Scansource Inc (SCSC) 2004 Q3 法說會逐字稿

Good afternoon. My name is Zendra and I will be your conference facilitator today. At this time I would like to welcome everyone to the ScanSource quarterly earnings release conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be 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.

Thank you. We will now present the ScanSource conference call to discuss results for the quarter ended March 31, 2004. Thank you for joining us. My name is Jeff Bryson; Vice President of Administration and Investor Relations and with me are Mike Baur, President and CEO; and Rich Cleys, Vice President and CFO. We will spend a few minutes reviewing the quarter's operating results and 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 and Exchange Commission.

Rich Cleys will now comment on overall sales and operating results.

Thank you, Jeff. The company posted sales of $293.6m for the quarter ended March 31, 2004, an increase of 29% over sales of $227.5m for March 31, 2003. Measuring sales based upon our product groups shows year-over-year growth of 30% in AIDC point of sale along with a 27% year-over-year increase in telephony for the quarter ended March 31, 2004. That produced a 60-40 mix of AIDC and point of sale versus telephony sales.

Gross margin was 11.2% for the third quarter of fiscal 2004, the same margin we posted in last year's March quarter, and we're stronger than expected because we reduced an obsolescence reserve by $1.2m due to the improved financial condition of certain vendors. Without that reserve change, gross margin would have been a more normal 10.8%.

Operating expenses were $19.8m and 6.8% of sales compared to $16.8m and 7.4% of sales last year. Operating income increased by 53% to $13.1m, which is 4.5% of sales compared to $8.6m and 3.8% of sales for the March 2003 quarter-end. Without the change in inventory reserve mentioned above, operating margin would have been about 4.1%. Net interest expense was only $88,000 versus $126,000 for the same period last year.

Our overall effective tax rate has decreased to approximately 37% from 45% for the year-ago period. Since the company is now making use of net operating loss carryforwards available in this foreign unit. We expect out blended tax rate for the upcoming quarters to be about 37% to 39%.

March quarter-end net income increased 81% to $8.2m and 2.8% of sales compared with $4.5m in March 2003.

Our return on invested capital this quarter was 29%, which was above our target range.

Balance sheet metrics and cash use were as follows -- inventory turns improved to 6.2 at the end of March 2004 compared to 5.9 turns in the June 2003 quarter. The number of outstanding accounts receivable days was 46 at March 31, 2004, which is unchanged for the June 2003 quarter. Cash of $9.6m was used in operating activities for the quarter, which, when combined with cash used for capital expenditures caused our line-of-credit balance to increase by $11m at March 31, 2004. We ended the quarter at about seven days of paid-for inventory, meaning that a significant portion of our investment in inventory was offset by our interest-free trade payables to creditors.

I'll now turn it to Jeff to comment on each of our reporting segments.

North America revenue, which includes sales from all three selling units, ScanSource, Catalyst Telecom, and Paracon, posted sales of $262m, a growth rate of 24% over last year. As a reminder, our growth rates were strong, partly because we had an easy comparison to last year, since March 2003 quarterly results were lower than planned. As we entered this quarter, we were also coming off a much stronger-than-expected December 2003 quarter and were unsure how that would affect March quarterly sales.

The ScanSource sales unit saw growth from some large deals from our POS product lines, which include IBM, NCR, and Epson. This quarter we also added some complementary products to our POS line card including Microsoft Retail Management software, SonicWall network security; Tellermate cash verification; and the Hewlett Packard/Microsoft POS bundle.

The indirect channel continues to grow as a result of partner programs implemented by several AIDC manufacturers. These programs have led to market share gains for resellers and distributors. As we discussed last quarter, we have launched our Solution City marketing program. We held our first Solution City roadshow in March in Anaheim, California, at which more than 200 solution providers attended. The second show is scheduled for June 3rd in New York City and will include a Solutions Expo where resellers can participate in hands-on demonstrations showing vertical solutions in action as well as a vendor-led solution-focused seminar.

One of the tools that resellers can use to learn about vertical market solutions is our Solution City Web portal which was launched concurrently with our Anaheim show and is located on the net at www.solutioncity.com.

We will now discuss the Catalyst Telecom sales unit. In Catalyst, we had predicted lower sales growth due to historical seasonal trends, but we were pleasantly surprised by strong sales in the Avaya line. A key reason for our growth was our ability to gain market share as Avaya sales force assisted the channel in closing business. Avaya also offered several promotions that ended March 31 for circuit packs, telephone handsets, and some of their configured products in both the SMBS and ECG product groups. We were also successful in recruiting some new resellers during the quarter and expect business from them to make an impact soon.

Our third selling unit is Paracon, which focuses on converged communications products from Intel and NEC. Paracon continued to increase its share with Intel and has become one of their largest U.S. distributors of communications products. This was our first full quarter with the NEC communication product line, and we've received our initial stocking order. They have tasked us with the recruiting of resellers who will be new to the NEC line. This quarter we have begun adding employees in tech support, sales, business development, and merchandising to meet those recruiting goals. We are very pleased with our initial success of signing resellers for NEC and have begun to train and develop them to sell NEC solutions.

Both Paracon and Catalyst Telecom will continue to participate in our Solution City vertical market program including the roadshows, reseller recruitment, online Web portal, and printed collateral materials.

Our second reporting segment is International Distribution. International Distribution, which includes Latin America and Europe posted sales of $31.6m compared to last year's quarter of $17m. Approximately $3.2m of the increase in international sales was the result of favorable foreign currency changes, taking foreign exchange out of the current year amount, would show a growth rate of 67%. Europe results continue to be led by strong sales of AIDC products. We have continued to gain market share from the implementation of manufacturer partner programs in that region.

The Latin America unit had a strong performance led by sales in both POS and AIDC, as vendors are just now implementing channel programs in Mexico. The Latin America team recently completed a successful ScanTeach roadshow in Mexico City, attended by 330 people from 157 reseller companies. We have added employees in Mexico City, have moved into new office space located with our distribution center there, and are seeing higher sales as a result of added emphasis on that marketplace.

We will conclude this part of the call with our expectations for the June 30, 2004, quarter. Looking ahead to the June 2004 quarter, we think total revenues could range from $280m to $300m and diluted earnings per share could range from 47 cents to 55 cents per share, which would be a 12% increase over last year of 49 cents. At this time we will be glad 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 will pause for just a moment to compile the Q&A roster. Again, please press star 1 for any questions. Your first question comes from Jeff Rosenberg's line.

Hi. I guess I wanted to start by looking at the difference in margin expectations you might have for -- it looks like -- I haven't been able to quickly run through the model, but it looks like you're looking for some degradation there relative to your EPS guidance?

I think, Jeff, it's Rich -- we had a reserve reversal in the current quarter, which gave us the 11.2%. If you take that reserve reversal out, which will not recur, we're at about 10.8% for June.

Okay.

Does that help?

Yeah, a little bit, I guess, so that would take EPS down to 57 cents, and so it's still at the high end of your range, you're still -- I guess that gets you most of the way there, but are you looking for higher expenses or -- I mean -- anything else there that takes operating margin down below 4%?

Yeah, on the operating margin, we'd also be looking to invest in both customers and employees that would bring us down to about the 55 cents. So you'll have some margin because of the nonrecurring reserve reversal and then some investment in SG&A for customers and employees.

Okay, and then if I did my math right, it looks like in the domestic ScanSource business, you were pretty flat to maybe a little bit down sequentially. Can you talk a little bit there in terms of linearity? I mean, how are things in March or just your -- you know, how much momentum there do you see as you make your way into the June quarter to grow sequentially?

Yeah, Jeff, hey, it's Mike. You know, we had a strong December, if you look back to that quarter, coming off of September, so we felt like we might not have as strong a March quarter because we really hadn't seen a turnaround in the business at all. What we did see in the December quarter and continued in this quarter were some POS deals that we saw a couple of years ago, so we were encouraged by that. The progress that the vendors have made in their partner programs, you know, Zebra, Symbol, InterMac -- all that has continued to incrementally help the business, but we haven't had any other major changes in the last two quarters relative to those programs.

So I would say the fact that we're suggesting and the fact that we saw in the last quarter reasonable or modest growth quarter-to-quarter is just -- we're trying to be conservative. We're not seeing anything that is going to suggest we're going to have an increase in growth substantially in the domestic marketplace. Again, comparing last year, that's why we said that -- we had a really poor March quarter, and so what we're suggesting, we're going from 29% growth this quarter to 19% next quarter, you know, if you look at the high end of the range, and that's pretty strong growth. I mean, the real story is really not the barcode business as you're seeing here. It’s really Catalyst had just an incredible quarter. It's the first double-digit gain we've had in Catalyst in about five quarters.

Okay, great, and then one last question was -- I don't know you don't want to break out Latin America versus Europe but maybe just a little bit of color there. I mean, the sequential growth that we saw there this quarter -- should we assume from your commentary that that was mostly Latin America or did you manage to sequentially grow in Europe as well?

Well, I think what we're saying is we were adding some color to Latin America because we have made an investment there during the last quarter with a new sales and distribution center in Mexico City but, yeah, we're still seeing growth in Europe. We've very pleased. It's still primarily an AIDC story. Our POS business there is still fairly early. We're still dealing with some vendors that, frankly, are restricting our sales in certain countries. So right now the story is an AIDC story, and it is doing well. We're definitely pleased.

Okay.

Thanks, Jeff.

Your next question comes from Reik Read's line.

Hey, good afternoon. I just wanted to follow up on the margin question. Could you talk a little bit about if you're seeing any margin pressure from Westcon getting into the market with Symbol, and just what that competitive dynamic and how that is impacting your business?

Hey, Reik, it's Mike.

Hi, Mike.

I guess, in general, you know, we're cautious about that. We're going to certainly be very careful to make sure we protect our customer base. You know, we don't really want to talk about their business, but I will tell you that, in general, our business has still been healthy in the Symbol marketplace. Overall, we're not seeing huge margin pressure, but we certainly are prepared for it, and we hope that it doesn't happen, but we certainly, as always, we prepare for it just in case it does come. The fact that they were added was supposed to be an incremental strategy, which we believe our vendors when they tell us that, that they were going to after incrementally new customers and not poach our customers. So, to-date, I would say that's pretty much the story.

And so you're really -- I mean -- you say not huge margin pressure, but you're not seeing any or it's pretty light?

Well, I would say we're not talking about it right now, which means we're not surprised by the pressure we're getting.

Okay, okay. And just to go back to Rich's answer to Jeff's question -- you're investing in customer and employees -- is that directly resulting from the NEC reseller agreement that you're talking about?

I think in this case some of it is, but other cases are, you know -- historically, we make investments in customer incentive programs as well as employee programs like profit-sharing and things like that, and this will be our final fiscal quarter. That's generally when we look at how we did during the year and can we provide some of that profit-sharing to our employees.

And can you just comment on the NEC business? It sounds like you're maybe spending a little bit ahead of seeing the revenue. When would you expect the revenue to ramp, and would that be leverageable, then, in the following quarter?

Well, I think what we're learning, so far, is that we're recruiting new resellers to NEC, so there's not really a transition program in place that we're seeing. So we're bringing in people that have never sold NEC products, which -- just like with Avaya's product line, it's very sophisticated. It does require a pretty significant investment by the reseller. So I think it's more than a one-quarter ramp-up. It's certainly, for most resellers, it takes them probably two to three quarters before we see significant revenue. We have to train them first, teach them the product line, then they start making sales calls, and then we start working with them to help them close the business.

So it's certainly, in our view, a product line that's worth investing in for the long term. So we're making a long-term bet here that these guys are going to bring us into new marketplaces and new opportunities with their product portfolio.

Okay, thanks a lot, Mike.

Thanks, Reik.

Your next question comes from [Steven McBoyle's] line.

Yes, good evening, there. First, on the Catalyst side, does -- I presume all this growth is Avaya-driven. NEC is not large enough to move the dial, is that correct?

Right, and when I mention it's Catalyst, I guess I was referring to just the Avaya and complementary vendors, Steven, you're right. Paracon, you know, is where we have the NEC product line. So it's really in that separate group.

Okay. So can you just refresh me on kind of relative to initial expectations coming in the beginning of the quarter to the actual results that you obviously posted here, which are quite exceptional -- what actually fundamentally changed through the quarter?

Well, I think it started in the December quarter, so what we saw was we were making some market share gains last quarter. We had some strong initiatives to develop new business, whether it was in point of sale or with telephony. And so I think what happened is we've now had two good quarters in a row, and our position is that doesn't make a strong forecast yet, although we think we're giving out a pretty good one today, but we are feeling better about the business, overall, because we've now had two strong quarters of double-digit growth. And I think the relationships that we have with our vendors, and the conversations we've had with them, suggest that their programs are on track for the year. We're not anticipating any fundamental changes to any of the channel programs out there that would not continue to encourage us.

At the same time, we don't see huge industry growth rates accelerating yet, so part of what we're finding is, we're taking market share from our competition and also from some of the business that was formerly sold direct now going to the channel.

And, I guess, just to elaborate on that point, the impression I had gotten last quarter was perhaps, rightfully or wrongfully, that Avaya was less proactive, if you will, in terms of a shift and that maybe you were going to be more dependent upon end-market growth. Obviously, you've gained share here, but it seems like you're making a little more favorable comment with respect to the shift. Is that fair to interpret?

Well, I think what -- yeah, I think it probably is -- to directly answer. We've had some very good meetings with Avaya's management team over the last quarter. They continue to assure us that channel is important. The roll the channel plays ongoing is still vital to their growth. So we do feel better today than I felt three months ago, to directly answer the question -- yes.

And any update on Expanets and what their plan is there?

We have had some conversations with them. It appears that as Avaya has tried to rationalize what parts of the business they want to maintain, it's taken them, I think, longer than we would have thought, but certainly, you know, they've got plenty of other things to worry about. But the Expanets business, we think, long term, was not statement of -- by Avaya that we want more direct business. We think they just have to rationalize it but that, over time, some of that -- of Expanets's business will flow back through the channel. Some of our stronger Avaya resellers have been out there working with some of the Expanets people and, as a matter of fact, they're hiring some of the people that used to be with Expanets. So we expect some of those dealers we already have will gain some market share over the next few quarters.

Great, and with respect to the broader question on sales growth being driven more from share gains, is there anything that you can point to specifically as to where you would be displacing folks? Or is it just fairly fragmented to talk to it?

Well, part of it is a competitive issue. I don't really want to educate my competitors too much here, Steven, to be honest. We think that we continue to develop some programs, whether it's through our partner services program or Solution City that give our customers ideas of how we can help them develop their business more efficiently, over time, I think we're out-executing our competition, to be honest.

Okay, great. Thank you very much.

Your next question comes from Chris Quilty's line.

A final question here on the guidance and the range you've given. Obviously, the revenue seems to bracket the consensus estimates, but the earnings guidance looks a tad lower than where the Street is currently looking for. If I run to the midpoint of your earnings guidance range, it would suggest an EBIT margin of closer to 3.9%, and I'm presuming the guidance you've given in the past with regard to where the operating margins in the business should be, probably still stand, which is you've been running north of 4%, and you're going to reinvest and maybe push it down more towards 4% if you're seeing the upside in the business and can reinvest in things like Solution City?

Yes, I think that's right, Chris. Yeah, you got it.

Fair enough. And, specific to that Solution City with the opportunity occurring here over the next couple of years in the health care market, traditional barcode VaRs don't have tremendous penetration to -- or historically haven't had a lot of penetration there to take up this FDA barcode mandate. Are you looking at any opportunities to go into non-traditional resellers; perhaps more health-care oriented resellers to educate them up on the barcode side of the business? Or which direction do you end up taking?

Yeah, no, it's exactly what we're doing with Solution City, is it has two parts to it. One is to educate existing company resellers that are already in a technology focus and get them to consider some new markets, but as important, if not more important, identify existing resellers who are in markets like health care or banking or education who already have a toehold for some other reasons, whether it's selling other IT solutions or services or software and educate them on an opportunity to take these technologies and these solutions to that existing customer base. So we definitely are focusing, I would say, more of our energy there on the long term. I think on the short term, Solution City is about making sure that the existing reseller base is educated on these new opportunities because some of those existing resellers can make early success in certain customers. So it's definitely a two-pronged strategy, and that's why we're talking about it a lot. It's a recruiting tool for us, and it should increase our customer base.

Okay, and can you give us a little color on the point of sale business? You seemed to indicate that there were some large deal opportunities or large deal transactions in this quarter?

Yeah, I think we had some in the December quarter, too, and we attributed that to end-of-year buying by retailers who got some incentives to do that because it's the end of the year, and they like incentives. So we were pleased that we saw that continue into the March quarter. So we saw some deals that, again, historically, it was two years ago when we saw them show up where we had, you know, in certain quarters one or two, for us, large deals, which generally are million-dollar-plus deals, and that represent our significant POS vendors and generally it's in the mid-market retailers. So we have these solution partner resellers who are selling IBM and NCR, who are very good at selling into the larger retailers more like the Tier 2 retailers, as they call it. And we saw some success last quarter. We're hoping that will continue. We're being a little bit careful here to predict anything in the future that that suggests -- because there's a lot of industry research out, as you've seen -- you guys have seen from these consultants that are saying there's going to be a replacement cycle in POS, and we're subscribing to that yet. We're saying in our market we're seeing some nice opportunities but not anything that we want to hang our hat on yet, long term.

Okay, but at least two decent quarters?

Yeah, absolutely. So whether two makes three or four, we'll see, right? But we do -- we are pleased with it, and we're glad that we can talk about those things.

Two points makes a line.

There we go.

Your next question comes from Kevin Starke's line.

Starke from Imperial Capital. Most of my questions have been asked, but I wanted to know if you were expecting any kind of seasonality on either side of the business in June?

Well, for us, you know, historically, June quarter was better than March, and so we've got some of that built in here but obviously not a lot. We're trying to be a little bit careful because we saw some differences in our seasonality in the last couple of quarters, and I guess that's what happened to us. We predicted the March quarter would be down, assuming that the June quarter then would pick up the slack. Now that March is coming strong, I'm kind of sitting on the fence here a little bit, Kevin, and I just want to make sure that we don't get out ahead of ourselves. So, historically, June quarter should be strong.

You said that Avaya had some promotions that ended in March. Do they have any new promotions that carry into June?

There's none that I can talk about today, but I would say there will be some contemplated for the quarter, and, you know, that's not uncommon. They've got some new products they're bringing out, and we expect that they will use some of those new products and will kickstart some of those new products this quarter.

Okay. Are you able to say how many NEC resellers you've got signed up?

I'd rather not right now, for competitive reasons. But we're certainly comfortable that we've signed enough that we can continue to have people right now. So it's a significant effort right now behind NEC.

Okay. And is Intel still meaningful?

Absolutely. We, frankly, didn't have as strong a growth quarter with Paracon just relative to the fact that Catalyst and ScanSource had such a strong quarter, but, clearly, Intel continues to do well for us. We had a record quarter in the December quarter, so we came off a really strong quarter -- a little tough comparable for them, but we're still number one or number two in the distributor rankings with Intel. We feel very good about the relationship.

Excellent. And here's a couple of stupid questions -- one, are you selling to Expanets and, two, are you selling any RFID-enabled products?

Well, we typically don't break out customers and talk about sales to them, but, we had, when we had Expanets as a ChannelMax customer, and so if we do it would be just as a normal reseller, and we don't break out any of those guys for publication -- again, for competitive reasons.

RFID -- we have sold some product. It's generally some small pilots. As we've been talking about, we like the idea that there is a new technology that's going to be additive to our barcode business. We think, for our channel, for it to become material is still probably a year or so away, so one of the key seminars we had at Solution City was on RFID, and it was standing room only. So everybody wants to talk about it. We have a lot of education we have to do to our resellers, even in advance of any large revenue opportunities. So we'll be talking about it a lot with the channel, but the revenue is still out there a little bit.

Your next question comes from [Patrick Tinney's] line.

A couple of quick questions -- do you guys say how big the POS sales are?

No, we really don't break it out. It's been hard for us, historically, too. We've got a couple of vendors that are easy to reference as POS vendors, but then we have products within, for example, the Symbol or Intermec or MetroLife portfolio that we don't know if they went into a retail store or into a warehouse. So we don't. And we also don't break out individual vendor sales. So that's why we can't characterize it much better than we do. We historically said our POS business was about 50% of the overall ScanSource AIDC and POS business.

Okay. How about -- okay, so I was going to ask the question in a different way, which was excluding the large POS deals, what was the core AIDC growth rate, year-over-year?

Yeah, we don't break that out.

Okay, but you're saying POS is 50% of AIDC?

Right, if you add it all up, and that's a guess. I mean, we've struggled with that for years and years, and that's really more of a North America statement, too, by the way. We try to give some color to international. Europe being still primarily AIDC whereas Latin America is both AIDC and POS.

Okay. As far as next quarter, any guidance in terms of the split of the revenue growth? What that growth will look like if you hit that 19%, you know, whatever the number is that you're talking about for next quarter -- what the split will look like between the two businesses?

We don't break it out on this call. You know, we hesitate to give guidance, anyway, but -- because you know we don't deal with a backlog. So our challenge as a distributor has always been we have no backlog so we don't go into the quarter having a certain number of orders in any of these buckets. So we're just doing the best we can to give you guys the forecast as we see it coming.

Sounds good. On the Avaya side, you talk about promotions that were offered, and you mentioned a bunch of different products. How unusual is that, and did they do that last quarter or the quarter before (multiple speakers)?

I think the reason I brought it out is that we wanted to try to give some color to why we did have a strong quarter, and we had predicted not to have one in Catalyst. I think the reason you saw the promotions was Avaya and our Catalyst unit and our resellers said, Hey, if you can help us with some of these products, we can help accelerate demand in the marketplace. So it's not unusual for any vendor to listen to -- when they come to us and say, Guys, how can we accelerate growth? And we come back to them with a promotion idea that they take it. So it's not at all uncommon, and we don't normally even discuss them in the call, but we felt like it would help you guys.

Your next question comes from [Gary Schnerow's] line.

Hi, guys.

Hey, Gary.

I just wanted to ask -- but I don't know what number question on the guidance -- I assume the method you're using and your assumptions you're using for your guidance is the same you used for the last quarter or is there any change in that?

Could you be a little more specific in terms of assumptions? We've given you the growth assumptions -- (multiple speakers)

I don't mean the actual numbers, I mean the process that you go through in looking at the business and your feeling for the market and then obviously you guys give a haircut to that or, you know, whatever your mindset is. Is it the same this time as it was last time or is there a change in your strategy?

Gary, let me try, because I think I know where you're heading, but we're kind of -- this past quarter’s guidance, and this quarter, you know, we've struggled with a little bit because we usually can look at some seasonality and use that in context with vendor program changes -- either yes or no -- and we look at those two components as well as how did we end the quarter prior? You know, was it a strong ending, meaning was there any business that accelerated into one quarter versus another? So that's the commonality to it that the challenge for us right now is the seasonality appears to be out the window somewhat. And so that's the part that we're struggling with, I've got to tell you.

Okay. Okay, great, I appreciate it.

Thanks.

Your next question is a follow-up question from Steven McBoyle's line.

Yes, I wanted to also touch on the Avaya promotions -- maybe just approach it a little bit differently. From your perspective, the level of contribution that the programs that are being run this quarter relative to what you saw last quarter -- are they as meaningful, less meaningful? Is there any way to quantify the impact that it may have had on the quarter?

Well, I think again, you know, when I mentioned -- when Gary's question was about how do we go about our guidance, we take into account vendor program changes or not, and so we would have taken that into account in our guidance, yes.

Okay, fair enough. And in Europe can you just kind of broadly speak to the success that you're seeing with respect to vendor consolidation efforts with the reseller base there, to date?

Yeah, we've certainly been a little frustrated at the progress there. We would have expected by now to see more vendors establish a two-tier model for their distributors, where you're either two-tier or you're not. But, to date, most of our competitors are still mixed-model distributors. They sell to end-users and resellers, and so it's been frustrating. I think certain countries are better than others; certainly, certain vendors are better than others. So I think we still have a long way to go before we see a channel that exists in Europe where -- that looks at all like the U.S. We're probably still about three years behind, even with the launch of some of these new programs that we've talked about, just because that's only one or two vendors out of, really, the top 12 that we would be concerned about. So we've got a ways to go. We're encouraged; we're able to grow. You know, at this stage and not because we've got some fundamental advantages, which is the best delivery and execution in Europe; we've got people skilled in all the languages; we don't compete with resellers. So even if a reseller can go buy it at the same price, if he's going to buy it from a mixed model -- if he has a choice on a mixed-model guy versus us, we tend to win. So we're playing that card pretty hard right now.

And with regards to the challenges that you're seeing in terms of that philosophical change over there and getting that system into place, is it -- are they all the same challenges that you kind of faced initially or are there new ones that are coming up and is it regional compensation still the issue and just vendor commitment or are you finding out there's new challenges arising?

I would say no news here. I mean, there's really nothing that we've learned in the last year. I would say, as of last June, we kind of got all the surprises on the table, and we figured out how we could execute our plan with the specific vendors and in the certain regions to go to market in. So, for example, today we're still not doing any business in Eastern Europe. We're doing very little business in Italy. I mean, we have found the places that we think we can make significant headway in, and that's where we're focused. So we haven't had any new surprises other than we've experienced some management turnover at our vendors, but that's common. We're used to that here in the U.S. About every year we've got to make new relationships and get that going again. But, otherwise, really, no new surprises that we have not seen since last year.

There are no further questions at this time, sir. You may proceed.

Okay, thank you so much for attending our call, and we look forward to seeing you again in August.

At this time, this does end today's ScanSource quarterly earnings conference call. You may now all disconnect.