Scansource Inc (SCSC) 2006 Q3 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the ScanSource quarterly earnings 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 session. (OPERATOR INSTRUCTIONS).

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

Thank you very much. Thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended March 31, 2006. My name is Jeff Bryson, Executive VP of Administration and Investor Relations. And with me today are CFO, Rich Cleys, and Mike Baur, President and CEO. We will review with you 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 start our discussion by providing overall sales and operating results.

Thank you, Jeff. The Company posted sales of 405.6 million for the quarter ended March 31, 2006, an increase of 14% over sales of 355.1 million for the March 31, 2005 quarter. Measuring sales based upon our product group shows year-over-year growth of 13% in AIDC and point-of-sale, along with a 16% year-over-year increase in communications products for the quarter ended March 31. That produced a 60/40 mix of AIDC/POS versus communications products.

Public companies with a fiscal year which begin after June 2005 are required to implement the new accounting standard related to option expensing. For most companies, that date was January 1, 2006. But for ScanSource, the effective date was July 1, 2005. As a result, our March 2006 operating expenses, income taxes and number of shares outstanding were affected by this new accounting requirement. The new standard is not applied retroactively to last year, so to help you understand comparable trends, we are going to isolate the effect of option expensing on the current year numbers in the discussion which follows.

While we would have preferred that analysts build their models off of income statements without option expensing, until the end of our fiscal year, June 30, 2006, we understand that First Call has asked everyone to standardize on the GAAP number. Therefore, we request that those that are following our company be very careful in their comparisons to last year for one more quarter, through June 2006. By September 2006, we will have had the comparability issue behind us.

Gross margin was 10.2% for the March 2006 quarter, compared to 10% for the same period last year. Operating expenses were 26.1 million, including 973,000 recorded for option expense. Without option expense, operating expenses were 25.2 million and 6.2% of sales, which is comparable to operating expense as a percentage of sales for each of the past several quarters. Operating income without option expense increased by 20% to 16.1 million, which is 4% of sales. Net interest expense was 390,000, which is comparable to 409,000 for the same period last year. March 2005 quarter-end net income without the effects of option expensing increased 24% to 10.3 million and 2.5% of sales compared to 8.3 million in March 2005.

We were very pleased with our return on invested capital for this quarter, which, after the inclusion of option expensing, continues to be strong at 22%. We have always managed our balance sheet in light of changes in our gross margin, meaning that the right mix of inventory turns, account receivable days and number of account payable days helps us achieve our targeted ROIC results.

Balance sheet metrics and cash management were as follows. Inventory turns were 7.1 at the end of March 2006, which is comparable to the 7.3 turns posted in the June 2005 quarter, and down slightly from the previous two quarters. The number of days sales and receivables, DSO, was 57 at March 31, 2006, compared to 51 days posted in June 2005.

Our line of credit dropped to 24.1 million at March 31, 2006, as our business has produced approximately 18 million in cash since June 2005, which resulted from a combination of growth rates and the timing of our payments on accounts payable. We ended the quarter at a negative 5 days of paid-for inventory, meaning that our investment in inventory was offset by trade payables to vendors. This metric can be temporarily lower or higher, due to the normal timing issues as to when the last day of the quarter ends relative to the bi-monthly payments we make to our vendors.

Jeff will now give you an update regarding each of our reporting segments.

Our North America segment include sales from our all three of our technology areas -- AIDC and POS by way of ScanSource; communications products through two sales units, Catalyst Telecom and Paracon; and electronic security products through ScanSource Security Distribution. North America posted sales of 349.4 million, a growth rate of 12% over last year.

Our next discussion will focus on the ScanSource AIDC and POS sales unit. We had a good quarter in ScanSource North America. Our point-of-sale business did not experience further degradation, but was steady compared to last quarter. We saw some upside in our AIDC product lines, where we took additional share from our competitors and experienced growth from larger resellers who are now buying from distribution instead of buying direct from manufacturers. We anticipate vendors continuing to shift one-tier resellers to distribution over the next few quarters. Typically, when these resellers begin to buy from distribution, they do so at lower gross margins and require fewer value-added services.

We held our quarterly Solution City Roadshow on March 23, 2006 in Atlanta. More than 400 resellers visited the vertical market-oriented show, where the latest technologies from 80 manufacturers for retail, healthcare, public sector, distribution, manufacturing and financial markets were on display in real world working environments. This year's Solution City Expos demonstrate how the key technologies available through ScanSource can be converged over a single network infrastructure, from voice and data to security to point-of-sale, creating a cost-effective and easy-to-manage total solution.

Solution City also featured an RFID Pavilion which showcased hosted RFID, retail and DoD compliance, closed loop solutions and beyond compliance applications. Solution City is a very successful example of how our size and scale can accelerate channel education and knowledge on behalf of our vendor partners. Our next Solution City Expo is Thursday, May 11, in New York City.

We will next discuss the first of our two communication units, Catalyst. Compared to last year, we had a strong Avaya quarter. As you recall, last year, we were feeling the first effects of Avaya's changes in its go-to-market strategy, which reduced sales in the March 2005 quarter. Coming into this quarter, we were concerned about Avaya's product shortages, but Avaya was very helpful in reducing their impact. We benefited from some shipments late in the quarter, so we were able to mitigate the effects on our resellers of most of the shortage issues. We appreciate our resellers, who helped us work through these product shortages by rescheduling installations or substituting other Avaya products.

Extreme and Juniper had very good sales growth compared to the December quarter, which shows that we are building momentum with our convergence strategy. We were very pleased with the success of Plantronics, SpectraLink and Polycom, which had record quarterly sales. During April, we hosted a convergence summit, at which the top executives at our key vendors -- Avaya, Extreme, Juniper and Polycom -- met at our headquarters to consider how to best market convergence solutions through our reseller group. Our shared challenge is developing programs for voice resellers to educate their sales and technical teams on the benefits of selling a total converged solution and building a profitable converged business model for the channel.

This quarter, Catalyst Meru's wireless VoIP and data product line, including its Meru Wireless LAN system, which is built to carry heavy voice and data traffic with reliability and optimum quality. Meru had previously announced an agreement to partner with Avaya to market Meru's Wireless LAN portfolio to Avaya customers. Meru adds great value to our convergence offerings, as they deliver scalable, reliable wireless LAN solutions that are built for the voice marketplace.

Our other communications sales unit is Paracon, which focuses on converged communications products. Paracon had a very good year-over-year sales growth, due to some larger Intel deals plus the addition of Zultys and growth in the vertical technologies product line over last year. Paracon is focused on recruiting new resellers for Zultys, as their products are designed to be sold by nontraditional voice dealers. We also sold through our first full quarter without sales from a key vendor who we dropped in the previous quarter.

We will now take a moment to update you regarding our third and newest technology area, ScanSource Security Distribution. The Security unit recently announced a key vendor signing of Panasonic. ScanSource Security has partnered with Panasonic to distribute their line of video surveillance solutions, ranging from analog-based to IP video security systems. Through this partnership, ScanSource Security's reseller customers will have access to Panasonic's IP remote monitoring solutions for residential and small office use. ScanSource Security will also distribute Panasonic's cameras and lenses, including the SuperDynamic III intelligent technology lineup of cameras, biometric access control, digital video recorders, management software, lenses and housings and network interfaces needed to deliver a total physical security solution.

ScanSource Security also strengthened its card printer solutions offering with the addition of Synercard, a developer of the Assure ID suite of photo ID and ID card application control software. Synercard solutions are easy to implement, and allow for the management of photo ID cards for the small business up to the largest enterprise. Synercard software solutions are well-respected in the industry, and work seamlessly with our leading card printer manufacturers' products.

The Security unit also added to its linecard IPIX Corporation, the leading developer of advanced visual intelligence technologies. IPIX products offer a unique, continuous 360-degree field of view, allowing full coverage for visual security needs. ScanSource Security will be distributing IPIX video product line, including the CommandView cameras which are used to monitor and protect high-risk environments. IP-based surveillance systems are the next generation of security products.

In April, ScanSource Security had its first presence in one of the security industry's most significant trade shows, the ISC West Expo in Las Vegas. At that show, we were able to meet with many of this industry's leading vendors and introduce ourselves to over 10,000 resellers in a single setting. From customer feedback and the leads generated, we believe our story was very well-received. This marketing effort, funded entirely by ScanSource, is indicative of the investments we continue to make to grow this unit.

Our second reporting segment is International Distribution. International Distribution, which includes the geographies of Europe and Latin America, posted record sales of 56.2 million, compared to last year's quarter of 42.3 million, a growth rate of 33%. If measured on a local currency basis, our international sales growth would have been 42% over last year. We avoided much of the seasonal decline that comes sequentially following Latin America's December quarter, due to the strong performance of our Mexico unit, which was helped by some larger deals that are common in this geography. Latin America's AIDC sales were led by Symbol and Zebra. We continue to invest in headcount and will do so going forward, especially in Mexico, because we believe the growth opportunity is sustainable.

For Europe, as in Latin America, we saw exceptional sales growth. Growth in Europe is coming from share gains from competitors and from vendors who are encouraging local resellers to buy from a pan-European distributor with no negative consequences. We had strong year-over-year sales performance across the board from our AIDC vendor lines, and geographically, sales growth over last year was led by the UK, France, Netherlands and the Nordics. We were especially pleased to see growth in our point-of-sale business from IBM and Epson, although these numbers are being compared to a relatively small prior-year base.

We believe we are gaining share versus our competitors because, as we invest in inventory and receivables and turn our inventory faster, we are providing better service levels for both our vendors and customers, who are bringing us in on larger deals. As we saw in the early days in North America, having better inventory availability allows vendors to increase business through the channel, because product gets to end-users faster and more efficiently.

We also had a number of marketing projects in Europe during the quarter, including several trade shows, special catalogs targeted at specific geographies or vertical markets, as well as direct-mail and magazine advertising. Our vendors are all facing the extra cost and supply chain challenges with new regulations in Europe regarding the disposal of hazardous waste. The Restrictions on Hazardous Substances Directive, RoHs, prescribes the maximum trace levels of lead, cadmium, mercury, chromium and chromium and flame retardants that may be contained in a product. Only products meeting these high environmental standards may be placed on the market in EU member states after July 1, 2006. We expect that we may have higher inventory levels over the next two quarters, due to the transition from noncompliant products to sales of compliant products.

We will conclude this part of the call with our expectations for the June 30, 2006 quarter. For the June quarter, there will be approximately 1.04 million of total compensation expense related to options in the GAAP SG&A number, along with 165,000 of taxes, for a net P&L impact of 875,000 after tax or $0.06 per share. We think total revenues for the June quarter could range from 420 million to 440 million, and GAAP diluted earnings per share could range from $0.71 to $0.75 per share.

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

(OPERATOR INSTRUCTIONS). Kevin Starke.

Avaya said yesterday that their indirect channel sales grew from 51% of sales to 58% year on year. They were not terribly clear on their call what was driving that, whether it was the supply issues they had on their direct business, or whether it was distributors such as yourselves actually fueling just that much dollar sales growth. I was wondering if you could shed some light on that?

I'll try. I think, from our perspective, we were still able to satisfy most of the demand for Avaya products in the quarter. And based on what I have heard, Avaya wasn't able to do that on the direct side of their business. So it looks like the indirect business was still able to happen pretty normally. Even though for us, we had some of our customers maybe not complete their installations, we were able to ship them product very late in the quarter, and they were willing to still take the product and install it in the first week or two of April.

So I think it really just reflects that the indirect channel was able to normally execute and maybe their direct side was not. It really wasn't a shift of any business to the indirect. It was more just the indirect was able to take advantage of the fact that we always have inventory, and so we were better prepared to satisfy some of our customers.

You are making it sound like there's some pent-up demand of Avaya product spilling into the June quarter. Is that a fair statement?

Well, not for the indirect channel. I think, if that would be the case, it would be on the direct side.

Reik Read.

Mike, can you just follow upon that? You say that there's not a pent-up demand. But how do you feel about the supply going into this quarter? Is it a situation where you wound up stealing some inventory in the March quarter and are going to have some difficulty in the June?

Actually, no. I think we feel pretty good. The product supply issue started back in December, the December quarter. So we have actually been dealing with this for six months now. And so we were able to better get ready for this. I think Avaya did a very good job, frankly, the last week of the quarter, at getting us product supply. And I think we exited the quarter with what we think is reasonable supply, except in a few areas. So, for example, if there were 30 products that we were short on throughout the December quarter, I would say that there's much fewer products that we're in short supply of today. So they made significant improvement in the quarter and have given us information. And I think they said this on their call, that they believe by June that they will have the remaining shortages resolved.

So we feel like we will have a -- we had a normalized quarter, based on supply coming to us late in the March quarter, and we think June will also be normal as a result of that. It doesn't mean that something couldn't still go wrong. And I think we've got some of that potential in our guidance.

And then, on the point-of-sale side, where you guys suggest in your comments, no new improvement there, can you differentiate between point-of-sale, retail and automatic identification as it relates to retail? And I guess, on the AIDC side, you had extended in the back office. And I just wonder if there's a difference in how you're seeing those two sets of retail customers.

I think for us -- it may be different than some of our vendors -- when we talk about point-of-sale and retail, we really mean point-of-sale systems at cash register type systems, not backroom retail supply chain systems. So for us, when we talk about over the last year a sluggish point-of-sale market, we truly do mean our cash register-based business.

So that's the part of our business that we think has bottomed out, and we saw some signs of life but nothing that is, from a growth standpoint, getting us excited yet. But we think we have bottomed out from that standpoint. So this is traditionally our specific point-of-sale vendors, not our general vendors who carry products that can be used in point-of-sale as well as distribution or manufacturing.

And then, just on the European side of things, you had mentioned in your comments that the vendors are now helping out between mix model and the pan-European style. Can you give us a sense -- one, is that being done really with the discount structure and what they are offering? And, two, what percentage of the vendors are really participating in that at this point?

Well, in Europe, the plan is for several of our key vendors -- so vendors that would represent over half of our revenue -- to implement programs like this during the calendar year, if not, at the latest, beginning January of '07. So throughout this year, we expect vendors to announce programs that will set up a two-tier pricing and service structure for Europe where they didn't exist before, where there was no real differentiation between a two-tier-only distributor and a mix model distributor. So certainly, Symbol led the way a couple years ago. When we entered Europe and shortly thereafter, they continue to execute on that, and I think the other vendors are announcing programs now and throughout this year, with some of them executing on that over the next two or three quarters. So we think it's a real positive sign that our model is being accepted well in Europe now from the manufacturers as well as the resellers.

Can you just clarify what percent are doing it today and what percent by the end of the year?

Well, we really only have one significant vendor doing it today, Symbol, to be real straightforward. And then, the other vendors that we expect to come out with programs to support that would represent, certainly, over half of our revenue. So without giving you a specific number -- I don't want to put any vendor on the spot.

Jeffrey Kessler.

It's Jeff Kessler with Lehman Brothers. You alluded to improving business with both Zebra and Symbol. And then, you have just talked about the Symbol model that you had in Europe. Are you seeing better vendor business in the US from these companies as well, or is it primarily driven by Europe?

Well, in our US market, we have tried not to break out a lot of details about our vendors, because our model there is pretty well-established, and the manufacturers tend to talk a lot about any changes in their strategy. So we really focused on Europe and called out some names just to highlight the companies that have specifically made different strategic plans that would include distribution. So there's no changes going on in the US that would affect our business substantially. That's why we didn't talk about them.

And we try not to tell their story. We really try to make sure that our vendors can talk about their specific geographical strategies, unless it is something that we are comfortable has already been publicly announced and that we're providing additional color on.

So you are seeing your AIDC business through the vendors in general being strong, regardless of whether it's Europe or the US?

Yes, that's right. I was just looking at something. We actually had the strongest performance in a year in our AIDC and Positive business, even in North America.

Ajit Pai.

A couple of quick questions. The first is -- I don't know whether I missed it, but did you give the breakdown of your total revenues in the two categories, the telecom category and the point-of-sale and the AIDC category?

We said it's about a 60 to 40 mix this year, or this particular quarter, and that it grew by 13% on the barcode side and a 16% growth on the telephone side.

And then, just having a look at the RFID, what's going on in that arena right now, a number of your vendors sort of talk about things slowing down at the end of the last quarter and saw some declines there. Are you seeing now that any increased activity over there? And how are you positioned right now with some of the activity that's going on over there right now?

Well, I think we have been pretty consistently saying throughout last year and going into this year that we didn't expect material revenues until the end of calendar year '06, and I think that's holding true. We are making some sales. Our primary focus right now has been on recruiting and educating resellers who want to make an investment in RFID. And so we got our RFID training lab set up in our Memphis distribution center, where we are running about 10 to 20 resellers through there every month to get certified. And we hope to have about 200 resellers RFID certified by the end of calendar year, so that we're in a position to be able to make some of these sales as they start happening at the end of '06 and early '07. But clearly, no dramatic changes in revenue for us at this time.

But the appetite for going through this reseller training is still pretty high or running at capacity there?

Yes, it is. And one of the attractive things about our offer is they can come to one school and get trained on multiple vendors' platforms. So we're the only place where you can do that, and we actually then, through cooperation with a few of our vendors, they spend another half a day and get their certifications on several vendors all at one time. So we're lowering the cost of a reseller to get educated on RFID.

And then, about a year ago, I think you had mentioned on your call that at some point, when the security business became a material percentage of the overall business, that you might give us what it is as a percentage of sales. Has it become sort of a material portion right now? Is it getting close to 10% of sales, or is it much too small still?

No, it's still much smaller than that. We're still at the stage where we are at the point of adding a couple more significant vendors. We announced Panasonic today. There are three or four other significant vendors that we are in the process of either signing or hoping to sign, and we expect that a few more quarters from now, we will have some more progress to really report it in a material way. But we're not in a hurry, either, to educate our competitors in the security space on what we're doing. And so we will not be eager to break that information out, to be honest.

But if you looked at the challenges, and you're entering a new market now, it's a sort of third leg to the story, the ScanSource story, are you focused much more right now on adding on new vendors? Or do you think that the vendor portfolio is sufficient and your focus is going to be much more on getting new resellers?

Well, we have a strategy in all of our technology areas to have a short linecard. Our belief is that we're a very close partner with a smaller number of vendors, that we can gain unusual partnership advantages and then translate that into market share. And typically our vendors, by deciding that our model has superior advantages to them, they then encourage their customer base to buy from us. So the fastest way for us to gain customers historically is for vendors to like our model and shift customers to us.

So, at the same time as we're trying to get manufacturers to say -- "Why are we dealing directly with hundreds of small resellers? Let's outsource that to ScanSource." -- we do have a significant marketing campaign on our own to recruit customers, where this recent trade show that we mentioned in our report today, we were very pleased to go to a trade show where there are thousands of resellers, and we had a chance to get in front of those guys and sell the ScanSource Security story.

Chris Quilty.

Congratulations on the great results. And Richard, thank you for your in-depth explanation on the FAS 123. A question for you -- this is just accounting. When you give us those growth rates on the AIDC/POS business and the telephone business, where do you put the Security stuff?

It is embedded in the ScanSource number, because that's where its roots are. In other words, that's where those card printer manufacturers were historically. We felt that that is the safest place to keep the comparables as appropriate as possible.

So it gets broken out separately?

Yes.

And did the growth rate -- well, obviously, it's such a small piece of the business, it probably didn't distort the growth rate of the barcode POS substantially?

That's correct.

That's correct.

In the Catalyst Telecom business unit, you indicated a number of different smaller vendors that had record sales. Was there some specific initiatives that you were pushing, or is that just indicative of strong end-market growth?

Well, we would like to think that we're having some impact on that. I think the story that we've been trying to communicate since October of last year is a real convergence story, and I think we referenced in our call earlier that we had a convergence summit, even, where we brought in the manufacturers and said each one of you guys plays a part in creating a convergence solution. It's not just a one-vendor story. So we have started doing a lot of convergence education to our reseller community, and I think that is what is leading us to sell additional products while we're selling, for example, the Avaya base system.

So now, it's easier for our sales force and for our customers to see why it makes sense to use products from Juniper and Extreme, as well as Polycom and Plantronics, to complete their solutions. So we're proactively marketing a more total solution this year than we did last year, yes.

You gave us the revenue numbers or growth numbers for Latin America, but didn't do so for Europe. Can you give us those numbers?

Yes. Actually, what we called out in terms of the numbers -- that was for the whole international segment.

Oh, you want to break it out?

No, we didn't. We talk separately about them but we provide just the one member.

Good try, Chris.

Yes, I know; I can only try. You been taking lessons from [Ed Kaplan]?

RFID business -- can you quantify for us what, either on a dollar or as a percent of your marketing budget, what your investment level is there or has been?

Well, I will say this -- it's clearly not proportional to the revenue. So we're taking marketing dollars that we would be spending traditionally on other products and diverting them to RFID. We would like to think we would have additional RFID dollars from manufacturers, but frankly, they are all investing so heavily right now it has been hard for us to make the case. So we frankly led the charge, and that is why we've talked over the last few quarters about continuing to make investments, and that is why we have seen our SG&A stay pretty flat even as we have grown revenue, is that we're continuing to invest our dollars in programs like RFID EDGE and this training program, and not getting additional funding from the vendors for that, which traditionally we would have. Traditionally, we would never have this big of an effort without the vendors paying for it.

I am just thinking, years ago, when -- what was it, in '02 when you greenfielded your European operations? I think at the time you were spending about $0.08 per quarter drag -- I can't remember whether that was pre-split or not. Are we talking an investment order of magnitude as the European expansion?

No, I would say not. But if you remember, too, now, unlike then, we also have Security going on at the same time. So I got a new business unit the started October of '04, and I've got RFID, and we've got international in general, not at mature operating margins. So we've really got three big investment areas going on at the same time, and still delivery normalized operating margins in ROIC.

A final question for you. There have been some indications -- and this is referring to the AIDC business -- of some pricing action. Are you seeing, either amongst vendors or product areas or specific geographical areas, any unusual or larger pricing discount or pricing issues through your vendors?

No, I would say there's nothing significant going on today, especially in the North American market, where you would expect the competition to be more mature. I don't really see anything other than normal promotional efforts to take market share from one vendor to another.

[Louis Tomas].

Nice quarter. I just had one question. I was unsure of -- I missed part of this, but the $0.71 to $0.75 you mentioned for next quarter's guidance -- does that include or exclude the options?

That would include the option expense.

Kevin Starke.

I'm sorry, my question was answered, thanks.

Jeff Rosenberg.

On Juniper's call, they talked about business strengthening in margin. And from talking to some of your customers, it seems like people talked about, in the AIDC space, some weakness in the first couple months of the quarter, with things strengthening substantially in March and following on into April. I was wondering if you could comment on whether you have seen that trend in your business.

I would say that's pretty consistent. I think in the March quarter, we typically have a strong March, and I think that was pretty true. I would say, for us, to be totally straightforward, February was really a tough month. I would say January was pretty good. February was not as good as usual on a proportional basis. And so we had a strong March to end up the quarter.

And then, thus far in April?

Well, our guidance reflects it.

And then, on Avaya, it sounds like the shift that was happening in their business was more a matter of execution than the direction of direct business to the channel. But that had been something you'd talked about. Can you give us an update on their plans to proactively move business into the channel?

Well, I don't think there's been any material change from their perspective. I think they are so consumed right now with product shortages that, just like our team last quarter, we end up and they end up spending so much time chasing product that you're handling orders two and three times, that people sometimes don't have proactive time to go focus on, well, what was that shift story we were supposed to be working on this quarter? So I don't think they've had time to work on it.

So, to your original point, you are right; there was no shift that ended up with the indirect growing. It was just the direct did not execute because they weren't able to their orders shipped. But on the positive side, after about June, for sure September, we saw there was no more weakness in the way they were going, relative to that go-to-market strategy. So we think that once the product shortages kind of ease up, things will be kind of back to let's see where there's some business that the indirect channel should be taking instead of the direct sales force going after it now. So I think it's probably another quarter away before we see them get back to that execution.

And then, my last question is just on Juniper. You mentioned them as building momentum as part of the convergence thing. Are you fully ramped with them, if you will? Or are you still kind of bringing that business up to speed? Or what is the right way to think about that, in terms of the number of resellers you have selling their product and that sort of thing?

We started in the December quarter with them, so this is really our first full quarter. And we were very pleased with the results. Our focus is to take juniper to our installed base of Avaya resellers and make sure that they view Juniper as an option to complete their solutions set, frankly, instead of Cisco. And so it is a strategy that is going to require some of our resellers to understand and be able to quote Juniper instead of a Cisco product.

So we think there's always going to be a longer ramp-up when they have to get educated and trained, but quite a bit of that did happen in this March quarter. So we are very bullish on Juniper. I think Juniper views our Avaya customer base as an ideal incremental opportunity for them.

But what does their existing enterprise channel look like? Is there opportunity for you to -- the kind of classic movement of resellers to you, or what does that type of structure look like for you?

That is probably not the opportunity that we would envision with other vendors. I think in this case, our strategy is if some of that happens, if a customer who is buying -- maybe not buying Avaya from us, but maybe he is buying Polycom and also wants to buy Juniper, now we would pick up that customer, and that would be great. But we don't see any significant -- any material movement of a Juniper customer moving from some other distributor to us, if they are not buying some other product from us, either through Catalyst or through ScanSource.

[Paul Krieger].

The tax rate was down from last quarter. Why, and what do you expect in the fourth fiscal quarter?

The tax rate on a year-to-date basis for the nine months was 37.7, which reflects a better international result in some of the US provisions. And as far as going forward goes, I think somewhere around 38 is an indicative rate.

(OPERATOR INSTRUCTIONS). At this time, there are no more questions. Do you have any closing remarks?

Thank you all for joining us. Our next conference call to discuss June 30 earnings is expected to be on August 17, which will allow time for our fiscal year-end close and audit process. Thanks a lot.

This concludes today's ScanSource conference call. You may now disconnect.