Scansource Inc (SCSC) 2004 Q4 法說會逐字稿

Good afternoon, my name is Jean, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ScanSource earnings for June 30, 2004, conference call. [OPERATOR INSTRUCTIONS] After the speakers' remarks, there will be a Q&A period. Thank you. Mr. Bryson, you may begin your conference.

Thank you. Thank you for joining today's ScanSource conference call to discuss results for the quarter ended June 30, 2004. I am Jeff Bryson, VP of Administration and Investor Relations. With me are Mike Baur, President and CEO, and Rich Cleys, VP 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 begin by updating you on overall sales and operating results.

Thank you, Jeff. The company posted sales of $333.1 million for the quarter ended June 30, 2004, An increase of 32% over sales of $253 million for June 30, 2003. Measuring sales based upon our product group shows year-over-year growth of 37% in AIDC and POS, along with a 24% year-over-year increase in communication products for quarter ended June 30, 2004. That produced a 60/40 mix of AIDC and point of sale versus communications product sales. Gross margin was 11.1% for the fourth quarter of fiscal 2004-- slightly lower than the margin we posted in last year's June quarter, and was stronger than expected because we had better results from a planned disposal of some obsolete product, and benefited from some buying opportunities where product sold through this quarter. Absent the impact of these items, gross margin would have been about 10.8%.

Operating expenses were 21.5 million and 6.5% of sales, compared to 18.4 million and 7.3% of sales last year. Operating income increased by 42% to 15.6 million, which is 4.7% of sales, compared to 10.9 million and 4.3% of sales for the June, 2003, quarter end. Absent the cost of goods sold, benefits mentioned above, operating margin would have been about 4.4%. Net interest expense was only $132,000 versus $80,000 for the same period last year. Our overall effective tax rate has increased to approximately 40.9% from over 39.7%, due to the true up required to adjust the year-end tax provision. The tax rate for the fiscal year was 38.3%. We expect our blended tax rate for the upcoming quarters to be between 37% and 39%.

June quarter end net income increased 45% to $9 million, and 2.7% of sales, compared to $6.2 million for the June, 2003 quarter. Our return on invested capital this quarter was 30%, which was above our target range. Our balance sheet metrics and cash use were as follows: Inventory turns improved to 6.5 turns at the end of June, 2004, compared to 5.9 turns in the June, 2003 quarter. The number of outstanding accounts receivable days was 47 at June 30, 2004, which was up slightly from 46 days in the June, 2003 quarter. The line of credit rose from March by 2.6 million to 32.6 million, due primarily to the expected cash required by operations that is typical of our business, when sales growth rates exceed 20%.

We ended the quarter at about five 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. In July, ScanSource signed a four-year, $100 million multicurrency, revolving credit facility. This facility has an accordion feature that allows the company to increase the revolving credit line up to an additional $50 million. This refinancing replaces the company's $80 million US dollar revolving credit line. This new revolving credit facility gives ScanSource the ability to borrow both domestic and foreign currencies, which gives us important flexibility in managing our worldwide business. Now I'll turn it over to Jeff to comment on each of our reporting segments.

Thanks, Rich. North America revenue, which includes sales from all three selling units, ScanSource, CatalystTelecom, and Paracon posted sales of 301 million, a growth rate of 29% over last year. Point-of-sale manufacturers use the channel primarily to reach the small and medium business marketplace. Sales in this arena have continued to be steady. However, the past two quarters we have seen strength across all our POS vendors in sales to larger retailers, grocery, and hospitality providers. On larger opportunities, we work closely with our vendors to get the specific equipment pricing and delivery parameters coordinated with installation, software, and other services that are being bundled for a complete solution. The challenge is to be able to forecast sales to these larger end users, due to the limited visible we have through our resellers. In AIDC, we are seeing our reseller group grow their business by taking full advantage of our partner programs like systems integration and e-commerce storefronts. These resellers are also benefiting from renewed industry growth and more end-user demand. We have continued to sign new resellers who like our value-add model, and we have gained market from other two-tiered distribution players. Some AIDC technologies, like mobile commuting and RFID, are still at an early stage for the channel, and require a value-add distribution model, including configuration support before the sale and technical services after.

We sell to many different types of solution providers which need a menu of value-added services. Our ability to add this value is more important than ever and has prompted us to invest further in our business development activities and headcount on behalf of our key vendors. Our Solution City marketing initiatives continues to be well received by vendors and customers. Solution City was developed to assist resellers looking to sell their existing technologies into new vertical markets such as health care, government, and education, or those looking to sell new technologies such as RFID, voiceover IP and convergence, into their existing markets. This program has led us to attract more independent software vendors to be able to offer complete AIDC, point of sale, and communication solutions.

We'll now discuss the CatalystTelecom sales unit. We were surprised by this quarter's growth in CatalystTelecom, especially off the strong sales quarter we had in March. Catalyst had record sales in both Avaya small and medium business, SMBS products, and in their enterprise, ECG products. Avaya's extensive portfolio of products, including their strong-selling voice-over IP solutions, has helped our existing reseller partners win business. The June quarter also benefited from a good sales ramp from a group of resellers who signed with Catalyst earlier in the year. Catalyst also had record sales from its vendors who market products that are complimentary to Avaya switches. These vendors, such as Spectralink and Powerware, sold well, along with nice progress in the Extreme Networks relationship. Catalyst hosted its annual customer conference in May called Convergence Connection 2004, and received good feedback on programs that resellers need to succeed in this business.

Our third selling unit is Paracon, which focuses on converged communications products from Intel and NEC. Paracon had a record quarter led by a large deal which has not been typical of this unit. We had success with Intel-based solutions including record sales from Artisoft. During the quarter, we invested in recruiting programs for NEC, including sales training webinars, the launch of an NEC microsite, and participation by NEC in our Solution City event in New York City. This line will require additional investment to not only recruit dealers, but to develop them sufficiently so they can deliver significant revenue.

Our second reporting segment is International Distribution. International Distribution, which includes Latin America and Europe, posted sales of 32.1 million, compared to last year's quarter of 19 million. Approximately 1.3 million 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 62%. Our Pan-European distribution strategy is beginning to take hold. We recently opened a sales office near Frankfurt to better reach the Germanic market. However, we have not seen a consolidation of distributors yet as was promised by our vendors. So we continue to compete against mixed model channel players. As a result, we are growing in some countries more slowly than we would like. Our vendors tell us that they continue to support our value-add model, so we will continue to invest in new programs rather than give in to a lower cost commodity distribution model.

Our Latin American unit had record sales led by the Mexican geographic area. We believe the investments we made in Mexico earlier this year are paying off in new customers and incremental business for our vendor partners. Symbol and Zebra's partner programs have been implemented in Latin America and are helping us, especially in Mexico. We will conclude this part of the call with our expectations for the September 30, 2004, quarter. For those of you who are new to our story, we ship almost all orders on the same day on which we receive them, and operate with no backlog or forecast from our resellers. This greatly reduces our visibility. With that said, we think total revenues for the September quarter could range from 315 million to 335 million, and diluted earnings per share could range from 57 cents to 64 cents per share. At this time, we will be glad to answer your questions.

And your first question comes from Reik Read.

Good afternoon, guys. Can you just give us little bit of a -- an understanding of -- of why the expenses seem to come down so much. You were at -- as a percentage of sales, 6.8% last quarter. And now you're down to 6.5. Is there something happening there that is causing you to become more efficient or that's permanent?

Hi, Reik, this is Rich.

Hi, Rich.

As far as the percentage to sales, in the quarter we just flat out sold through our expectations, so we weren't able to ramp up expenses at the level of our sales. So I don't know that -- that it's a permanent benefit -- We're going to be investing in -- in people and in programs in the future. So you should see some in our forecast. You should see some impact for some investment in the SG&A line.

And you guys had mentioned in your remarks really two things; some of the mobile computing and RFID initiatives will require some incremental investment, and then some new European requirements not wanting to give in just the pricing model. Can you talk about, you know, how much above and beyond what we might see currently in the -- in the SG&A that might add? Or give us a sense for that?

Yeah. Hey, it's Mike. I think for competitive reasons, I'd rather not answer that. But clearly, we've got some special programs like this RFID boot camp that we're sponsoring, a series of webinars, expanded Solution City, and we're going to take some of those programs actually over to Europe, as well. Even though it may be a little bit early for that. So some of the things we've already talked about, we're going to continue to reinforce and expand.

Okay. And then Mike, can you also maybe just give us a competitive update here with -- with Ingram entering the market and buying Nimax. And now that you've had a chance to maybe digest that acquisition, what that may mean in terms of -- of competitive dynamics pricing, and then also Symbal's going to be doing more distribution through Voda One. Any impact from that.

Well, in -- in general, the fact that Nimax has been competing with us for 12 years suggests that we know that -- that company pretty well, and where they have a value-added model and where they don't. You know, the challenge really is for the vendors to see if they will continue to invest in a value-added model. Obviously, the way it looks to us is Ingram is setting it up to be left alone. I think the concern we'll have is -- is watching it to see if that will continue. To see if they will leave the value-add pieces alone in the model that Nimax has already built. We, frankly, have had competitors like Nimax a long time, and we certainly will watch what they do in the marketplace. And you know, similar to what happened to us a couple of years ago when Avaya set up Tech Data for the S&B products. You know, we'll be quick to respond if there's a lot of pressure on margins. We don't want to lose market share to a different business model. But I think from what we've heard so far, the vendors are very concerned about maintaining this value-added model because it's the only way that long term we can grow the channel and grow the -- the market that the channel addresses, which is principally the S&B market. So, we're optimistic that the vendors will keep a real sharp eye on this, but we'll be quick to respond if we seep see anything that is unnatural. And, you know, I think that -- that clearly is the same model that we'll look at with Voda One. I think the Voda Symbol announcement is really more of a complimentary product type scenario. Not really a new sales strategy. And as you know, we've had our Catalyst group for a long time tied closely to our ScanSource business unit. As a matter of fact, at our Solution City, we feature products from all three divisions. So we have started earlier this year to do a lot more co-marketing, if you will, across all of our brands. And across all of our business units. So if there are Avaya-type resellers that buy from Voda or from our Catalyst unit, we believe we'll be able to offer them similar services.

And one last follow up on Ingram. Is -- is the primary threat that you see it then, that Ingram now brings incremental resources to Nimax so they can build up that value-added model and compete with you on value-added services maybe more effectively than they have historically?

Well, I don't believe so. I mean, I think what I've seen so far is they're going to automate the back room functions. And reduce maybe some of their costs there. And, you know, certainly the size Nimax was, they weren't quite at the critical mass stage that certainly ScanSource is. Today so I'm not -- I've not seen any evidence that they're going to invest in more value-added programs.

Okay. Great. Thanks a lot.

Yeah.

Your next question comes from Chris Quilty.

Good evening, gentlemen.

Hi Chris.

Hi, Chris.

Hate to do this to you, Rich, but at the front end I missed the numbers that you gave for -- for the breakdown of bar code versus telephony. In terms of revenues out of each of the product areas.

All right. Year-over-year growth in AIDC and point-of-sale of 37%, 24% year-over-year increase in communications product for a 60/40 split.

Got it.

Okay?

Okay, thank you. And can you talk about -- I mean, the strength you've seen in your Latin American business and specifically in Mexico, is that being driven by adding new resellers, is it the underlying growth in the market? Or is it, you know, specific product area where you're seeing growth?

Hey, Chris, Mike. I think a couple of things. One, is we invested in a warehouse in Mexico in January this year. So we now have local warehousing of products which we didn't have before. We were shipping products from Memphis directly in the country, and frankly our service levels weren't what we wanted them to be. So we now have the fast-moving products located in Mexico City in a warehouse. We also now now have a significantly enhanced headcount. We have 18 people in Mexico City, whereas we were servicing some of the Mexico City functions from Miami. Where before we had just salespeople. In addition, we have expanded the number of products that they have been trained on. We've got a sales team now that is a couple years old. And they're now able to sell more and more products which has helped us expand the -- the opportunity with our customers. In the last quarter, when we looked at the top customers for the Latin America region, more of the top 25, for example, came from Mexico last quarter than they had in previous quarters. So we are selling more product to our customers, which has been -- which has been a good reason for the success.

Okay. And can you comment on just in the general international business, I think last quarter you had mentioned, well, you've been in the black for a couple quarters now. But are you getting any margin improvement in that business, or is it still relatively static? You need more top-line leverage to increase the margins?

Yeah, I think right now, I would say we are anticipating more investment. We think the Solution City concept makes perfect sense for Europe, so we're going to take that over there. So we're going to continue to see, absent a significant revenue growth, no real dramatic increase in operating earnings international.

Okay. And on the telephony side of the business, how -- how quickly has NEC come on board in terms of actual ramping those products, and are you continuing to look at other products that might potentially fit that portfolio?

Yeah. First, I would say we would -- we would have hoped we would have ramped faster with NEC. I think what we're learning, which is typical in the communication space, is the resellers take longer to actually start selling significant amounts. It takes six to nine months. It's not something they sign up and immediately turn deals into NEC revenue. So the six to nine-month rampup is something that we're seeing that's pretty consistent with what we saw in Avaya, quite frankly, with new customers. So nothing real different there. We are just a little impatient. We have recruited quite a number of resellers; what we haven't really benefited from is any significant shift of resellers, which is okay. We didn't anticipate that at this early in the stage. Clearly that opportunity exists for us out in the future.

Okay. Very good. And I just wanted to let you know I put in the book that's one of the most perverse statements Rich said earlier about not being able to ramp SG&A quick enough to meet sales.

Got it.

Your next question comes from Ajit Pai.

This is actually Andy Yan speaking for Ajit Pai. One question about the tax -- is that a pretax swing from last quarter to this quarter, can you give what we call in terms of why there's a big increase in the tax rate.

Yeah. The -- the way we book our tax rate is we use a -- a full year forecast, which includes obviously jurisdictional mixes. And at the end of the year, obviously, we have the final numbers. And -- and all of the -- we have no period of time other than that quarter to make the adjustment. So what we're reflecting is a tax rate of 38.3 for the year. But because we were booking at the lower rate, it has an adverse impact on the quarter.

Okay. Okay. So that's adjustment for the full year?

Right.

Okay. The other question is about accounts receivable. You have been turning up, I think, through the year now. Is there a reason why accounts receivable is turning up faster than, say, sales maybe?

Well, if you look at our days receivable, we're almost flat. Even -- even the last year. So I would say that the receivables are reflective of our -- of our sales.

Okay. Thank you. That's all the questions. Thanks.

Thank you.

Your next question comes from John Coyle.

Thank you. Good afternoon, gentlemen. I was wondering if you could please provide little bit more color on the strong business you saw with CatalystTelecom and Avaya, and particularly, provide a little color on what the breakdown was between the -- the SMBS and the ECG business.

Great, we'll see what we can share here. Obviously we try to be a little guarded because we have competitors out there, and they'd love to know what we're doing.

I understand.

But in the past we had a mix of ECG and S&B that was 75/25. That's still pretty close. We're seeing growth rates for S&B and ECG being comparable, which is good news for us. We actually over the last year spent a lot of effort at, you know, having a real focus on not only ECG, which is kind of the heritage of the business, but also some of the new opportunities in S&B. And I think we've seen the payoff in that. So our sense was, you know, that the quarter came in strong. We talked last quarter about there were some promotions that Avaya had put in place. Turned out, you know, they did that not only in S&B but also ECG. We saw good, I guess, take from our resellers, with some of the promotions that helped drive revenue for the quarter.

Great. You made comments about some of the new resellers you had signed up at the start of the year for this business. Ramping -- ramping well. How many did you sign up at the beginning of the year?

Well, we didn't disclose the amount, but I would say the partners we found, some of them were existing Avaya partners that decided to select Catalyst over competition. And some were brand new. So they kind of ramp at different rates. And that's why it's a little difficult to forecast how much revenue they're going to provide us, and in which quarter will that start. So that was a little bit of a surprise in the quarter, was some of those guys who were brand new to the story, brand new to the Avaya product family I should say, ramped up faster. And some of the ones that really moved over to us from competitors, were able to start buying quicker than we thought. So that was -- that was a little bit of a surprise on the Catalyst side.

Great. Just one last question on this -- in this point. You know, looking out and looking at the end market, are you seeing any of your resellers or end customers saying anything about why the adoption has -- has accelerated for the IP telephony, or, you know, is it just the sales incentives that Avaya's giving, or is there something else going on?

I think it's underlying interest in the technology. Every story that gets printed out there now that has to do with communication products is about voiceover IP. Avaya, I think, has done a fantastic job with their leadership position from a technology standpoint. Then they've been getting the word out better from a variety of marketing vehicles. And I think frankly some of Avaya's competitors spent a heck of a lot of their time and money talking about the technology. I think Avaya's benefiting from that because they have the legacy install base Avaya does. They have the strongest channel, and they have some of the strongest service offerings to go with it. So it makes it easier right now to be reselling Avaya's products than some competitive products.

Great. Thanks a lot.

You bet.

Your next question comes from Peter Barry.

Good afternoon, gentlemen.

Hey, Peter.

Mike or Jeff, in your Q1 revenue guidance, is there anything that would suggest to you and then to us that there would be any meaningful shift in the mix? Either by geography or by product?

I'll try, Peter, it's Mike. No, but I think one thing to remember is -- is for, and this is something we don't have a lot of experience yet is with the international business. So this quarter, you know, if you listen to and look at all the numbers, is -- should be the slowest quarter for us internationally. Just with the August holiday schedule and all of Europe. So we're anticipating that there's not a lot of -- not as much growth there as you would have seen in prior quarters. So that would be the only geographic thing that we would be sensitized to. It doesn't really effect us in Latin America. It's mostly a European phenomenon. But this general we looked at, you know, what did we do for last quarter, and, you know, we certainly are trying to be a little bit conservative in that, you know, some of that growth we didn't anticipate. We still feel like the growth rates we're forecasting are still pretty strong year over year. And absent any strong changes in the marketplace, economically or with our vendors, we think it's a pretty good -- pretty good projection.

So Mike, it's not your sense that Q4 in any fashion borrows from Q1?

No, it's not. We -- we definitely talked through that, and I think this forecast reflects where we are today during the quarter, as well. Reflects what we've already seen in July.

And also suggests that AIDC is gaining some significant momentum here, it looks like, huh?

Yeah. We've been pleased with the -- the overall strength of the product families, the different vendors we work with. It's a really -- they've done a great job. I think we did reference continuing strong point-of-sale demand that we haven't seen in a long time. And it's been now two quarters in a row. Really there was some of this in the December quarter, too. So we've really seen, you know, almost three quarters of strong point of sale larger deals, and for us we're generally talking about total system deals that included IBM and NCR-type products that are sold together with scanner products. Some other services and software, as well. So we look at AIDC as strong, but also point of sale as very strong.

For want of a better term, is most of the growth or let's look at fourth quarter. Was most of the growth organic, that is really derived from existing customers, or did your -- your new customer count have a lot to do with this?

Well, I would say that across the whole company it would be our existing customer growth. And some of those existing customers have invested in the last few quarters in more headcount themselves. They've come out of a really tough economy, and they're finally feeling good. We had our convergence connection 2004 in Hilton Head in May with our Catalyst guys. And they were very positive about growing their salespeople. And it's one of those where if the resellers don't have salespeople on the street, it's hard for them to grow. They're not really marketing machines, they're more sales machines. And we hope to see that when we have our ScanSource customers together in October. We hope to hear the same thing, that these guys are starting to invest in more salespeople. I think that's what we -- we feel the true story is; is our existing partners who are already in the business are starting to grow their -- their top-line revenue again.

One final from me. Just looking at inventories, they were up rather significantly year to year. Your terms clearly improved very impressively. Does that level of inventory give you any pause of any kind?

No, you know, we've always felt like inventory availability was a strategic weapon for ScanSource. And you know, as we look at the competitive landscape that's starting to emerge, we've always said that this model is a real difficult one to be a small distributor and do it well. Meaning small inventories with the vast number of SKU's and custom configurations this business requires, it's not a "do you have this one in stock and I can get it for you in three or four weeks." We've been able to refine the model where we can have the best inventory position of any distributor out there, and continue to meet demand. But do it in a way that we think is fiscally responsible. So we're very comfortable with these inventory levels.

Thank you very much.

You bet.

And you have a follow up question from Ajit Pai.

My follow up question is, you have a breakdown between the sales figure for POS and other products?

Well, we've never been able to -- to definitively answer that question because a lot of the products that can cross the line, let's take a typical scanner. It could be sold as a POS system or not. We've never captured the data reliably. I would say it's one of the things we want to do better in the future. Some of our vendor partners are asking us for that. How do we start knowing which markets our products are going into. And that's why we're putting so much emphasis on Solution City and we're starting to profile, you know, our customers so we'll know if a customer takes a product from us which market is he putting it into. But we don't have it today. And historically, we always said if you take our key vendors and put them in two buckets, it was kind of a 50/50 mix.

Okay, great. Thanks again.

You bet.

Your next question comes from Jeff Rosenberg.

Hi.

Hey, Jeff.

You made the comment about what you've seen in July relative to the guidance that you gave, and I thought your tone was pretty positive and constructive. And yet you are looking for things to be flat to slightly down -- I just wanted to make sure that in your mind, that's sort of the preamble of visibility. Or has there been any of the attenuation of the momentum of your business?

No, I would think it's appropriate. Typically as we've thought in the past, different quarters have strong months. And historically in this quarter, it's going to be September. And so a strong or good July doesn't guarantee the quarter will come out as well as we might like. And so we really won't know until we get into September. But -- but we did -- we did have what we feel is an appropriate July to be able to give this kind of forecast rather than, you know, last quarter we were sitting there earlier in the quarter talking to you guys. That's why we felt so nervous about the range.

Right. And I don't want to get ahead of myself, but are you saying that if you have a typically strong September, and maybe you can comment a little bit on the whole seasonality that you usually see with Avaya with their fiscal year end, that you'd be hopeful that you could be toward the high end of your range or better if September is strong? Or is that what you're saying, or--

I think that's what I'm saying. The other caveat is I've got this European business that's now starting to get larger. And I don't know how bad a quarter you have in Europe yet. Now, we still expect to grow just because we're taking market share in some cases. But this is still kind of new to us there. So there's a little bit of the conservativism because of the international element now.

Okay. That's fair. And then on the -- the SG&A issue, I guess I had a different take than what was said earlier. I mean, I saw a bigger uptick here in SG&A than we've seen in quite sometime. And you didn't really talk about any the sort of one-time things that sometime accompany a -- a big upside in revenues. So it sounds like you have been investing aggressively, and I guess my question is, you know, how much have you committed to in terms of a sequential increase in SG&A, if you are indeed, you know, more toward the mid point of your range and down a little quarter on quarter? I mean, how much would you think -- can you quantify how much incremental SG&A we should expect at a bare minimum, versus that which you would grow with -- if you indeed were able to grow the sales quarter on quarter?

Yeah, Jeff. If you're looking at -- at the fourth quarter and trying to reconcile to -- to the first quarter, there are a couple of things that will occur. One, we think that there will be a little bit of pressure on the margin because we had some favorable buys that's we sold through. And we had a program where we -- we got rid of some obsolescence at better than expected value. So that's going to have a little bit of pressure to take the EPS down. We will have investment in headcount and some other programs above and beyond the level that -- that you see in the fourth quarter. So we've begun to invest in the fourth quarter. For instance, when you hire people, you're not going to naturally have them for the whole quarter. In the first quarter, we'll have them for the whole quarter. And, you know, we'll be looking to bring on some -- some more people to support our growth. So you'll have some additional run rate on the SG&A in the first quarter. And then of course we'll go back to a normalized tax rate.

Right. And I guess -- you had a $1.6 million increase or thereabouts in quarter on quarter and SG&A Q4. I assume, though, that -- that at least based upon a -- if we're looking at the mid point of your range, that there would be some incremental increase, but it would be a lot less than that. Is that fair to say?

Jeff, this is Jeff. I think -- I see where you're going. Is I think what we've got still, though, even though we're making some commitments on headcount, I do think there's still enough discretionary spending and there will be enough visibility for Mike and Rich that they will be able to make decisions. In other words, if the sales don't come in at the high or above the high end, I really don't see that as a negative. We've navigated that before. I don't think that will catch us this time unless we -- unless we miss something.

Right. And it sounds like all that being said, you're -- you're assuming an operating margin, you know, back down around that 4% even range. And that's again -- I realize all the extenuating circumstances over the last few quarters. But you haven't been that low in -- certainly not in the last fiscal year.

Yeah. I think some of the models we've got, though, to deliver 64 cents on the upper end would still have an operating margin slightly above the 4. So I think we're still pretty optimistic on the operating margin.

Great. I wanted you to elaborate a little on the share gain mention you talked about in the bar code point-of-sale business. The -- is that share gain in the traditional sense of from direct sales, or are you saying that it's share gain from others that are wholesalers?

Jeff, I think it's definitely both. I mean, we -- we definitely feel like our value proposition is as strong as ever. We're winning business. Even where people have -- are out there selling with lower value. And that certainly concerns us if the vendors allow those kind of models to prevail. And if they do, then we'll have to reduce our investments in value add. But we did see, like we have for the last year and a half, we talked about the different partner programs from the vendors; that has tended to allow the "larger or preferred partners" to gain share themselves. So whenever there's some direct business up for grabs and a preferred partner is involved, they get the business. So a shift from direct to indirect, and if you have those indirect partners buying from you like we have, you know, a bunch of them, our customer base is growing, yes.

And so is that putting permanent pressure on your gross margin, in other words, in the last two quarters you've been at about 10.8%, excluding these benefits that you've -- that you've had. Is that -- or is that a function of some of this run of large point-of-sale deals and it's more of a mixed thing?

I would say so far it's been more of a mixed thing. But having said that, I know that our manufacturers are also, frankly, always looking at us. And you know, this time of year we start talking about Avaya comp plans and how do we sit down and understand what value we deliver and what margin are we allowed to work with from the vendor. So it's always a concern is that we have to make sure that we're earning our margin. And we have seen historically that there's always some pressure on that. Frankly, from the manufacturers for us to be more efficient. So I don't think there's any -- anything that is happening any sooner than typical, absent anything coming from, you know, some of the changes that have happened in the distribution landscape.

Okay. And one last question on -- on the other income line. I mean, it's bounced around a fair amount. And so Rich, what would be a good number for us to sort of, just assume, or when you give guidance, what are you fort of thinking about in terms of the net of all the below-the-line items?

I think all the below-the-line items would include interest --

Yes.

I would think that you look at something similar to our fourth quarter.

Okay. Thank you.

Thanks.

And at this time, there are no further questions.

Okay. Thank you very much for joining us for today's call will we will talk to you again in October.

And this concludes today's conference call. You may disconnect at this time.