Scansource Inc (SCSC) 2010 Q2 法說會逐字稿

Welcome to the ScanSource quarterly earnings conference call. All lines have been placed in listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections you may disconnect at this time. I would now like to turn the call over to Mr. Rich Cleys, CFO. Sir, you may begin.

Thank you, Rudy. And thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended December 31, 2009. My name is Rich Cleys, and with me are Scott Benbenek, President of Worldwide Operations, and Mike Baur, CEO, 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 and Exchange Commission.

This afternoon, the Company released results for our second quarter and year-to-date period ended December 31, 2009. I will start with our discussion by providing overall sales and operating results for the quarter. Later in the call, Mike will comment specifically on the quarter results and the outlook for each of our business units.

For the quarter ended December 31, 2009, the Company generated worldwide net sales of 548 million, which represents a 14.9% increase in sales over the comparative prior year quarter, and a 12% increase over the quarter ended September 30, 2009. Our net sales for the quarter exceeded our expectations, and we attribute these results largely to improving economic conditions, which we believe has encouraged year-end spending in our markets.

Accordingly, the Company experienced sales growth in all of our sales units and geographies, both comparatively and sequentially. Quarter sales results also include revenues from our acquisition of the assets of Algol Europe, which was not considered in our initial sales guidance issued last quarter. The closing date of this acquisition was November 30, 2009. As discussed in our January 8th, sales release, we believe that the acquisition of Algol was a key step in our strategy to become a Pan-European distributor of communication products.

Our geographic basis, sales originating from our North American distribution segment increased 12.4%, in comparison to the prior year quarter. Our international segment grew 24.5%, and when measured in local currency, grew 14.1%. Within our product lines, we experienced a 10.3% increase in worldwide sales from our POS Barcoding and Security Product categories over the prior year quarter.

These product categories represent 63% of our total sales for the current quarter, with the remaining 37% of our total sales originating from communication products. Our communications business experienced an increase of 23.5% in comparison to the prior year quarter.

Company's consolidated gross margin percentage was 10.3% for the quarter ended, which was lower than the prior year quarter gross margin of 11%. The decrease in gross margin is largely a function of two unusual factors that inflated gross margins in the prior year quarter. First, certain vendors announced price increases during the quarter, which had the effect of improving gross margins on lower-cost product already in our inventory.

Second, specific vendor program changes affected in the prior year quarter resulted in the accelerated recognition of vendor credits for that period. Excluding these two unusual events, gross margins were largely consistent between the two periods. Sequentially, gross margin was down 20 basis points from the previously-reported 10.5%, primarily due to an increase in the number of large sales.

Operating expenses in the current quarter increased to 32.8 million, compared to 33.9 million in the comparative prior year period. The majority of this increase relates to increase in bad-debt expense, as compared to the prior year quarter. This increase is primarily due to an increase on the allowance for doubtful accounts, largely to reflect a specific account exposure. Overall, our bad-debt expense was 2.5 million more than we would anticipate on the reported revenues for the quarter.

In addition to the higher bad-debt expense, the current quarter also includes approximately $600,000 of operating expenses related to the operations of Algol Europe. This did not exist in the comparative quarter. As discussed previously, the acquisition occurred on November 30th. Despite the increase in bad-debt expense, and the incremental operating expense of Algol Europe, operating expenses, as a percent of net sales, actually decreased to 7%, compared to 7.1% in the comparative prior year period.

Operating income for the December 2009 quarter decreased slightly to 18.1 million, a 1% decrease from operating income in the comparative prior year of 18.4 million. Expressed as a percentage of sales operating income was 3.3% in the current quarter, compared to 3.9% for the prior period. The decrease is largely attributable to the higher-than-anticipated bad-debt expense, as previously discussed. Interest expense was 364,000 for the quarter.

Important to highlight that during the prior year quarter, the Company settled a legal claim with a former legal service provider that resulted in a $3.5 million recovery. This settlement was received in December 2008, and was recorded as other income in our consolidated income space. Tax effective this settlement accounted for approximately $0.08 of our diluted earnings per share for the quarter. The effective tax rate for the December 2009 quarter increased to 35.7%, compared to the prior year quarter of 34.8%.

The increase in tax rate from the prior year reflects a favorable tax ruling recognized in the prior year period that was retroactive to fiscal 2008. Applying the ruling, the Company received a one-time tax benefit during that quarter of approximately $400,000, or $0.02 per share. Our return on invested capital was 16.3% for the quarter, which compares to the 18.6% for the prior year.

Summary, the December 2008 quarter had reported EPS of $0.51. It was favorably impacted by $0.08 of gross margin benefit from price increase and program changes, a legal settlement of $0.08, and a favorable tax ruling of $0.02. Net of these three items of non-GAAP EPS was $0.33. For the current quarter, our EPS, as reported, was $0.44, which was unfavorably impacted by $0.06 of unplanned bad-debt expense.

Turning to the balance sheet, inventory turned 6.8 times during the quarter, which was slightly lower than the 7.2 inventory turns generated in September 2009 quarter, but higher than the 6.2 turns in the comparative quarter last year. As inventory balances continue to increase during the current quarter, paid-for inventory days were a positive 6 days, compared to a positive 4 days for the September quarter, and a positive 4.8 days for the comparative prior year quarter.

As indicated on our last call, the Company increased inventory levels, as planned, for all our business units this quarter to ensure high customer fill rates, as sales volumes improve, and to mitigate potential product shortages. Accordingly, our inventory on-hand at December 31, 2009 was 309 million, versus 270 million at September 30, 2009, and 216 million at June 30, 2009.

There's $65.4 million in checks written but not cleared in the December accounts payable balance. At June, this amount was $45.6 million. Number of days in receivables, DSO, was 59 days at December 31st, up from 58 days in the sequential quarter, and 54 days for the comparative prior year quarter. As discussed during previous calls, we continue to be cautious about the economic environment, and we believe our underwriting policy is appropriate under the current conditions.

Company's cash and cash equivalents decreased to 38 million at December 31, 2009, compared to 87.8 million at September 30th, and 127.7 million on the end of June 30, 2009. These decreases are largely attributed to the significant growth in our inventory and receivable balances over the last several quarters.

Total interest-bearing debt remained unchanged at 30.4 million for December 31, 2009 and June 30, 2009. In addition, at December 31, 2009, we continue to have 250 million of available funds for borrowing on our revolving credit facility. Mike will now update you on our business.

Thanks, Rich. As we have already mentioned, our sales results for the December quarter were outstanding. We actually achieved record quarterly sales results in our Security unit, our North American Communications unit, and our International business. The key reasons for our excellent results were better in-market demand, tied, in some cases, to a year-end budget flush, and better product availability compared to the September quarter.

In addition, we saw a spike upward in the number of large deals in our ADC/POS business and our communications sales unit. As a reminder, large deals generally have lower gross margins and lower SG&A associated with them. We began the month of December with the successful completion of the Algol acquisition, and we believe this strategic investment will allow our communications business to grow faster across Europe and the UK.

Now, I will comment on each of our reporting segments. First, North American distribution includes sales in the United States and Canada, and posted sales of $428 million, an increase of 12.4% year-over-year, and 7.8% over the September quarter. In North America, we'll start with Catalyst Telecom. Catalyst's sales unit had a great December quarter, as it exceeded our expectations by growing year-over-year and sequentially from a strong September quarter.

These strong Avaya results were led by increase in large deals and excellent growth in enterprise-class products, with the best quarter since September 2007. Avaya growth was helped by an improvement in supply chain issues, and by market share gains by our sales and business development teams. Avaya completed the Nortel acquisition in December, and is meeting with all channel partners to outline the new product roadmap and discuss long-term strategy.

As Avaya's worldwide largest distributor, we believe Catalyst will continue to play a leading role as the distributor of choice for the newly-acquired products and the former Nortel resellers. The Catalyst sales and technical teams are being trained on Nortel products during January and February, and we expect to begin selling data products during the quarter, and voice products no longer than April.

Catalyst is hosting a series of webinar and road shows to educate the reseller community, and to being the process of Nortel partner integration. In addition, Catalyst has added new sales reps, business development reps, including some former Nortel account managers, and we've added technical support specialists to prepare for the Nortel on-boarding opportunity. Catalyst also added new customers and increased its market share with both Juniper and Aruba, and achieved record quarterly sales with both of those companies.

Next to discuss is ScanSource Communications. ScanSource Communications unit had another record sales quarter, as they grew sequentially from September and year-over-year. Strong demand for Polycom video products led the way in the quarter, and the ScanSource Communications sales team took market share in video and voice products.

We also had strong growth from AudioCodes, Plantronics, and Allworx in the quarter, and we recently signed a distribution agreement with ShoreTel and IBM, and this bundled solution should offer our resellers a compelling choice for SMB markets.

Next, I'll discuss North America POS and Barcode Business unit. This sales unit had year-over-year growth for the first time since September 2008. And they recorded sales growth sequentially for the third straight quarter. Highlights for the strong sales performance include a jump in the number of large deals in the POS and ADC markets led by IBM, NCR, Motorola and Intermec.

All of our product categories experienced strong demand in the quarter as end users spent year-end budgets. Many ADC and POS vendors continued to experience product shortages as we exited December. We expect supply-chain issues to persist with certain companies throughout March and into the June quarter. As lead times lengthen, our product management teams have invested more in inventory over the past two quarters, and that has led to market share gains.

As the new year rolls out, the ADC/POS team will invest in additional headcount and innovative marketing tools that are web 2.0 based in order to drive demand across the channel. Our investments in demand-generation activities, in specific vertical markets, will mirror many of our vendors' efforts. Our ADC/POS vendor community is ready to ramp up the launch of new products throughout 2010, and will focus renewed efforts on existing technologies, including RFID.

I will now update you on our third technology area, ScanSource Security. The Security team also delivered excellent results with record sales for the December quarter. Several key vendors had strong growth with ScanSource Security, including Panasonic, Axis, Zebra Card and Cisco Security. This team's focus on IT technology has allowed ScanSource Security to differentiate itself from the competition.

And similar to the early days in our other business units, the larger system integrators recognize the value of a professional, two-tier-only distributor with available inventory and excellent customer service. ScanSource Security has continued to add new customers, as the IP road shows being held across the country highlight our commitment to education and training.

Our second reporting segment is International distribution. Our International business, which includes Europe, Latin America, and Mexico, posted sales of $120.1 million, an increase of 24.5% from last year. When measured on a local currency basis, our International business increased by 14.1% on a year-over-year basis, and sequentially, International grew 28.5% on a local currency basis.

First in Europe, the AIDC/POS team had a record month in December. That led to our second-best quarter on record. This team gained market share and new customers, especially in the UK, France, Italy, and Germany. All of our vendors grew sequentially from September, as we experienced stronger in-market demand, and saw temporary government incentives, as in the UK, drive customers to make purchase decisions by December 31st.

Although gross margins were down from last year, due to one-time price increases a year ago, we believe we gained new customers, in spite of more competition from distributors, and from certain vendors. However, we did benefit from the transition of certain customers to distribution by a few vendors.

ScanSource Europe launched multiple marketing events during the quarter, targeting healthcare and new customer recruitment. Additional investments were made in headcount and programs to drive demand. As in North America, our product management teams invested in more inventory to offset the product shortages and the longer lead times.

In our Europe Communications business, we achieved another strong quarter in the UK, with year-over-year growth, despite of the loss of the Siemens Communication product line that was terminated in October. And as we have focused on fewer key vendors now, especially Avaya and ShoreTel, we will begin to invest in other complimentary product lines to build out our solution portfolio.

We've appointed a new executive, Patrick Zaman, to lead our UK efforts, as needed, to support to the Avaya-Nortel opportunities this year. Patrick is based in our head office in Brussels. And as we announced earlier, we have completed the acquisition of Algol Europe, and have one month of sales results reflected in our December quarterly results.

The Algol management team, led by Marianne Nickenig, is still in place, and now operating as ScanSource Communications Europe with responsibility for the Germanic region. With the addition of approximately 65 people, ScanSource is making a big investment with Avaya to develop the Germanic region and beyond. Algol brings relationships, also, with Extreme, Juniper, 3Com, Plantronics, and LifeSize to the ScanSource Communications portfolio.

With the Avaya-Nortel acquisition, we expect to add additional resources to grow our business in 2010. Algol was already recognized as the largest 3Com distributor, and the Extreme distributor of the year in EMEA for the last five years. A significant amount of marketing road shows and other education events will be rolling out throughout 2010 to accelerate ScanSource Communications' success.

Now, turning to Latin America, we achieved record results for the quarter. The strong sales were led by Mexico, Argentina, Chile, Panama, Guatemala, and by our US-based exporters. And we saw an increase in large deals, and an increase in new customers, which resulted in slightly-lower gross margins.

Additional inventory helped us close some deals in the quarter, as Latin America also suffered constrained supply of certain products. All product categories experienced sequential growth, including our Security and Communication business based in Latin America.

Now, I will conclude this part of our call with closing comments. We believe total revenues for the March 2010 quarter could range from $535 million to $555 million, and our earnings per share could range from $0.44 to $0.48 per diluted share. At this time, we'll be glad to answer your questions.

Thank you.

(Operator Instructions)

One moment please for the first question. Reik Read, Robert Baird Company, you may ask your question.

Hey, guys. Good afternoon. Mike, I was wondering if you could talk a little bit about the price pressure that's been flagging you for the last couple of quarters. Has that started to update? And if so, can you tell us what's changing?

Yes. Hey, Reik. I think the pressure changed somewhat in the December quarter, because it was a busy quarter. I think there were more opportunities to close business, for our vendors, for us, and for the distributors. I believe the fact that some volumes returned allowed the markets to be a little more normal. We certainly also saw our vendors talk about margins to some extent, and we certainly did a lot of that. And so, I think we did see less of that pressure.

Okay. And then, on the Polycom side of things, you guys had talked previously that both guys have been adding salesmen, and is that something that you think is starting to, I guess, result in maybe a little bit more business than you might otherwise get? I know that business has been strong, but is that starting to see a little bit of a incremental push because of those salesmen.

Well, I think it may be a little bit early for that. And I'll let Polycom tell their own story on how their deploying their teams. But, in general, the strategy is to drive more end-user demand through a high-touch sales force, and the channel will certainly play a role in helping fulfill that demand and provide the total solution. But, I would also say part of the change in Polycom was they did terminate TechData as a distributor in the December quarter. And so, that also allowed some additional opportunity for us to take market share.

Okay. And then, you mentioned a number of investments throughout the call, particularly, the incremental Nortel opportunities that are out there. Is this something that puts pressure on the near-term margins, or is this like you normally do? You just kind of invest as you see the revenues.

Well, I would say, looking at our forecast, we've certainly baked that into the numbers. And at the midpoint, it would suggest a little more investment than we would've had last year, especially when the revenues weren't growing and we were not sure when the recession would end. So, I would say we have more confidence for a couple reasons.

One is that we know the Nortel opportunity is coming. And so, it's less of a, will it happen? It's a question of, how much share will our Catalyst unit gain in the US, and how much can we grab in Europe. So, we know the Nortel opportunity's out there and it's real, and Avaya's done a great job of communicating the product roadmap. They're going to make a decision by the end of March as to which distributors will no longer be part of their group.

Clearly, Catalyst will make the cut. The question will be, how many other distributors do they need? But, it's clearly an Avaya-led strategy, and we think it's a very good decision, an easy one for us to invest ahead of that opportunity. But, again, we're talking about people that are salespeople and business development, and so they're easy for us to ramp up. It doesn't take us a long time to get them productive.

And then, the other places we're investing would be our Security business. We continue to invest there. And also, with the Algol acquisition, we want to make sure that we cover the European market, especially, of course, the Germanic region.

And we want to really extent our reach in the UK, because we really have just had the Avaya Enterprise product there for only about nine months. So, I really see that we're still having to add some technical people there and some additional business development people to get out in the marketplace and make sure we do a good job for Avaya telling the story.

Okay. And I'm sorry, just one more question on the retail side. I think last quarter you guys, Ted mentioned that big deals are still tough to come by, at least in part, because of the excess inventory that's out there. Does the fact that you're talking about some bigger deals suggest that that excess inventory is starting to get whittled away?

Well, I think what we've learned so far on the excess inventory is that the primary home for the product is in tier-one retail where we don't play. And so, our larger deals are still with retailers that are not the tier-one retailers, the non-Wal-Mart and big guys. So, from what we can see so far, the excess inventory out there has not affected these opportunities for us.

Okay. Thank you very much.

You bet. Thanks.

Brian Drab, William Blair, you may ask your question.

Good afternoon, Mike. Good afternoon, Rich.

Hey, Brian.

Hey, Brian.

First one, just on the bad-debt expense, a couple questions there. I know you're not going to name the customer, but could you tell us what segment that was in? I don't know if you mentioned that.

No, we didn't. We've just talked about, in general, with the economic conditions. What we've got is a partner that had a weakened financial position. And then, they did an opportunistic acquisition that they closed during the quarter which significantly taxed their liquidity.

Got it. Okay. And could you give us an idea what operating margin would've looked like if you didn't have that increase in bad-debt expense?

I think we'd be closer to where we were last year, close to 3.8, if you backed that out.

Yes.

Um-hmm. Okay, great. And I guess it's probably premature to do this, but could you possibly quantify the Nortel opportunity, or put a range, or just give us a rough idea how big that could be, because it sounds like a really exciting opportunity, and I'm not sure how to frame it?

Well, Brian, this is Mike. We haven't seen the number put out in public yet, so I don't want to tell Avaya's story. But, I think at some point here, they will be talking more about that, related to how much of the business they expect to go through distribution. One of the big differences in the Nortel distribution strategy that we're still learning was they did a lot of business direct to their [bars] and didn't run it through distribution, whereas Avaya has a different strategy.

They prefer to use distribution for most of their business, as you know. So, I would say, what Nortel was doing is going to be different than what Avaya's doing. And so, we see that as a significant opportunity. The questions will be, of course, what the pace of that will be and how much share we can get, starting in April.

Okay, great. And then, in the Security business, congratulations on a record quarter, are you seeing any sign-ups of some big customers there, or is that really strength across an assortment of smaller customers?

Well, I use the term "system integrator", and what that connotates is a large security customer. And what we've learned is that, just like in the Barcode, POS, and Communication business, the larger customers tend to have a better appreciation for some of the value we add and provide. They don't view that buying direct is critical to them. And they recognize the efficiency of a distributor, like ScanSource.

So, we have found, frankly, a better success rate with the larger system integrators for one main reason, is we're the only distributor that will say, "We will never sell to an end-user against you." And they have found that to be an amazing value-add, one that we thought was kind of old hat.

It turns out that is a very key differentiator for us in our Security business. And it is allowing us to win larger customers. And these are the kind of customers, by the way, that are very intrigued by Cisco's security strategy. We've really had remarkable success in a short couple quarters with Cisco.

They also like the Axis product line, which Axis is the largest IP video provider, and I think it just lends itself well to the portfolio of vendors we have today. These big integrators are not generally the guys doing small burglar alarm systems in the commercial world. But, I think the larger guys fit our model much better than the little, small guys.

Okay, great. And then, just one last one for Rich, what should we expect for a tax rate here for the balance of the fiscal year?

Our year-to-date tax rate is about 36.5%, and I think that that would be a reasonable expectation.

Okay. Thanks, guys.

Thanks.

Tony [Cherokee], KeyBanc, you may ask your question.

Good afternoon, guys. A quick question on that bad-debt expense, given that there was a liquidity issue with one of your customers there, do you think that begins to update anytime soon? The increase, does that stop or cease as we move forward to the second half of the year? Or is that elevated level going to be maintained?

Well, I think this is really a customer that we're talking about who did an acquisition. You don't have that many of those going on right now. So, we all know what's going on in the credit markets, and we've talked about, as our customers come out of this, some of them will be weakened. But, this one had the added benefit, if you will, of doing an acquisition at the time, too. So, I don't anticipate a higher level of occurrences like this on an ongoing basis.

Okay. And then, as far as the inventory situation, you mentioned a couple times that you think that the benefit to ScanSource during the quarters was that you actually had product on the shelf to supply. Do you think some of your competitors have since caught up at this point? Or do you think that you still have that edge?

Well, I think the edge was very important as we got near the end of the quarter, because a lot of the manufacturers' field sales teams were trying to hit their quotas. They're all on calendar year-end sales quotas. And so, I think we did get that burst of activity at the end of the quarter. We were able to get that and the other guys not. I think, as we go forward, our advantage will be lessened.

I think we have a better supply today. And I think as this shortage eases up over the next quarter and a half, yes, I think they'll catch up. I think one of the things that we've always learned is that it's better to be early with this, even though it cost us a little bit of money. We felt that there was a huge gain from having that extra inventory. So, right now, we still believe we're in a strong position as we go into March.

Okay. And then, last question, in the second quarter, or maybe, actually--well, let's start with that. Did you see any material shift, or the impact of any material shift to tier-two distribution from any of the major OEMs? I saw the IBM-ShoreTel announcement, the Fujitsu announcement. Did any of that impact the second quarter? And if not, is it factored into your third quarter guidance at all?

Well, yes, those announcements of new relationships with new OEMs, none of that was in the second quarter. It is in our guidance for this quarter. To be real clear, both of those opportunities are interesting because they get us into some new markets. The Fujitsu one, there's an existing group of customers out there that are already buying some of this product.

And in this case, Fujitsu would like ScanSource to help them on the logistics and the implementation side. And I think there is some existing business there. On the IBM-ShoreTel, that's a new opportunity, a new product that they're launching together. So, I would say that one will be a slower ramp, but it certainly is a great relationship that we're going to be building with those two vendors.

Okay, great. Thanks a lot, guys.

Thank you.

Ajit Pai, Thomas Weisel Partners, you may ask a question.

Yes, good afternoon.

Afternoon.

Afternoon.

A few questions. The first is, I think, to do with the bad-debt expense that you recorded in the quarter. Could you just give us the principles that you used with this particular customer? Is it that you don't expect to get this money back within 12 months and you're using conservative accounting? Or you're just not expecting to get it back at all?

The way you have to book the reserves on the accounting rules, it's an expectation that you won't collect the current receivable. So, to the extent that we set a reserve up, whatever percentage that is against the receivable, it's a current receivable that we don't expect to collect. That's the way the accounting rules work.

Okay. So, it isn't time-bound. It's just that you don't expect to collect it at all.

We don't expect to collect the portion that we've reserved.

That you've reserved, got it.

Yes.

Okay. The second question is just looking at your receivables and how rapidly it's climbed. And I know you folks have done a tremendous job in the past 15 years in investing in your business, both on the inventory and receivables side. But, could you give us some color as to how you're allocating these receivables, where you're investing? Is it specific geographies? And are there areas of bad debt? Are there parts of Europe where things are ugly enough that you're not investing?

The receivables are going to go where the sales are, obviously. There's a little bit different historical payment patterns, where you are geographically. So, you mentioned Europe. There are some areas of Europe that historically pay slower than other areas. They pay slower than most of the US. And then, in Latin America, there's some areas where, actually, you do a little bit better than what you do in the US, and that's really based upon risk and the conditions in which business is conducted.

So, I wouldn't necessarily call it the way we invest in the receivables. It's where the sales are and where we're growing. We're growing internationally. And if the European businesses are growing, especially Southern European businesses, those tend to pay slower. So, that could have an impact on our DSO.

Right. So, it's fair to say, when you look at the mix of receivables by geography, that Europe is over-represented in terms that the receivables are greater proportionately, relative to the sales, Europe as a percentage of sales?

Europe would tend to have a higher DSO. So, that would be correct.

Got it.

That's not necessarily indicative that they would have higher bad debt.

Right, right. Okay. And then, when you talked about the vendors, where you were seeing strength on the Point-of-Sale Auto ID market, the vendor that you mentioned, I think, [unintelligible], which is Point-of-Sale, and also in the scanner-mobile computing side, not so much on the Barcode-printer side, but could you give us some color in terms of verticals? Are there any specific verticals, transportation logistics, or retail, or any area where you could see specifically as a strength, and areas that you're not seeing a recovery in?

Well, Ajit, this is Mike. We don't track the end-user applications. So, anything we know is anecdotal. And we know that we have been investing heavier in the last two or three quarters in healthcare, because our vendors also view that as a good opportunity. So, I think our healthcare business has grown fairly well off of a small base.

I think, in general, we saw good performance across our customer base, and we've got a mix of guys in distribution. We've got a mix of guys in manufacturing and field mobility. So, it wasn't a specific area that jumped out other than retail. Retail showed up better than it has in two years. And it was the front end and it was the mobile devices being used on the warehousing, especially of retail. So, I would say the retail market really surprised us. We didn't have that in our forecast.

Got it. Thank you so much.

Thank you.

(Operator Instructions)

One moment for the next question. Chris Quilty, Raymond James Associates, you may ask a question.

Good evening, gentlemen. A question for you, just a follow-up on the strength you saw in the December quarter, and it seemed that that alleviated some of the pricing pressures. Historically, you're going to see seasonal downturn going into the March quarter. Are there any indications that those pricing pressures are rematerializing in the current quarter? I mean, you've got a month look at sales.

Hey, Chris. This is Mike. I don't think I would say that at this stage. It is early in the quarter. It's certainly possible that could happen. I think our view is that the manufacturers recognize that they need distributors prepared this year to invest in growth. And one of the things that I think we're seeing is almost all of our vendor programs are being changed for 2010 to reflect additional compensation if you can provide growth in the markets they're interested in.

And so, it's a little too early to say how those programs will be manifested. But, there's always going to be pressure on the street gross margin. There's no doubt about that. Where I think we've been able to, historically, do better than others is finding ways to use vendor programs and incentives to enhance our margins. And this quarter is always the toughest one, because it's the beginning of the year. And the vendor programs aren't all out yet and well-articulated.

Okay. And that was the next question I was going to ask is, have you seen any major programs announced? And what's the general indication you're seeing? Are they getting a little bit more attractive, in terms of, as you mentioned, trying to facilitate growth?

Well, yes. I think what happened last year is most of the discretionary funds that manufacturers would normally have were just cranked way down, for obvious reasons. In a down sales year, marketing programs and extra incentives just took a backseat to other expenses. This year, it sounds like every program we're seeing is coming in saying, "If you can show us growth," and they're really saying, "We don't want to hear a lot about these year-over-year growth, because those are off numbers that were so low that doesn't make a lot of sense."

So, a lot of the programs are going to be around sequential quarterly growth. And so, we're telling our sales teams to get ready for that kind of year. It's going to be, "What did you do for me in the quarter?" not "What did you do for me versus last year?" So, I think anything we can do that are in specific vertical markets, showing growth and incremental growth, really, I think that will be well-rewarded in 2010.

Okay. And one other question, and this is just kind of a macro question. Your strategy here in the US has always been predicated on using a single point of distribution and leveraging it. And obviously with the acquisition-based approach that you've taken to the European market, it's a different look to the model. But, is your long-term game plan to kind of replicate the US model, or to modify it, as appropriate, for international markets?

Well, the interesting thing for us in Europe is we have a smaller geography to cover than the US, right? And so, it's actually easier to have one central warehouse. The only reason we don't have that yet today is because we started out in Belgium, of course, with our POS and Barcode. But, we didn't start our Communication business in Brussels. So, our [unintelligible] as you've identified, our other businesses in UK and Germany, we still maintain distribution centers there for the near term.

And as long as that doesn't handicap us, we're going to continue that. We don't see that it's costing us a significant amount at all today. But, I think, long-term, we do see the value of one central distribution center, even in Europe, to reach the markets, because the logistics systems and the delivery service levels are very high. We can generally get product from Brussels anywhere in Western Europe, and most of Eastern Europe, and at least southern part of the UK in two days without using air.

Okay, great. Thank you very much, gentlemen.

Thanks, Chris.

Chris.

There are no more questions at this time.

Okay. Well, thank you very much. We appreciate the questions, and thank you for joining us. Our next conference call to discuss the March 31st quarterly earnings is expected to be on April 22, 2010. Thank you very much.

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