Scansource Inc (SCSC) 2005 Q2 法說會逐字稿

At this time we’d like to welcome everyone to the quarterly earnings release conference call. Mr. Bryson, you may begin your conference.

Thank you. Thank for joining today’s ScanSource conference call today to discuss results for the quarter ending December 31, 2004. I am Jeff Bryson, Vice President of Administration and Investor relations, and with me are Mike Bauer, 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 Security 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 10K and quarterly reports on form 10Q filed with the Security Exchange Commission.

Rich Cleys will begin by updating you on overall sales and operating results.

Thank you, Jeff. The company posted sales of 370.1 million for the quarter ending December 31, 2004, an increase of 28% over sales of 289 million for December 31, 2003. Measuring sales based upon our product groups shows year-over-year growth of 29% in AIDC and point-of-sales, along with a 26% year-over-year increase in communications products for the quarter ended December 31, 2004. That produced a 6139 mix of AIDC and point-of-sales versus communications products.

Gross margin was 10.2% for the second quarter of fiscal 2005, lower than the 10.7% margin we posted last year, but similar to the margin that we posted September 2004. This margin reflects the continuing change in the mix of larger orders with a low value- add requirement versus fewer smaller orders which require more value-added services.

Operating expenses were 23.1 million and 6.2% of sales compared to 20 million and 6.9% of sales last year. Operating income increased by 36% to 14.8 million, which is 4% of sales compared to 10.9 million and 3.8% of sales for the December 2003 quarter-end.

Net interest expense was 148,000 versus 199,000 for the same period last year. Our overall effective tax rate was approximately 38.4%, as expected. The December quarter-end net income increased 36% to 9.1 million and 2.5% of sales compared to 6.7 million in the December 2003.

Our return on investment capital this quarter was 26%, which was within our target range. Balance sheet metrics and cash views were as follows—inventory turns were 6.6x at the end of December 2004, which is slightly above our targeted range of 5.5 to 6.5x, and is comparable to the 6.5 turns in the June 2004 quarter. The number of outstanding accounts receivable days was 46 at December 31, 2004 compared to 47 days posted in June 2004 quarter.

The line of credit balance was 60 million dollars at December 31 compared to a June 30 balance of 33 million. We ended the quarter at about 14 days of paid-for inventory, meaning that a significant portion of our investment and inventory was offset by trade payables to creditors. The higher line of credit balance on higher paid-for inventory days is a result of three factors. There’s a normal timing issue as to when the last day of the quarter ends, relative to the bi-weekly or every other week payments that we make to vendors. We have invested in greater inventory levels in our international segment to prepare for growth in those regions. And, thirdly, we have worked with our vendors to change our purchasing habits, related payment cycles to provide them with greater linearity in our purchases throughout the quarter.

I’ll now turn it over to Jeff to comment on each of our reported segments.

Thanks, Rich. Our North America segment includes sales from all three of our technology areas, AIDC and POS via ScanSource, communications products through two sales units—Catalyst Telecom and Paracon—and security products through ScanSource Security Distribution. North America posted sales of 322.9 million, a growth rate of 24% over last year. One operational note for the North America unit is that we have expanded our distribution capacity in Memphis to allow for additional growth. We have leased space in a facility next door to our building, bringing our total to around 375,000 square feet, and earlier this month, successfully moved our communications product into that space. We will have an incremental increase in rent and added headcount that we believe will position us well for the next two to three years.

Our next discussion will focus on the ScanSource Sales Unit. We saw strong North America demands this quarter for AIDC and POS products, led by continued sales to some larger volume customers who don’t require all of our value-added services. Our business model is set to provide services on an as-needed basis.

ScanSource continues to sign additional vendors to enhance the industry’s most complete line card and to provide resellers with a one-stop shop. This year we added Posiflex, which makes PC-based POS systems and Seagull Scientific, which is a label printing software product. In addition, ScanSource has signed an agreement with MCL Technologies, which provides a suite of software tools that enables resellers to develop mobile data collection applications. In November ScanSource partnered with Microsoft to create four specialized retail bundles for the small and medium business—SMB—marketplace, featuring Microsoft retail management systems software and hardware for many of our manufacturer partners. The specialized bundles are targeted at four retail markets—beer, wine, liquor, apparel, sporting goods and gift. These bundles are integrated and tested on our Memphis system integration facility, making it easy for resellers to provide a vertical-specific turnkey solution to their customers.

In December ScanSource opened a sales office in Toronto, dedicated to serving AIDC and POS resellers in Eastern Canada, which will compliment the company’s presence in Van Couver British Columbia, where it has been serving Western Canadian resellers since 1998. The expanded Canadian presence will enable ScanSource to have dedicated sales and business development representatives familiar with Canadian business processes.

We will now provide an update on RFID. As we’ve said before, we believe the channel may not participate in significant RFID revenues until calendar 2006. In the meantime, our job is to help educate hundreds of resellers to be prepared to sell the technology when it becomes widely accepted and available.

In January 2005 ScanSource formally launched its RFID Edge program, which is aimed at helping resellers be successful selling RFID solutions through educational events, best-of-breed vendor partnerships, leading products, pre and post-sale text support and comprehensive web portal. To further strengthen our RFID offerings, ScanSource signed a distribution agreement with Alien Technology, a leading supplier of RFID readers, tags and services. Under the agreement, ScanSource will serve as a distributor of Alien RFID products, as well as education and service offerings, and the two companies will collaborate on joint marketing activities related to resellers.

ScanSource will be hosting a preconference workshop at Demonstration Pavilion with eight of our leading RFID vendors at the upcoming RFID World Event in March. We have also invested in two dedicated product managers to manage the Intermec and Zebra RFID media product lines. Our Solution City Road Shows in 2005 will continue RFID content. Our next Solution City Expo is in San Jose in March. The company is also sponsoring an ongoing webinar series to educate resellers about RFID opportunities.

We will now discuss the first of our two communications units, Catalyst Telecom. Catalyst Telecom had excellent year-over-year sales results, although the Avaya line is rarely a strong sequentially in their first fiscal quarter, following Avaya’s fiscal year-end of September 30. Although we had a good quarter with the Avaya SMBS product group and the other Catalyst vendors, the Avaya enterprise class, ECG business, was the driver this quarter. Due to the success of Avaya’s IP office product, the SMBS team has identified the wide space for Catalyst to expand our coverage. Catalyst has prepared to provide significant resources to assist new resellers as they come up to speed on these new products. We have set a goal to recruit 300 Avaya SMBS resellers, and have added staff to recruit and market to those new resellers. One of the channel developments we’ll be watching in Avaya’s new fiscal year is their effort to position their direct sales reps to serve larger end users and to get mid-market business leagues to the channel. The near-term impact of these changes is that some of our largest resellers may have to replace some business that they are currently doing with large end users with new opportunities with smaller enterprises. While we think a long-term plan is good for the channel, this will cost some channel shift for Avaya.

Our other communications sales unit is Paracon, which focuses on converged communications products for [Intel] in NEC. Paracon sales did not have the benefit of the larger deal that have helped it in the most recent two quarters, so these unit’s results came from our traditional business with existing Intel resellers. After some strategic discussions with Intel, we have decided to increase the breadth of Intel products that we sell. Our goal would be to add other complimentary products, including servers, to provide a total solution to our resellers. Their servers can also be used with solutions from our other ScanSource business units. We are investing in our other Memphis systems integration group to prepare to integrate Intel servers with the communication products and potentially the AIDC POS products that we sell today.

We’ll now take a moment to update you regarding our third, and newest technology area, ScanSource Security Distribution. As a reminder, the security marketplace has an existing channel of over 10,000 resellers and hundreds of vendors. ScanSource Security will establish an independent hardware distribution company 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.

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

There are five key product categories that make up the electronic security market, including identification, access control, intrusion detection, surveillance and fire and alarm. We have moved three vendors—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 merchandising team. We are identifying and meeting with vendors to describe our business plan and help them grow their business incrementally with a lower cost channel structure. We have signed four new vendors thus far—Image Vault, [Eltronics], KeyScan and JVC—and are already targeting some of our existing POS and communication dealers who have shown an interest in selling some of these new products.

Our second reporting segment is International Distribution. International Distribution, which includes Latin America and Europe, posted record sales of 47.2 million compared to last year’s quarter of 29 million, a constant currency growth rate of 53% after adjusting for 2.8 million of benefit in sales as a result of favorable foreign currency changes.

In Europe we are beginning to see the evolution of our panned European strategy, in spite of the fact that the indirect channel is being served by too many distributors, which makes it difficult to achieve the critical mass necessary to deliver more value-added programs that will generate demand. Two years ago we had over two-thirds of our sales from the U.K., or what we call the Northern European Region. Today sales in the Northern Region are only one-third of the total, with two-thirds coming from Central and Southern Europe, anchored by Germany, France and Italy. We continue to receive broad support from our AIDC manufacturers in Europe, with continued up side available as we grow sales with our [e-pause] manufacturers. We recently assigned a U.S. merchandise director to Europe to bring some of the programs and successful experiences we’ve had here with POS vendors. Our European has grown a marketing portfolio there with a twice-per-year catalog reaching 26,000 resellers and 53 countries, printed in six languages. They have also successfully launched many of our e-commerce tools there and are seeing wide acceptance by Europe customers in using our system for on-line order entry and shipment tracking.

Our Latin America and Mexico regions had record quarterly sales, driven largely by AIDC product lines. The December quarter is seasonally their strongest of the year. The export business to Latin America operates from a Miami warehouse, which provides efficient service and local product availability. Business development, additional marketing programs and more sales people are generating stronger sales to the Dominican Republic, Uruguay, Peru, Chili and Argentina.

We continue to build our management team with our recent promotion of [Jose Roland] to the position of VP of Sales for Latin America. We generate more sales in Mexico than any other country in Latin America. Mexico had a record sales quarter where we are seeing the benefits of investments we’ve made over the past 18 months. Since Mexico represents our largest opportunity, we are continuing to add infrastructure to support the high level of growth. Our sales effort has been supported primarily by Symbol, [Elow], Zebra, PFC and [Handhill] products.

We are pleased to announce several organizational changes to positionize for future growth. [Buck] Baker has been named Senior Vice President of Merchandising for Catalyst Telecom, where he is now responsible for Catalyst vendor relationships, including Avaya and the other 22 vendors and managing its merchandising team. Buck has more than 15 years of distribution experience, 9 of which were with the companies AIDC and POS units. His years of merchandising leadership and experience will add great value to the Catalyst team as they look to continue to grow that business.

Paul Constantine, former Vice President of Merchandising for the AIDC POS sales unit has joined partner services as Vice President of Solutions and Services, serving all sales units of the company. Paul joined ScanSource in 1999 and has 11 years of distribution experience. Paul will be looking to expand the company’s strategic partnerships with independent software vendors—ISVs—accelerate e-commerce and EDI initiatives with vendors and customers, increase partner marketing and educational programs, and roll out the company’s managed services initiatives.

[Jeff Yelton] joins ScanSource as Vice President of Merchandising for the North America AIDC POS sales unit. Yelton will manage all of the units, vendor relationships and merchandising team. Jeff comes to ScanSource from [Retalics], a point-of-sales software company where he served for over two years as CEO over [Talics]North America and as Executive Vice President of Acquisitons of Business Developments. Prior to that, Jeff worked with IBM retail for 12 years and for 7 years with [Chirus] Corporation where he held sales, business development and senior management positions.

We will conclude this part of the call with our expectations for the March 31, 2005 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 March quarter could range from 350 million to 365 million and diluted earnings per share could range from 64 cents to 68 cents per share.

At this time we’d be happy to answer your questions.

The first question comes from Jeff Rosenberg.

Hi. How are you? The first question I wanted to ask is on the adding customers to Avaya front sounds like you’ve laid out a specific plan. Can you tell us how the rate at which you’ve been adding customers over the past quarter or two there, if you’ve already seen customer sign-ups growing?

It’s Mike, Jeff. It’s something that we just started, really in the last quarter, and really just started putting in the resources in place and do it year end December or January. So it’s still too early to report on the progress. We have met many times now with the Avaya team so that we know exactly where we need to add resellers, and we’ve had quite a bit of interest from resellers who have heard that we’re looking at more. Clearly, we’re trying to do it in a place where we don’t already have a strong reseller customer so that we’re not trying to grow on top of one of our existing guys.

Is it more in the traditional IT space that you’re looking to add them? Sort of to compete with the networking world, or what’s the idea there?

We’re primarily looking at guys that want to start in our SMB Product portfolio, and so behind the office product line, which is more of a—seems to be more of a better product than a voice product compared to the older technology, so it might attract someone who is coming from the data world. But I would say principally we’re going after a lot of the market share that Avaya’s really never had. Market share gets some of the key system vendors that are out there, and there’s probably eight to ten of those vendors that have existing dealers that have never really been courted by Avaya in the past. So we’re really looking for first pass a lot of traditional telepany guys that are looking to add an Avaya product to their portfolio.

If I look at this quarter, and if my numbers are right, it looks like your telepany business on the Catalyst side was down below double-digits sequentially, and I know it’s seasonally a weak quarter, but I think that’s a little more than usual. Is that because of the Paracon unit, or maybe a little bit of color there as to why the weakness quarter on quarter?

Yes, I think there are two issues. I think there was definitely a weakness in the Paracon. We had compared to the prior two quarters we’ve had some very large deals with Paracon, as you recall from the last two calls, and we did not have those large opportunities at the end of December quarter, so that coupled with the normal seasonal decrease in Avaya’s business through us in the December quarter—historically, we’ve always seen that in September, there’s some push to close the business at the end of September, so there’s always some of the business that might have ended up in the December quarter that stayed in September instead. So the combination of Avaya’s normal seasonality, coupled with not a real strong Paracon quarter, did lead to that decline, as you had identified. That’s correct.

In terms of the margin profile on the [telephony] side, I guess I’m just asking where the status is of you having your normal annual negotiation with Avaya, and, obviously, your ROIC is quite good so they’ve got to see opportunity there. How do you feel about the margin outlook there as you look after the current year?

Obviously, they’re a big part of our business, and so they do have an impact on our ROIC. Although, we have separate ROIC negotiations with each vendor. Having said that, we think that this year our biggest concern is where Avaya’s going from a focus from their high-touch direct sales force. As we indicated in the call, there’s a change in strategy with Avaya this year where they’re going to service a smaller number, but they’re going to be more clear about the very large customers that they’re going to service at the exclusion of having resellers participate. At the same time, they want to move some of what they call their mid-market customers to the channel. So the timing of that shift is going to indicate our success over the next couple of quarters with Avaya, more so than any compensation issues. That’s one of our largest customers, so if they lose some of that business, it would change the mix of our margin, even potentially in the Catalyst business unit. So those are all the things that are kind of up in the air right now. But in general, our compensation plan that we’ve come to agreement on is consistent with what we expected, and it’s consistent with our return metrics.

Okay. My last question—just generally, can you comment on the tone of business in the first month of the quarter? How have things started out? Have you seen any softening relative to last year on both sides of the business?

Okay. Typically in this quarter—March is the big mine force—so we always have, historically, every year have to have a strong March. The January numbers today, just like they have been in the past, generally start out slow. So the key for us is going to be do we have a strong finish to this quarter.

Your next question come from Reik Read.

Good afternoon. Can you guys spend a little more time on the margin side of things? You talked about the gross margins, and it basically sounds like you’re having to supply right now fewer value-added services. Can you talk a little bit about what the dynamics are behind that, at this point?

I’ll answer part of it, and then I’ll let Rich talk. One of the things that happened to us, pretty much all of last year—I think we talked about last quarter—was sort of as our manufacturer started to move some of their larger resellers to distribution, those guys started becoming more of our business, and they clearly come in with higher discounts, relative to their volume and their lack of need for some of our evaluated programs. So, in general, did the shift from vendors to send some more of their largest customers to the channel—to the distribution side of the channel—has really made that impact more visible the last two quarters.

I was just going to chime in, Reik. We did have some larger deals, I think we mentioned that those are lower-margin deals. Another impact is vendor program changes that we’ve had, which some of the program changes are—we are a set of eyes for things that are other than growth. And that’s had some impact on those, too.

Is there a concern on your part that as more of these large resellers come in and require value-added services, that more competition can come in and just compete on pure logistics?

I think the challenge with this—every one of our business units is that it’s not easy to be a small distributor in this industry. So the logistics part alone requires you to have significant inventory levels across thousands of SKUs to be a legitimate player to a large reseller. The large reseller is coming because they pretty much know what they want to buy. They may not always know the part numbers and what always goes with what, but they generally know the technology, but they’re also in a hurry. And they want someone who is not going to compete with them, they want somebody who understands that if you’re going to commit that if you’re going to get the product, that you don’t let them down. And, historically, this is the business where we have so many products, very few are discontinued timely, so every year our number of SKUs goes up, and it’s really one of mass customized solutions. The larger the reseller, the more products they tend to buy, too. So they’re not buying just, for example, 500 scanners, and that’s all that’s on the order. It ‘s all the other vendor’s products that they’re going to add to it. So we generally serve those large resellers across several vendors, not just one. So we feel like even in a competitive marketplace, our ability to have the inventory on hand—the right inventory on hand—has been a huge advantage.

Is there an opportunity that you guys see to—as you work more with these large resellers—to come up with more of these value-added services, other than just the inventory, to be able to augment the value-add and keep those margins up? I guess the other question I’m asking, Mike, maybe you can address this as well. Given that you’ve had a little bit of a change here with some of these larger guys coming in, is there ultimately a threat to the operating margin?

I think there are a couple of answers there. One of our real advantages as a company is that we’re in multiple business technologies, and one of our very first sales, for example, in our new electronic security division, which is one our largest point-of-sale resellers. So that combination of solutions was something that nobody else today can match, and I think that one of key strategies will be how can we compliment our product portfolio across our customer base? I think that will, on one hand, provide a total solution, on the other hand, it should improve our value proposition. Relative to operating margin—of course we’re still very happy with the results we generated, because we were able to generate that operating margin and make investments. So we’re still making investments in international, we said we don’t have mature operating margins there yet, and you saw the high growth rates we just generated—we still that’s got significant growth, we’re investing in security, we’re investing significantly in RFID, and then also in voice overwrite PE in the Avaya and SMBS group. So I think, overall, we think that if there are some challenges to our business model over time from an operating margin, there are places that we can reduce some investments before making any radical changes to our business model.

Okay. Then just one other question from me. You guys had talked about retail specifically to Microsoft partners that you’re doing. I know you serve an awful lot of segments, but is this a segment that’s becoming a little more important to you guys as you go forward? Particularly what seems to be in the middle of a point-of-sale upgrade?

I think if you go back and look at our history, we’ve always had a very strong relationship with our retail vendors and retail marketplace. The retail point-of-sale business has been focused around some very important vendors, and Microsoft was one of the vendors that kind of came late to our party, from a channel perspective. They were working with a lot of direct customers, probably for the last eight years, but we really saw that Microsoft was able to come in to this market now and provide a really strong branded point-of-sale product to help reach SMB. Most of our significant point-of-sale resellers are selling a custom solution to a mid-sized customer. There are very few of our existing resellers who have the margins and the scale and, frankly, even the interest in selling to the small two-store retailer. And it’s that two-store retailer to three, four, five-store retailer that Microsoft is targeting. So for us, we see that more than a replacement business, this is pure incremental for us, for Microsoft—and, frankly, for any of our vendors we take into this. So we’ve got Microsoft invested in this program, as well as some of our other key vendors, including folks like [APG] and Epson.

You’re next question comes from Mark Roberts.

Thank you. Good afternoon. A couple of things—what did you say that the international revenues were?

It was 47.2 million, I believe. I’ll confirm that.

Okay. I was a little surprised that your guidance—is your guiding sequentially down for the fourth quarter? Is there something specific that’s causing that break from the trend line here?

Hey, Mark. It’s Mike. I’ll take that one. Traditionally, this has been a tough quarter for us over the years. It’s even more challenging when you have a really strong December. So we felt like we delivered incredible results for December, our normal caution is always there, because the December and March quarter together are the two toughest for us, historically. We always come off a typically, a challenging telephony month, and we’re always wondering how quickly we’ll ramp that business up there. And now with some of this as a little bit of a concern—not a lot, but a little bit of a concern—will this Avaya channel strategy really play out to where we net [inaudible] drive for business, not less in the short-term. It is a concern. That there, and you can’t forget that Europe and Latin America just had a killer quarter. That counts as 53% growth rate is fantastic when you look back over the last three quarters, they were relatively flat. So we saw a huge surge in December, and we just want to make sure that we’re careful about saying that they can stay on at that pace.

Okay. Also, looking at your balance sheet, you’re matching payables against receivables, and then inventory turns, would you anticipate that you’re going to be able to get to an operating cash flow to break even this year? Or are you going to be burning—use of cash as you throw the inventory in receivables.

Yes, Mark? Let me answer it this way. In terms of our overall balance sheet at the measurement that we have there for inventory, that inventory days, the debt that we had—that’s a point-in-time. The three points that I made about the debts, the timing about our accounts payable, the supporting of the international growth, and the linearity inventory purchases—they’re all important. When I looked at my overall debt levels, I look at averages instead of point-in-time, and I can tell you that those averages are more in line with what I expect, and I’m not concerned about having a significant increase in debt. Does that help answer your question, Mark?

Okay. I’m not sure it did. So you’re saying that you probably will not have operating cash flow this year?

Yes. We don’t set a goal for the full-year cash flow. We don’t publish a goal for that.

But you would not expect it to be positive?

Generally speaking, when our growth rates are 30% or greater, or like this quarter right around the 30% mark, we’re generally a cash user. We’ve never been ashamed of that. If growth rates drop down around 20% or below, all things being equal, and they aren’t always equal, but if they were, we might generate some cash. But that wouldn’t be the long-term plan. We’d love to grow and use some in a ratable way for current assets over current liability.

The other thing, Mark, is we have sufficient capacity with our existing facilities to grow this business. We’ve got a debt facility that’s got umbrellas to it that can take us up to 150 million existing today.

Okay. And my last question—you have seen kind of a slow erosion over the last five or six years over gross margin, and you’ve generally offset that by falling SG&A—I guess do you see the gross margin settling out and being stable and SG&A being stable, or do you think the trend lines are going to continue along this track or that gross margins are going to slowly erode but it’s going to be offset by leverage and SG&A category?

I’ll take one crack at it. This is Mike. One of the things we’ve talked about—probably for the last five years—is that we really use that to run the business, and that we have always seen that we can model a variety of different gross margins, SG&A and operating income, and still, using our balance sheet, drive a very strong ROIC. So that’s probably the place we’d take it to first. In having said that, we always use gross margins barometer to tell us if we’re over investing, if we’re ahead of ourselves. For example, our challenge is, is there are some of these programs here that we’re trying to be early on. An example would be—a great example would be RFID—zero revenues right now. If we sit around and wait for the vendors, we will probably have a better [inaudible]. It gives us a growth opportunity three or four quarters from now. It puts us in a place to where, back to these larger resellers, we can bring larger resellers, even these guys into some of the new technologies earlier and for a lower investment that they can without it. So we said, early on in our business, that we would see gross margins decline. Frankly, for the last four years, they’ve been fairly consistent—fairly flat. In the very early days we were at 18% gross margins, and we’re seeing some of that still being the case in our international business where we have higher gross margins required until we can achieve critical mass. Today in the U.S., we’ve got reasonable critical masses that we’re able to drive down the SG&A asset investment.

You’re next question comes from Chris [Koulty].

Good evening, gentlemen. I may have missed it, but did you discuss at all the current path you’re pursuing on the security products initiative and, more importantly, can you expand for us what the sort of operating expense impact you might expect going out over the next six to twelve months from that effort?

Hey, Chris. It’s Mike. I’ll take the first part of this and let Rich in the second part. Basically, we’re still in the early days of signing vendors, so our initial strategy has been to move three of our existing vendors with existing employees over to security. As we start to actually sign up new vendors, we announced four today, then we’ll start to add additional people and then start to look at additional programs that we would need to support the value-added services that that business will offer. I’ll let Rich talk about any financial impact.

Overall, again, we don’t project out, but we have very few—we’ve added a few sales people, we’ve added some merchandising people, we’re using our existing infrastructure for warehousing, back office, and that will continue to be the model for this business. So as we pick up incremental revenue, we’ll have incremental headcount that we’ll have to pick up there. And then there will be some marketing programs. But I don’t see a lot of infrastructure need in this business as we grow it.

I think the only caveat to all that would be if we strike an agreement with a major anchor vendor product line, we would pre-invest in that product line to—and get ready and make sure we do a good job for that vendor. So we would not be afraid, at that point, of making a significant investment to make that vendor comfortable that we were going to be a big player for them.

Okay. But in terms of trying to build your reseller network—most of those resellers are currently aligned with, I’m guessing, either Honeywell or Tyco, which years ago acquired some of the largest independent distributors. Does that mean you’re going to have to invest either in active call programs or advertising in order to try to sign up resellers?

Yes, clearly there’s going to be some marketing costs, and that’s where we’re going to have some incremental costs. We don’t see it being significant yet. It still kind of depends on how we’re going to end up on the vendor community side of this. Plus, I’ve got to tell you, our strategy is to try to look at the business models that are currently in place and see if there’s a better business model that we can get support from the manufacturers for. Our model looks different then most of the existing distributors out there. We’re the only significant independent distributor that’s not owned by a manufacturer. We’re only going to be wholesale. So we’re going to have some attractive features when you think of our model versus others, and so that should be attractive to certain resellers and certain vendors. So we think that our model alone should attract us some customers, but we’ve got to tell them we’ve got it though. You’re right.

Switching back over to Avaya and they’re shifting mid-sized accounts to the channel. Could you clarify whether that was in SMB, Enterprise or both?

It’s ECG—it’s the Enterprise—because almost all of SMB is already channel. I think there’s a number out there—I think it’s 90% plus. So, yes, this is ECG. Correct.

Okay. And on that SMB category, was it within the last year that you had some competition enter, and have you seen any significant impact on that business in terms of margins from Text Data?

Yes, they entered almost two years now, believe it or not. And we have not had any market share issues. When they first came on the scene, what happened, as you recall, Chris, was there was an immediate margin drop for us and for some of the other players. It was interesting, because it was precipitated by Text Data’s lack of investment in that business at the outset, and generated by some of our competitors worried about losing market share probably too early, and fired off some early shots that, frankly, took some margins down. But, no, since then we have not seen a significant change.

Okay. And just a general question for you here. You’ve surely gotten some sort of a benefit over the last 12 months, as Symbol has executed its channel strategy and pushed a significant number of accounts into the two-step model. Is there a point where you think you will start to see a slowing overall growth in the business as the number of new resellers slows? Or has that already happened for you?

I would say most of the channel shift from resellers that are already buying from Symbol, or any vendor direct to us during the last year has already happened. So that shift has happened throughout last year, probably happened much earlier in the year last year. The shift that remained that went on through some parts of last year, was, as Symbol talked about a lot in their calls, that they moved business that was fully going through the user, the hot touch sales force to the channel. So this wasn’t really a reseller shift as much as an end user shift, but we really haven’t seen a lot of that in the last quarter or so. So I would say, yes. Most of that shift has already happened, and it’s in our December numbers and with our September numbers, too. You bet.

Okay. And final question—when I was up at the [NRS] Trade Show earlier this month, Dell had a fairly substantial presence with their POS business, and I guess you’re doing all of the fulfillment for that. Can you give us an idea of how quickly that business has grown for you relative to some of your older established POS vendors?

Well, we typically don’t talk about customers, so I’ll probably just say, No comment on that one.

And I think that is an important point, that, for us, Dell is a customer, not a vendor. In other words, they are buying from us in this case. We’re not buying from them.

If they were a customer of ours.

I guess I’ll call it quits there. Thanks.

Okay, thank you so much for attending our call. We’ll talk to you again in April. Thanks a lot.