Scansource Inc (SCSC) 2007 Q3 法說會逐字稿

Good afternoon. My name is Christie and I will be your conference operator today. At this time I would like to welcome everyone to the ScanSource quarterly results conference call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Rich Cleys, you may begin your conference.

Thank you, Christie, and good afternoon. Thank you for joining the ScanSource conference call to discuss results for the quarter ended March 31, 2007.

My name is Rich Cleys, Chief Financial Officer of ScanSource, and with me is Mike Baur, President and CEO. We will review with you the quarter's 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. On April 20 2007, the Company announced that it had completed its accounting analysis of the special committee findings regarding the Company's stock option grant practices and reached a determination that, under applicable accounting principles, the appropriate measurement dates for certain stock options differed from the recorded measurement dates for certain grants. Accordingly, the Company announced that its Board of Directors had determined that the Company's previously issued financial statements included on its annual report on Form 10-K for the year ended June 30, 2006 and perhaps financial statements for earlier periods, including other historical financial information, related disclosures and applicable reports of its independent registered public accounting firm, should no longer be relied upon and that the Company will restate the previously issued financial statements as necessary.

The Company intends to file with the SEC any consolidated financial statements required to be restated and its quarterly reports on the Form 10-Q for the quarters ended September 30, 2006 and December 31, 2006 as soon as practicable. The Company will not be in a position to report net income or diluted earnings per share for the quarter ended March 31, 2007 or other periods until the above referenced restatements and filings of the quarterly reports for the first two quarters of the Company's 2007 fiscal year are complete. Therefore, our financial discussions of earnings will be limited to sales and gross margins since SG&A, operating income, taxes and net income will be impacted by the adjustments due to the findings.

Any number of other important factors could cause actual results to differ materially from anticipated results. Results of the review of the special committee will have an impact on reported financial results for this quarter as well as previously reported results. For more information concerning factors that could cause actual results to differ from anticipated results, see "Risk Factors" included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

ScanSource disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I will start our discussion by providing overall sales and operating results. The Company posted sales of $492.7 million for the quarter ended March 31, 2007, an increase of 21% over sales of $405.6 million for the same period last year.

Measuring sales based upon our product groups shows the year-over-year growth of 21% in AIDC and point-of-sale, along with a 22% year-over-year increase in communications products for the quarter ended March 31, 2007. That produced a 60/40 mix of AIDC/POS versus communications products.

Gross margin was 10.4% for the March 2007 quarter compared to 10.2% for the same period last year. Gross margins were higher due to favorable product mix, including better than expected fees for vendor service related programs. Due to our previously described ongoing accounting analysis of stock options of the impact on earnings we are unable to disclose color or metrics on the Company's operating expense, tax rate, net income, and EPS. Further, in this discussion I will give a more in-depth discussion of cash flow than we normally would give, so as to give the impression on cash operating results.

Net interest was $1.7 million compared to $390,000 for the same period last year. The majority of the increase compared to last year is primarily the result of higher debt due to the cost of acquisitions in the first quarter of 2007.

Balance sheet metrics and cash management were as follows. Inventory turns were 6.2 times at the end of March 2007, compared to 7.2 turns posted in the June 2006 quarter and 6.5 turns from the December quarter. Inventory levels were increased from prior quarters due to the RoHS and vendor supply chain issues. We will discuss specific inventory issues in the business unit discussion. However, we expect turns to improve in the June quarter.

The number of days sales and receivables, DSO, was 61 at March 2007 compared to 58 days posted in June 2006. As explained last quarter, our DSO is higher than year end as a result of negotiated terms on larger strategic deals. We anticipate that we will continue to manage DSO at the 60 day level or slightly higher as long as we generate an appropriate ROIC in our business.

We ended the quarter at 8.4 days of paid-for inventory. Last quarter, we had a negative 2.5 paid-for days of inventory. This metric can be temporarily lower or higher due to the normal timing issues as to when the last day of a quarter ends relative to the bimonthly payments we make to vendors. This quarter's timing of payments to vendors and an increase in vendor special pricing allowances lowered our A/P days from 61 to 51.

At this time, I will expand our discussion on cash flow. From June 30 to September 30, total debt on the borrowings had increased from the $75 million from $32.2 million to $107 million. From September 30 to December 31, total debt and other borrowings decreased $28.4 million. From December 31 to March 31, total debt and other borrowings increased $54.3 million to a total of $132.9 million.

As we've previously disclosed, the $75 million increase from June to September was primarily due to one, the first quarter acquisitions of approximately $50 million; and secondly, net increase in approximately $38 million of working capital items of trade receivables, inventories, less trade accounts payables and accrued expenses; thirdly, capital expenditures of approximately 600,000, the sum of which is reduced by our cash operating results.

Looking at the quarter ended December 31, total debt and borrowings decreased by $28 million. Working capital items consisting of trade receivables, inventories, less trade payables of accrued expenses decreased approximately $20 million. Capital expenditures were approximately $1.4 million. And finally, the remaining balance of the decrease in debt is primarily attributed to cash operating results.

Looking at the quarter ended March 31, total debt and borrowings increased approximately $54 million. Working capital items consisting of trade receivables, inventory, less trade accounts payables increased approximately $69 million. Capital expenditures were approximately $500,000. We also had favorable changes to deferred taxes of about $5 million this quarter. And finally, the remaining balance of the change in debt is primarily attributed to the positive cash operating results.

On April 20, the Company increased its multicurrency credit facility from $150 million to $200 million. This facility increase is under the same terms and conditions as a previously existing facility and this was the same bank group led by BB&T and co-arranged by Wachovia. We appreciate the continued support of our bank group which gives us the flexibility to support the continued growth of our worldwide operations and future strategic investments.

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

Thanks, Rich. Operator, can you hear me okay?

Okay, good afternoon, everybody. Our North American segment includes sales from all three of our technology areas -- AIDC and POS via ScanSource, communication products through our three sales units, Catalyst Telecom, Paracon and T2 Supply and electronic security products through ScanSource Security Distribution. North America posted sales of $413 million, a growth rate of 18% over last year. Our next discussion will focus on the ScanSource AIDC and POS sales unit.

The North America AIDC and POS business unit turned in another strong quarter. AIDC sales growth led the way and showed impressive gains across most product lines. We believe we are continuing to gain market share as the AIDC manufacturers continue to support and prefer the indirect sales channel. We believe the AIDC business will continue to grow as the focus for the industry turns more to vertical marketing and applications selling to the SMB, small medium business marketplace.

Our POS business had only modest growth for the March quarter as some of the large deals we anticipated were delayed. We believe this part of our business will remain difficult to predict for some time due to the uncertainty of large deal time.

We again managed our inventory to higher levels than historic, as we absorbed the final product transitions from the RoHS initiative begun last summer. And we brought in extra inventory this quarter designated for several large point-of-sale deals that did not ship in the quarter.

During this last quarter of the RoHS product transition, we have had duplicative inventory as we brought in new RoHS-compliant products and still have the older non-compliant products in stock. We expect our product management teams to be able to improve our inventory turns in the June quarter by selling or returning any remaining non-RoHS product and lowering our overall inventory levels. Lower inventory levels should not affect service level to our customers, however, or jeopardize sales opportunities.

Several new vendors have been added to the linecard, including Panasonic point-of-sale systems, Janam Palm-based rugged mobile computers and Sensormatic EAS, Electronic Article Surveillance products for retail. ScanSource is the first two-tier distributor for two of these vendors and we will be helping these companies recruit, train and support new resellers as well as provide value-added services to their existing reseller community. As we mentioned last quarter, we've also added Cisco wireless products to our offering to complement our other vendors' mobile product strategy. We have begun an intensive effort to educate and certify our Intermec partners on Cisco wireless products and expect them to ramp up quickly over the next few quarters. We will next discuss the first of our communication units, Catalyst.

Catalyst's sales rebounded nicely from our tough December quarter, when we had Avaya supply chain issues and product shortages. Those supply issues were mostly eliminated during the quarter. However, our inventory levels grew this quarter as supply caught up with demand, while we expect to improve inventory turns by the end of June. Unlike in December, we experienced a surge in activity at the end of the quarter by our larger resellers. Yet we were disappointed in that our Avaya business was flat year over year. We had some growth with our Avaya ECG or Enterprise Class Products but the SMB, small and medium product business sales, were down for the second consecutive quarter. However, we believe we're not losing SMB sales competition.

Our Avaya sales and business development teams are focused this quarter on recruiting and training new and existing resellers for a new mid market enterprise product offering that will bridge the gap between certain ECG and SMB sales opportunities.

We did achieve very good results with our resale of Avaya maintenance and insulation services this quarter. We have made investments in dedicated personnel and information tools to better support our resellers who want to resell Avaya services. Catalyst also had record sales this quarter from Juniper and Extreme networks as our resellers continue to see opportunities selling data and converged products as a total solution. Many of these retailers are new customers for Catalyst and will become good prospects to sell a total Catalyst solution, including Avaya voice products.

We also had excellent sales results with Polycom audio products, and SpectraLink wireless handsets with strong gains year over year due to market share gains by our sales team.

During the June quarter, we will host our annual Avaya partner conference, where we will educate, inform and receive feedback on our joint opportunities with our partner community of resellers and vendors.

Our second communications business unit is Paracon. Paracon had a strong quarter as we gained market share with Dialogic and closed some big deals. Paracon's performance was very good considering that this was the first full quarter after Intel sold the Dialogic business. We're pleased with the new management at Dialogic and the strategic direction they are taking. Dialogic has already reduced their number of distributors and have committed to invest in an indirect channel going forward.

One area of significant growth continues to be Media Gateway products from Dialogic, AudioCodes and Quintum. These products allow IP-based technologies to seamlessly integrate with legacy PBXs.

Our third communications business unit is T2 Supply. T2 Supply continues to deliver record results for the Company and our vendors Polycom and Plantronics. As T2 continues to grow rapidly by taking market share, we are investing in additional sales and business development resources to ensure we take advantage of this opportunity. Our list of active videoconferencing customers has grown substantially over the last three quarters as the T2 sales team drives incremental Polycom video sales through our Catalyst and Paracon units in addition to recruiting net new resellers.

We will be investing in more T2 marketing efforts over the next few quarters, including tradeshows, educational seminars demo units and vendors sales conferences.

We will now take a moment to update you regarding our third technology area, ScanSource Security Distribution. ScanSource Security had another record quarter across all product categories. An emerging area of high growth is with outdoor wireless networks, led by our TROPOS and Alvarion offerings. We're finding early success with TROPOS by providing better logistics and financial services for their existing reseller community.

Our ID card business also had very strong results across all of its product categories. We're seeing a growing number of new customers from a variety of vertical markets, purchasing card printers and associated media.

Our video surveillance business had record results, led by Panasonic, General Solutions, and [Active] Communications. Our business model of new end-user sales and quick, reliable delivery of product has won us market share from the competition. As the shift from analog to IT technology continues to accelerate, we believe we will take increasing market share.

Our ramped up marketing investments, including the launch of the ScanSource Security IP center, which is a combination of Web tools and in-person seminars, with the help of our sponsors, AdTran, Axis, ipConfigure, IQ Invision, Panasonic and Sony. Through that, we will host two-day education seminars in five locations across the country. The focus here will be to help resellers gain network and physical security expertise during these hands-on sessions. We also plan to add additional sales and marketing people this quarter to better prepare for the growth opportunity in this business.

Our second reporting segment is international distribution. International distribution, which includes the geographies of Europe and Latin America, posted sales of $79.6 million compared to last year's quarter of $56.2 million, a growth rate of 42%. Without the effect of foreign exchange, our growth rate was 32%.

ScanSource Latin America had good results coming off their seasonally strong December quarter. Sales growth was led by our strong sales in Central America, Puerto Rico, Argentina, Chile, and the Caribbean. We continue to take market share due to excellent product availability, well-trained sales reps and continued marketing efforts.

To we did experience a slow quarter in Mexico due to the unusual absence of large deals. We also devoted a significant amount of time in Mexico to the launch of our Mitel relationship. We expect this business to ramp over the next few quarters as we develop Mitel-specific expertise and Mitel shifts their existing channel to ScanSource Mexico.

Our marketing efforts in that region are led by education and training events held in countries such as Chile, Venezuela, Dominican Republic, and two locations in Mexico, where we are able to deliver product-specific training to our resellers.

ScanSource Europe achieved record results this quarter. We received several large deals during the quarter from our key AIDC and point-of-sale vendors and our larger resellers. Our ability to provide quick availability of inventory and appropriate credit terms has allowed us to recruit larger resellers to ScanSource Europe. Our vendors continue to promote the advantages of two-tier distribution to their existing channels and develop incentive programs to make choosing distribution an easy decision.

Our inventory levels in Europe were also higher, again for the quarter, due to RoHS. There were also some large deals that have not shipped and some continued supply chain issues in Europe. However, we plan to improve our inventory turns by the end of June.

We will conclude this part of the call with our expectations for the June 30, 2007 quarter. We think total revenues for the June quarter could range from $512 million to $532 million and gross margin could range from 10.2% to 10.35%.

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

(OPERATOR INSTRUCTIONS). David Thurman.

I was just wondering if you could just spend a little bit more time on the balance sheet and some of those metrics. I know you just covered it in your prepared remarks. But, I knew you took up the credit line and you've always looked at borrowings as part of a strategic factor in taking up inventories and trying to win accounts through generous terms. But there was a big jump December to March in some of the metrics. And I'm just wondering if you can maybe spend a little bit -- just a couple more minutes on walking through the rise in payables and the inventories -- rise in receivables and inventories and what's going on behind there?

It's Rich. What I'd point first to in terms of our working capital, is the paid-for inventory day metric. Paid-for inventory days of 8.4 does work within our business model. Our product managers are achieving their ROC targets. And I know we can't report all of our results but they are achieving their ROIC targets. So to us, an 8.4 days of inventory is within the metrics that works for us.

Having said that, I think Mike talked about the different geographies where we do have higher than anticipated or higher than normal inventory levels because of the transition on RoHS. And we did have some inventory we brought in for some deals that we felt we could have gotten -- we might have gotten this quarter and they didn't occur this quarter. So we did have higher inventory levels.

On the payables side, we've always said that the timing of the payables can affect our payable days that you see. So at the end of this quarter, our payables were lower than what you have seen in the past. Our payable days went down to 51 days. That's a combination of timing, where these payments for some of our larger vendors are large payments. Depending upon when those scheduled releases are and when it clears the bank, that will affect our payable days. And then we also had a number of -- probably a greater influx of vendor receivables, if you will, that are contrast to the payables, primarily for special pricing adjustments. So those are situations where we have made a sale to a customer. It is in our receivables. We've purchased the inventory at what really amounts to the higher cost and we are awaiting a cash credit from the vendor, and that has increased in our business and those are -- that is actually an area where we're carrying more working capital then we have in the past. But overall, when you look at our working capital, we are -- we can deal with an 8.4 paid-for inventory days.

Okay. Just one other question before I step back in the queue, just staying on the balance sheet, so you've announced plans to take up the credit line a little bit and you've always been aggressive about investing in businesses to generate growth and going to new verticals. Can you talk a little bit philosophically about taking up leverage further and how you're going to balance investing in some new opportunities versus current cash flow generation?

Well, yes, I will take this and maybe Mike might want to add to it. In terms of the investment opportunities, I think we've touched on a number of things. Our investment opportunities are there in marketing. They are also in the area of bringing people on. We're looking at our international business as real -- a good opportunity. We also see the T2 business and the securities business as areas where we need to continue to invest in people and in programs.

As far as the returns that we're looking for, we primarily look at our return on invested capital. So, part of the denominator is the debt. So we have to have those returns to achieve our targeted levels, which, as you know, are in the 20s, in the low 20s to take on that debt. So that is what we look for when we take on this debt. We look for those kinds of returns.

I guess what I'm getting at is, are you in a position to manage it in a way that the ROIC stays there as you would invest or do you have to take a near-term hit to ROIC for the long-term growth?

From an operating perspective, okay? We would anticipate that we should be continuing to hit those low 20s right now.

Jeff Rosenberg.

I also wanted to ask about the ROIC as it relates to the inventory levels. I realize it's within your range, Rich. But it does seem like it's been -- the inventory paid-for days is a little bit higher than it's normally been. And I'm looking back to the last quarter you guys reported, margins were relatively healthy. And I guess my question is whether or not we should take from this to mean with inventories being a little bit high that you have had to probably do what's necessary to keep profitability higher in order for those product managers in order to make those targets. Is there anything -- is that the right way to think about probably what's happening within the business?

Well also remember, Jeff, our margins are up from what you've seen probably over the last four to six quarters. So when we look at those ROICs, there's a numerator and a denominator and we have got some good margins compared to what we've seen in the recent past.

Well, your gross margins are sort of where they were two quarters ago so I guess I'm wondering whether or not that's kind of the right way to think about -- and you are right, your margins in that quarter were as good as they've been in a while. And I guess I'm wondering whether or not the general trend has been able to hold that level of return in order to be able to -- whether this somewhat higher inventory and still hit your ROIC targets?

Well of course we can't report on the net numbers at this time. But what I can tell you is that the merchandising folks that work within this business are achieving their goal. Maybe another way to look at it is if you look at our net interest expense, recall that the working capital and the debt that's based on averages, what you see are the end of the quarter numbers. So, if you take a look at the interest, that might give you a better feel too for the kind of returns that we're getting based on those averages.

That's some helpful color. And I realize it's hard not being able to tell us everything you know about the bottom line.

And in terms of the trends in the business in the quarter in the AIDC space, I mean it was down a little bit sequentially it looks like both in international and domestically. Mike, would you say that that's inconsistent with sort of a normal, broad, seasonal trend or is it more because of the weakness in POS and the weakness in Mexico in sort of isolated areas that drag you down a little bit? Or maybe would you say it's more of a broader trend in the sector?

I think you are right. I think there's some specific areas of weakness. And you know, you couldn't offset some of those as much as we had. It does reflect on the continuing strength in AIDC. But yes, we've had big deals in Mexico for the last eight quarters. And so we were surprised at that.

But I think the general theme there is point-of-sale continues to be frustrating. We get some opportunities and we feel pretty good about them and a quarter ago we were talking about supply chain issues that were limiting us. We caught up with some of the supplies we needed and then we still didn't ship the business. So that led to some inventory increases. But we believe that the business is still out there. So, the point-of-sale weakness I think continues to plague us there and that's our concern. And that's still our concern going into June quarter.

And would you characterize though, more of your mainstream AIDC vendors as having better growth than what you showed in total or having positive sequential March over December?

Yes. I would say our AIDC business, without breaking down any vendors, overall continued to have strong sequential growth rates.

Reik Read.

Just to go back to the balance sheet issues, the DSOs -- if I go back, they have essentially increased for the last eight quarters consecutively. Is that all due to extended terms to get larger business? Or is there something else in there as well, Rich?

There's probably three things. We do have -- especially in our communications business -- when we take on new customers, we've had competitive terms that we have come out with which those terms are probably -- they're different than our other businesses.

In addition, as the best services business increases, one of the -- we haven't spent a lot of time talking about this. But one of the things that occurs in terms of revenue, let's just use an example. Let's say we sell a contract that has a $1000 face value and it's got a 10% margin or a fee. From a revenue perspective, we record that as a $100 revenue item. But we have $1000 receivable to collect. So, that does come into play too.

And then of course as our international business increases in some of the geographies internationally, traditionally, you have longer repayment terms. It's not that you've got risk areas. It's just that that's the way business works in those geographies.

And then you -- so I take it from your comments before though is that you wouldn't expect to see the deals -- I know they will fluctuate a little bit quarter to quarter but if I look at 60 days, you are really going to fluctuate around that and not continue to expand?

In terms of the DSO, I don't see us being back at 48, 49, that kind of DSO because our business model has changed in that regard. The overall receivables that we've got, we continue to use the same underwriting. Our credit risk profile is the same as what we've been doing in the past. And we view our credit area as an area of strength in this Company not only in terms of the way that we manage it -- manage the receivables but also the way that we create purchasing power for our customers.

And then just back on the inventory side, the RoHS inventory I would take it is a relatively small amount of your overall inventory. Is that a fair statement?

Well, it depends. Because if you look at it based on the AIDC unit, it's fairly large. We're comparing -- you have to compare that -- that's for the business unit that we called out, were our AIDC. And it's true in Europe and in the U.S. and somewhat in Latin America.

Okay. But it sounds to me like more of this inventory is a result of -- is a result of big deals as opposed to maybe RoHS. That RoHS component is dissipating and ought to go away after this quarter?

Well, we've mentioned both of them for a reason and we don't want to break out the numbers because we don't want to call any attention to any vendors specifically. But, clearly we had some duplicative inventory as the new products were available we then stopped selling the old products, is the problem. And so we end up with double inventory levels with some products. And those did not move off the shelf from a sales perspective and so we've got to find a way to either sell them this quarter through some vendor promotions or return them.

Okay. That's great. Thank you. Then, on the European side of the business, and Mike, you touched a little bit on this in your remarks. But can you just talk a little bit about the vendors and the pricing structure that's out there and how well they are supporting the two-tier model at this point? And I mean Symbol or Mot. at this point was kind of the lead there. And have other vendors kind of joined in with that similar structure?

Yes, over the last 1.5 years, there have been a couple of vendors that have been public with their plans. Zebra for example announced their partner select program -- partners first program last year in April. And it basically was to take effect in January of this year. And so they gave their partners eight months to look at what business they prefer to be in -- either the reseller business or the distribution, but, make a choice and they will only get the discount based on the model they choose and that's the model they are going to invest in. So they've helped us.

Intermec is doing similar actions there. Interestingly, NCR, who we announced a distribution agreement with in Europe recently, they've also decided to allow pan-European two-step distribution. So, yes, there are starting to be other companies. And there are several that haven't publicized their strategy that are doing it that are smaller vendors as well.

But I take it that most of this did start in January and that was -- this is kind of the starting point and you will start to see it evolve from here?

Yes, and much like with Zebra, most of the vendors want to be careful that they don't frankly hurt their partners. So they are basically coming out and they are saying at some point they're drawing a line in the sand saying six months from now or nine months, we're going to do it and we're serious. We're giving you reasonable warning to change your business model or find a way to sell it or something. And so, once they go out and state that publicly, there's at least a year before there is significant change in the distribution of landscape. It took Symbol frankly two years to work it out.

Okay. And then just one more question on the European side. You have talked before about some of the key vendors that are in Europe, like, for example, IBM. But they're only in two countries. Can you talk about what some of the largest opportunities are in terms of the geographic penetration that you might see over the course of say the next year, year and a half.

A vendor? Or are you talking about just geographically?

Really both. IBM being a big vendor is only in two countries so here you have a big vendor that could expand into other countries. Are there -- is IBM a good example and are there some other ones that really could expand it to be more meaningful in terms of geographic coverage in Europe?

Yes, there's probably -- yes. IBM is a good example. They have a fundamental challenge that they have to figure out how to support pan-European sales, that today they don't have other distributors that have wanted to do that. So that we're trying to create something new. I think frankly the NCR announcement, they're going to move a little faster now, which is good and they admitted that. And hey, we kind of waited around and we need to get working on this. But, yes, we see IBM making some moves this year to resolve their issues there.

And frankly, they get down to pretty simple things like they've got to have a compensation plan based on where we sell product, not where we buy product. It's that simple. And sometimes bigger companies that's their biggest problem.

The other companies like Epson, they are just now looking at allowing us to move into other territories. We've made significant progress showing them our success in the UK. So we believe that they are a significant opportunity for us this year as well.

I was wondering if you could quantify what the impact of the options backdating probe has been on SG&A? How much has that cost you in the past two quarters?

Unfortunately, because we are not disclosing SG&A, we're not in a position to disclose that at this time.

Okay, but would you describe it as material? (multiple speakers)

(multiple speakers) once we get all -- when we get the quarters caught up.

I know this is a tough way to put it but, would you describe it as material?

I think what I said last time when I was asked this question was I said something to the effect of for the December quarter that if you look at other companies, it was a mid-7 figure amount. And I would tell you that in our March quarter, we had ongoing expenses. Does that help?

Yes. We're talking about the cost of actually doing the probe, right?

Yes.

Okay, got you. Thanks. Second question, is there any way to quantify how much non-RoHS compliant inventory there is and what might happen to it?

Well, we would rather not because we're working with our vendors very closely on this issue, and we believe that we can get it resolved by the end of June.

Does that imply in any way that there might be some right of return? Mike --?

Possibly, but as most vendors don't want that stuff back, our first objective is to help them sell it as you know. And that's why -- the only reason I mention it is because we've been talking about it with them for about two quarters and it hasn't happened fast enough so I think it will happen by June now.

Chris Quilty.

Can you elaborate on Avaya and some of the manufacturing problems that happened? It sounded like from your comments that most or all of those issues are resolved and would we expect any lingering inventory or margin issues associated with that?

Right, Chris, we did say that they were resolved in the quarter. So we don't anticipate any problems with supply here in the June quarter. So we feel good about that. They did put a lot of attention on it. I give them a lot of credit for that. They told us this back in January that they would resolve their distribution issues, which the prior quarters had been product shortage issues, and those definitely got resolved. And then the distribution issues were mostly resolved by the end of March. And we don't expect any material problems with them this quarter.

And shifting over to the point-of-sale business, it's now been a couple years where we just haven't seen large order activity. Is it probably safe to assume that we're kind of halfway in the five-year cycle and we shouldn't expect much in terms of major uptake in that area of business?

You know, I don't know that I would say that. I haven't come to that conclusion. I'm still working with our vendors to understand why there are hesitations with the retailers that are buying or that claim to want to buy. They tend to be retailers that are definitely improving their installed base of registers and adding some new technology along the way. So I don't think we would say that yet but, who knows. Our challenge is to sit down with the IBM's and NCR's and Epson's and figure out what are the key obstacles to getting growth on a more predictable path.

I think what is happening is there's still quite a bit of SMB run rate business that we're doing that never gets a lot of attention that is doing fine. And part of our goal with the vendors has got to be to accelerate our efforts at growing that part of the business. And frankly, hospitality has continued to be a good business for us. It's that general retail specialty segment and the grocery segment that has been weak.

Okay. Can you comment on the recent consolidation in the AIDC vendors and what impact six, nine months out from that you're seeing if any?

As far as an effect -- I can only talk about an effect on ScanSource because that's what I'm looking at. And in my conversations with some of the recent new players and new executives have been that they are excited about this industry. And I think it's a positive sign because it suggests to me that these guys, these companies, these new players are going to invest more money in the technology budgets to improve the growth rate of this industry. So we -- from our perspective, from my perspective, I see it as good news. I think it will take away some of the pricing pressure that was on the Street last year. And so I think it is good news for our Company and our resellers.

Final question, again on that industry, you had stated earlier this year that you were going to back off on some of your RFID training efforts because the market didn't seem to be there. Any change in the outlook?

No. I would say we still feel like that's the same view now. We've got vendors that are basically saying the same thing. Let's focus on the closed loop applications. Let's make sure we have enough resellers for those opportunities and be prepared in case it changes.

Craig [Wagner].

When you guys are kind of thinking -- it's interesting this RoHS stuff. When you think -- have you thought about kind of vendor promotions in your June quarter guidance? Is that because your guidance looks relatively strong versus what you've done in -- on the top line versus what you've done in historical June. Is that a function of trying to move out some of this excessive inventory that you have?

Well, it's definitely in our guidance, yes.

So you could kind of view it as one-time-ish then?

Well, definitely -- any RoHS sales would be one time. But, we don't view our guidance for the quarter as being one time. Those issues with RoHS are not issue enough to make us nervous about our guidance. If it doesn't happen (multiple speakers) if it doesn't happen we won't hit the number.

Okay. Can you guys give us an update on when you might pay your -- do your filings? Are you going to hit the May 15 target date?

We are working as diligently as we can. We're using outside help as well as internal resources. And we're going to do everything we can to achieve the deadlines. We're going to keep -- while we're going through the process though, we're keeping NASDAQ, the SEC, our bank group informed along the way as well as our Board. So we're going to work as diligently as we can to get complete as soon as we can.

Is it realistic to think you will hit the deadline?

I would just say that we're going to work as hard as we can to get those -- get our filings done as fast as we can.

If you don't, do you have -- are you in a position where the NASDAQ can give you another extension? I haven't followed it.

I don't know if I can comment on whether they can give an extension or not. We're certainly talking to them.

And just last one. Can you update us on the cash overdraw as a function of the A/P?

What that represents is outstanding checks. That haven't cleared.

Oh, I understand.

That is a normal accounting procedure that we have. So with those other companies.

Historically, you have disclosed in your Q's. You just haven't put out any Q's, so I was just wondering if you could give us the number.

Oh, okay. Well I don't think I can break it down any further than what we've done in terms of the release. I think that you will have to wait until we get the Q out.

Ajit Pai.

This is Andy Young standing in for Ajit. I have a couple of questions. One is, going back to the gross margin, it had been pretty steady last year and it had been fluctuating quite a bit in the last two quarters. Can you tell us a little bit more about what a cause for the swing, especially between last quarter and this quarter?

Last quarter we had -- as I recall we had some pretty good rebates and we had (multiple speakers) fewer large deals was the main reason. Fewer large deals. When we have a larger deal, they tend to use less of our value-added services. So, the gross margin -- the gross margin would be lower for those larger customers. But then our investment in SG&A would tend to be less. So we would work those larger customers as well as the medium to small customers to the same kind of ROIC targets. But if we have a mix of customers that are medium to small, that will tend to give us a better gross margin line.

So, would it be fair to say like this quarter you have larger customers compared to last quarter?

Yes, I would say that that's true.

And then you know, like going forward, what do you see as the normalized gross margin? Is that 10.2% -- 10.2% to 10.4%? Is there a normalized range?

Well, the guidance that we've given is 10.2% to 10.35% for the next quarter. So overall, we would be continuing to work those margins depending upon the customer to achieve an ROIC target. So to offset the key metric is return on invested capital.

And then so step back a little bit on back to securities business. And it has been almost like a year since you launched the segment. Overall, what is your [corpus way] now in terms of the revenue side? And what is the time frame that you think you can report the segment separately like you have done with international?

The security business has been closer to two. Go ahead.

Yes, let me jump in. Yes it's the actual launch was in October of '04 and we had some initial challenges for trying to fill out the linecard appropriately, meaning pick the right vendors. And we had some difficulty there as we reported. I think our success in the last three, four quarters has been because we have found a few vendors and we've mentioned a couple of them -- TROPOS and Panasonic -- General Solutions, Axis, companies that really recognize the difference that we can bring to this marketplace. And it takes awhile once they say you guys are different than what we have out there and we want to help you grow. It takes a little while, we have to be patient as to how we do there. Now the reason we don't report it is frankly it's not significant enough yet. And I don't prefer to tell our competitors what we're doing yet. We feel like we have -- we're having unusual success in this marketplace.

And this is one of the few markets we've entered, as you probably know, where we didn't make an acquisition. And so, we feel very good about the progress and we think the opportunity, especially as this whole industry moves to IP-based technology. We think the opportunity for our business model is huge.

There are no further questions at this time.

Okay. Well, thank you very much. Thanks for joining us. Our next scheduled conference call to discuss the June 30 quarter and fiscal-year results is expected to be held on Thursday, August 23rd. Thank you.

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