Scansource Inc (SCSC) 2010 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. During 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 would now like to turn the call over to Mr. Rich Cleys. Sir, you may begin.

Thank you, Rosie, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended September 30, 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 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, 2009, filed with the Securities & Exchange Commission.

This afternoon, the Company released results for our first quarter ended September 30, 2009. I will start our discussion by providing overall sales and operating results. Later in the call, Mike will comment specifically on the quarterly results and outlook for each of out business units.

For the quarter ended September 30, 2009, the Company generated worldwide net sales of $488 million. While this represented a 9.5% increase in net sales from the prior year comparative quarter, it also reflects a 10.7% sequential increase in the sales from the June quarter. The momentum and the overall demand that we experienced late in the fourth quarter continuing to the September quarter and enabled the Company to exceed the high end of our initial sales guidance issued at the end of last quarter.

In our geographic segments, sales originating from our North American distribution segment decreased by 10.7% in comparison with the prior year quarter, but increased by 9.9% on a sequential basis. Internationally, sales decreased by 3.8% over the comparable prior year period. On a sequential basis, net sales increased by over 14.1%. When measured in local currency, the international segment grew at 11.2% as the dollar has weakened since the June quarter.

Within our product lines, we experienced an 11% decrease in worldwide sales of our POS bar coding and security product categories over the comparative prior year quarter. These product categories represent 61.6% of our total sales for the current quarter with the remaining 38.4% of our total sales originating from communication products. Our communication businesses experienced a decrease of 7% in comparison to the prior year quarter.

The Company's consolidated gross margin percentage was 10.5% for the September 2009 quarter, which was slightly higher than the prior year comparative quarter gross margin of 10.3%, but significantly lower than the June 2009 quarter gross margin of 12.1%. As we communicated on our prior quarter conference call, the increase in gross margins for the June quarter reflected certain one-time benefits that we indicated would not recur in future periods. We said a more normalized margin for the June quarter would have been about 10.8%. In the September quarter, our gross margins were negatively impacted by pricing pressure in all of our markets and a slightly unfavorable product mix.

Operating expenses decreased slightly in the current quarter to $33.7 million versus $34.9 million at the comparative prior year period. While the Company was able to reduce SG&A expenditures below prior year amounts, operating expenses as a percentage of net sales increased to two -- [6.9%] in the current quarter compared to 6.5% in the comparative prior year period.

The increase is largely attributable to higher than anticipated bad debt expense experienced in the current quarter. The increase in bad debt expense over our forecast had a $1.6 million adverse impact to our SG&A this quarter. This equates to $0.04 per share. We are confident that our underwriting strategy and execution is appropriate for the current environment and reflects our commitment to working with our reseller partners in a responsible manner to ensure our mutual success.

Operating income for the September 2009 quarter increased to $17.7 million, a 14.3% decrease from the operating income at the comparative prior year quarter of $20.6 million. Expressed as a percentage of sales, operating income was 3.6% in the current quarter compared to 3.8% for the prior period. This decrease is largely attributable to the higher than anticipated bad debt expense as previously discussed. Interest expense was minimal for the quarter as we did not have outstanding balances on our revolving credit facility at any point during the September quarter.

The effective tax rate for the September 2009 quarter decreased to 36.4% compared with the prior year quarter of 38.2%. The improvement is largely attributable to a favorable state income tax [relief] received in the second quarter of fiscal 2009, which had the effect of decreasing our effective tax rate on a go-forward basis. A return on investment capital was approximately 16% for the quarter, which is below our historical range of 20% to 25%. The Company has maintained a strong liquidity position in order to fund growth. At September 30th, we have over $57 million of cash net of debt.

Turning to the balance sheet, inventory turned 7.2 times during the quarter, which was higher than both the 7.1 inventory turns generated in June 2009 quarter and the 6.9 turns in the comparative quarter last year. As inventory balances increased during the quarter, paid for inventory days were a positive 4 days compared to a negative 2.7 days for the June 2009 quarter and a positive .8 days for the comparative prior year quarter. As indicated on our last call, the Company's increased inventory levels for all of our business units this quarter to ensure high customer fill rates if sales volumes improve.

Accordingly, inventory on hand at September 30, 2009 was $270 million, a $53 million increase over the June 30, 2009 balance of $217 million. There are $59.2 million in checks written, but not cleared in the September accounts payable balance. At June, this amount was $45.6 million. The number of the days in receivables, DSO, was 58 at September 30, 2009, down slightly from 59 days in the sequential quarter 57 days outstanding for the comparative quarter. As discussed during previous calls, we continue to be cautious about the economic environment, and believe our underwriting policy is appropriate under current conditions

The Company's cash and cash equivalence decreased to $87.8 million on hand at September 30, 2009, compared to $127.7 million on hand at June 30, 2009, and $16.2 million at September 30, 2008. The decrease from June is largely attributed to the significant growth in our inventory and receivable balances during the current quarter. Total interest-bearing debt remained unchanged at $30.4 million for the September 30, 2009 and June 30, 2009. In addition, at September 30, 2009 we continue to have $250 million of available funds for borrowing on our revolving credit facility.

Mike will now give you an update on our business.

Thanks, Rich. We were very pleased with the revenue for the September quarter and as we delivered strong top line results. For the September quarter, our revenue was up 10.7% compared to June 2009 and we believe we gained market share in a more competitive environment in our sales units. We had fewer big deals in our AIDC POS units, but more big deals in security and communications.

There is more pressure from certain vendors for the channel to win revenue, so we did see a significant increase in the number of deals with special pricing that results in lower gross margins for everyone in the channel. We are working with our manufacturers across all geographies to improve our inventory availability as product shortages have continued from last quarter and are expected to be an issue into the first part of next year. Our balance sheet strength should allow us to take market share by securing a better supply of the most popular products and by offering appropriate levels of credit terms to our customers.

Now I'll comment on each of our reporting segments. North American distribution includes sales into the United States and Canada, and posted sales of $397.2 million, a decrease of 10.7% for the September quarter on a year-over-year basis. However, sales did grow 9.9% sequentially from June. In North America, we'll start with Catalyst Telecom. Catalyst sales unit continued to post strong sales results after hitting the bottom in March of this year. Seasonally, this is also the strongest quarter as it is Avaya's fiscal year end quarter.

However, we did experience some product shortages at the end of the quarter, which have delayed some orders to the next quarter. Our Avaya results were, again, better than we had planned. The Avaya Enterprise business continues to perform well as resellers are able to close big deals again, as well as improve their run rate business. The Avaya software support program has become successful with our customers and is driving annuity revenues for them and for Catalyst. The Avaya SME, small-medium business products, had strong results as Catalyst successfully executed a reseller incentive plan to improve the focus on this part of the business.

Catalyst convergent strategy is successfully growing our business with our Avaya customers as they are selling Juniper Extreme and Aruba as a total solution to end-users. And we are seeing good attach rates for Polycom voice and wireless products with our sales of Enterprise and SME communications products.

At the recent Avaya partner conference, we received an update on the pending Nortel acquisition and believe that Catalyst will be in a good position to benefit from the addition of Nortel's channel. At the same time, Catalyst has been successful at signing existing Nortel resellers to sell Avaya products.

Next up is ScanSource Communications. ScanSource Communications had a record revenue quarter as they exceeded our expectations with gross sequentially and year-over-year. Polycom video and voice products led the way with record results and we were helped by an increase in the number of big deals that closed in the quarter. Communications sales and business development teams were more aggressive in this quarter and that activity led to market share gains.

We've expanded our focus on service providers who are a significant channel for Polycom voice products. These customers represent an incremental opportunity and are attracted by our value added marketing services. New vendors have been added recently, including Allworx and Sutus, who have IP-PBX solutions that integrate well with Polycom. These vendors will give us new solutions to go to market, especially in the S&B area.

Next, I'll discuss North American POS and Barcode business unit. This unit exceeded our internal plan with double-digit growth sequentially from June 2009. We had growth across all product lines, however the number of big deals are still significantly lower than the prior year. In certain cases, this sales team took market share through aggressive promotions resulting in lower gross margins. In addition, certain manufacturers are demanding that the channel operate at lower margins than is normal in value-added environment. We have been engaged in discussions with our suppliers to determine how we work cooperatively to reduce costs across the supply chain yet still deliver a product that requires value added services and satisfies the end user.

ScanSource POS and Barcode annual partner conference was held in September and attracts over 400 customers and vendor executives. This event allowed the Barcode POS unit to launch a new set of programs and offerings for the channel. Attendees also were able to provide feedback during the conference regarding their outlook for their business in the next 12 months. 72% of resellers surveyed said their business would grow greater than 6% next year versus 2009 and a third of those said growth will exceed 10%. During the event, two key demand generation initiatives were launched. One is called Government Source and the other Healthcare VAR Source. We believe both programs will enable resellers to better compete in these growing markets.

I will now update you on our third technology area, ScanSource Security. The security sales team achieved another record quarter as all product groups achieved strong results led by more big deals and new customers. Highlights from the quarter in security included strong sales from our Motorola wireless products and significant growth and market share gains in our card printer business, led by Zebra Card.

The video surveillance category also had strong growth and was led by Axis and Panasonic products. ScanSource Security team is adding value by taking the leading role in IP education for the channel and finding ways to help our resellers lower their costs by outsourcing more services to distribution. One service offering that is becoming popular is for resellers to use our custom configuration center to configure, stage, and test IP video systems and direct ship to their end users.

Our second reporting segment is international distribution. Our international business, which includes Europe, Latin America and Mexico posted sales of $91.2 million, a decrease of 3.8% from last year. However, international did grow 14.1% sequentially. When measured on a local currency basis, our international business decreased by less than 1% on a year-over-year basis.

In Europe, the POS and Barcode team had excellent sales results compared to last quarter. This was better than expected as normally this quarter is seasonally weaker than June. The growth was very strong in France, the Germanic region and to a lesser amount, the UK and Ireland. The sales team took market share from competition and also took advantage of some channel shifting from certain vendors, although these sales were at lower gross margins. There were more big deals in the quarter, which also led to better sales and lower gross margins.

Another bright spot was the record results achieved by our POS team, with strong sales in the UK with Elo, Metrologic/Honeywell, and Epson products. Our product management team there is challenged by product shortages and recent price increases which have hurt our sales in some areas. We are working closely with our manufacturers on these issues.

Turning to our Europe communications business, we achieved excellent sales growth in the UK both sequentially and year-over-year. This team saw record sales with Avaya products, including strong sales with the Avaya ACM Enterprise products, which are new for Europe communications. We've invested in the appropriate sales and support people and have educated and trained them successfully to provide the same excellent value to our UK customers as we have delivered in North America for many years. We were pleased with the growth in our ShoreTel business that has come from recruiting new customers and taking market share in the UK. We expect this product line to become more significant as we develop our communication strategy for the UK and Europe.

Finally, turning to Latin America and Mexico, our team there had strong sequential growth with significant sales increases in Mexico, Puerto Rico, Venezuela, and Costa Rica. Sales are still lower on a year-over-year basis as this region continues to recover from the economic recessions and the currency devaluation, especially in Mexico. Sales growth came across all product categories and all vendors, and like our other units, they are facing margin pressure from certain vendors to lower our prices so that products can be more competitive. We will continue to work on this issue cooperatively with our vendors.

And now I will conclude this part of our call with closing comments. We believe total revenues for the September quarter(Sic-see press release) could range from $475 million to $495 million and our earnings per share could range from $0.38 to $0.43 per diluted share. At this time, we'll be glad to answer your questions.

Thank you. (Operator Instructions) Our first question comes from Mr. Read of Robert Baird & Company.

Hey, good afternoon. Just on the retail point of sale, Mike, I mean it doesn't sound like the large deals are there right now. But is it a situation where you think that that business is stable or are you still seeing a good amount of push outs?

I think right now our sense is that it has stabilized, but there's no strong pipeline of projects like we would have had in prior years. Normally, we would go into the December quarter with more projects that are POS oriented because it's typically a large deal quarter for us. And if you go back many years, we didn't have that many last year, but I would say that is still a weak part of our business is the large point of sale projects.

And do you have a sense for why that pipeline might not be building? And I guess I'm asking from the standpoint that when you look at various retail statistics, they seem like they're getting better. It seems like those guys might be willing to spend capital. Is this a situation where they've had so many store closures that there's excess equipment floating out there and you're fighting through that? Or is there something else to it?

Well, I do think that's part of it is there's a significant amount of used equipment on the market that in some cases is only a year or two old, ala Circuit City. But in general, I think there's still a lot of hesitancy of any significant capital outlays. I think we're seeing some sales that are going on in some of those retailers, but it's just not any big wholesale deployments. And so there's really not a lot of excitement right now from the larger retailers.

Okay. And then on the pricing front here with the pressure, is that -- is that in essence related to one or more vendors pushing themselves into broad line? And can you talk about how you're trying to respond and maybe how the resellers are responding to something like that?

Well, I think there's maybe a little different dynamic going on right now and that is I think there's a big desire by everybody to drive top line revenue. So I think as deals pop up in the marketplace, there's probably some natural reasons why, especially the larger the deal, the manufacturer doesn't want to lose it to their competitors.

I think we're seeing some vendor competition going on and I think what we're seeing is resellers in some cases are getting pressure from end-users because the end-users know the manufacturers want the business. And so we're seeing a lot more pressure placed on any deal of any size to win it, and so the manufacturers are not wanting to lose it on price. So we're seeing more price pressure driven by, in some cases, the manufacturer's sales force out there making sure they don't lose the business. And I think that -- when a manufacturer has to take a lower price to close it, in their opinion, at the end user, the reseller generally takes a lower margin and is the distributor.

We think in some cases, though, they're competing with themselves. And so we're trying to recommend to the manufacturers that some of this is end-users taking advantage of the current environment that we're in and maybe somebody needs to blink a little bit and let's see if we can still close these deals at better margins.

Does that suggest that the broad line issue is not any more significant than you suggested last quarter?

Yes, that's right. This is probably a bigger issue than the broad line issue from last quarter. And so we're just, we're flagging it as the -- what's really signaling to us is the number of special pricing that we're being asked for by our customers, meaning that we give a normal price, they come back and say, hey we need a special price to win this deal. The amount of time that's happening has gone up dramatically just in the last few months.

Okay. And then just one last question, the equipment shortages, can you talk about from a lead time perspective how that's maybe jumped up, how you guys are positioned to weather than and if there's any relief on the horizon?

Well, what we did last quarter, I think we exited June with the feeling that we probably -- well, number one, we felt better about the potential demand and we had cranked down our inventory levels substantially in the March quarter. We went into June still being very careful about building any inventory based on future growth. When we saw growth return in the month of June, we immediately started telling our guys to add more inventory and then as business took off in September, we probably still didn't have enough that came in during the quarter. However, we feel like we've got quite a bit of orders already on order with our manufacture.

So they've got, right now, every manufacturer has got more visibility from us as to what we will take this quarter than I would say ever before. We hope that by giving them that kind of visibility, I mean we are not giving orders out 60 and 90 days when historically we might give out orders over 30 days. So we hope the manufacturers, with this visibility, will be able to hit our request some time by the end of the quarter.

Having said that, again, some of our vendors as you know have only in the last year or so moved their supply chains to Asia and so those guys, we were already working close to with as they managed their transitions. And so I think in general we've learned how to work with lead times where it used to be three or four weeks, in most cases now it's six to eight weeks. But we've learned to work with six to eight weeks as long as they hit six or eight weeks.

But I guess I'm hearing you say you're working with it and it's not more disruptive than that.

Right. We're -- in our guidance, we're assuming that it's not more disruptive than that.

Okay. Great. Thank you, Mike.

You bet.

Our next question comes from Mr. Brian Drab from of William Blair.

Hi, Mike. Hi, Rich.

How you doing?

All right. So first question is just and I think you've already talked about some of the dynamics that are going to effect the second quarter, but your guidance is for revenue to be essentially flat sequentially. Can you talk anymore about the balance of 2010 and is this based on longer-term trends that you're seeing that maybe you're going to be in a period of sequentially kind of flat growth? Or do you think that it's just going to be a flat quarter?

Well, I think one of the things as a reminder for this quarter is Avaya fiscal year end in September, but historically when you go back we've got, except for last year when it where it was dramatically down anyway, separate out the economic issues, we always have a down quarter and meaning from our Avaya Catalyst business. They close really strong in September, separate out any shortages, and we always expect that business to be somewhat down in September. We're not forecasting as much, but I think that's kind of the wildcard in the quarter is what will happen with our Catalyst business for December.

And so going out beyond December, which we're not forecasting, that issue goes away and we hope that we will see the, as we've seen so far, our continued improvement now internationally that we hadn't seen up until last quarter. And we are seeing a stronger pickup every quarter in our security business. So we think those things, and that's without adding any potential pickup in 2010 from the Nortel acquisition by Avaya.

Okay. Great. So it's really just that Avaya dynamic. And speaking of Avaya then, have you seen increasing use of the channel by Avaya lately and is that playing out as you'd hope it would?

Yes, I think we have. I think it's been a challenging time for them with all the stuff going on, and yet in spite of that they had their partner conference last week in Nashville. It was well attended, 1,000, I think there were about 1,000 resellers there from around the Americas primarily. And I think there was a lot of enthusiasm around Avaya's current business, meaning that they're doing very well as a company financially. And their outlook for the future once you add Nortel to it is very positive. And I would say their management team took the stage and was very clear on how Avaya cannot be successful without the channel, and if they have people at Avaya who don't follow that story, they won't be there in the future. And I think Avaya stuck to that.

So we would say that this management team has been tested already and have come through with flying colors.

Okay. Great. And then just one last one. Can -- in recent quarters you've talked a little bit about the dynamic of some new management teams at some of the vendors given some of the economic turmoil lately, and having to -- some orders being taken back to direct method rather than using distribution. And can you give us an update on how that dynamic is playing out lately?

Well, I think part of the margin pressure I've been referring to today on the call is part of that dynamic. I think manufacturers are saying, well, we'll let you guys still keep the business as long as you take it at a lower price. And so I think that's one of those areas where it's showing up. I think we would have lost the sale to the manufacturer direct, either direct to end-user or direct to the reseller if we hadn't have taken some of that business at a lower margin. We don't think that is something that will continue throughout next year. We think it's just short-term pressure on everyone to make numbers and so we're having I think very honest and open conversations with our manufacturers about that.

Okay. Got it. Okay. Thanks a lot.

You bet.

(Operator Instructions) Our next question comes from Mr. Anthony Kure of KeyBanc.

Good evening, guys. A couple questions. First, factor into the guidance just given the bad debt expense it was kind of an outlier here this quarter. Is there any sort of similar level factored into the guidance for the next upcoming quarter?

Yes, Tony, this is Rich. Let me -- first of all, for the current quarter, I want to make it clear that the bad debt expense that we had was an increase to the reserve. If you look at our overall DSO, we actually improved our DSO by a day. Our write-offs are similar. In fact, last quarter we -- if you remember, we had recoveries, fairly significant recoveries. So what we're really looking at is as we come in this environment, as we're starting to come out of the bottom of the economy, as you know, a lot of our customers are thinly capitalized, smaller companies and we work very closely with these guys, and we have a lot of visibility into their situation.

We know that it's tough for them to get credit out in the banking arena now and we're doing the same kind of things that we've done in the past in order to find ways to grant credit to these customers. But I think we're being prudent in increasing our reserves on our balance sheet. Having said that, if you take the midpoint of the guidance this is a very similar model, if you will, to what we've just reported. So we're anticipating a continued kind of outlook in the overall credit activity.

Does that help?

Yes, that's helpful. Thank you. And then just, this pricing pressure and this margin pressure going on with the manufacturer, this dynamic happening this quarter seems a little -- seems odd just given the fact that in the March quarter of '09, your revenue level was 390. Now you're $100 million more than that and now there's pressure coming from the manufacturers. Why would it be happening now and not two or three quarters ago?

This is Mike, Tony. It always is a factor. It's more of a factor now as there's I think a lot of attention being spent at our suppliers on who's going to grow out of this recession. Everybody was hunkered down back in March trying to cost cut and now everybody's trying to find growth. And so I think it's normal as we start to see growth that there's going to be a lot more competition to make sure you win that next deal, and there's just a normal nervousness with our manufacturers because this is, if you think about it for a minute, this is the end of their year.

Right, that's what I was going to say.

It's the beginning of ours. So it's the end of their year, they're all looking at their sales guys, how do I make my quota, how do I make my numbers. So that's the dynamic.

I've been hearing from some folks in the industry saying that there's longer [pilas], especially on large projects that are smaller in scale. Do you expect there could be a push out maybe? There's about -- to the second half of calendar 2010, in other words, I just look back at the history and your second half is typically about 50% or 51% of sales. Do you think this year it could be more heavily weighted toward the back half of the year just as we move into the calendar 2010?

I don't think it would be related to any significantly related to pushing out, because I think we're already in the cycle of things are already kind of pushed and we don't think they will be more so, and then we'll see a recovery come second half. I think the second half for us is going to be more a factor of how we do in some of these new areas that we've been talking about, whether it's security or the Nortel opportunity, or it's Europe communications.

I think those will be the more key factors than it will be, will there be some more business come in because it was pushed out. And we hope there'll be some of that that will come in, but right now for us historically that's been a point of sale retail story and we just haven't seen a lot of stuff in the pipeline to be pushed. So we feel like we're already pretty low from a standpoint of a number of projects that are out there on the retail side. Whereas on our communication business, as I referenced, and even in security, we actually saw some big projects get closed this quarter, which was surprising.

Okay. And then just a last question in regards to the Avaya Nortel tie-up here. Given we've talked that maybe it's tough to move a reseller to the new product line from Nortel to Avaya. Do you think as this deal, let's say it happens and closes, as this progresses and it's more of a long-term dynamic here, do you think you're going to have to incur some training and additional expenses to train your folks on the Nortel lines, whatever's left of it?

Well, I think a couple things. One is there's going to have to be and there will be as Avaya said last week, there's going to be a rationalization of the products delivered 30 days after closing the deal. So they've already got a good sense of what products are going to say and which ones are not, and they kind of already communicated that that'll happen pretty quickly, which will be good.

And at the end of the day, what's interesting about the difference in Nortel's channel, in their distribution channel specifically and the distribution channel for Avaya is the Nortel distribution channel is generally not that involved in selling their higher end products. The Nortel distribution channel is much more of a data center channel whereas the Avaya channel sells the high end products, as we've talked about many times the enterprise products. The typical Nortel distributor doesn't sell those products. So we think we're going to be in a great position from a technology and a technical knowledge. It's going to be more learning what processes we have to hook into, to be able to ship Nortel products instead of Avaya products. If there's anything we have to do to stay plugged into Nortel's systems is what we would expect during the first year or so.

But from a technical competency, we think we're actually going to be in a favorable position compared to the Nortel distributors.

Okay. Great. Thank you.

Our next question comes from Mr. Ajit Pai from Thomas Weisel Partners.

Yes, good afternoon.

Good afternoon.

The first question is just looking at your security products, can you remind us when you said that you'd begin to (inaudible) what the tentative revenues are, when it reaches 10% of the point of sale (inaudible) and security products or 10% of the overall business. And for the past several quarters, you've been talking about some decent strength over there. So by when do you expect to have reached that metric?

Well, I think -- Ajit, it's Rich. I think that if we get to 10% of our total business, we'll be in a situation where we probably have to disclose the security. And as you know, for competitive reasons we're trying to build this business up without giving too much information to our competitors. So I'd be looking at 10% of the total business as kind of the bellwether that says, well, we'll have to do something then.

Right. And then the next question about security itself is that you've seen some consolidation in your -- some of the vendors in that space or them sort of refocusing on that business if you look at [Tyco], [ADC] (inaudible) Security, you look at United Technologies with Sharp and trying to consolidate that space. IS that a trend that you think is a headwind for you folks or you think it's a tailwind for you folks in dealing with your existing vendors, as well as like in the manner in which the market might sort of embrace (inaudible) distribution?

This is Mike, Ajit. I think it's just -- we're still such a small part of the business. We have not seen that become a problem for us and it doesn't come up a lot in our discussions with the other vendors that aren't involved in that. I'd like to think the vendors we're working with have an opportunity to take some market share by leveraging the value we bring them, plus the new customers that we're bringing to the security. We're still focused primarily on the video surveillance part of the business, the card printer part of the business and the wireless networking that goes with delivering those products.

And so we are much more focused now than we were the two first two years. We were trying to, frankly, not sure where we were going to go with security. We were in intrusion. We were thinking about fire and safety. So I think our focus has allowed us to identify the vendors that are starting to appreciate the value of two-step distribution and we're seeing them take advantage of that. And we're seeing, more importantly, we're seeing a lot of the large customers that are really called systems integrators in this space, or who view themselves that way, start to consider ScanSource Security because we're the only through Two Tier distributor that doesn't sell to end-users. And so they're finding the bigger the customer, the more sophisticated and mature they are, recognizing how we can add value to their business.

Right, but the two sort of vendors you talked the most about today when you talked about security was both sort of long-term customers of yours, which is Motorola Wireless, which I expect to be -- must be the (inaudible) business, and then Zebra when you talk about the card printer. Is that fair? So that's still sort of the biggest driver of folks that already appreciate the value you've been adding for a while. But with a new vendor that you've started the security business with, (inaudible) and some of the others that you included, that the progress is being slightly slower than you expected over the past two to three years. Is that fair?

For sure and you can add a few other ones, though, that have embraced us that really have done a great job like Panasonic. They really reduced their distribution universe dramatically. Sony has. We're working very closely with Axis and Axis was early, frankly. Late to the securities business with IP cameras. They didn't have the legacy analog and so they were an easier target for us. So whereas some of the other ones you mentioned that have a huge legacy install base of distributors and resellers, they are harder to move across, Ajit, as you're saying.

So we're targeting a lot more of the IP type vendors that are seeing a technology shift and they need someone to get excited about new stuff, not just selling the old products, and bringing in new resellers to do that.

Got it. And then just one question about the traditional markets you've been in. I think a few years you had introduced a product called Virtual Technician for the sort of remote monitoring and helping with managing folk's sort of existing [ID] assets. Is that something that was just a product introduced and you haven't been investing in? Or do you think during the slow down and people have had to manage their assets better, both software and hardware, that you're seeing businesses (inaudible) material?

Well, I think what we've learned is that along the timeline or business, we're always trying to introduce new services and offerings, and Virtual Technician is one of those. I think right now a big push we're making is into these focuses on healthcare as we talked about today, and government programs. We're trying to follow where the money is and the Virtual Technician was primarily targeted at retail and POS, and as that business has not been as strong for us, we wanted to make sure we move our investment dollars in other places, although we still have Virtual Technician as an offer.

But we clearly se the government and healthcare markets as places our customers are asking us to give them some help in.

Got it. Okay. I'll get back in queue. I have a couple of other questions, but I'll get back in queue.

Thank you.

(Operator Instructions) At this time, there are no further questions.

Okay. Well thank you. Thank you for joining us. Our next conference call to discuss the December 31st quarterly earnings is expected to be on January 28th, 2010.

Thank you. We appreciate it.

Thank you for joining today's conference call. You may disconnect at this time.