Scansource Inc (SCSC) 2009 Q1 法說會逐字稿

Welcome and thank you for standing by. (OPERATOR INSTRUCTIONS) Also, as a reminder today's call is being recorded. If you have any objections, you may disconnect at this time. I would now I would like to turn the call over to our first speaker, Mr. Rich Cleys. Sir, you may begin.

Thank you, Roy, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended September 30, 2008.

My name is Rich Cleys and with me is Mike Baur, CEO of ScanSource, and Scott Benbenek, President of Worldwide Operations. 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 risk 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 for the year ended June 30, 2008 filed with the Securities and Exchange Commission.

I will start our discussion by providing overall sales and operating results. The Company posted sales of $539.8 million for the quarter ended September 30, 2008, a decrease of 3% over sales of $553.7 million for the same quarter last year.

Measuring sales based upon our product groups shows year-over-year growth of 3% in AIDC and point-of-sale, which was offset by an 11% year-over-year decrease in Communications products for the quarter ended September 30.. As expected, revenues in our Catalyst Telecom sales unit were adversely impacted by program changes implemented by our key vendor of this division. Mike will discuss this further in his remarks later on this call.

Overall, we had a 63-37 mix of AIDC POS versus communications products for the current quarter. Gross margin was 10.3% for the September 2008 quarter compared to 10.5% for the same period last year. The decrease in gross margin percentage from the prior period comparable quarter is largely attributed to less favorable product and geographic mix, and to a lesser extent, lower achievement of vendor programs compared to the prior year.

Operating expenses in the current quarter were $34.9 million or 6.5% of sales compared to $32.8 million or 5.9% of sales for the comparable prior year period. The majority of the increase is attributed to operating expenditures associated with our newest acquisition, MTV Telecom, which was acquired in April 2008, and did not exist in the comparative period.

Although year over year, our bad debt expense is essentially flat, we've increased our reserve by $1 million since June 30, reflective of the tightened credit markets. The Company also experienced incremental expenditures associated with the operation of our new North American distributions facility, located in Southaven, Mississippi, which was opened in January of 2008.

Our operating income for the September 2008 quarter was $20.6 million a 19% decrease from the prior year. Expressed as a percentage of sales, operating income was 3.8% in the current quarter compared to 4.6% in the comparable prior year period.

Net interest expense was $200,000 in the current quarter compared to $1.8 million for the comparative prior year quarter. Interest expense decreased over the prior year quarter primarily due to lower average debt balances. In fact, at September 30, 2008, we had no outstanding balance on our revolving line of credit. The effective tax rate for the September 2008 quarter increased slightly to 38.2% compared to the prior year quarter of 38.0%.

Net income for the September 2008 quarter decreased to $12.4 million or 2.3% of sales compared to the prior year quarter of $14.7 million, which was 2.7% of sales. Our return on invested capital this quarter was 20%, which is at the low end of our historical range of 20% to 25%.

Balance sheet metrics and cash management were as follows. During the quarter, we were diligent in our efforts to manage inventory levels and were successful in maintaining inventory turns at 6.9 times for the September quarter which was consistent with the June 2008 quarter and down slightly from the 7.0 turns posted in September 2007. The number of days in receivables, DSO, decreased to 57 at September 30, 2008 compared to 61 days posted in September 2007 and 59 days posted in June 2008. The decrease in DSO reflects the change in geographic and customer mix. In the current economic environment, we continue to monitor the health of our receivable portfolio. At the same time we have never been more committed to finding ways to assist our customers.

Paid-for inventory was a positive 1 day for the September 2008 quarter and a positive 7.2 days for the September 2007 quarter. At June 2008, our paid-for inventory days were a positive 2.7 days. Quarter-over-quarter improvement in paid-for inventory days was driven by lower inventory purchases in response to lower sales volumes as well as higher quarter-over-quarter accounts payable, which can be impacted by the timing of payments. Included in accounts payable are checks written but not cleared, which decreased to $21 million compared to $26 million in June.

Our interest-bearing debt was $32 million at September 30, 2008 compared to $149 million at September 30, 2007, and $64 million at June 30, 2008. During the quarter, the Company generated over $30 million of cash flow from operations and used the majority of these funds to pay the outstanding balance on our revolving line of credit facility. As a result, at September 30, 2008, there was $250 million of available funds for borrowings on that facility.

On October 10, in response to the uncertainty in the credit markets worldwide, the Company borrowed $75 million on our revolving line of credit. This amount has been held in a federally-insured cash account because the sole purpose of this borrowing was to ensure that the Company would have access to sufficient working capital to meet the needs of our customers and vendors in the unlikely event that the credit markets and the related financial system would deteriorate further. This borrowing could cost the Company $0.015 cents a share if outstanding for the balance of the quarter and will reduce our second quarter ROIC results.

Mike will now give you an update on our business.

Thanks, Rich. The September quarter was expected to be challenging for the Company as we discussed on our year-end conference call in August. We had very good financial results last year in the September quarter so we had a tough comparison. Based on this backdrop, we were pleased with our performance and remain optimistic for our long-term business prospects. Certainly the economic and financial upheavals in recent weeks have affected our business and our near-term outlook. The global economic slowdown has been felt first by our European business and will affect our Americas business, we think, in the upcoming quarters.

The financial problems that are affecting the credit markets are having an impact on some of our resellers; however, historically we have seen our financially healthy resellers continue to prosper and grow during periods of uncertainty. We will continue to invest in our business where we see growth opportunities. This translates to investing in certain markets, vendors, and customers.

First, I will comment on each of our reporting segments. North American Distribution includes sales into the United States and Canada, and posted sales of $445.0 million, a decrease of 4% for the September quarter on a year-over-year basis.

Our North American discussion will start with Catalyst Telecom. As we discussed on our August conference call, our Avaya enterprise business is still struggling due the difficult ties associated with the launch of Communications Manager 5.0. We anticipated continued confusion in the market surrounding the terms and conditions required when resellers purchased Communications Manager 5.0. Adjustments to this program are planned for rollout to the channel in early November. As a result, we are still cautious in our forecast for Catalyst in the December quarter in addition to our concerns around the economy.

Despite the Avaya challenges, Catalyst has continued to recruit new resellers over the last few quarters. The Catalyst convergent story continues to gain traction as resellers seek advice and education on migrating customers to a converged voice, data, and video platform. These new resellers helped Catalyst record excellent growth with Juniper, Polycom, Aruba, Meru, and Extreme.

Next I will discuss ScanSource Communications. Our team in ScanSource Communications had another record quarter in September led by our Polycom video, audio, and network product sales. We have continued to gain market share and add new customers through a mix of sales and marketing activities. The Polycom education and certification classes hosted by ScanSource Communications continue to be in high demand.

During the quarter, we exhibited at the [Astrocon] Trade Show CompTIA Breakaway Orlando, and conducted three regional road shows. Our ScanSource Communications president, Jill Phillips, has decided to retire and will be missed. Jill was the former owner of T2 Supply which we acquired in 2006 and has done an excellent job for the Company. We have promoted a 13-year ScanSource veteran, Buck Baker, to replace Jill. Buck was most recently our Senior Vice President of Merchandising in our Catalyst business unit and spent six years as Vice President of our North American POS and Barcoding Unit. We appreciate Jill's contributions and congratulate Buck.

Next, I will discuss our North American POS and Barcoding unit. This sales unit delivered another solid quarter of growth although business slowed the last two weeks of the quarter. The point-of-sales systems business did remarkably well led by our IBM and NCR business. The primary reason for the success with our retail resellers was due to long-delayed deals that had been in the pipeline for at least a year. Our Barcoding or AIDC business also held up well despite the late quarter slowdown. In addition, we had good incremental growth from POSEX, a new SMB hardware vendor and point-of-sale, and we announced the launch of LXE as our newest AIDC vendor.

We recently held our annual partner and vendor conferences over the last four weeks where we presented updates on our programs and ideas and plans for 2009. The conferences took place in Southaven, Mississippi, where we conducted tours of our new distribution center and showcased our expanded, custom configuration center.

We will now update you on our third technology area, ScanSource Security. This team had a record sales quarter led by record sales of Panasonic, Axis, and Sony video surveillance products. We continued our strategy of investing in inventory, people, and marketing programs. A better selection of inventory has led to market share gains and improved service level to our customers and vendors. Our management team was strengthened with the addition of Paul Constantine as Vice President of Merchandising. Paul's a ScanSource veteran of nine years. Paul will be joining Tony Sorrentino, our VP of Sales, who's been with ScanSource Security since its inception.

This unit's marketing investments include attending the recent ESX Electronic Expo and hosting IT workshops in Boston and Irvine. We expect the physical security business to continue to grow substantially as we add customers and participate in the technology shift from analog to digital.

Our second reporting segment is International Distribution. Our international business, which includes Europe, Latin America and Mexico, posted sales of $94.9 million, a growth rate of 5%. When measured on a local currency basis, our international business decreased by 1%.

In Europe we experienced a challenging quarter, yet we achieved an improvement in return on invested capital. The September quarter is seasonally weaker in Europe; however, we did see strong growth in the Germanic region in Eastern Europe led by our AIDC venders. We also announced new distribution agreements with Epson that covers Benelux and Germany and will extend our POS strategy into the major countries in Europe. Our lack of overall growth in Europe was due to the reduced level of large deals that closed in the quarter and the loss of several large deals that certain manufacturers took direct.

As manufacturers see challenges to growth in the region, we've experienced some sales teams working for the manufacturers taking business direct and skipping two-tier distribution. We believe this issue is being driven by poor compensation assistance from the manufacturer and the slowdown in business in Europe. We've addressed this issue with the manufacturers' executive teams and expect this to be resolved in January as new compensation plans are introduced for 2009.

Our European communications business grew from the prior quarter led by strong growth from our Avaya SMB business. Our MTV Telecom team was strengthened by the addition of our new head of sales, Chris Harris. Chris brings his years of experience in channel management from Inter-Tel to ScanSource and MTV Telecom. We've also expanded our product offering with the recently announced addition of ShoreTel communications products. The MTV team will be launching the ShoreTel products and programs through a series of road shows in the UK.

Now turning to Latin America, ScanSource achieved good growth especially in Mexico, Columbia, and Guatemala. Our Mexico business did very well with Mytel communication products during the quarter. After a slow start, we have done a nice job of recruiting new Mytel resellers and providing better services to the existing Mytel channel.

We also recently announced the addition of [Aristele] Aguilar as director of ScanSource Mexico. Aristele has more than 12 years of experience in distribution working in Mexico.

We will now conclude this part of the call with our closing comments. Our expectations are certainly challenged by the current economic crisis yet we believe our proven business model that reduces cost for manufacturers and resellers will continue to be preferred. ScanSource continues to deliver healthy profits and cash flow in this challenging economic environment and our strong balance sheet will allow us to continue investing in specific growth areas. As you know, ScanSource operates with no backlog as we take orders and ship products the same day. As a result, our visibility into future quarters is always limited. We think total revenues for the December quarter could range from $515 million to $535 million and earnings per share could range from $0.40 to $0.44 per share.

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

(OPERATOR INSTRUCTIONS) And our first question comes from Reik Read with Robert Baird.

Hi. Good afternoon guys.

Hi Reik.

Mike, can you maybe expand a little bit on Europe and I guess, two things. One, how much of this is economically related? I'm not sure that any of us have heard a conference call yet where the UK isn't viewed as being incrementally negative. And then two, on the compensation issue, what's happened there? It seems like the vendors had been addressing that and tried to have maybe pushed through better compensation plans. Obviously that's not the case and maybe can you talk about what the key issues are and how quickly that can get addressed with a new plan.

Sure, Reik. In general, we've always had discussion with manufacturers about compensation plans. I'll address that first. And the plans that were put in place when we first entered Europe have been pretty effective and have not been a problem for us. We had a few manufacturers change something in the last year to where, for the calendar 2008, what happened is there's less over incentive (technical difficulty).

Mike, hello?

Hello. Can you guys hear me?

You faded out there for a minute Mike.

Sorry about that. How about now? Is this better?

There you go.

Sorry about that. So we've always had problems in general with manufacturers' compensations systems where they had disincentives to push business to the channel. In this particular case, we had a couple of manufacturers that changed their comp plans this year and frankly we weren't aware they had changed them. And as business got tighter towards the end of this year, we found that manufacturers are trying harder to make sure that they improve their gross margins. And many of the comp plans are based on gross margin rather than net margin so there have been some incentives that were not designed to be used to move business back to manufacturers direct.

So I think when everything's going well, a little difference in gross margin doesn't affect a sales team's behavior. When things are tight and people aren't making quotas, even an extra point or two is going to make a difference to them. Does that make sense?

It does. So is the issue that they didn't understand this and how do you kind of re-educate that?

No. They understood it. They were trying to -- the manufacturers were trying to align their compensation so they actually were trying to pay their people less this year than they did last year and the way a salesperson could make the same amount of money, sending it through the channel, was to sell more.

Right. I'm sorry. I understand that but I've always been under the impression that, particularly in Europe, that the manufacturers were trying to put more business through the two-tier structure. And I'm just wondering are they cognizant of the changes that they made in that regard and how have you tried to educate them?

I think it wasn't the plan that they would move business if I can answer it that way.

Yes.

So the plan was designed for business to stay through distribution, not like it was last year, and push even more in the future. So it was a surprise to the executives when they heard that their teams were taking business direct.

Okay. So it sounds like from top down, they're pretty willing to change these --

Oh yeah.

-- in a big hurry.

Absolutely. Yes. And then the other answer about the business slowing down, we definitely saw it in the UK but as I said on the call, we actually had good business in the Germanic area. But we started our business in the UK, if you recall. We acquired a second company in the UK so we have a -- it's the largest part of our business is the UK. It's less than 50% but it's the largest part of our business.

Okay. And then just in the current environment, are you seeing -- you talked about North America potentially getting weaker as well so it doesn't sound like you've seen that. But are you starting to see those signs and are there certain end markets that are more pronounced than others in that regard?

I think in general what we're concerned about in North America is, number one, we're probably more concerned about this Avaya issue with Catalyst. So that's the biggest part of our concern for the numbers right now. And that outweighs what we expect to happen to our North America POS and Barcoding unit here in the December quarter.

We certainly saw some surprising good business from POS but we don't expect that to continue. And we did see in the POS and Barcoding business, we saw some of our customers experience some delays in orders during the last two weeks of the quarter. And so we're just assuming that that was tied to what's going on right now in the marketplace and we're not sure if that was more recession driven or economy driven versus the current credit market.

So we also know that back in 2000, 2001 when we had troubles in the overall economy, our best customers continued to find ways to grow their business and we think the same thing will happen again. And because we have such a large group of customers, we're very diversified and spread out, we have confidence that we'll have a lot of customers that will take advantage of this slowdown and find ways to take market share.

Okay and then just one last question on North America. You guys have been recruiting a number of incremental resellers in the past really couple of years. Does a weak environment change that in any way, the potential to accelerate that?

Yes. I think what we're finding to that point is that the smaller resellers use more of our value-added services and actually generate a strong operating profit for us. And so we would like to continue to recruit and develop those type customers. Yes.

But does a weakening environment change that dynamic at all, do you think?

I don't think so. I think what is happening is the largest customers tend to have problems first because they're selling to larger end users. So I believe the SMB customers that we have in the past and the ones we've recruited more of are more stable and more run rate business opportunities for us going forward, even in a weaker economy.

Okay. Thanks a lot.

Yes. Thanks Reik.

Our next question comes from Andy Young with Thomas Weisel Partners.

Hi. Good afternoon.

Good afternoon.

Just a couple of questions. When you say given the huge currency fluctuations in the last few weeks, what's your current assumption for the euro?

The euro -- primarily in Europe, we're a euro-based company. What we try to do is we try to balance our exposure on our balance sheet first. And we also have a hedging program that we have in place. So from a transactional standpoint, we feel that we're fairly well protected. Of course in our forecast, the forecast that we have, as you turn those euros into dollars now with the dollar strengthening, those comparatives are tougher because on a translated basis, that same sale is worth less today.

Right.

Does that answer your question?

Yes. So when you do this guidance, do you assume constant currency at the end of a quarter or do you have a different assumption for the euro for the full quarter?

We don't necessarily use the end of the quarter rate but we do assume a constant currency in the forecast.

Okay. Okay. And also, a quick question about Latin America. We have recently seen quite a bit of problems in Mexico, Argentina, and Brazil. Do you see any change in the business (inaudible) in the current month in October?

Well, I think we're not going to give an update on October on the call here.

Okay.

But I think in general, we're going to be very concerned about what happens down there. There is certainly devaluation going on in Mexico so we're going to be watching that very closely too. And I guess we all know that when you do business in Latin America, it's almost a cycle that we go through that some countries get into trouble and so we're conditioned to that over the last five years, six years and so, we're going to be very cognizant of what happens down there.

Okay. Okay. And one final question which is regarding your accounts receivable. It seems like your accounts receivable there's no material deteriorations in the quality of your accounts receivable but do you see incrementally some of your customers delaying their payments a little bit more or do you see the same payment patterns?

We haven't necessarily seen a delay in payments overall as evidenced by our DSO. But we've been cautious in our overall review of the portfolio. As I mentioned in our scripted comments that we increased our bad debt reserve by a $1 million. And because of this current credit market both here and overseas, we're staying very close to our customers. There are going to be some customers that won't do as well because of their banking relationships. And then there will be other customers that are going to be able to take advantage of it because they're very strong. So we're optimistic overall but we're managing the receivables.

Great. All right. Thank you.

Our next question is from Chris Quilty with Raymond James Associates.

Thanks. Rich I wanted to ask that same question from a different angle which is, you've obviously, I think a smart move taking the available money from the credit line and securing it for your use. When you look at the customer base, your resellers, obviously there's going to be an increased risk of default here. And how do you look at that situation versus the potential long-term opportunity if you can help skate these guys through a difficult time by helping to fund them through it? And does it -- do any of the terms, in terms of the lending terms, change for any loans or terms that you may have with them on purchase of products?

The first -- Hi Chris. The first place where we would go is we look at different programs that we've got. So as I've talked about before, we work with leasing companies, we work with asset-based lenders. We do take secured positions with customers to be able to grant additional credit and we're monitoring our third-party financing providers closely in this banking market too.

And we want to make sure that they are able to continue to grant the credit. But our first action for somebody who may be a little bit tighter on credit is to try to work with some of these third-party providers. Those who are really strong because we've got access, we've got such a strong balance sheet, and because we've accessed some of that line just in case, we feel that we certainly have the runway on our own working capital too.

Okay. And in terms of when we look at your returns on capital or the lending rate that you may see on your receivables, does any of that change?

Well, the return on capital right now, because I've drawn the $75 million, that's going to be impacted. If you were to model that I kept the $75 million outstanding for the entire period, that's probably going to cost us about 2.4% on our return on invested capital calculation. Does that answer your question Chris?

Yes. But you're also going to be putting some of that to use and might we see better gross margin terms or some other economic variable where you'd see improvement?

Not necessarily on a gross margin in this market. We're not necessarily looking to extend terms for our customers. We're looking to gain more market share.

Okay. And when you look at who your competitors are in this market, are they taking similar moves or are they retrenching from the market?

I don't necessarily know. Certainly the privately-held companies, I have no idea whether they've taken similar moves or not. I know that other large public companies have done similar things. Frankly from an overall treasury standpoint, some of the information that we've got is as many as 25% of the companies surveyed on some surveys have actually drawn on their lines recently in a similar way to what we've done.

Okay. Changing gears a bit, the Catalyst issue with the communications manager. Has it surprised you that it's taken this long for the customer base to adjust to the pricing and come back into the fold?

Yes, Chris. This is Mike. Well, the problem is they still haven't fixed it. Maybe I didn't make that real clear. So they announced some changes that were dead on arrival back in the springtime. They made some additional adjustments this past quarter. That didn't work. It was a partial success so, as I referenced on our August call, they've kind of fixed the issues with selling new Avaya systems but not with upgrades. And upgrades are a big part of the Avaya business both for our customers and Avaya in general. And so they won't announce the new pricing for upgrades until early November. So we're frustrated by it.

Okay. I guess I didn't realize that the problems were still not fixed.

Yes. I'm sorry I didn't make that clear enough. That's why we had a tough time with this forecast. It's the Catalyst piece that's still challenging to us to figure it out. And typically with Avaya, and we saw some of this, is Avaya ends strong in September but it was muted because of the fact it didn't have this program resolved. So this is -- the December quarter's typically the weakest, as we all know, with Catalyst and Avaya and so we're trying to figure out how much of an uplift can we have. And so we feel less confident that they've fixed it now than we did back in August.

Okay. Another question. I don't know if you made -- distinguished between the performance of the AIDC and the point-of-sale business either globally or by market in North America and Europe. Can you give us any color?

I would say that the AIDC business was weaker in Europe than in North America. Comparatively in both markets, our POS business in Europe has been doing well from a growth percentage. It's just a much smaller percentage of our business than it is in the US. As you recall we've never really had a strong Pan-European POS business in Europe. We've just started making headway in the last two years. Epson signing us. Metrologic's starting to work with us, again in the UK only. So we really haven't had a strong POS business in Europe and so that business hasn't been negatively impacted. We're still, where we are doing business, gaining some share.

Going back to the US, that business really has seen very little activity other than at the SMB level. So in the US I have to talk more about the IBM NCR systems business and it has been weak for 18 months or so. We just had a good September, kind of came out of the blue. There were some deals that we just said we'll never close that finally closed. So that was good news. But in general, I would say the AIDC business in the US and the AIDC business in Europe were both about the same. They were okay. The one up side that we're starting to see is the shift from Intermec. And they haven't made it a requirement for their direct customers to choose distributors but they're giving a lot of incentives for them to do it and they're going to push them even harder come January.

Okay. And final question just on the security piece of the business. Maybe I missed it in the past month, or past quarter, excuse me, but were there any major vendor pickups or other business changes that I may have missed? And what's kind of the next step in the business? Is it really focused more on brining in new hardware vendors, more product vendors, or more important on the recruiting side of bringing in more resellers and integrators?

Yes Chris. No new vendors. We still have a short list of some people we would like to have so we are still talking to a few but it's a short list. I think from a customer perspective one of the things we wanted to do was to move beyond the typical security distributor base of low voltage electrical kind of guys and to move more into the systems integrator space which is where we -- if you look at our businesses over the years, we typically have done very well with the larger companies who value our services and are willing to outsource more of their business than some of the smaller customers. So the area that we have not really exploited yet in security area is this idea of going after the larger systems integrator. So that's really the next piece that we're focused on right now.

Okay. And I don't think you gave a specific comment on it, but as we went through this credit debacle over the last three, four weeks here, can you tell us sort of what you saw in the customer buying pattern? I mean did things just totally freeze up as reflected in your guidance or did you continue to see a nominal level of business. And how are things changing now that the credit markets seem to be getting a little bit more traction?

Yes. I don't think we've seen anything freezing up necessarily. There might be some anecdotal customers out there but in general we haven't seen that. I think it's more of, when I look at our overall forecast, the areas that I'm focused on from trying to understand our forecast myself is our Catalyst business. What's the impact of this Avaya issue? Europe, which already had some slowing growth for us. And now probably has a little more head wind and especially when, as Rich said, as we translate the exchange rate, the Euro currency. And then I think the last area of concern has really been North America.

Okay.

And it's not nearly at the same level as the others.

Got you. Well, I guess there is one victory is North America is no longer the leading problem.

Yes. You bet.

All right. Thanks guys.

Thanks Chris.

Our next question comes from Brian Drab with William Blair.

Good evening.

Hi Brian.

Just a couple of questions for you. First of all, at the end of last quarter you talked about gross margin outlook. You actually talked about a specific margin, 10.3%. That's what you hit in this quarter. Is that the sort of visibility that you feel like you have going forward here or is it going to be a little harder to call?

Yes. As far as -- if you look at our midpoint guidance Brian, I think a similar gross margin maybe a couple of basis points higher, would be a reasonable expectation. Don't forget when you're looking at the midpoint guidance to include an assumption on the interest expense for the $75 million.

Right. Okay. Okay. So you still feel like -- I guess the source of my question is we're expecting in our industrial group here, much more volatility in the markets going forward. Do you feel like you still have the same visibility you had a month ago or three months ago or is it really getting more challenging?

Well I think -- This is Mike, Brian. I think overall, yes, it's challenging and I tried to preface my normal remarks on expectations with a reminder that we really don't operate with backlog. Those guys do, maybe. Maybe some of those industrial guys do better than we do. But the other way to look at it is our average order size is around $2,000. We've got 20,000 active resellers so we tend to see that we have our bigger customers and those tend to be in our Catalyst group in general and in our POS group in general. Those guys generally the ones that get challenged first because they've got the larger end users. So the two-thirds to three-fourths of our business is what we would call the run rate business. And historically it's been less volatile. Don't know what's going to happen this quarter. We're giving our best shot. There was a lot of discussion here about do we even give guidance in this environment but we felt like we should do the best we could at giving you guys what we know today.

Okay. Yes, we appreciate that. And then do you talk about sales growth by region, in say North America and Europe with a breakdown into volume and growth from acquisitions, growth from currency translation and selling price? Or do you not have that type of resolution that you share with the Street?

Yes Brian. When we give our guidance we do guidance for the total Company. In our comments we give you visibility to the historical breakdown of our segments. In the past -- for instance our most recent acquisition was MTV Telecom -- what we said at the time of the acquisition that the trailing 12 months was about $18 million in sales. And historically that will be the extent of the kind of guidance we'll give for an individual business unit.

Okay. Okay. Thank you. And just lastly again in anticipation of a more difficult operating environment, can you talk a little bit more about the different levers that you can pull to control costs and maintain margins given a worst case scenario or at least a worse scenario?

Yes. First of all in terms of our sales force, which is clearly the largest group that we have, they're a commission-based sales force, so if we're not getting the sales and the margins, they're not getting their commission. So we've got a built in variable on the sales force which is the largest employment group that we've got.

We've historically invested in programs. So for instance, Mike is talking about our security business as being an opportunity, our communications business on a world-wide basis as being an opportunity. So there we'd be looking at perhaps even bringing in people if we see the opportunities there having marketing programs.

Those kinds of decisions can be reversed rather quickly. If you look at our overall constitution of our spending, our company's about 70%, if you look at salaries and benefits, in terms of our spending it's about 70% people related. So as we see changes over time, those things become variable. We've also got marketing programs that we can look at and then certainly in this environment, we'll watch our overall underwriting. So our ability to grant credit, I talked a little bit about using third-parties to help us for maybe some customers that have a little bit less runway on their credit. So those are all things that can be variables for us.

Okay. That helps. Thanks very much.

(OPERATOR INSTRUCTIONS). And at this moment, I am showing no further questions.

Okay. Thanks Roy and thank you for joining us. Our next conference call to discuss December 31 quarterly earnings is expected to be on January 22. Thank you very much.