Scansource Inc (SCSC) 2005 Q3 法說會逐字稿

Good afternoon, my name is Miranda and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the ScanSource, Quarterly Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) 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 March 31, 2005. I am Jeff Bryson, Vice President of Administration and Investor Relations; and with me today are Rich Cleys, Vice President and CFO; and Mike Baur, President and CEO; We'll 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 $355.1 million for the quarter ended March 31, 2005, an increase of 21% over sales of $293.6 million for March 31, 2004. Measuring sales based upon our product group shows a year-over-year growth of 22%, in AIDC and point-of-sale along with a 19% year-over-year increase in communication products for the quarter ended March 31, 2005. That produced a 60:40 mix of AIDC and point-of-sale, versus communications product. Gross margin was 10% for the third quarter of fiscal 2005, lower than the 11.2% margin we posted in last year's March quarter and slightly lower than the last quarter.

The March quarter's gross margin continued a trend of changing mix of more sales to larger resellers who have a lower value add requirement. As we discussed in our September quarterly call, there have been changes in vendor purchasing programs that continue to negatively affect gross margins. Operating expenses were 22.1 million, and 6.2% of sales compared to 19.8 million and 6.8% of sales last year. Operating expense dollars are higher than last year, principally due to increased head count to support our international security initiatives, additional marketing programs, and our first full quarter of cost related to added capacity in the Memphis distribution center.

Operating income increased by 2% to 13.4 million, which is 3.8% of sales compare to 13.1 million and 4.5% of sales for the March 2004 quarter. Net interest expense was 409,000 versus 88,000 for the same period last year due to higher interest rate and higher average use of the line of credit. Our quarterly effective tax rate was 36.2%. March quarter end net income increased 1% to 8.3 million and 2.3% of sales compared to 8.2 million in March 2004. Our return on invested capital this quarter was 22%.

Balance sheet metrics and cash use were as follows. Inventory turns was 6.2 at the end of March, which is within our target range of 5.5 to 6.5 turns, but slightly lower than the 6.5 turns in the June 2004 quarter. Compared to the December quarter, we managed inventory levels down by $21 million. The number of days receivable was 49 in March 2005, compared to 47 days posted in the June 2004 quarter. Our line of credit balances were 39.3 million at March 31 compared to a June 30 balance of approximately 33 million. We ended the quarter at about 8 days of paid for inventory, meaning that a significant portion of our investment in inventory was offset by trade payables to creditors. I will now turn the call over to Jeff to comment on each of our reporting segments.

Our North America segment includes sales from all three of our technology areas. AIDC and POS via ScanSource communications products through 2 sales units, CatalystTelecom and Paracon, and electronic security products through ScanSource security distribution. North America posted sales of 312.7 million, a growth rate of 19% over last year. Our next discussion will focus on the ScanSource sales unit. During the March quarter we continued our investment to recruit new resellers for our vendors. Programs such as RFID Edge, Solution City and other marketing events have helped us in our recruitment efforts. The number of active buying customers is up 9% year over year. In connection with this increased recruiting we have reorganized our sales team to have specific reps designated to help new resellers who are focused on the F&B marketplace.

We experienced lower than expected POS sales in the quarter due to delayed end-user decision making in that marketplace. The March quarter has always been tough to predict for the retail sector because it comes off the manufacturers' fiscal year end in December. We have recently signed an exclusive distribution agreement with Printronix, which is a bar code printer manufacturer that is a leader in the RFID space. Printronix also has a thermal printer offering, which will round out our line card in that area and they are transitioning a majority of their current resellers to buy from distribution.

We made good progress with our new Toronto sales office and have seen strong sales results, as that geographic region grew faster than the overall company growth rate. We now have additional sales and business development reps to support our resellers in Eastern Canada. During the June quarter one of our major vendors will be making changes to their reseller program, while we agree with the strategy behind these changes, it may cause some near term distraction.

We will now provide an update on RFID. We have several ways to educate resellers about RFID, our comprehensive RFID qualification courses will be offered at our distribution center in Memphis Tennessee. During our hands on lab, resellers will spend a significant time gaining real life, practical experience on how RFID solutions are working in various industries and see them at work in our demonstration facility. Sponsoring vendors and resellers who have successfully attended the qualification course will be able to bring customers to demonstrate recommended solutiond on site in Memphis. Ongoing training resources will also be available through our RFID education program.

Our RFID Edge provides customers with every component of an RFID sale, from hardware to software to services. ScanSource does the front end legwork required to identify and recommend the best RFID products. We also research integrated solution elements including software solutions. All of this prep work enables us to offer a superior product mix including middle wear, readers, printers, labels, and professional services to tie it all together.

We will next discuss the first of our 2 communication units, CatalystTelecom. CatalystTelecom saw great year-over-year growth in the Avaya Line. We normally expect this quarter sales to be higher than December due to our vendor seasonality. But this was a challenging quarter for two reasons, the changes in Avaya’s go-to-market strategy and weakness in end-market demand. As we mentioned in our January call Avaya began a go-to-market strategy to position their direct sales reps to serve larger end users while giving mid market business leads to the channel.

The near term impact of these changes was that some of our largest resellers had to replace some business they had previously done with large end users with new opportunities. This caused a lot of distraction and competition for accounts during a quarter in which there was already a weakening in end market demand. We believe that this conflict between the reseller channel and Avaya’s direct sales force will be resolved by Avaya in the coming months. Another sign of the industry's weaker demand was reflected in end-users making later buying decisions, within the quarter. Despite these challenges we continued to invest this quarter in recruiting activities.

We signed new accounts in both Avaya, ECG and SMBS, conducted IP Office boot camps and organized a series of educational sessions for our new resellers. We also had record quarterly sales with some of our other vendors including Plantronics, Extreme, PolyCom, and Bogen. Our other communication sales unit is Paracon, which focuses on converged communications products from Intel and NEC. In April Paracon announced an agreement to distribute Microsoft Speech Server 2004, which is a flexible and integrated speech platform designed to reduce the complicity and cost of developing speech applications.

Microsoft's Speech Server enables companies to unify their web and telephony infrastructure and provide speech enabled access from telephones, mobile phones, pocket PC's and smart phones. We are still investing and recruiting and training new resellers for our NEC product line. The resellers we are recruiting are providing net new business to NEC, and as a result they require a longer ramp up time before we see significant revenue. Paracon's strategy continues to be to sign successful communications venders in addition to the ones we already have so that we can extend our reach into the non Avaya market place. We will now take a moment to update you regarding our 3rd and newest technology area, ScanSource security distribution.

In March ScanSource security was named an authorized distributor for Bosch Securities Systems. ScanSource security will offer Bosch products including intrusion and access systems, motion detectors and fire alarms, analog and digital video systems, observation systems, surveillance cameras and other products. The distribution agreement significantly broadens the ScanSource security product line and offers security dealers and existing ScanSource Inc. customers, a single resource for a full suite of products from one of the security industry's premier manufacturers. ScanSource security provides a specialist sales team, free same-day shipping, a large inventory, online ordering, and experienced technical support.

This agreement establishes Bosch as an anchor product line and allows our resellers to purchase total security solutions from one source. We expect to continue to add vendors complementary to the Bosch line. This quarter we added Number Five, which is software for access control cards, Rainbow CCTV, which is surveillance cameras, Altronics, who sells electronic security components, Ditech, which is low voltage surge protection, RCI which is electronic locking hardware and Videoalarm which sells surveillance cameras. We have found significant interest from the Catalyst customer base for security products as well as from ScanSource's AIDC and POS reseller base. Many of these customers already sell security products in addition to phones or point of sale.

We had record sales from our card printer vendor group which grew at its fastest rate in 2 years. A significant amount of our card business includes media products, which provide recurring revenue for our resellers and for us. Our second reporting segment is international distribution. International distribution which includes Latin America and Europe posted sales of 42.3 million, compared to last year's quarter of 31.6 million, a constant currency growth rate of 29% after adjusting for 1.5 million of benefit to sales as the result of favorable foreign currency changes.

On April 15 we purchased from Zetes Industries SA, the shares of Europdata Connect an AutoID, RFID and wireless distributor based in the UK. The acquisition expands our reach particularly in the UK and Ireland, in the Netherlands and in the Nordic region. Philip Boyd the managing director of EDC will become Partner Services Director for ScanSource, Europe. Partner Services will include new offerings to our European line up of value added services and expand existing ones like our online catalog, product configuration, quota and order entry tools, educational programs, the Solution City Vertical Market road shows, technical knowledge portal and reseller marketing materials.

We believe ScanSource and EDC manufacturer partners will see the benefit from more value-added programs as a result of the increased resources the combined companies provide. The sale of EDC allows Zetes’ companies to build on their leading position as a pan-European systems integrator and enhance their collaboration with ScanSource in several strategic areas. The transaction, which was immaterial in financial terms, was a purchase for cash of the shares of EDC. After one-time expenses of $0.01 per share for the June quarter, the acquisition is expected to be earnings neutral. EDC has 27 employees in various roles including sales, technical support, and business development in offices in both the UK and the Netherlands.

Latin America showed the strongest sales growth in the Company this quarter with excellent results from Mexico, Argentina, Venezuela, and Puerto Rico. We have continued to see strong growth in Mexico, which was led by sales from our traditional AIDC vendors. We have continued to invest in marketing and recruiting new resellers. We just hosted a well-attended partner conference in the Dominican Republic with our key vendors and Latin America customers.

Seasonally, March is this region's slowest quarter and we saw more sales in the last month of the quarter than in previous years. We will conclude this part of the call with our outlook and expectations for the June 30, 2005 quarter. Last year's June 2004 quarter provided a tough comparable number because sales growth was so strong and because we had a higher than normal profitability. As we mentioned during that quarter's call, the June 2004 quarterly operating margin was stronger than expected because we had a better result from the planned disposal of some obsolete product and benefited from some buying opportunities for products sold through that quarter. As of the impact of these items, the June 2004 quarterly operating margin would have been 4.4% and earnings would have been $0.64 per share. With that said, we believe that our overall business model is more attractive than ever to our business partners. Technology manufacturers and resellers desire our evolving menu of value-added services. While choosing to invest in marketing activities, we expect to continue to gain operating leverage in our SG&A expenses as we achieve economies of scale. Our confidence in our business model is reflected in the investments we continue to make in international and security, which have not yet reached critical mass.

While acknowledging the limited visibility common to distribution, we think total revenues for the June quarter could range from $365 million to $385 million, and diluted earnings per share, excluding the one-time cost of $0.01 per share from the acquisition of EDC, could range from $0.64 to $0.71 per share. At this time, we will be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Mr. Jeff Rosenberg.

I guess the first question I wanted is see if there is any color you could give us on exactly what sort of disruption this new vendor program from one of your major vendors program is -- a little bit of where we should expect to see that affect you?

I think what is going to happen is some of the program changes include changing in the overall pricing models for the channel, not just for broadcast. And so, the whole channel is being affected by a change in the list prices which then affect reseller prices, and frankly our prices too. So, there is a massive administrative process underway, and then you've got a lot of customers that have to be requoted on opportunities, and certainly we expect that to take some of our sales reps’ time to do that. So, we are concerned that some of that is going on, but we expect it will be over fairly quickly.

So, this kind of harking back to when you guys were changing their channel programs, and you just were worried about a topline effect or is it changing in anyway what you are doing in terms of inventory? Should we read into anything in terms of how you have cut back on inventory because you expect lower margin or is it really just you just think it takes peoples' eye off the ball in terms of generating sales?

Yes, I think it's more a topline question. It does, frankly, put us in a position where we have to spend a lot of time talking about this rather than about what are you working on for the quarter and what deals can we help you close. So that's kind of why I say it's really more of a topline revenue issue.

Okay. And then, competitively, one of your major vendors added a distributor this quarter and there is obviously a lot of talk about new people being in the industry or the big PC distributors ramping up their activity with overall operating margins coming down some could you talk about whether or not you are seeing any effect of that or is it just all about mix and it is not really any new competitors having a big effect?

In general, we don't like to talk about our competitors. As you know Jeff, I think what we have seen is that some new competitors have come on the scene and yet at the same time our belief is that our business model is still very attractive to the manufacturers and to the resellers in that new competitors are going to be forced to build the same kind of value added model that we will. So far, we think that is still the plan. Those guys will have to build the same value added model that we will and our challenge is to make sure we are being very crisp on execution during that time so that we don't artificially lose any business because we are just not good at supplying products. So any inventory reductions are certainly planned for different reasons than making sure we are prepared for the competition. We want to actually have more inventory available in a competitive marketplace rather than less.

And just maybe another way to look at margins. Your operating margin this quarter was at the low-end of the long-term historical range, but was it down a sequential revenue quarter, and am I hearing you right that you were saying that you believe with revenue growth in the June quarter that we should expect you to get some SG&A leverage from that and the operating margin to improve sequentially or can I get that precise with you or was there a different message in what you were saying about how you are managing margins going forward?

Jeff, this is Rich. If -- the way I have been looking at it, I have been modeling to the midpoint of the range and if you look at the midpoint of the range of the $375 million revenue number, I think that what I am modeling right now shows a little bit of an improvement in the operating profit where we do get some of that leverage while we are continuing to invest.

When you say operating profit you mean operating margin?

Right.

Reik Read, Robert W. Baird & Company

With respect to the vendor changes that are underway Mike, can you just give us a sense for when that would be implemented? And it sounded like a short period of time to go through that, but how long do you think that might take?

Well, it actually started here in April. And so we have already seen a couple of weeks of that. We expect it to play out fairly quickly. But certainly by the end of June we will certainly have seen the impact of that.

Okay, and then just going back to the North America bar code point of sales segment, in you guys remarks it sounded like point of sale was the area that saw weakness. Do I understand it to be that it's really more end-market weakness with a couple of customers pushing things out or is there other type of weakness associated with that as well?

I think what we -- you did hear us right. We talked about POS deals and in the past when we characterized POS deals it is generally the larger opportunities that are -- some of our larger resellers who are selling to larger end customers. So it is really not the day-to-day `SMB` type point of sale business. It is really the larger end users that work with our largest resellers. So you definitely saw a slowing down in their ability to close business in the March quarter. It is our challenge right now as some of those deals are still out there and we just don't know when they are going to happen. So it is one of those where our customers told -- our resellers told us. They didn't lose the business. It wasn't like it went to another competitor or to the manufacturer direct or any of that it wasn't any of the channel stuff. It was really just end users saying we are not going to make the decision in the March quarter.

And did any of that weakness flow into the bar code side as well?

No, this is primarily a POS statement.

Okay, and then in the international bar code segment or I should say Latin America, it sounded like it was a very good quarter. Does that suggest that Europe was a little bit weaker than you might have expected?

No, I think, not, I think Europe was actually very good. We've just continued to see strong execution by our Latin America team, they have a smaller opportunity. And frankly, they have less opportunities to improve profitability down there because they are working off such a small opportunity, but the bright spot was that a couple of the countries that had been dormant for about 2 years, Argentina, specifically, have come back and that was kind of the nature of their improvement was looking -- Argentina, Venezuela, and then Puerto Rico, which also had been kind of slow point for us. And then we just reemphasized the fact that Mexico, after we made an investment in a little over a year and a half ago now, by putting that local warehouse and a strong sales team in Mexico City has just done gangbuster. So we really think they've done a great job. And then in Europe, continued to execute well. They got, obviously, a bigger business already in place there. So the percentage growth was certainly higher in Latin America. But overall we felt like the international performance was strong.

Okay, and then just one quick question on the Avaya side and I will get out of here, is when I look at Avaya's results, they posted 57% of their business indirect in the March quarter a year ago and down to 51% in the March quarter this year. And the question is, you know, how relevant is that metric, what's happening there, and what would you expect with that trend going forward?

I think, the way I read that is this – it is a little bit of how they are counting the revenue, because I discussed that with some of the guys at Avaya, just so we were real clear. Two things happened that affected specifically their business that they are probably are better at giving you the details, but, if you recall when we used to do business with Exponet. That business was acquired by Avaya and they continued to count that as indirect revenue even after they acquired it, and that was long, that was now, I guess, a year and a half ago. So that business just kind of went away, and lot of that business is now served by the channel. But over time, you had the Exponet change, and then when they acquired Tenovus last quarter, or the quarter before last, that was actually heavy direct business. So the net effect is they got other things going on in their business. And for us we have not seen yet an indicator that Avaya is moving business specifically to direct at the expense of indirect. So during this past quarter, we saw a lot of channel conflict. And, I think, what happened is neither one of us won. Neither the direct side nor the indirect side. I think Avaya was frustrated with it and so are we. And, I think, everybody is so focused on it now, they are going to get that resolved, we hope during this quarter.

That's great. Mike, thank you.

Chris Quilty, Raymond James.

Good evening gentlemen.

Hi, Chris.

Another question on the vendor pricing. Can you give us a sense of -- you know, is this an across the border pricing and to what degree are we talking, 2 to 3% or 7 to 8% and obviously you are working that into the forward guidance that you've given, because you've going to see that impact also. And also would you expect to see all your other vendors follow through with similar price cuts. And is that built into your expectations?

I think, number one our expectations include what ever happens to that program. In general, this particular vendor was basically adjusting some end market pricing that maybe wasn't realistic, and so they are trying to close the gap between what appears to be a suggested street price and what is a real street price. So the net effect should be that the margins to the channel shouldn't change. It just requires you -- to be honest to do a hell of a lot of administrative work to put in place new pricing, new programs, reset expectations with channel partners. It just is a lot of work. And those kind of things, when you look at all the different part numbers that are affected when -- a major vendor affects for us probably 6000 different part numbers with different pricing. It really makes for a lot of work. But, having said all that, we've got that built into our forecast.

Okay, so in another words it sounds like the particular vendor was not price competitive with what peers were charging on certain products, had discounts in place and is moving towards a permanent lower pricing structure?

Well, you know it's probably not that, it's probably more there was an artificial price in the market that didn't reflect reality. That's all.

Okay, so they had been selling at a significant discount to the list price for a long time, and they finally said okay let's just adopt a list price.

You've got it.

The street price.

Absolutely right.

Okay.

So, it's not that there's going to be a significant change in cost to anybody, but it's just you've got to go through that whole process.

Okay, so that's just a --.

Net net we think it is good because it should impact end user demand, especially for their smaller end users who might look at list price as something that's meaningful. You know, the Wal-Marts of the world, they never believe in list price.

They don't have to pay it.

That is right.

Okay. Shifting gears, when you mentioned that you had some point of sale weakness and that primarily being the IBM, NCR type stuff, does that also mean that in the bar code portion of your business that there was weakness in the retail vertical or was it just specific to the sort of front-end systems that characterize point of sale? In other words not all bar code products, scanners and mobile computers go into the retail market, 80% of them go into other verticals, but was there a specific weakness in retail?

It was really point of sale. It was absolutely the cash register portion of the business, because you know overall we felt like we still had a great quarter. I mean the growth rate year-over-year was strong and we think that there is no sign any of particular vertical market that has weakness. I think, as you guys know if you've followed us a long time, the March quarter is the most difficult quarter we have to predict every year. There are so many things that go on in December with the larger retailers as they obviously are not installing point of sales systems but manufacturers want to get them to make buying decision so that they install them in the March quarter. And you know, frankly we just saw a lot of these decisions put off, and yet as you said, the overall retail sector itself doesn't appear to us at this time as having problems.

And actually I didn't catch, what were the year-over-year growth rates on the bar code and the telephony businesses?

21 on bar code and 19 on phones.

21 and 19, okay.

Yes, actually 22. Yes, 22 with a little bit of rounding. 22 and 19.

Okay. Those were right about in line with expectations or at least mine. You mentioned within the security products group that you had some strong performance there. At what point will you start to break that out for us in terms of segmented data on the financials?

Well, I think so far the -- you know the business that we are doing of any relevance in that division was formally included in our point of sale and bar code business, you know the card printers. So, that's why right now we are just keeping it all lumped together. As soon as we have reasonable material revenue coming from specific new security vendors, we will be looking at how we are going to indicate that to you. Part of our challenge, of course, is there are some competitors in that business right now that would love to know how we are doing, and we would like to keep some of that confidential as long as we can.

And if you can say, was there anything specifically that drove the higher performance of the security printer business?

Well, I think it is our focus. We used to have all of our ScanSource sales reps selling card printers along with the other vendors, and now we've got a specialized sales force who are focused just on those products. And since we haven't had the Bosch line until just this quarter, the April quarter – April, May, June quarter, they really had to sell what they had. And they put a heck of a lot of focus on it and it resulted in increased revenue. So I would say you just -- it goes to show that the model we have, we have a separate sales force for specific technology products really is the best one for our manufacturers and our customers.

So it was more about taking market share than necessarily bringing a new product line on or accelerated growth in the end market?

We think for sure we took market share, yes.

Okay. Final question on that security products group. At some point do you realistically have to go out and acquire one of the distributors out there as you typically don't deceive the market? And are you at some level of discussion with any number of players that you can talk about?

I would say it this way is that, unlike some of the other markets, this market already has an established channel, it has already even established knowledge of what two-tier is all about. So, we are not having to go and totally educate the manufacturer. So, if we can identify, like we think we have with Bosch, manufacturers who really understand how we can differentiate a two-tier model, we don't believe we have to make an acquisition to make this particular technology segment work for us. We think that would accelerate our efforts, but we also have learned that it is best to be somewhat patient here in the early days, and let's make sure that we understand exactly what we are signing up for. And I think with Bosch, we feel like they've proven themselves in the channel, they've proven that they are interested in value added distribution for incremental purposes, and we believe our existing customer base is very attractive to Bosch and other companies

Okay. I think it was couple of hours ago actually Synex announced that they were given access to the entire Intermec product line for distribution which to my knowledge that is the first time that a competitive two-tier distributor has gained complete access to one of the -- sort of tier one, tier two bar code vendors. Does that increase the level of competition or is the fact that that business is right now just bettered in Canada prevent them from making any fast moves into the US market?

As you know they acquired EMJ last year, and EMJ had the Intermec line and so we have been competing with EMJ for a long time in Canada. And so based on the announcement today it just allows EMJ it appears to sell in North America, not just Canada. But I am really not sure that changes any thing from where they were. We really, like I said, have known EMJ for a long time and it’s one of the reasons that we expanded our Canadian presence at the end of last year. And this past quarter we discussed we have increased our Canadian business substantially. We feel like the moves we made in Canada were the right ones and we think the same value added model that we use in Canada or EMJ does has to follow also in the US, that the manufacturers have said that they really don't want a low value fulfillment business like Synex runs in their separate US business, but they really want a value added business, which is the type of business that EMJ was running in Canada.

And then the final, final question, given the degree to which the stock has come back, is there some level here where the board would look at repurchasing shares or taking other moves to support the stock price, has that been discussed?

At every board meeting we evaluate all of those type of actions, and I am sure we continue to in the future.

Ajith Pia (ph).

This is Andy filling in for Ajith. I am just wondering if you can provide some details or some information regarding the linearities during the quarter. You mentioned some weakness, some softness in telecoms and also in the POS area. Do you see that weakness spilling over into the current quarter?

Well it is certainly something that has us concerned, because whenever end market demand is down, you know we are not sure if that's temporarily because we don't sell directly to end-users. So, we are having to get our information through two sources, the resellers who tell us what they are seeing and hearing, and then also the manufacturers. So, we hope to learn more about that, frankly over the next few weeks. We've got a partner conference with our top AIDC resellers coming up next week, and then we have got our top Catalyst resellers, we have our partner conference coming up in about 4 weeks. So, we hope to learn a lot more about the end-user market and what we can do along with the manufacturers to help our resellers to close the gap. But having said that, what we believe about the end user demand is built into our guidance at this stage.

The question is geared to RFID, can you also give us some color in terms of what is the market demand for RFID product right now is? And is that too early stage, and do you see it ramping in the current quarter?

Sure. We have I would say significant interest from our customers and their end users in RFID. Revenue is a different story. We still believe that sometime in 2006, and so - calendar year 2006. So, our objective right now and the reason we talk about it is that we are investing a lot of money this year in building educational programs. We talked about it in this call, we are building a demonstration lab, in our distribution center in Tennessee, so that our customers can bring their end users and demonstrate how this technology works, because it is a long sale cycle and we want to help reduce some of the barriers to entry for our partners to be able to participate when RFID revenues become material. So we think we are still at the significant investment stage for the next probably 3 quarters, and then we hope we will see some revenue in 2006. I think the point of the education is to tell our customers here is all the things that you have to know about RFID, but some of these applications your customers are asking about can be served today with traditional bar code and AIDC technologies. So hopefully our existing technologies would continue to sell in spite of the fact that people are asking about RFID.

That's great thank you very much.

Jeff Rosenberg, William Blair & Company, LLC.

Hi. Rich did you give us a tax rate number we should be thinking about for the fourth quarter?

No. I didn’t. But you should probably think about it more of a traditional tax rate for us in modeling.

Okay. So if I have been using -- I know it sounds wrong -- but if have been using 38% that’s --?

That probably would be okay.

Okay. Great, thanks.

Eric Ind (ph).

Hi. Perhaps you could clarify something for me in discussing the company as a whole in gross margins, you suggested that they were -- there was a mix issue that you had more orders from large resellers with less value added and then in discussing POS specifically you said there was kind of an absence of large orders as you often have in POS. Does that suggest that you really had a kind of an extra large amount of big orders in either bar code or telephony?

I think what we are saying is that not only is there large order activity in our business. But over the last three quarters or so maybe four quarters, what's happened is we are serving resellers who are now larger and whether they buy a small amount of product from us or a large order from us we still give them good discounts that are appropriate to the value that they need from us. So, the point of that comment was absent large POS deals, we also have larger resellers who don't require the same level of value added services, which suggests lower gross margins but also lower SG&A.

Okay. And that's of course a permanent situation?

Sure. Absolutely unless we can find ways to provide additional value to that customer that he is willing to pay for, absolutely right.

Okay. Thank you.

Kevin Starke (ph).

Good afternoon, gentlemen. EMJ got brought by Synex, Enax (ph) got swallowed up by a white box distributor, have you seen momentum towards these once value added distributors becoming more white box in orientation? In other words lower margins.

Well, I'll say it this way. We have always believed that the business model that we operate under is still the right one and the manufacturers support us, meaning that they are confident and comfortable with the value-added services we provide their channel, because we really construct our business model around what manufacturers and then reseller believe is of value. If they believe that this was just a fulfillment commodity business, then we would have a different business model. And we have always said that what we do to long term protect our value added business is we do sell some products on a low value basis, whether that's a larger reseller, as we talked a few minutes ago that needs less services or there are certain products within a manufacturer’s product line that over time become commodity like and on those products we do take a little margin and we have lower cost to service that. So, we are comfortable that we have an interesting blend of a very efficient fulfillment mechanism when necessary coupled with a value added model, and we believe that's the challenges. How do you combine a value added company and a low value added company, and keep the two separate enough, yet leverage the efficiencies of the low value. And I think that's a challenge for everybody.

Okay. Second question, from what you said and what Avaya said on their conference call last week, one gets the sense that you lowered your inventories of Avaya products quite considerably and I think this is the first time I have ever seen your inventories go down in the aggregate quite so much. I wonder if you lower your purchases of Avaya products in one quarter do you then lose volume rebates in subsequent quarters and would that affect gross margins negatively?

But we don't talk about specific vendor, or our inventory levels or margins. So, I can't comment on what the Avaya inventories did with us. So, in aggregate we lowered inventory levels, but that's the combination not only in the US but also International. So, in the particular case if you are asking as an example, do we have programs tied to volumes? Sure we do. We have some of those and what we referenced in this quarter, we talked about gross margin impacts and also back in September some of the manufactures are actually moving away from volume based incentives and moving to other programs that we have to provide or service to retain or to earn some of those incentives. So, I would say manufacturers have moved in the opposite way. They are moving away from volume based incentives and more value added incentives, and so we are saying that because of that change over the last 3 quarters, it is still a little harder for us to predict exactly how much we are going to earn from the manufacturer. So, that's why it's bouncing around a little bit on us on the gross margin line.

Does the movement away from volume based incentives favor you in the long-term do you think?

I think it does. I think our model has always been about value added programs and how do we compete and offer a service or a program manufacturers would prefer over somebody else, and we actually love that challenge.

Gary Shinarow (ph).

I guess just to follow up on Kevin's question in terms of inventories. Would the decline -- is it fair to assume the decline and that is in proportion to the decline in each business in the core business and the telecom business?

Gary, I think one of the beauties of having return on invested capital based pay plans and measurement goals for division heads and for different people managing the product line is that each of them is instructed every quarter to have the best inventory level that maximizes their return on invested capital. So it is really the accumulation of a whole bunch of individual decisions made by individual business leaders that felt they were doing the right thing for their line, both to position for future growth as well as managing their profitability for right now.

Okay. Also Avaya started breaking out their revenue and they said that their sales through the channels have been pretty consistent for the last 5 to 6 quarters and your telecom business has felt a little bit more volatile, I think it was up for a couple of quarters and then down the last couple. Can you help me understand what would you know to reconcile those two issues?

Well, I think what you have to remember Gary is in our world, we compete with other distributors. So we can have market share gains that don't affect Avaya’s numbers and so that's what we look at as well as what is our share of any manufacturer's distribution business on an availability standpoint and we've said in the past we had gained some market share in different quarters.

I guess that would imply though that may be you lost a little share in the last couple of quarters or do you not think so?

We don't believe so. We believe if the overall channel business is down meaning that if we kept share then the overall channel had to be down, then we also think to any manufacturer – I am not picking on Avaya here -- their direct side could be down also. Sometimes the direct side of the business is down and most manufacturers don't even publish that percentage.

Mr. Bryson, at this time, there are no further questions. Do you have any closing remarks?

No. We appreciate your joining our call and we will talk you to again in August of 2005. Thank you.

And this concludes today's ScanSource Quarterly Earnings Release Conference Call. You may now disconnect.