capital expenditures, our line of credit balance increased to $ 22.1m at quarter end. We ended the quarter at less than 3 days of paid for inventory, meaning that a significant portion of our investment in the inventory was offset by our interest-free trade payables to creditors.

In looking ahead to the December quarter, I'd expect our number of paid-for-days to be flat or just slightly higher and our average line of credit usage to be flat to slightly higher due to some changes we made in key vendor programs. I'll now turn it over to Jeff Bryson to comment on each of our reporting segments. First, we'll cover the North American distribution and ScanSource sales unit.

Thanks a lot Rich, North American distribution revenue, which includes sales from all three selling units ScanSource, Catalyst Telecom, and Paracon were a record 252.8m a growth rate of 3% over last year. Note that, North America had growth even when compared to an exceptional quarter one year ago. The ScanSource sales unit within North America distribution was led by strong AIDC sales this quarter, some of which resulted from Symbol's PartnerSelect, Intermec, Honors Partner and Zebra's PartnersFirst programs implemented recently. In general, these programs are designed to grow the market by rewarding demand creators and have reaffirmed the importance of the value-added distribution model that went forward. These programs have been well received by ScanSource's value-added partners and will require us to continue to expand our menu of service offerings. To that end, this quarter ScanSource expanded its programs by signing [Rollouts, Inc.], a leading provider of on-site support for end-user multi-location store installations. Through its partner, Services Group, ScanSource will match its reseller partners with [Rollouts, Inc.] to handle their end-users systems installations through out North America. [Rollouts] handles all aspects of an end-users installation including recruitment, deployment, management and payment for field service technicians. In addition, the reseller pays a per site or per device fee. This arrangement will allow resellers to complete installations more quickly, gives them greater geographic reach and helps them manage peak demand on a variable cost basis. ScanSource will also be offering resellers a professional employer organization, PEO to assume payroll management, government compliance, personnel administration, risk management, and human resource functions. Resellers will be able to pay a pre-negotiated fee under ScanSource's group discount. These two offerings complement our existing Partner Services portfolio, which include systems integration, the technology partner program, and e-commerce solutions. Our goal with Partner Services is to offer solution providers additional A La Carte services that will enable them to focus on their core competencies and growing their business.

In the Catalyst Telecom sales unit in order to be a one-stop shop for its customers, Catalyst Telecom continues to focus on providing resellers new revenue opportunities and or to fill in any gaps in personnel or skills that a reseller company may have. Resellers will now be able to buy Avaya maintenance contracts and other Avaya installation, project management and network analysis services from Catalyst Telecom. Catalyst OUI unit will be an authorized Avaya subcontractor to assist resellers with installation and training services for smaller opportunities and Catalyst will also be working with some of the national long-distance service providers to resell their networking services to its reseller base. As a reminder, we just finished Avaya's fiscal year which brings conversations about distribution and the role that the channel will play in the upcoming year. We believe the channel will play a larger role for Avaya in the next fiscal year, but the timing of those opportunities is not predictable.

Next, we'll talk about the Paracon sales unit. The Paracon sales team achieved a second consecutive quarter of strong growth as Intel has completed some new programs to drive more sales to two-tier distribution. As you may remember, the Paracon sales unit was organized with a separate telephony sales force, President and merchandizing team to allow us to sign business telephone products vendors other than Avaya. On September 8, Paracon announced that it had signed NEC America, Inc. full line of voice and data products, which include enterprise communications platforms and key telephone systems, IP telephony products, the unified communications, and data networking access solutions. NEC had previously gone to market with a one-tier distribution strategy selling directly to resellers and using their direct sales force to reach large enterprises. This contract is an indicator that NEC wants to make greater use of the two-tier distribution model. We have confidence in NEC's strategy and product portfolio as evidenced by NEC growing its share of the U.S IP telephony market nearly five fold during the first quarter of 2003 according to a June InfoTech report.

Our second reporting segment is international distribution. International distribution, which includes Latin America and Europe, posted sales of 23.7m, which is higher than last year's quarter of 14.6m. When compared to last year, approximately 2m of the increase in international sales was the result of favorable foreign currency changes. Our international unit performance was also led primarily by the sale of AIDC products. Over the next few quarters, we will be giving greater emphasis to the sale of POS products in Europe and Latin America. As we discussed relative to the North America AIDC unit, we should also begin to see some help from Zebra, Intermec, and Symbol's new partner programs, which are just now being implemented internationally. We will now remind you of the restructuring that we completed for ChannelMax. As of October 1st, 2003 we have reassigned the ChannelMax service team to become a part of our partner services group. We have consolidated the information services staff into the MIS department at ScanSource and have the operation management team in Memphis now reporting to our corporate group. In conjunction with this change, this reporting segment identified by its minority shareholders has ceased as of October 1, and a one-time charge has been taken against September 30 earnings of 11 cents per share.

We will conclude this part of the call with our expectations for the December 31, 2003 quarter. Looking ahead to the December quarter, we think total revenues could range from $250-270m. Diluted earnings per share could range from 44-53 cents per share for the quarter ended December 31, 2003. At this time, we will be glad to answer your questions. Chris.

Yes, I would like to remind everyone that in order to ask a question, please press star then the number "1" on your telephone keypad. And your first question comes from Jeff Rosenberg.

Hi, how are you?

Hello Jeff.

I guess first question is just with the completion of the ChannelMax. Does that have any net effect on merging going forward or was that already recognized this quarter? Just talk about that a little bit.

In terms of gross margin, the ChannelMax, you know, we've talked about the fee revenues going down. Those are not a significant piece of the business anymore. In terms of operating margins, we think we've had some restructuring in terms of headcount, but it's not significant to our total headcount.

And is the activity in ChannelMax -- you've maintained as a fee business, it's just the -- you really just restructured the -- is that correct? I mean has there been any change in your activity related to what you are doing and pursuing at ChannelMax?

Yeah. This is Mike, Jeff. You know in general the activity has decreased over the last few quarters, really over the last year. You know we started talking about it probably a year ago that some of our manufacturers at [inaudible] were starting to trying to find other ways to use their own capacity, and so their need for ChannelMax became less. So we definitely saw a downward trend in opportunity with the existing partners. However, we have continued to keep the business unit strategy intact. We think that are opportunities for other vendors that may want to use a ChannelMax type idea, but we are just going to market it now through our partner services program, but still have the service available as manufacturers may change their mind as their businesses change over next year.

Okay. And then I just wanted to -- it looks like Europe had, you know, still a smaller base, but a really nice sequential growth there, I guess it's international, I don't know that it's necessarily Europe. Any color there in terms of just greater mind share and traction and the model being intact and attracting business or anything you can, sort of, say that kind of helps to understand what we can look for going forward there?

Well, I think in general, you know, we made a lot of changes back in the April, May, June timeframe, when we consolidated the U.K. operations from ABC; moved to one warehouse; got all that done in that April, May, June quarter; ended up at same time changing some of the compensation plans for our sales team. We moved to a compensation strategy frankly over there in Europe that's similar to one that we have in U.S. and that was a pretty dramatic change for us. So, I would say we did make a tremendous amount of progress in moving to a more U.S.-type model from a sales perspective. And I think, the vendors that we have been working with are starting to -- number one, they know that we are not leaving, and l think maybe 6-9 months ago they were wondering were we really going to hang in there. So, I think, people believe we are there for good. We moved in the new offices in Brussels. We did have our operations team and our management team in Belgium co-located with our Liege warehouse; we have, in the last 3 months, moved into a nice facility in Brussels. And so, we are definitely showing to our vendors and our customers that we are there for a long halt, and I think, we're starting to see the results there.

Can you talk about how many total resellers you have signed up over there or what sort of goal you have in terms of resellers per month; do you want to add or any sort of metric -- I know you used to keep pretty close track of that sort of stuff in North America?

Nothing that I want to talk about right now. You know, I think for us we are still in a real competitive mode right now over there and we want to make sure we are not tipping our hand. But we do and we are doing some of the programs we've always done here such as road shows; we just did one in Belgium to attract the local Belgium reseller community. We're going to be doing a series of these road shows throughout next year where our targets will be to bring in, you know, 100-200 resellers in each one of these road shows, so we are putting in place the marketing programs that will bring the numbers in like we have in the U.S. and our belief is that are least as many resellers in Europe as there are in America for our products.

Okay and I just wanted to ask one more sort of big picture question. On Zebras call today they said that your revenue was -- sales to you were about 15% of their sales and if you assume that the majority of that is North America you are probably about 25% or so of their North American business. So to sort of use that as proxy of major vendors and how big you are becoming as you talk to people about growth next year; how do you feel like you can -- can you feel that you can continue to gain share and push that sort of number higher or should we be thinking in terms of a [meaner] version and how much share do you think you can gain from this point?

Well I think the thing that we always have to go back to is -- number one, you still got Zebra notwithstanding a lot of other vendors still have a large direct sales presence to end users right. So you still got quiet a few that have more than 50% direct end users, and then you have the other parts of our vendors business that are channel oriented but not all the channel business goes through two-tier. So several other vendors still have direct [ball] relationships and through some of these new partner programs that Zebra Intermec and Symbol have rolled out, they are making it so that it's really the reseller's choice whether they want buy direct from the manufacturer or through distribution. They really level the playing field for making a decision where maybe in the past it was -- you had a stronger relationship or maybe even a better price to buy direct from a vendor. That's no longer the case; it's more who you would like to do business with, what are the other benefits of distribution versus buying direct. So we still think there is opportunity, so even if we have a vendor that has a tremendous channel business already, very few of them have all that business going through two-tier, and I think, that's where we still see opportunity.

Okay. Thanks a lot.

Thanks Jeff.

Your next question comes from Chris Quilty.

Good afternoon gentlemen.

Hi Chris.

Just to clarify here on the quarter with the one-time charge if I back that out and apply a 42% tax rate I come up with about 55 cents of earnings, does it sound about right?

Well -- 40, our tax rate that we are using right now is our overall tax rate of 37.

Okay.

So you know --

It's been moving --

In that neighborhood, yeah.

Okay. I mean it's been moving all over the map depending on the tax credit in the last 6 or 8 quarters. Okay that's actually a separate question I will come back to.

Okay.

But you know, for purposes of reporting here, I mean when I look at the operational strength for the quarter, does this thing get reported the 55 cents or you guys want to see the easier number up there in terms of the 48 cents on the tape; I mean what's the better way to look at it?

Well I think what's more predictive really for the future would be that you won't have a ChannelMax restructuring in quarters going forward. So I think to be fair, I mean it probably was a 10-11% charge after tax. So I think to be fair, you know, it probably was a 59 cent quarter. Now there are a number of reasons why we think 59 is probably not predictive either. You know, we probably rather see a number like 54-55 as being more predictive of the future. But I think, you know, just on what was reported I think that would be a fair recasting.

Okay and so I mean all the analysts are going to have to come up with the same number; First Call is going to call us and want to get a consensus, but that goes to the tax issue where you are getting down to a lower than normal level. Once you move out of the second quarter is it more likely to migrate towards the 40% level on a go-forward basis

The way that we provide our taxes, Chris, is we look at our full year projections and we anticipate the full year tax rate. So if all of our projections held true that we used in this quarter, we would have a 37.1% tax rate for the year. Of course, as you go through the year there are changes in the estimates and the mix and that's what causes the tax rate to change. But based upon the way that we do our taxes that's a -- the rate that you would expect should all of our assumptions stay the same for the rest of the year.

Okay. So we'll use that on a go-forward basis but if I apply 42%, which is what you did baseline last year I come up with 55 cents in the first quarter. I am just making a statement, I am not asking for an endorsement.

Okay.

All right and just a follow-up on that ChannelMax charge, how much of that was cash versus non-cash?

Most effectively the entire charge was cash.

Okay. So these were --?

Of course, the tax will be cashed later.

Okay.

[Tax] benefit later.

And these were all severance related?

Not all severance related. There was a portion that was severance related and there was also -- we also had some options, because it was a separate legal entity, which we came to some arrangement on the options.

Okay. And the revenues that used to show up in the ChannelMax line that's split up into -- it depends on how we break up the segments either you know, barcode or telephony or into other segment reporting. The most of it I assume now shows up in the barcode side, so that 17% you reported in the first quarter has a little bit of benefit of some of the revenue movements?

Historically, there have been two ways of recognizing or -- two different kind of contracts we have had, those that produce revenue that where we actually purchased inventory and recorded revenue tended to be in the telephony side. So if you were going back historically that portion that is revenue-related, which is the bigger piece is telephony, those [P] programs are essentially barcode.

Okay.

But Chris, the combined numbers was probably under 2m by the time this program was rearranged. So I don't think it had a material effect on really either of the two segments' growth rates.

Very good, and in Europe, any further movement or can you give us an idea in term of how may VARs you have been able to sign up or at what sort of rates you are able to bring new VARs in and is above or below where you'd like to be?

Well, I think in general, Chris, we feel like the manufacturers are really starting to embrace our presence there and what we will see is with these new partner recruitment programs and royalty programs that the key vendors have set up, Symbol for example, they are going to have a clear strategy for next year on helping distribution become a bigger part of their business, frankly. Almost all the vendors over there have traditionally had literally hundreds if not a few thousand resellers and they have decided that they cannot service effectively and efficiently with the right customer satisfaction that many resellers. So we don't have a specific number that we need, but what we found so far that has been real good to see is not we have received a fair number already from vendors helping us, but we've also been able to recruit some of the larger VARs over there who are doing business with us in the U.S. So we have several of our international companies that are doing business with us in the U.S. and also now doing business with us in Europe. So that's been a real help.

Okay and final question on the telephony side, competitive situation changing at all in the Avaya SMB category?

You know, it's kind of I would say calmed down to some extent over the last of quarters. We have -- we certainly saw year ago a lot of predatory pricing by our distributor competitors. I think that definitely has calmed down some.

Okay, great keep up the good work guys.

Thanks Chris.

Your next question comes from Rick Reed.

Hey good afternoon. Mike, can you just -- just wanted to follow-up on Europe there and you'd mentioned these recruitment and loyalty programs, can you provide a little bit more detail in terms of when these are ramping up and what some of those programs are specifically?

Well, in general, they are very much reflective of the U.S. programs where they -- the vendors have decided that if you're a value added partner and there is definitions for that such as you have software that you provide as part of your solution, how much of your offer is services and may be the -- as well as professional services or other types. And it categorizes resellers in the different buckets and those buckets come with different awards, it might be additional marketing programs or other services that they are receiving that the manufacturers are extending through distribution. So it's a -- it really is a recruitment and loyalty campaign that makes sure that you are not just getting the best set of pricing and programs because you are buying a lot of volume. It's a program that will develop a channel of demand creators who [rollout] their selling total solutions, not just because frankly historically they knew somebody in a particular country and got a special deal. So there was certainly a lot of that going on in Europe because of the European model being that the folks in certain countries wanted to do business with people of certain countries and anyone that was coming in doing paying European distribution or [pay in] European reselling was generally disadvantages. So this is going to level the playing field from that perspective and I think the fact that now resellers will be able to make a fair margin, I think you are going to see them embrace some of the products that the manufactures are offering.

Should we read this as a more formalized endorsement by the vendors in that they have established these [Stalicis] programs and it sounds like they are actually putting dollars towards it, this is something that did sounds to me like it's incremental?

I think that what we are seeing is that they decided that the channel business in Europe, for example, is even more important because there is very few of the manufacturers have a large direct sales presence. You have smaller end-users -- if you got a still a very large geography to cover. So they want to figure out ways to make sure they identify the right partners and definitely reward those partners incrementally and some of it is shifting dollars around, shifting dollars from guys that were just getting good pricing just because of historical volumes and now making sure that the true value added reseller gets compensated appropriately and we are and other distributors like us are kind of the linchpin to making sure that gets done quickly, frankly, otherwise it will take them a couple of years to get it done in a place like Europe. So we are going to see we believe more consolidation among the number of distributors and as I have said on my earlier calls, different manufactures have anywhere from 10-20 different distributors across Europe and we expect to see consolidation in that next year.

And a cost question on the partner services that you are putting forward and these sound like many of them are incremental. Is there -- are there incremental costs associated with that and will they come ahead of any revenue that you might be able to generate in that area?

I think in general we are always, as you guys know, looking for ways to add more services and value to our programs and as we have seen some growth in our business trying to make sure that we are building some additional value adds, and in some cases there would be some incremental investments ahead of time, yes. What generally happens is, that's for a short time period, in the startup phase and these are small dollars involved, most of this will be on [inaudible] by the [resale] and also by us, meaning that we are reselling a service, we don't have a huge amount of infrastructure to fund these, we're using infrastructure from other companies and we are more -- we are doing a wholesale deal. So we are buying and reselling the services and for that we get a margin that's similar to a product margin. But because we are doing that, we don't have the huge upfront investment either.

Okay. And then just last question from me, quickly on the point of sale side, you had indicated that that had seen some strength and I just wondered if you could give us an idea -- is that a reflection of the overall market, is that a reflection of you taking on some incremental lines from some of your customers or is that a reflection of an increased shift and I know that you guys had talked in the past that [NCR] might start shifting more of their business, can you just give us a little bit of detail on that?

I think in the quarter we actually referenced AIDC was stronger right, but in Europe we are going to put and in Latin America more focus on POS, that was kind of what I was trying to say, was that for the quarter, it was really more of an AIDC quarter as opposed to a POS quarter. But in Europe and in Latin America where we historically have not been strong in POS, we do see opportunity there, we do see the growth there and demand there.

Okay great, Mike, thank you.

Our next question comes from Steven McDoyal.

Yes, hello, maybe if I could just first follow-up on the one comment that you made with respect to the consolidation of VARs in Europe, did you make mention that that would incrementally benefit beginning Q3, is that correct?

No, I really think what I was talking about was, there's most manufacture, Steven, have found there're too many distributors. So [inaudible] number of distributors [inaudible] and that that will happen as these new partner programs roll out and many of them started rolling out here in the United States, let's say, really in May and June and we had hoped that they would roll out this quarter in Europe and Latin America and I would say it's probably going be more like the end of this quarter, the first of next year. So probably to that point, yeah, a January Q3 for us is probably about right.

And any indication as to, you know, if you look at Symbol, obviously they have got double-digit distributors, any sense as to -- can you quantify what their indication is in terms of the level of consolidation they are driving towards?

Probably I'll let [him] tell their story on that one because they certainly got a plan and they have got a lot of history in the marketplace. So I'll defer to Symbol to answer that one.

Okay, fair enough, and on the tax rate, looks like it came in at 37%. I think you guys were guiding for 38-40%. I am just curious how much that may have been driven by Europe turning more profitable. I think exited the quarter last quarter on Europe profitable, can you just talk to me as to why that would be a little bit better than your expectations?

We wanted to make sure that we had some of our programs in place that would ensure that we would be able to utilize the NOL. So with another three months of work we are more confident that we are able to do that.

So having said that, if I were to look at a potential 300 basis point improvement in the tax rate, would that, you know, relative to your high-end of the guidance there, would that be entirely the utilization of NOLs in Europe or are there any other factors there?

Well, there's a lot factors that go into the tax rate -- state, local, federal, just the overall mix and difference statutory rates. For the 37% though, a large reason for that being at 37% is because of the NOL benefits that we are seeing in Europe now.

Okay, great. And can you comment on pricing, as I understand it some of the vendors by way of their loyalty programs may be offering you higher rebates or, put another way, more favorably margin opportunities. First, is that true and then secondly, can you just talk more broadly about the pricing you may be receiving from vendors?

Well, we typically don't talk about that, but I just maybe clarify for everybody that the programs that have been put in place are really rewarding the resellers, the VARs, the demand creators. And so, historically they were not a lot of -- there was a lot of ability for the manufacturers when they're selling through distribution to make sure that people who created demand, who went up there and sold the products along with the rest of the solution actually got the business at the appropriate margins. So some of these programs do reward us and the reseller, based on the type of sale made and the type of services rendered. So, in some cases there are rebates either to us or to the reseller, frankly that make sure that the folks that really created the demand get rewarded for that. But in general, I would say the emphasis is on improving margins for those -- for that group of resellers that are truly evaluated resellers and not just in general -- giving everybody the same margin. So, this gives demand creators a higher margin opportunity, but overall does not dramatically change our margins.

Okay. So I guess the more important point there is that last statement. As you look at these new loyalty programs that are being put in place, your margin opportunity is equal if not better?

Could be and again it's one of those where we are still seeing the result of this. I would say in general though the way that we went at this with the manufacturers was to sit down and say what are the services that ScanSource is providing now and are those still relevant and providing these services to this new group of resellers that they are calling loyal partners. And we believe if those set of services are provided we will have comparable margins now. Some cases, we may disconnect some services for some of these partners, if they are getting the benefit of some services from the manufacturer. So there is always a little bit of give and take. We did that a year ago with Avaya where we decided to take on some of the services that they used to do and they took on some [inaudible], so we are to -- every year go through this type of who should do what, the key is that we don't provide the same overlapping services to manufacturer and at the end of the dat, we have always been able to adjust our SG&A to accommodate whatever that gross margin we were allowed to make.

Okay. And just on the competitive landscape. Can you comment on Tech Data obviously they have been selling into the [SNBS] area now for some time, have you seen any share loss there or any margin pressure and then I guess similar line of question for any competitive threats within POS here in North America?

Well, with telephony and Avaya, specific on [SNBS], we did see that a year ago. I think it had somewhat diminished only because we took some aggressive actions. We frankly had to take some cost out of our selling model last year. We knew that we could not have a huge gap between what our gross margin would be to a customer and what a Tech Data would be so. We, I would say, proactively took some action there to make sure that, hey we are no longer going to provide this service and I think Avaya and ScanSource and our Catalyst units sat down and said we would like the services you're providing here and let’s make sure you're getting rewarded for those. So we think it has gotten to a level now they were comfortable with. And having said that, we are right in the middle of working on [SNBS] plan for next year. And as happens every year [derby] around this time, so we are still going to that process and we will see what this says for next calendar year and related to POS, Tech Data's entry with IBM and a couple of other vendors, I am certainly concerned with this. And we have met with our vendors who are working with Tech Data to make sure we understand what value Tech Data is bringing to them, is it a certain set of customers or a set of programs or services, and our feeling is just like with the Avaya business it's not our intention to lose any market share based on price. So we will certainly be ready to compete for the business on a level [inaudible] with any distributor comes along.

Okay, great thank you very much.

You bet.

Your next question comes from Kevin Stock.

First question is did you happen to compute your ROIC excluding the charge?

Yes.

What was that?

Oh, I am sorry. Yeah, the one we gave you was with the charge in.

Yeah.

I didn't actually go back and do that.

Fine, I am just being lazy. I will do it myself.

Right.

And I was wondering I know the NOLs have basically three components domestic, U.K., and Belgium. And I am wondering if you are able to use all three components?

But it’s essentially -- they are essentially European NOL.

Okay.

And right now based on that tax rate we are able to utilize our NOL.

Okay, one aspect of your business that is difficult to model is telecom seasonality and back in June, I remember Mike, had suggested that we might not see that typical June to September step up. Avaya had a conference call the other day where they suggested they might not see the typical September to December step down, but in fact, your telecom revenues were probably up about 8m sequentially from June to September by my calculation. Can you give us any sense of -- any interest that you have gained in telecom seasonality?

Well, yeah we were definitely looking at that as we were getting ready over the last few weeks of this call and I would say if I go back, you know, even back to '99, that was I was looking back to we certainly have seen some seasonality and we know that part of that has been the [inaudible] you have that September 30 fiscal year end for Avaya and this year we talked about, you know, at our year end call that in June, Avaya did made sure that they had a June quarter, and that was their first profitable quarter and so we were cautious about how much would actually happen in the September quarter because maybe some of that business moved into June, and I would say -- having said that we are forecasting, you know, with our guidance here of 250-270 that's assuming some seasonality in our telephony business absolutely.

Okay. And finally if you take out the charge, it seems your operating margin was about 4.3%. I was wondering if there was anything in your sales or purchasing trends, your opportunistic purchases of inventory whatever it might be that led to the higher than average margins?

I would say it was two things; I think one is that we had a stronger than expected sales quarter and as you guys know and who have followed us for long time is, you know, we always wait before adding investments, whether it's in people or some infrastructure until we are sure that the revenue is there. And since we had such a strong quarter, you know, we felt like we had some of this leverage over our infrastructure because of that. And then the second piece is that, you know, historically we have opportunistic buying deals and chances depending on which quarter it is and whatever and so some of that did happen as well through this quarter.

Okay that's all for me. Thank you.

You bet, thanks.

And you have a follow-up question from Mr. Jeff Rosenberg.

Hi, I just want to follow-up on part of what was just talked about, which is you talked about the telecom seasonality, but last year you did grow both domestically and internationally on the AIDC POS side and so unless you are really going to fall off heavily like you did last year, are you expecting –- have you started off slowly or was there something in the September quarter that, you know, is not necessarily repeated in terms of large orders; any sort of comment on what you would expect sequentially in the ScanSource side?

Well we actually looked on that too and we actually historically were down this quarter in ScanSource, even going back to '99 again. So, you know, last year you know, we all remember that horrible time we had last December trying to tell you guys what the heck was going to happen, and remember we had a very strong last 10-12 days of the quarter. And so you know, that really bailed out that quarter or else it could have been worse than it was. So I think last year -- last quarter was very strange for us, and I think this quarter we are assuming there is some seasonality even in the ScanSource business; yes.

And I think maybe it was 2 years ago that you started off weak and you know, had you know, October had you concerned and then it turned out that that also finished strong. I mean, so can you talk a little bit about what you are seeing just in the beginning of the quarter?

I think what we are seeing is that baked into the 250-270 is our current feel about this quarter.

Okay. Thanks

You bet thanks Jeff.

At this time there are no further questions.

Chris I want just to take one minute and clarify how we arrived at the 11 cents. I was just [inaudible] called in and have people a little bit confused about what the ChannelMax charge did for us. I thought I might just take one second and give you just our math as to how we arrived at the 11 cents. If anybody is trying to oscillate for that, I just don't want any confusion between whether it was really 7 cents of effect or 11 cents. What we said in the detail of the P&L in the press release on a line item and operating expenses that the charge pre-tax was 2.275m. So if we take a tax effect; in other words a 37% tax rate, so after tax multiply by 0.63, that brings it down to $1.433m after tax and then divide by the number of shares 12.681m it clearly comes out to around 11 cents, so whether a person is modeling with it or without it, I would just not want to have confusion over that, and we can take maybe another moment if there is a follow-up question on that, just so we don't have any confusion.

There are no questions at this time sir.

Okay thank you very much for joining us on the call today.

That concludes today's conference call. You may now disconnect.