Scansource Inc (SCSC) 2009 Q3 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS.) Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn over the meeting to Mr. Rich Cleys. Sir, you may begin.

Thank you, Kelly, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended March 31, 2009. My name is Rich Cleys and with me are Scott Benbenek, President of Worldwide Operations; and Mike Baur, CEO of ScanSource. 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 the 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. For the quarter ended March 31, 2009 the Company generated sales of $390 million, which represents a 24% decrease over the prior year's comparative quarter sales of $514 million. The Company's third-quarter sales results reflect the overall decline in demand for technology products as economic conditions have continued to deteriorate across all of our geographies. As a result, sales originating from our North American distribution segment decreased by 26% in comparison with the prior-year quarter, while the international segment saw sales decrease by 18% over the same period. When measured in local currency, the international segment sales decreased by 9%.

Within our product lines we experienced a 26% decrease in worldwide sales of our POS Barcoding and Security product categories over the comparative prior-year quarter. Those product categories represent 63% of our total sales for the current quarter, with the remaining 37% of our total sales originating from Communications products, which experienced a decrease of 20% in comparison with the prior-year quarter. Mike will discuss these sales results in greater detail later in this call.

Gross margin expressed as a percentage of sales increased to 12.2% for the March 2009 quarter, compared to 10.1% for the prior-period quarter. The improvement in margin for the current quarter was driven primarily by our ability to take advantage of strategic inventory purchases in anticipation of vendor price increases introduced through the quarter. These opportunistic purchases resulted in $3.2 million of additional margin achieved through the quarter. While we were very pleased with our execution on this opportunity, we do not expect to be able to sustain gross margins at this level once the inventory is liquidated.

In addition, the Company also benefited from the recognition of approximately $2.1 million of vendor program benefits during the quarter that we do not believe will reoccur in future periods.

A third benefit was favorable sales mix. A more normalized margin for the March quarter, excluding the opportunistic purchases and vendor program benefit would be approximately 11%.

Operating expenses decreased slightly in the current quarter to $32.4 million versus $32.7 million for the comparable prior-year period. Included in operating expenses for the current quarter is over $2.1 million of bad debt expense, which was approximately $1.1 million higher than in the comparable quarter. While we were able to reduce our SG&A expenditures below prior-year levels, operating expenses as a percent of revenues increased to 8.3% in the current quarter versus 6.4% in the prior-year period. The increase is largely due to the significant decline in revenues between the two periods. As a reminder, MTV was acquired in April 2008 and its SG&A is included in our March 2009 results. [Offsetting the additional cost] is the [favorable year-over-year] exchange rate impact of our international business.

In response to lower sales volumes, the Company implemented a comprehensive cost reduction initiative in January. Although we continue to invest in growth opportunities such as our Security and international businesses, we have begun a program to reduce costs in specific business units and certain areas of our SG&A. We are encouraged with the early results of this initiative and believe that further savings will be realized in the June quarter and into fiscal 2010.

Operating income for the March 2009 quarter decreased to $15.1 million, a 20.4% decrease from the operating income in the comparable prior-year quarter of $19 million. Expressed as a percentage of sales, operating income was 3.9% in the current quarter compared to 3.7% for the prior period.

Interest expense was $600,000 in the current quarter compared to $1.1 million for the prior-year quarter. At March 31, 2009 there was no outstanding balance on our revolving credit facility.

The effective tax rate for the March 2009 quarter decreased to 37.6% compared with the prior-year quarter of 38.8%.

Our return on invested capital was 14% for the quarter, which was well below our historical range of 20% to 25%. Although higher ROIC is a strategic long-term goal, we believe that managing our liquidity, including cash available for future growth, is important in the short term. Our strong balance sheet should allow us to make the necessary investment in programs and working capital at the time needed when sustained growth returns.

Turning to the balance sheet, inventory turned 5.7 times during the quarter, which was slightly lower than the 6.2 inventory turns generated in the December 2008 quarter and the 5.8 turns in the comparable quarter. Current quarter turns were adversely impacted by the opportunistic purchases during the quarter. Paid for inventory days was a positive 5.4 days compared to a positive 4.8 days for the December 2008 quarter and positive 14.5 days for the comparative prior-year quarter. We are satisfied with these performance metrics and our ability to manage inventory levels down over the past two quarters in response to lower sales volumes.

There are $27.8 million in checks written by not cleared in the March accounts payable balance. At December this amount was $91.5 million. The number of days in receivables, DSO, increased to 58 days at March 31, 2009 compared to 54 days in the sequential quarter and decrease from 59 days in the comparative quarter. DSO of 58 days is in line with our expectations. We have noted that certain customers have requested extended terms on specific deals and we've noted a slight deterioration in aging some of our businesses. During the quarter we increased our bad debt reserve by $400,000. Nonetheless, we have continued to operate under consistent underwriting policy, which we believe to be appropriate under the current conditions.

The Company has over $114 million of cash and cash equivalents on hand at March 31, 2009 compared to $85 million on hand at December 31, 2008 and $15 million at June 30, 2008. Recall that since early 2008 the Company has maintained a minimum liquidity reserve of $75 million. For the year-to-date fiscal period ended March 31, 2009 the Company has generated over $131 million of cash flow from operations.

Our total interest-bearing debt was $30.4 million at March 31, 2009 compared to $64 million at June 30, 2008. At March 31, 2009 there was $250 million of available funds for borrowing on our revolving credit facility.

Mike will now give you an update on our business.

Thanks, Rich. March quarter has always been our most difficult to forecast and this year was even tougher. As I mentioned in January, we were hesitant to provide quarterly guidance due to the general lack of visibility inherent in our business, plus the economic uncertainty that began late last year and continues to persist. However, we continue to believe that our investors appreciate our best efforts to frame the key business issues and discuss how they may affect ScanSource's revenues and earnings on a quarterly basis.

As you have already read and heard, ScanSource's revenues declined substantially in the March quarter, yet we maintained very good profitability on a percentage of revenue basis. The ScanSource business model has proven to be consistently profitable over long periods of time and through the ups and downs of business in economic cycles.

Our employees have done an excellent job of adjusting our spending and investments as we face these economic challenges. As Rich mentioned earlier, we have begun a cost-cutting program that will focus on reducing expenditures in key areas such as travel, entertainment, marketing, fees to service providers and certain employee benefits. The majority of our compensation systems are designed to be variable. Sales personnel, for example, are compensated based on gross margin, and management compensation includes a significant component of pay based upon operating income or ROIC. As a result, when our sales and profit dollars decline, we expect a decrease in compensation dollars. We also have allowed attrition to reduce our headcount by 3% since December 2008.

Our balance sheet has never been stronger, so we are in a position to support demand from our customers and manufacturers. We will continue to invest in the growth opportunities available in our Security business and our international business, because we believe there is market share available for us to take in those markets. Our overall business is solid and will improve as the economic issues are resolved.

Now I will comment on each of our reporting segments. North American distribution, which includes sales into the US and Canada, posted sales of $313.3 million, a decrease of 26% for the March quarter on a year-over-year basis. Our North American discussion will start with Catalyst Telecom. Our Catalyst sales unit showed continued decline from last year and last quarter. However, we believe we are at the bottom of our sales decline and expect sequential growth in the June quarter. Our resellers have proven to be strong survivors despite all of the challenges the economy has thrown at them. We've experienced some increased bad debt and some slower payments, but overall our Catalyst channel has been resilient.

Our key vendor here, Avaya, is making progress with programs, products and service offerings that will start having an impact on growth during the June quarter. Avaya is still committed to utilizing the indirect channel much more than in the past, and we are beginning to see evidence of stronger ties between the direct sales team and the reseller channel.

Catalyst is having good success competing for new business with Nortel resellers, as our offer of Avaya, Juniper and Extreme appear to be a winning combination. We achieved record sales of Juniper products again this quarter. Catalyst revenues for the March quarter had fewer big deals, which resulted in better gross margins.

The annual Catalyst Partner Conference will be held in the June quarter and will give several hundred Avaya resellers a chance to discuss key business issues with top executives from Catalyst, Avaya and our other manufacturers. We believe that the expense for a top customer conference is a smart investment, even in tough economic times. Feedback from this event will help shape our plans for the second half of 2009.

Next up is ScanSource Communications. This sales unit also experienced revenue decline sequentially and year over year. As with our other sales units, gross margins held up as we had fewer large deals. The Polycom channel appears to be weathering the economic storm and the resellers are excited about several of the new Polycom product offerings, like the entry level QDX 6000, the new CX 5000, which was formerly known as Microsoft's product, RoundTable, and an updated bridge product to compete favorably with Tandberg. ScanSource Communications will continue their marketing efforts by helping resellers with end user marketing campaigns and will be rolling out new product launch programs for Polycom.

Next I'll discuss the North American POS and Barcode unit. This sales unit also had revenue declines sequentially and year over year, and experienced some competitive gross margin pressures. We did a very good job managing to keep a high fill rate for sales orders, while we worked to reduce overall inventory levels to match our sales. This unit also saw a significant decrease in large point of sale system deals for the March quarter, and the current pipeline of large POS deals is very weak.

The POS and Barcode reseller channel has the same financial challenges as our other sales units in that end users are paying slower and expecting better discounts. ScanSource reseller financial services team is working closer than ever with our resellers to help them finance opportunities through our various financial offerings, including trade credit, leasing, escrow accounts, and third-party financing. We believe availability of credit for our customers is a strong value-add in these economic times and we have the right balance sheet to do that.

I will now update you on our third technology area, ScanSource Security. The Security team was able to grow on a year-over-year basis and continues to gain market share. The sales team has introduced a new program called the Premier Partner program that has received excellent reviews. This program is targeting security system integrators that are looking for a value-added distributor who doesn't compete with them. We still believe the security business has significant opportunity as this industry remains very fragmented and very inefficient.

ScanSource Security recently attended the ISC trade show and had heavy traffic in our booth, where we exhibited Cisco security products for the first time. Cisco is introducing a new line of IP camera products and ScanSource Security will be a key distribution partner.

Our second reporting segment is international distribution. Our international business, which includes Europe, Latin America and Mexico, posted sales of $76.6 million, a decrease of 18%. When measured on a local currency basis, our international business decreased by 9%. In Europe we had sales decrease from last year and sequentially from last quarter. However, we were able to close the quarter with a strong March. The sales team experienced weaker demand across all countries, but especially weak was the UK. We had fewer large product -- projects in the United Kingdom and ScanSource has the highest market share in the UK compared to other areas of Europe.

Another key factor affecting demand was the price increases across Europe instituted by most manufacturers, and they ranged from 15% to 30%. Many of our customers as a result had to re-quote their end users, which delayed or lost certain projects. These price increases are also helping the non-US manufacturers which ScanSource Europe does not sell products for. We do expect to grow in the June quarter after these price increases reset the market and we expect to gain market share and add additional resources in the region.

During the quarter we were able to improve our opportunities for our POS and AIDC business, as we are now authorized to sell Metrologic products across Europe, due to the merger with Honeywell. In addition, we have been signed by LXE as a value-added distributor across Europe.

The ScanSource Communications Europe business will be one-year old in April, and we will be transitioning from the MTV Telecom name in the marketplace to ScanSource Communications. Our key manufacturers are giving us excellent support in the UK, and we were recognized by Avaya as the top sales of SMB products in March. Avaya also has announced that ScanSource Communications has been authorized to sell the complete enterprise-class products beginning this quarter. We will be investing in the appropriate resources to support the recruitment of partners and the pre- and post-sales support for these new opportunities. In March we hosted a training class for our resellers on Avaya's ACM product and we will be organizing additional training and certification classes in the June quarter.

We are also investing in resources to support the growth strategy for Siemens, Swick's and our newest vendor, ShoreTel. We believe the value-added distribution model we are building will receive strong support from vendors and customers in the UK and also across Europe.

Now, turning to Latin America and Mexico, our business in this region also had revenues decline from the prior year and prior quarter. Our export business from Miami had lower sales and lower gross margins as we experienced some irrational pricing. We also lost some profitability as we missed achieving some vendor programs due to lower sales volumes. However, our team was pleased with the progress we have made with Intermec, as they began to utilize two-tier distribution in Latin America.

Our Mexico business was also down from last quarter, yet we see opportunity coming from our key vendors Motorola, Zebra and Intermec. The significant devaluation of the peso has caused most of our product prices to rise substantially in Mexico. As a result, demand is weaker and resellers have had to re-quote all of their customers that were in the sales pipeline.

Now, we'll conclude this part of our call with some closing comments. As we indicated on our prior-quarter conference call, due to the unprecedented volatility in our business and the global economic climate, we are increasingly challenged to provide guidance, even looking out one quarter. As you know, ScanSource operates with no backlog, as we take orders and ship products the same day. Furthermore, resellers are not required to provide forecasts and our visibility into future orders is always limited. Reconciling our March guidance to actual results reflects this difficulty.

Nonetheless, we have elected to continue to provide guidance, albeit with wider ranges to reflect the potential volatility we have experienced in the past two quarters. We believe total revenues for the June quarter could range from $390 million to $430 million, and our earnings per share could range from $0.25 to $0.32 per diluted share.

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

Thank you. (OPERATOR INSTRUCTIONS.) The first question is from Brian Drab.

Good afternoon. I don't know if it was just on my end, but I think you might have had a problem with your microphone and you broke up a little bit, Rich, when you were talking about the dynamics that resulted in SG&A being a little higher than maybe some of us might have expected. So could you talk about the points that you went through regarding SG&A?

Yes. Well, the SG&A for the quarter was -- excuse me? Can you hear me now?

Yes. I can hear you fine.

So SG&A for the quarter at $32.4 million, compared to the prior-year period was slightly down, just about flat. We had $2.1 million worth of bad debts in the quarter, which was about $1.1 million higher than the year before. The other thing that I noted was that MTV Telecom was included in the current-year quarter, whereas it wasn't included in the prior-year quarter. But that additional SG&A was offset by the favorable exchange rate impact on our international business.

Okay, thanks. And I know there were some management changes, or at least one important management change, at Motorola in their Symbol division in the recent months. And I'm wondering if you could give us an update there as to how that may or may not affect your business with them going forward?

Sure, Brian. This is Mike. Yes, they announced some major changes in how they're going to integrate potentially more between the Motorola public safety business and the former Symbol business. And we've met with the key people in charge of that program now. Recently we had Gene Delaney from Motorola here, and Mark Moon, and got a very good understanding of what they're trying to accomplish. They have their partner conference coming up here in a couple weeks and we, frankly, don't see any disruption or any changes that will affect our business negatively on the horizon.

We think the opportunity that they're trying to execute on is to cross-pollinate the channels that they have today for their public safety and government business and find opportunities to sell across the Symbol product line, as well as the public safety product line. So I think there's savings probably that they're looking at executing on. But we don't foresee right now any significant changes to the way we operate or the way a Motorola/Symbol reseller will operate.

Great. Thanks. I'll get back in the queue.

The next question is from Mr. Read of Robert Baird & Company.

Hi. Good afternoon, guys. Rich, could you comment a little bit more on the vendor pricing that you took advantage of. And you talked about margins would be a little bit more normal as that inventory gets depleted. What's the timing on that depletion? And you also had mentioned it was really in front of some price increases from the vendors. When would those kick in and would that have an impa- -- a swing the other way?

So Reik, the price increases occurred during the quarter. So we took advantage, because we knew those were coming, and we made some purchases earlier in the quarter. So with those purchases early in the quarter, as the prices increases come out we've had a favorable purchase price benefit. We rolled out about $3.2 million of favorable purchase price benefit in the current quarter.

As far as what to look for in the future, in our guidance we talked to a normalized gross margin of about 11%. So if you were looking at the guidance that we gave, so maybe on the high end at $430 million you'd be looking at maybe about -- $430 million you'd be looking at maybe about 10.8% of gross margin on the low end, closer to the 11%. If I was going to give you a target within that guidance, normally what we do is we give you right in the middle. I would probably give you something more towards the $400 million in sales and about 10.9% with the gross margin, which would have the impact of all of those price increases baked into it.

And, yes, to follow up on that, Reik, so there --going forward there's no negative impact of having the price increases. The margin's reset in the marketplace, Reik.

Okay. Perfect. Thank you for -- that's exactly what I was looking for. And then, Mike, you had mentioned areas that you want to focus on, continue to invest in, mostly the international and the security businesses. But it sounds like you've also taken some efforts to reduce certain areas that had been investing in before. Can you just comment on where that's coming from?

Well, we gave some general categories of areas that were marketing related, travel. We didn't replace some headcount that in other times we probably would have. And so we let some of the normal attrition take place in our business, whereas if we had some attrition in international Security we would replace those people. And I'll probably not get too specific just for competitive reasons.

So it was a little bit more horizontal across the rest of the business?

Yeah, I would say so.

Rather than -- okay. And then in Europe, maybe you could comment a little bit on -- with the economy the way it is, does it change the dynamic in Europe in terms of we've been waiting for this consolidation to occur for a while now. Is there a catalyst for that to happen and for you guys to gain a little bit more share?

Well, I think one of the dynamics possibly is the economic pressure on all these small distributors. I mean, I certainly expect that there will be some consolidation or some just fallout. And I think manufacturers have, frankly, preferred that method rather than just declaring that they're going to reduce from, say, 30 distributors to 20. They would rather the market forces take an effect. And so I think there will be some acquisition and consolidation activity going on in the European marketplace. And I think from our perspective we would certainly be looking at that for our European Communications business, as an example.

Okay. And then just one last question. On the Communications side in Europe, it sounds like you've been from Avaya some relatively nice new product sets to go ahead and sell in this quarter. How meaningful is that? I mean, I understand that Avaya just isn't quite as big in Europe as they are in the US. And just trying to get a sense of the magnitude of that.

Well, the challenge with it is it's UK only, because that's the only place we have really a presence today. And that's the only place we're marketing. So it's UK only. It is, however, the largest part of the product line that we've sold historically in the US, the large end of the enterprise.

So kind of as a reminder, the company we acquired, MTV, had the SMB products and then right after our acquisition they were approved for what they called the mid-range products. But really, the volume has always been in the high-end enterprise products in the US. In Europe maybe not quite as big a differentia- -- quite as big a gap, because the Europe market and the UK in specific has fewer large companies than the US.

But, having all that been said, we think there's a significant opportunity because there is some competitive market share we can go after. We believe there's some underserved resellers. And Avaya is aggressive right now on recruiting new resellers, especially from competitors. And as I mentioned on the call, Nortel is the biggest opportunity. Although they're not big in the UK, they are a big opportunity. And while they're teeing up Nortel to go after, there are other companies that they also have in their sights.

Okay. Great. I appreciate it. Thank you.

Next question is from Chris Quilty of Raymond James & Associates.

Yes, question for Rich. Just looking at what you've experienced historically here in the last couple of quarters in bad debt, how well do you think you have that situation contained? And do you expect it to get worse on a go-forward basis? Or are you seeing signs of it starting to lift?

Chris, we did increase the reserve by about $400,000. We had some slight deterioration in the aging in the business units. We do see spots where there are some customers that maybe are having problems with their lines, or tightening up on their lines with their bank. And then folks who are maybe getting some deals where their customers are asking them for terms are coming to us with one-offs on those kind of terms.

Overall, though, our customers are relatively healthy and we stay very close to those customers and work with those customers. Until we start seeing some of the bigger deals coming through, some of the more creative things that we do with the larger deals, we're not seeing that. So overall our margin's healthy and we think that the underwriting risk that we take today with the underwriting policies that we've got are sound. I can't necessarily predict the future in the economy, but right now we're fairly comfortable with the way we're handling credit.

Okay. And switching gears, I don't think you gave a specific number on how much the Barcode Point of Sale business was down and I think you've done that in past quarters. Can you tag a number onto that?

No. We haven't broken that out. We -- other than we combined it, as you know, with Security. And we've done that for quite a while now.

Okay. Did you give a combined number there?

Yes. So that number we did give, yes. It was 20 -- North America was 26.

Down 26%.

(Inaudible) 26 quarter over quarter.

Worldwide 26%.

Okay. Now that was -- okay, which just happens to match the North America being down 26%?

Yes.

Yes.

Okay. Mere coincidence.

Yes.

So --

Don't forget you've got Security in there too.

Correct.

Yes.

And the Security was up year over year?

Yes.

And looking at the Barcode business, I mean, in the past quarter or so you've had some problems in Europe with foreign exchange and losing market share. Where do you sit in terms of do you think you're gaining or losing market share, both domestically and in Europe?

Okay. Well, in Europe I think we've got that behind us, that issue, in the last quarter, actually back to December. Once we got the -- well, frankly, once the dollar strengthened, some of that stuff went away anyway, the advantage that some of the distributors had. Then we had a key vendor, as you'll recall, that had some distributors buying in local currency and some distributors buying in dollars. And that's all been changed to where that manufacturer requires all distributors to buy in local currency, and, frankly, in euros. So that's behind us, the issue that we had the disadvantage. So we believe that we should be continuing to gain market share in the current course and speed we're on in Europe.

In the US, I'm not sure if we're gaining market share or not. It's kind of tough because we ask vendors that question all the time. And we don't always get consistent answers that jibe with the data we're getting. I think the fact that our business is down as much as it is does suggest that we may have lost some market share with some product lines. We're offsetting that with the fact that we've added some new product lines, like LXE, and a few other small product lines that may be offsetting that. But I can't be 100% sure that we're not losing some market share right now.

Got you. Thank you.

The next question is from Tony Kure of KeyBanc.

Good afternoon. Just want to review a couple of things. In regards to the restructuring program, or the cost takeout program that you initiated, did you recognize some of savings in the third quarter and do you expect to see similar type levels or maybe increases in the fourth quarter?

Yes, Tony. This is Rich. If you look from an operating basis versus the prior year, our bad debt expense is up by $1 million. So if you normalize the bad debt, we'd be $1 million less year over year. Some of that is -- the majority of that decrease is really for those variable programs that Mike was referring to, variable compensation. But there is a six-digit savings in the third quarter. And then baked into our forecast would be additional savings for the next quarter.

Okay. And could you just -- one of the things you cited as impacting positively on the gross margin side was a favorable sales mix. Was that by product or by deal size? And how sustainable is that?

It would be -- it really is both. So deal size, we don't have as many big deals. The big deals tend to be lower margin, lower value-add kind of deals. And then from a product standpoint, we did have favorable product mix, too.

So what -- can you mention what kind of products that are favorably impacting you?

Well, one of the things that we do have is we do have a higher percentage of service products that we sell which are much higher margin products, frankly.

Okay. And I think Mike mentioned that there's confidence that you're at the bottom in regards to the Catalyst, in the Catalyst business. What kind of gives you confidence or what's signaling that?

Well, talking to the vendors, frankly, and some customers. And our team has spent a lot of time trying to figure out how much worse can it get, you know? This has been a painful decrease in that business. And the management team that came in about nine months to a year ago now are starting to put together the right programs and systems and, frankly, promotions to solve some of the pricing issues we had in prior quarters, Tony. So we think the combination of -- that marketplace itself has a lot of disruption going on, meaning the Nortel issues are allowing Avaya and Catalyst, frankly, to gain some market share against a weaker competitor. And we believe that if we're looking at the just over the last few weeks, starting the April quarter -- I'm sorry, starting the June quarter, few weeks of April -- we believe that the activity level has gone up substantially over last quarter.

Okay, great. And the last question is just maybe if you could review the positives and negatives or surprises in regards to end markets, retail and industrial, as you move forward?

We don't get a lot of specific knowledge of markets other than those key product lines that we sell into the retail space, like IBM and NCR and Epson and those that are very clearly retail oriented. And those are kind of those systems sales I talked about that were down significantly and the activity level is down significantly. We don't get much more detail than that from our customers or from just the facts of what products we're selling. Because a scanner, for example, we don't always know where it goes. Matter of fact, we rarely know which market it goes into. So some of that is anecdotal we get from the vendors. And we've not gotten any vertical market data outside of retail.

Okay, I'm sorry. I lied. One last question just in regards to the uptick you're seeing, or based on your revenue guidance, that the midpoint is up about 5% sequentially. But I know that, or in looking back in prior years it looks like it's kind of a seasonally strong quarter. So is this kind of a return to normalcy as far as seasonality goes? Or is it more a return to stronger demand just based on the other factors you were talking about?

Yes, I don't think seasonality is playing into the forecast. We basically do a business review for every one of our business units. And then we roll up their numbers. And we look at all the different impacts that they expect to see, and we actually widened the range because we're just so nervous about the fact that it's a lot of guesses and what ifs. And back to the example of even though we saw, starting the April month, we saw better activity in our Avaya business, we haven't seen the sales yet. And so I would say we're not even looking at the seasonality impact. Typically, you're right. The June quarter is strong for us. And typically for us March is the one quarter we have missed more than any other one in being able to predict how we're going to do. So taking out seasonality, I would say this is more of a business-unit and geographic-specific forecast.

Okay. Thank you.

Your next question is from Andy [Young] of Thomas Weisel Partners.

Hi. Good afternoon. A couple questions here. You have very good cash management and very strong cash flow generation in your past two quarters now. You mentioned that you want to maintain certain level of liquidity cushion during this time. But going forward, how are you looking at cash flow generation and the use of excessive cash [if you may.]

Let me add -- on the forecast, the guidance that we've given, I would not be looking for a significant uptick in the cash flow that we've generated. This year so far we've generated $131 million from operations. So there's been a lot of benefit in the balance sheet that we've realized. This guidance that we're giving is equal to the last quarter, so we won't be looking at doing a lot of liquidation of receivables and things like that with a guidance that's fairly flat.

As far as what we'd be using the cash for going forward -- and I'll let Mike add to this -- but certainly we want to be ready to invest in working capital as the business turns around. And because we've got a much stronger balance sheet than a lot of our competitors, we should be able to take advantage of the market when it turns around because of our strong balance sheet position. And I'll let Mike add to that.

Yes. And then just the other comment I made earlier about potential acquisitions to enhance the growth areas, which would be primarily our European Communications strategy and possibly Security.

Okay. And also looking at your guidance, you seem to be pretty conservative guiding down 22% to 30% on year-over-year basis. Now you also mentioned that you see some improved activity in the Telecom segment. The question I have is that a lot of companies also mentioned that Q1 may be the bottom for this business cycle. Did you see improvement in [all] business in your AIDC POS business in March and in April? And how much is this, your guidance, is due to being prudent and how much is the end market situation right now?

Well, I think the -- to answer the question on the -- outside of the Catalyst business where we think we saw the bottom, we're not prepared to say that for the other businesses yet. I think our AIDC and POS business we haven't seen enough indicators to suggest we're at the bottom. I hope we are. I think the difference would be in Europe, where we still have significant market share opportunities, even if we're not at the bottom, we could still grow in Europe. And so I believe the POS and Barcode business there has opportunity.

I also think our Latin America business had a tough quarter and they believe there's opportunity to grow in the June quarter. But I think our US business is going to be tough again in the June quarter.

Okay. One final question about your gross margin. And it's interesting that despite declining sales in the last two quarters, you guys were able to expand your gross margin on a fairly consistent basis. And also, I mean even excluding the one-times that you mentioned [during] this quarter. And then also, it's interesting that some of your vendors actually increasing pricing for their products into this kind of economic environment. What motivates the end markets to actually accept that kind of price increase? And do you have any insight into that?

Well, of course, some of that we wouldn't want to be too precise, because our competitors would love to know, too. So I'm trying to be sensible about that. But I think in general what we've always seen is that we've got a value-added business model that vendors and customers do prefer. And absent a lot of large-deal activity, which we've kind of noted across all of our businesses, where we were okay taking lower gross margins because we have lower SG&A. And as you recall, ScanSource has always talked about strong ROIC, but also a real focus for us is on operating income. And so we use the gross margin as a barometer for how much SG&A we should have to support that business.

So our feeling is that the customers and manufacturers are comfortable that we're providing the value they need at the price points and that allows us to make the gross margins, and ultimately the operating margins that we're making. But we remain cautious that that all could change. One of the things that we've not seen -- we've seen some, but not a lot of -- is irrational pricing. I mentioned that in Latin America, specifically in Miami, we did see some irrational pricing in the quarter. Haven't seen that in other parts of our business, but I'm not crazy enough to say it won't happen either.

So we're going to watch that but we do believe -- we've been in this business a long time, especially in the POS and Barcode and the manufacturers recognize that if we see our gross margins coming down we will reduce our investment in SG&A, which when we turn the corner on revenues, if we don't have those kind of infrastructure, whether it's people or programs, then the business won't grow as fast as it could otherwise. So we believe that we're making a fair margin on the value we're delivering.

Great. Thank you very much.

Your next question is from Mike Marburg of Ramsey.

Hey, guys, it's actually Mike Marburg. I must have been cut off there. Are you able to give us an annualized sort of cost savings from the efforts that you mentioned on the call -- and I apologize if I missed this question earlier -- for the 2010 fiscal year?

We haven't given a cost savings for the full year. We give guidance out one quarter and savings for the next quarter are baked into that guidance.

Would you -- are you expecting in the fourth quarter to get sort of the full benefit of the efforts you've made this quarter or is it certain things I guess you --

We expect to have more benefit in the fourth quarter. And you'll run your models and you'll see that there's some savings in there. But we also expect to have some further benefit into our fiscal 2010.

Got you. Great. Thank you very much.

The next question is from Reik Read of Robert Baird & Company.

Just a quick follow-up on your comment, Mike, on the share loss. I mean, you're not sure if it's occurring but that you have a sense that it might be. Do you have a sense as to what might be causing that and what you do to remedy that?

Well I think -- I'm trying to be careful here by saying we did see irrational pricing in the US market from a gross margin perspective. And so that leads me to believe that we're being good, we're being smart at what business we take, which means there probably was some business out there at what we would say are walk-away margins that we didn't take and didn't entertain. And yet it wasn't the amount of activity that I -- would lead me to say we know for sure we lost market share.

But I've got to believe that with the margins the way they are, that somebody out there has taken some deals. And we heard some anecdotes about that, that some people were taking some business. And I also believe we lost some business direct back to the manufacturers. During some of this economic uncertainty and it's the first quarter of the manufacturers' year, and a lot of them did look at changing compensation systems. I believe if we lost some share it certainly could be back to the manufacturers.

And when you talk about the manufacturers changing compensation systems and what you just suggested, is this salesmen that are acting on their own to try to get incremental business and the manufacturers are trying to dis-incent that through changes, or are the manufacturers okay with that?

Well, I think they're -- the executive level, the very top, would say that wasn't the intent. But I think what we've seen over the last, let's say, five to eight years in the US POS and Barcode business is the manufacturers had to pay extra to their sales teams to get the right behavior, meaning allow business to flow through channels, because it's more efficient on a operating margin to manufacture. But most sales guys that work for manufacturers are paid either on sales or on gross margins, not on net margins or on operating margins.

So we've seen that they have changed the compensation system so that now some of the manufacturers have sales people who make less money if it goes through the channel. Even though they don't have to work as hard, if they're having a tough quarter there's a tendency for manufacturers to take some deals back direct. And we have seen that in the quarter.

Is that reflective -- I mean, why would they do that in this environment? It seems like in this environment you'd almost want to go the other direction and have the channel do more.

Well, it's back to if you've got sales people who don't have a rigid rule that you can't and some -- most manufacturers, they tell us that they had these processes where they can't do it. But most manufacturers still will take an order from a reseller on a direct basis if it's a big enough deal. And that -- and we never even get a chance to compete for that. So that's why we didn't see gross margin impact, but we think we might have lost some revenue.

Okay. And then just one last question. NCR has brought in some new management. I think you guys talked about this actually last call, that are historically pretty channel-friendly. What's the status there in terms of that opportunity there of driving more business in direct?

We're very excited about their ideas and programs. I think they've got to organize their product portfolio that makes it more channel-friendly. And we expect that they're doing some of those things now. They're pushing much more of their strategy towards self-service and kiosk, as I know you've seen. And they've got to design and promote some of those products in a more channel-friendly and make them more channel-friendly from a distribution standpoint too.

So I think that's a work in progress. But clearly the direction has been stated and they've hired people in the channel organization to promote it. So we haven't seen a significant impact yet, but they're doing all the right things.

And that's something that I would take -- I would take it that it's six to nine months to move in a direction that you realize in terms of revenues?

Well, it always takes longer than we would like. And so that would not be unreasonable to expect, yes.

Okay. Thank you.

No further questions at this time.

Okay. Well thank you for joining us. Our next conference call to discuss the June 30th quarterly and full-year earnings is expected to be on August 20th.

Thank you very much.

You may now disconnect.