Scansource Inc (SCSC) 2005 Q1 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 quarterly 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. (OPERATOR INSTRUCTIONS.)

Thank you, Mr. Bryson, you may begin your conference.

Thank you very much. Thank you for joining today’s ScanSource conference call to discuss results for the quarter ended September 30, 2004. I am 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. The 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 362.7 million for the quarter ended September 30, 2004, an increase of 31 percent over sales of 276.5 million for September 30th, 2003. Measuring sales based upon our product groups, shows year over year growth of 26 percent in AIDC and point of sale, along with a 38 percent year over year increase in communications products for the quarter ended September 30. That produced a 56-44 mix of AIDC and point of sale, versus communications products.

Gross margin was 10.2 percent for the first quarter of fiscal 2005, lower than the 11.2 percent margin we posted in last year’s September quarter. As you remember from our call in August, the 11.2 percent we posted in the June quarter was helped by two items that do not always reoccur. We said then that a more representative margin would have been 10.8 percent. The September quarter’s gross margin further deviated from June due to a changing mix of more larger orders with low value added requirement, versus fewer smaller orders, which require more value-added services. There was also some negative margin impact from changes in our vendor purchasing programs.

Operating expenses were 22.3 million and 6.2 percent of sales, compared with 21.2 million and 7.7 percent of sales last year. Please note that last year’s operating expenses included the cost of 2.3 million for the restructuring of the ChannelMax business unit. Without that expense, last year’s operating expenses would have been 18.9 million and 6.8 percent of sales. This year’s reduced operating expenses as a percent of sales reflects the benefits of greater economies of scale in general and administrative expenses.

Operating income increased by 51 percent, to 14.7 million, which is 4 percent of sales, compared to 9.7 million and 3.5 percent of sales for the September 2003 quarter-end. Absent the ChannelMax restructuring in last year’s numbers, operating income would be up 22 percent year over year.

Net interest expense was 413,000, versus 343,000 for the same period last year, reflecting higher interest rates, offset by a slightly lower use of our line of credit. Our overall effective tax rate was approximately 38 percent as expected.

September quarter-end net income increased 47 percent, to 8.9 million and 2.5 percent of sales, compared with 6.1 million in September 2003. Without the ChannelMax restructuring in last year’s amount, net income would have been up by 18 percent over last year. Our return on invested capital this quarter was 28 percent, which was above our target range.

Balance sheet metrics and cash use were as follows. Inventory turns improved to 7 at the end of September 2004, compared to 6.5 turns in the June 2004 quarter. The number of outstanding account receivable days was 47 at September 30th, 2004, which was the same as the 47 days posted in June 2004.

The line of credit was virtually unchanged from June 30th, at approximately 33 million. We ended the quarter at about two days of paid for inventory, meaning that almost all our investment in inventory was offset by our interest-free trade payables to creditors.

I will now turn it over to Jeff to comment on our reported segments.

Thanks, Rich. North America revenue, which includes sales from all three selling units, ScanSource, Catalyst Telecom and Paracon, posted sales of 330.2 million, a growth rate of 31 percent over last year.

Our first discussion will focus on the ScanSource sales unit. We continued to enjoy strong demand this quarter for AIDC and POS products, led by sales to some larger volume customers who don’t require all of our value-added services. As we’ve said before, our business model is set to provide services on an as-needed basis.

A key investment will be to support the deployment of RFID technology. We recently launched RFID Edge, which is an extension of our Solution City marketing program and is an example of how we are helping focus customers on specific new technologies and new markets.

The RFID Edge program will include educational webinars, a prominent position in the Solution City web portal, wide visibility, and our Solution City Roadshows, participation at RFID boot camp workshops and a dedicated RFID website, which will provide the latest news and development on the world of RFID in one location.

Resellers can also access a special RFID helpdesk, which is made up of specifically trained ScanSource technical sales specialist, who can support resellers with pre and post-sale question, product selection and application scenarios. Through its RFID initiatives, ScanSource can provide resellers with access to RFID solutions or supply chain, healthcare, pharmaceutical, asset tracking and many other critical applications.

These RFID solutions will include handheld and fixed readers, thermal label printers and encoders, RFID tags and Smart Labels, as well as access to application software and middle ware partners.

ScanSource is also the sole distributor sponsor of RFID boot camp, a series of one-day educational workshops in various cities across North American, at which leading RFID experts will be on site to answer important questions about RFID technology and the solutions available in the market today.

We see a need for hundreds of resellers to be trained and certified within the next year, to sell RFID technology. As a result, we are developing an RFID certification program in partnership with trade associations like AIM and CompTIA and our key vendors.

We will now discuss the Catalyst Telecom sales unit. Catalyst had its third strong quarter in a row and its second consecutive record quarterly sales for both a bias (ph) small and medium business, SMBS products and their enterprise ECG products. Our Catalyst business has always been seasonally strong in September due to a bias fiscal year end and this year was no exception.

New dealer recruitment continues to be a big focus. We have added new ECG accounts and even more new SMBS resellers this calendar year. The September quarter also benefited from a good sales ramp from resellers who signed with Catalyst earlier in the year. Catalyst had record quarter sales with other vendor lines including Extreme Networks, Plantronics, Spectra Link and Power Ware.

Our third selling unit is Paracon, which focuses on converged communications products from Intel and NEC. The Intel product line had a record quarter led by another large deal like last quarter, which has not been typical for Paracon. The NEC unified solutions product line also had a record quarter and we continue to sign communications products resellers new to the NEC line. NEC recently provided us with a list of transition accounts, those resellers who previously purchased directly from NEC, who are now free to buy from Paracon. We have launched a recruitment campaign targeted to reach this group, supported by our business development reps in the field to convince these customers of the benefits of buying from distribution.

We are creating a NEC technology education program which will allow us to train our resellers directly, saving them from having to wait for the scheduled NEC classes. This step will reduce the time needed for a new reseller to become authorized to sell the NEC line. Similar to our experience with the AVIA product line, there is a lead-time of several months after a reseller is signed before we see a significant impact on sales.

Our second reporting segment is international distribution. International distribution, which includes Latin America and Europe, posted record sales of 32.5 million, compared to last year’s quarter of 23.7 million. Approximately 2 million of the increase in international sales was the result of favorable foreign currency changes. Taking foreign currency exchange out of the current year amount, we show a growth rate of 29 percent.

As expected, we are beginning to see the seasonal effects of a slower Europe sales quarter in our international results. One of our strongest growth areas continues to be in the Germanic region, due to the focus we are making there, as evidenced by the sales office we just opened near Frankfurt.

In our Latin America unit we continue to have revenue growth year over year, but we have had margin pressure in the geographies other than Mexico. We are seeing increased competition on two fronts – from other distributors and from manufacturers who are surprisingly taking resellers back to buying direct, after those resellers had previously been served by the channel. The sales highlights for this region were Peru, Brazil and the Dominican Republic.

I’ll now take a moment to outline our new security business. We are taking the occasion of today’s earnings release and conference call to announce the formation of ScanSource Security Distribution. As many of you know, from the inception of the Company, we said that we wanted to be in multiple technology areas which have in common a need for our type of two-step value added distribution. The security marketplace has an existing channel of over 10,000 resellers and hundreds of vendors. ScanSource Security is focusing on hardware distribution in North America and does not plan to enter the monitoring side of the business.

To clarify, the security market we are targeting should not be confused with software or network security devices for protecting computers or local area networks.

John Gaillard, formerly Vice President of Sales for Catalyst Telecom has been named President of ScanSource Security Distribution and he will bring 10 years of distribution experience to the new unit.

We believe that our business model, including a specialized sales force, a dedicated product management team, extending credit terms to resellers and excellent logistics will provide an appealing alternative to resellers. We will begin to work with security manufacturers and resellers to determine what additional value add services are needed and can be delivered by ScanSource Security Distribution.

Products that make up the electronic security market include access control, intrusion detection, surveillance/closed circuit TV devices and fire detection. We are moving our access control vendors, such as Zebra Card, Fargo and Data Card from the AIDC POS sales team, to the security unit, since these vendors and customers will benefit from a specialized sales and merchandising team. Starting with this existing business, the security unit will have critical mass.

Recently we announced the addition of a new independent director to our board. Mike Granger was the President and Chief Operating Officer of Ingram Micro from January 2001, to April 2004. He has nearly 14 years of experience in the distribution industry, including eight years with Ingram Micro, where he previously served in the position of Executive Vice President and Chief Financial Officer, and six years with Ingram Industries Inc, its former parent.

Earlier in this career, Mr. Granger held executive financial positions with two companies and served as a certified public accountant with Price Waterhouse. Mike brings a wealth of knowledge and experience related to building an international business. The addition of this financial expertise and knowledge of the IT distribution industry will strengthen our board as we look to continue to expand our business.

We will now conclude this part of the call with our expectations for the December 31, 2004 quarter. As a reminder, 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 provides us virtually no visibility. With that said, we think total revenues for the December quarter could range from 340 million to 360 million and diluted earnings per share could range from 60 cents to 68 cents per share.

At this time we will be glad to answer your questions.

(CALLER INSTRUCTIONS.) Jeff Rosenberg.

Let’s start with a couple of margin ROIC questions. I guess when you look at the mix is this something where you felt like there was a surge of large orders and this is an unusual drop in gross margin or is it a shift in your business relative to some of the strength of some of the vendors that you would expect to see going forward?

I think what happened was a combination of some of the newer customers that we’ve been recruiting. Some of it’s due to the partner programs that directed some of the formerly direct resellers who were buying from manufacturers to distribution. Some of those customers now buy through ScanSource. There were some other resellers who used to buy direct from some of our other vendors that are now buying through distribution. And those resellers typically are large resellers, selling larger volumes and they don’t need as much of our value-added programs. So I think we saw a combination of that, more than we typically have seen, as well as some changes in some of our vendor purchasing programs.

As you recall, typically we talk this time of year about Avia’s cop (ph) plan changes. I think what we have seen over the last year is some of our other vendors starting to change our vendor purchasing programs as well. And you saw some of that impact in this quarter as well. So it was a combination of those two things.

But it seems like some of that I would assume you’ve made up with inventory turns. I don’t know if you’ve ever had them quite as high as 7, so is that something you think you can sustain?

I think what we do, like we’ve said before, when we see gross margin as kind of a barometer going one direction, we then look to SG&A levers that we can move as well as balance sheet metrics like turning inventory better or working with terms with vendors. So yes, we think at the end of the day we still are managing our business on an ROIC basis and so we’re very comfortable with the mix of business we’ve got. We’re still able to deliver we think superior returns.

And in terms of SG&A you talked a lot about RFID and it sounds like there’s some expenses there. I know some of those programs are already in place today, but it sounds like some of it’s incremental. And then security – I haven’t had a chance to crunch the numbers but are we able to hold operating margins flat quarter on quarter all things considered? Or do you think there’s erosion under 4 percent, because of the whole security investment and whatever else you need to spend going forward?

We’ve never had a target of a certain number. We’ve always talked about the 4 percent or so operating range, but again, in security, we’re going to be talking just like our other businesses on return on invested capital as well. So we don’t have enough information yet as we’re just launching that business unit, to talk about what its impact will be and where it will come into the operating earnings mix.

But clearly, our strategy was for the last y ear to find other ways to make investments. We think one way was to continue to expand internationally, which is still not at critical mass yet from a mature operating earnings. Now we have security starting off. As well as we have some of these larger resellers, where we’ll make a lower operating margin, yet we still have a strong return.

So we think that’s what you’re seeing now and I think if you look at the forecasted revenue with EPS, we think that you can work with the numbers there. And certainly the gross margin coming down to 10.2 is something that didn’t totally surprise us. It also could happen again in the future. We think that now there’s probably a lower range on gross margin than there was in the past.

And I’ll just ask one last question. In the security area, can you talk a little bit about the opportunity for acquisition in terms of a way to build critical mass in that operation? Is that part of the plan or just maybe handicap your chances of finding something that you think would fit?

I think it could happen. I think if it does, the primary reason for us would be to sign some vendor lines quickly through acquisition. If we can locate the right vendors and attract them without making an acquisition, it’s very possible we’ll Greenfield it as well.

We have some revenues, as we discussed, from Zebra Card and Data Card and Fargo, that can get us started. The access control part of that industry is not the largest part of it, but it certainly gets us started. So certainly by our next call we’ll have a lot more to talk about there as to how we’re doing.

But we certainly are prepared to make a smart acquisition.

Reik Read.

Can you – would the Paracon unit – and NEC has given you that list. Can you talk about the size of that list and how many folks you may be adding and how quickly that can happen?

We’re not going to talk about the size of the list, but I think historically when we sat down with vendors and went through these transition programs, we started off with a fairly small list of customers that typically were not buying a lot of product. They just weren't getting a lot of attention, so it was kind of easy to transition them. I think what we have seen so far is that if we do a good job with this early list, it certainly suggests that we’ll get more over time and the guys that will come over time will be even larger resellers that are already in the business.

So if I would have predicted in past years how much those list represented, I would have always missed by probably a factor of 10. So we are just excited that we’ve been able to get to this point in the relationship, that NEC is confident in our ability to deliver the right kind of services and the right kind programs that will bring benefit to these resellers. When they say hey, rather than buying direct we have a better alternative, it’s something that NEC frankly is proud of. So we’re excited about that.

Is it fair to say too with a project like this that it requires a little bit more resource on the front end and then the rhythm will tend to flow?

Yes it is. We’ve been adding to our Paracon infrastructure over the last three quarters, frankly building it so they will come. We had benefit all last year from some profitability that we were looking for places to invest. That was one of them and we think that going forward it’s going to be more in line with the revenue and profit that we’ll experience. But we today already have built a pretty good infrastructure at Paracon.

And then just going back to what you said before about getting some of these larger resellers, is that in a specific area or is that across the board at this point?

You know it’s interesting, when you look at it, it’s actually –- across the board it’s not as much in phones per se, only because most of the phone resellers were already buying from distribution. So there are some parts of our phone business like the NEC and the Intel that would allow that. And then clearly in POS and AIDC, both of those areas we have seen larger resellers that are now buying from distribution, yes.

Last question. Can you just elaborate a little bit more on what you’re seeing in terms of changes with your vendor purchasing programs in terms of what I guess they’re desiring from you? Is that the way to look at it?

Yes, I think it is. I think what they’ve done that’s different than years ago, it used to be we had incentives based on volume. Over time, that has not necessarily been what the manufacturers want to do. They’ve now tried to steer some of their programs that allow them, even on a shorter-term basis than a year, meaning on a quarterly basis, to reward certain focuses, certain market initiatives, certain types of value-added services. So we’re frankly having to spend more time now sitting down with the vendors, understanding what are their expectations for distribution. And we actually like that. It gets back to our model is about sitting down with vendors and allowing them to help manage our business. It’s not about us telling them what to do; it’s about the manufacturers saying, guys, this is where we need help and if you’ll do that we’ll provide you some additional incentives. So we enjoy a great relationship with these vendors and we think this is a good evolution of the programs.

Okay. And just one quick follow-up off of that is I understand what you just said about trying to create more value. Can you help me understand why that’s putting pressure on the margin today?

I think what we’re saying is that in the past it was real easy to see if we hit revenue we might get some additional incentives. Now, it’s requiring us to spend more time understanding where those levers are. And we have to make sure that we hit those. It’s not as easy as just making sure we sell x amount of products. So there are some things we’re having to do with our sales force. We’re having to reorganize our sales force now more around demand creation activities. And so we won’t necessarily maximize all those programs as easy as we did in the past. We still believe that even if that happens we still have the ability to moderate our SG&A to still deliver appropriate returns as well as manage our balance sheet so we give you a strong ROIC.

Okay. Great. Thank you.

Your next question comes from Peter Barry.

Mike, could you give us a little more color on security distribution? Are you breaking new ground here? Is there anyone else in this space? How long a wrap might be involved?

Yes, Peter, I’ll try to give you a little more color. We believe there are quite a few distributors that have focused on this area. There’s a very large one, a company called ADI. They are owned by Honeywell Ademco. That presents a little bit of a conflict that they –- one of the largest distributors is owned by one of the largest manufacturers, so a little bit of an issue there that there might be an opportunity for an independent distributor like ScanSource Security Distribution. There are some other distributors that have been around quite a long time that are more regional based. But what’s interesting about many of these distributors, Peter, is that they have many warehouses. There’s nobody that has a central warehouse strategy like we have shown in our telephony businesses and in our barcode and POS. So we’re going to have to break some new ground in terms of convincing the marketplace that we can deliver the right level of service from a central distribution center.

Is your first challenge that or simply consolidating the industry, Mike?

Well, I think that will be a significant challenge in changing some of the purchasing habits of the security dealers. Frankly, today, some of those guys don’t have warehousing, they just have their inventory in trucks. They go and pick it up every day, they install it, and then their trucks are empty. So it’s going to be an interesting one. We think there are some signals or signs that the industry is always looking for some more efficient ways to procure product. There have emerged in the security business, just like in telephony and bar-coding, Internet and mail-order companies who are out there competing with some of the traditional dealers that have that large installed base of installers and equipment and trucks. So we’ve been looking at this industry for quite a while. I think many of you know Steve Owens, our chairman. He has spent a lot of time in the last four years continuing to poke at different businesses. And this industry continues to emerge as one that has similar issues that we have in our existing businesses. It has a large number of dealers and a large number of manufacturers. So, clearly, one of the other challenges will be to get some of the key manufacturers onboard, Peter.

Are there any significant upfront operating or capital costs we, and you, should be prepared for?

One of the things that is an advantage of the way we’re launching this is we’re going to leverage our existing infrastructure here at ScanSource - the same warehousing, the same back office, you know finance teams, credit teams, so there’s no CapEx investments to speak of. It’s really headcount and marketing programs will be the real thrust of our initial efforts.

And we probably will not see that in the income statement in any meaningful way I gather.

I’ll let Rich answer that one.

We’ll certainly have to move some of the sales folks over that are supporting those product lines today. John is going to have a merchandising VP and he’ll start work on the merchandising side. So there will be some headcount there while we’re trying to build that business. And certainly we’d probably be looking to backfill some of those positions on the ScanSource side.

While I have the CFO of the Year, given the Q2 guidance that you’ve provided us, could I ask in the 340 to 360 revenue number, what the revenue mix assumption was? And on the earnings number what the margin assumption was?

In terms of the revenue mix, what I would say is that the Avaya, but for the catalyst business, the fiscal year-end of Avaya, is usually a strong one. So we’d be looking for maybe a little bit weaker catalyst side, telephony side, and continue the strength on the ScanSource side in terms of the revenue mix.

So back to 60/40 again?

I mean it could be, yes.

Okay. And the margin assumption you’ve used?

We usually don’t comment on the margin assumption. We’ll be looking to target an operating profit which is typical of our business. We’ve got the ability to flex that SG&A based upon the volumes that we get in and the kind of mix that we get in that business, as exhibited by this quarter.

Thank you all very much.

Mark Roberts

Thank you. Good afternoon. In looking at the revenue split for this quarter, it looks like that international was pretty much flat sequentially. Over the last couple of years it has typically been up sequentially, fiscal fourth quarter to fiscal first quarter. In your revenue guidance for the second quarter, are you assuming continued softness in international or do you expect that to kind of get back on track and grow sequentially?

Yes, Mark, it’s Rich. I think we’ve gotten to the point now with the size of our international business, we do get the impact of the vacation schedule for the European business. So I think that impacted our quarter-on-quarter growth. Certainly going into this next quarter we don’t have that vacation period. So I would hope that we have some improvement in the international side.

Okay. And could you give us the gross profit margins by North America and international for the quarter?

Mark, we don’t disclose the gross profit by segment.

Okay. And my last question is in the new security business, are there particular brands of equipment that you intend to carry or any special relationships you’re going to form? Are you going to pretty much work with a wide range of manufacturers the way you do in the AIDC space?

Yes, Mark. Mike. I’ll take that. Yes, we would work with the key vendors. I mean our strategy would not be to be an exclusive or anything like that. One of the things that also you find in this industry is a lot of private label products. It’s not our plan to have private label products either. But clearly there are a large number of manufacturers and we’re looking to have quite a few of them as part of our portfolio.

All right. Thank you.

Loy Toma (ph).

Just a couple of questions. The first thing I wanted to do is just go over the guidance that you gave for the December quarter, I didn’t catch the earnings numbers.

We gave revenue and EPS.

Right. What was the EPS number?

60 to 68 cents a share.

Thank you. You said in the next region you were experiencing pricing pressure or margin pressure from your distributors and from other people ordering direct. How much of your revenues come from that segment geographically?

We don’t break it out for competitive reasons, but it is a concern for us and really it’s all across Latin America. We’re having some challenges because what you find is a lot of the manufacturers want to have at least 1 or 2 key resellers in these countries. We’re struggling with that because even in some of the smaller countries, those resellers really aren’t large enough to be buying direct and meeting all the infrastructure that the manufacturers are trying to put on them. Yet there is this cultural need to keep 1 or 2 resellers direct. And so we’re struggling with that. Whereas in the U.S. there might be some direct resellers, but when you look, obviously the size of the market, some of that is understandable. In Latin America not only do they buy –- they’re being taken direct at some of the customers that came to us last year and now are going back direct. That’s the frustrating part. So we’re sitting down with our manufacturers and trying to understand how do we provide you the account control that you’re seeking in those countries and yet still have those customers work through distribution.

And you gave the revenues booked for your communications segment. What was that? I missed that.

Communications growth was 38 percent.

Okay. And last question I had just trying to understand your model in terms of leveraging the SG&A. I mean how much leverage do you have on the SG&A line and how low can you get it as a percentage of revenues to offset some of the other stuff that you might encounter?

Certainly in the short-term we’ve got, if you target say the midpoint of the guidance that we give you, we certainly have the ability to flex I’d say at least 50 basis points pretty easily.

All right. Because you guys have done a great job over time and these are multi-year lows for you guys. So I’m just wondering, how low can they go?

There is discretionary spending that we have the capability of adjusting, even late in the quarter. On the other hand, as we grow our business, we have been adding headcount. We all pull in terms of growing the business. We’ve got a larger receivable number. So our bad debt formula causes us to increase our bad debt reserve as we’ve done in this last quarter.

Right. What was your allowance account this quarter?

Our allowance was up over $11 million.

It’s at over $11 million.

Yes, it’s about $1.8 million higher than it was at the end of the fiscal year.

Kevin Starke

First of all, on Latin America, again, if you look at the sales office structure of some of the big vendors you see that they all have offices in Argentina, Mexico, and Brazil. So I’m wondering is there a duplication of efforts between yourselves and the vendors in those countries? And then are you really seeing traction more in the countries where they don’t have their own sales offices.

Yes, it’s a good question. We do have significant infrastructure in Mexico. What we found is that it was difficult for the manufacturers to really adjust to the model that most resellers want in those countries. So even if the manufacturers build the infrastructure, you know today’s world, especially in our AIDC and PSO business, it’s a multi-vendor world. And so the resellers want to buy from a single point if they can competitively. So even if the manufacturers had the infrastructure we still have preference as long as it’s not a financial reason to go direct. Having said that, we don’t have an infrastructure in Argentina or in Brazil. Those are countries for us to be successful long-term we might have to do that. Today we are able to do business in Brazil and Argentina primarily from Miami. We have marketing efforts that go on and happen in-country, we have business development people who travel in-country, but we don’t have any significant infrastructure in those countries – only in Mexico and Miami.

Okay. What incentive are the vendors giving to the resellers? They must be giving them margin points.

Yes, exactly. It’s generally a pricing issue. They offer a special pricing program that’s only available if you buy direct. I don’t mind if they would offer a valuated service that we can’t duplicate. That’s our problem. But I mean I can’t beat a price that’s below our cost.

It just makes me wonder a lot whether Latin America is really ready for two-tier. But changing gears for a second, I think about 2 or 3 conference calls ago we talked about RFID not being ready for two-tier distribution and yet here you are obviously putting some resources behind it. I’m wondering if you can explain what’s happened on the product development side that makes you think there are products our there that are channel friendly enough for you to get involved in.

Yes, we had a lot of conversations internally about that, believe me. I thought my guys were nuts 6 months ago for telling us they were thinking about this. The reality is, by the end of 2005, our estimates, along with a lot of the vendors and other experts, suggest that we’re going to need hundreds of resellers to be ready to sell product in 2006. And to be ready to sell you’ve got to be somewhat what we’re calling certified. There’s a base level of RFID knowledge that anyone who is going to talk about the technology needs to have. And then there is some vendor-specific certification or education you need to have. We’re suggesting that it makes sense to let’s go out and start the base levels of certification to get to the point by the end of 2005 where we have hundreds of resellers.

Working with an organization like CompTIA, who is responsible for about 11 different certifications, they do the A++ network certification, they have estimated that it will take us 8 months from start to finish to develop the content and the program so that we will then be ready by June, July, August of next year to educate so that people are educated by January of ’06. So we’re starting this initiative. Frankly, quite a bit of the funding will come from vendors. Not all ScanSource money, but we feel like we’re in the right position to drive this initiative because we’re frankly agnostic about the standards and about the technology (today) (ph). I think the organizations like to see us taking that role, as well as our vendors. So we don’t anticipate revenue any earlier than we’ve been saying. We think the revenue is still out to 2006.

Hundreds of resellers could sell to whom? Are we talking mostly about the manufacturing segment in this case?

If you look at the current initiatives in place by Wal-Mart and DOD, our estimate is you’re going to have to have hundreds of resellers to supply those companies working with Wal-Mart and DOD by the end of next year.

Okay. The last question I had, forgive me if you said this already, I’m assuming you’re going to be breaking out security as a third segment going forward. So I was wondering if you pick Zebra or Datacard and Fargo and whoever else may be now in that Mason segment, what percentage of your business does that already represent?

As far as a business segment goes, we’re going to view this as part of the North American distribution. Just as we report North American distribution as a combination of barcode and communications products, we would be including these products in that segment disclosure.

Right, but you also break yourselves down by AIDC point-of-sale versus Telecom. So is this going to fit into one of those two?

We’ll probably have a better look at that in our January call. I’ll be able to give you a better idea of where we’re headed with that.

Gary Janero.

I have a follow-up on the new security piece. Other than the access control where you mentioned the key vendors for that, who would be the key vendors in the other pieces that you mentioned – surveillance, intrusion, etc.?

Some of the companies – probably the 2 biggest companies are Ademco, which is part of Honeywell, and G.E. And those are like the 2 big boys. Then you’ve got companies like Teleco, Napco, there’s a whole list of them. So we’re doing our due diligence right now and really we’re just launching this division. So we’ll be able to talk more about who we’re targeting and who we’re working with hopefully over the next few months. But we certainly believe that there is significant opportunity here. And like it has been in our other businesses, it’s always difficult to decide how long will it take us to ramp this thing up. We don’t know. But we know that we have the right model at this stage for this business and our efforts will be to sit down with these key vendors and make sure we understand what their needs are in the marketplace, what they see as a way for us to bring added value.

You mentioned there was a lot of private label. Does that change the dynamics?

I don’t think so. I mean I think it’s just one of those that we chose not to do that in our ScanSource and telephony business before because it does exist in those businesses too. I think when you look at the industries that we’ve been in a lot of the companies end up either doing a mixed model, selling to end-users and resellers, or they compete with their manufacturers by selling private-label goods. So our strategy is to be very focused on the key brand and manufacturers working exclusively through the reseller channel.

Ijeek Pay (ph).

(Indiscernible). One question regarding the security division business. How is the business going to impact your margins, both income gross margins and operating margins?

I think right now it’s too early to discuss. So it’s early days. We’re just getting started with modeling the business. But I guess if I had to go back to what we’ve always kind of said is that we’re really an ROIC-based company. We can handle a variety of gross margins and even a variety of SG&A and operating earnings models as long as we can achieve our target ROIC metrics. That’s really how we organize and manage our merchandising teams and our vendor programs. But we do feel that we can have what we believe is an appropriate ROIC.

Okay. Do you have any one-time (indiscernible) that you can make to start up the new (indiscernible) business?

Any one-time costs?

Yes.

Not at this time, other than we’ve got some initial organizational costs, there is probably some legal, things like that. Nothing that’s significant at this time.

At this time there are no further questions.

Thank you very much for joining our call. We’ll talk to you again in January 2005. Thanks.

This concludes today’s conference call. You may disconnect at this time.