Scansource Inc (SCSC) 2013 Q2 法說會逐字稿

Welcome to the ScanSource quarterly earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mary Gentry, Treasurer and Director of Investor Relations. Ma'am you may begin.

Thank you. And welcome to ScanSource's earnings conference call for the quarter ended December 31, 2012. With me today are Charlie Mathis, our CFO; Gerry Lyons, SVP Finance and Principle Accounting Officer; Scott Benbenek, President of Worldwide Operations; and Mike Baur, our CEO. We will review operating results for the quarter and then take your questions.

Certain statements made on this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, those factors identified in the release and in ScanSource's SEC filings. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. ScanSource undertakes no duty to update any forward-looking statements to actual results or changes in expectations. We will be discussing both GAAP and non-GAAP results during our call and have provided reconciliations between these amounts in our press release.

Mike Baur will now begin our discussion with an overview of the quarterly results.

Thanks, Mary, and thank you for joining us today. Our sales results varied by business unit and by geography this quarter. We had increases in certain business units typically driven by higher big deals and decreases in others. Net sales for second quarter 2013 totaled $748 million, within our planned range, though at the low end of that range. In North America, our POS and barcode unit and our communications unit had record sales quarters.

We had solid year-over-year sales growth for three of our four North American business units; POS and barcode, communications, and security. In total, net sales for these three business units increased 8% and higher big deals contributed to our sales growth. However, sales did decline in our other North American business unit, Catalyst telecom, with the end of our distribution agreement with Juniper and lower than planned Avaya enterprise sales. International net sales for the second quarter 2013 declined 9% from last year, or a 4% decline when you exclude the impact of foreign currency. Despite this decline sales were better than planned in our European business units and our team in Mexico had a record quarter.

As previously announced we made some personnel changes in Europe during the quarter. We named Buck Baker president of ScanSource Europe for both our POS and bar code and our communications business units on an interim basis. Buck started his new role in early January in Brussels. During the quarter, we had $2.1 million in one-time costs to comply with local Belgian tax matters. These costs included the replacement of certain personnel in our Brussels office, associated severance costs, tax accruals, and related professional fees. These costs had a $0.05 per share negative impact on our GAAP diluted EPS of $0.59. So for the quarter, we ended up with $0.64 for our adjusted diluted EPS, a non-GAAP measure that excludes these costs.

Now for a few comments on our ERP project. In January, we filed a lawsuit against Avanade, our former ERP implementation provider, alleging fraud and performance failure in leading and delivering a new global ERP system for the Company. We believe we have a very strong case. We have since hired Tata Consulting Services, or TCS, as our new ERP implementation partner and the initial phase of the TCS engagement is underway. With TCS onboard we are moving forward with our ERP project which uses the Microsoft dynamics AX system. Meanwhile we will continue to use our legacy ERP systems without disruption to our business.

Now, I want to introduce Charlie Mathis. Charlie's our new Chief Financial Officer. He joined ScanSource in mid December and brings extensive financial leadership and international experience to the Company. We are delighted to have Charlie as a part of our team.

With that I will turn the call over to Charlie to discuss our second-quarter financial results in more detail.

Thanks Mike, and it's great to be here. Let me start with the revenue. Net sales totaled $748 million in the second quarter 2013. A 4% decrease from the prior year and a 2% increase from the September quarter. North American sales decreased 3% year over year while international sales decreased 9%. Excluding the impact of foreign currency translation, international sales decreased 4% year over year.

POS barcode and security product categories represented 65% of total sales for the quarter with the remaining attributable to communications products. POS, barcode and security products worldwide had record quarterly sales and increased 1% over the prior quarter or 3% excluding the impact of foreign currency translation. The increase is largely due to good growth in North America, partially offset by weak demand in international markets. Sales for communications products decreased 13% from the prior year quarter, primarily due to the termination of the distribution agreement with Juniper and lower Avaya sales. The overall gross margin decreased to 9.94%, or 26 basis points from the December 2011 quarter and 15 basis points sequentially. The decrease from the prior year is largely due to product and customer mix.

North America results include a higher level of big deals which generally have lower margin than the run rate business. The decrease in gross margin in North America was partially offset by a higher gross margin in our international segment. The international gross margin increased primarily due to better vendor program attainment and the timing of recognizing these programs. SG&A expenses in the current quarter increased to $49.4 million, compared to $48.5 million and $47.1 million in the prior year and sequential quarter respectively. As a percentage of net sales, our SG&A expense ratio totaled 6.61%, an increase of 42 and 19 basis points over the prior year and sequential quarters respectively.

Second quarter 2013 SG&A expenses increased primarily from $2.1 million and one-time costs associated with Belgian tax compliance and personnel replacement costs that Mike spoke about earlier. In addition, SG&A expenses include increases to bad debt reserves, principally in Europe for customer specific situations. Accordingly, the allowance for bad debts increased from $28.7 million at September 30, 2012 to $29.8 million at December 31, 2012, while accounts receivable declined slightly. These increases were partially offset by lower ERP expenses and lower employee costs during the quarter.

Each quarter we remeasure our earn out for the CDC Brazil acquisition to fair value. And second-quarter 2013 we recorded a fair value adjustment loss of $533,000. This compared to a gain of $722,000 in the prior-year quarter and a loss of $764,000 in the September quarter. Factors impacting the fair value adjustment can cause volatility in this line item quarter to quarter. On a GAAP basis, operating income was $24.4 million, down from $32.1 million a year ago and $26.2 million last quarter. As a percentage of sales, operating income was 3.3% in the current quarter compared to 4.1% in the prior year and 3.6% in the September quarters. Excluding the $2.1 million in costs associated with Belgian tax compliance and personnel replacement cost, the non GAAP operating margin for the December12 quarter was 3.6%.

Looking at the operating income by segment, North America operating income decreased 13.1% to $23.3 million and $26.8 million in the prior year. The decrease in North America is primarily due to lower sales volume. Operating income for the international segment decreased to $1.2 million from second quarter 2013 from $5.3 million for the prior year period. This decrease internationally is due to lower sales volumes, increased bad debt reserves in Europe, and costs associated with Belgian tax compliance and personnel replacement. Interest expense was $130,000 for the quarter and interest income was $532,000.

In September 2011, we transferred $22 million to our Brazilian subsidiary to pre-fund a portion of the future earn out payments and finance current operations. With the annual earn out payments and use of funds for short-term working capital needs, these balances have declined, reducing interest income. The effective tax rate was 34% this quarter, down from 34.7% in the prior year quarter. Return on invested capital totaled 15.2% for the quarter, compared to 19.3% and 17% in the prior year and sequential quarters respectively. In summary, diluted earnings per share totaled $0.59 for the current quarter, compared to $0.77 and $0.63 for the prior year and sequential quarters respectively. Second-quarter 2013 non-GAAP adjusted diluted earnings per share, which excludes costs associated with Belgian tax compliance and personnel replacement, totaled $0.64 per share.

Moving to the balance sheet. Inventory turned 5.7 times during the quarter, compared to 5.6 times in the prior year and sequential quarters. We had 16.3 paid-for inventory days at the end of December 2012, up from 10.7 and 11.9 days for the prior year and sequential quarters respectively. Paid-for inventory days are up versus prior periods, primarily due to timing of vendor payments toward the end of the quarter. There are $34.2 million in checks written but not cleared in the December accounts payable balance versus $52.9 million at September 30, 2012 and $48.2 million at June 30, 2012.

Our day sales outstanding, DSO, was 56 days at December 31, 2012, compared to 57 and 58 days in the prior year and sequential quarters respectively. The improvement in DSOs was primarily related to customer specific collections in North America. Cash and cash equivalents on hand totaled $31.5 million at the end of the quarter, compared to $24.2 million at June 30, 2012. The Company spent $1.2 million on capital expenditures during the quarter, primarily on our investment in the new ERP system. Through December 31, 2012, the Company has spent or accrued approximately $38 million on the new ERP system, of which $27.8 million has been in the form of capital expenditures.

During the second quarter of 2013, SG&A expenses included approximately $1.3 million of expenses for our ERP project. The Company held $27.8 million of interest-bearing debt at December 31, 2012, up from $17.6 million September 30, 2012. Average debt for the December 2012 quarter increased to $23.9 million from $16.6 million in the September 2012 quarter. For the second quarter 2013, we used cash from operations of $12.4 million, principally from the payment of a few large accounts payable balances at the end of December.

I'll turn it back over to Mike for business unit comments and results.

Thanks, Charlie. I'll start with our North American segment. This includes the United States and Canada and represents 73% of overall sales. In North America, sales of $548 million represented a 3% decrease year over year and are basically flat sequentially. North America POS and barcode team achieved record quarterly sales. After lower big deals last quarter, this sales teams closed more big deals in both point of sale and barcode with a higher average deal size. The higher percentage of big deals contributed to a lower overall gross margin. During the quarter, we also regained some market share with key vendors and had strong products segment growth in POS systems and mobility products. We have expanded the role of our technical services team, as solutions consultants, to better help our resellers solve their customers' business problems. This team is now focused on key high-growth vertical markets and technologies; such as healthcare, mobile POS and wireless.

Our security business unit had another quarter of excellent sales results, with double-digit year-over-year growth. As expected, sales were seasonally down from the prior sequential quarter, as our security business is seasonally higher from April to September with school and government projects. It was a record big deal quarter and we continue to gain market share. We had strong growth in networking products fueled by a record quarter with Ruckus. We also had a record quarter with Mobotix, March Networks and Bosch.

Turning to the North American communications unit, this team had a record sales quarter with strong year-over-year and quarterly growth led by record quarters with Polycom, Plantronics, AudioCodes, and Sonus. This growth included higher big deals for the quarter. We had an excellent recruitment quarter for new ShoreTel resellers, launching a record number of new ShoreTel customers. At a partner conference in November ShoreTel named ScanSource Communications as its US distributor of the year. In January ScanSource services began offering reseller training and certification programs for Polycom, and our technical support team received 100% customer satisfaction in a Polycom annual survey.

Catalyst Telecom sales declined from the previous quarter and year over year due to weakness with Avaya enterprise product sales and due to the end of our distribution agreement with Juniper. This quarter included no Juniper revenue compared to sales of approximately $26 million last year. In addition, we had fewer big deals this quarter, frankly less than half the number we had during the prior year quarter. We did have strong year-over-year growth however with Aruba, and we have new opportunities with Aruba such as the Aruba Instant product for small businesses and branch offices. We recently expanded our Avaya relationship by adding the Radvision video solutions which include the Scopia video portfolio. And we also have a better and a good mid market opportunity with the new Avaya IP office release. ScanSource services continues to hold Avaya certification training classes on a frequent basis.

So now, turning to our international segment, which is 27% of our overall sales this quarter. International net sales of $200 million declined 9% year over year and increased 6% quarter over quarter. Excluding the foreign currency translation impact, net sales decreased 4% year over year and increased 4% sequentially. Europe POS and barcode had sales results ahead of plan. Although down year over year, but our gross margins were better than planned. Our European team had better attainment of vendor incentives, they improved inventory turns, and they sold to a higher number of customers. While big deals were down year over year, they did increase over the September quarter, with a little bit lower margins. With tighter market demand some vendors took some big deals direct. In November we held a successful Germany partner tour with record attendance of around 300 customers.

In February we are hosting a retail experience event with our newest point of sale vendor Wincor Nixdorf to launch sales of their EPOS solutions to our customers. Our Europe communications business unit had top line sales that exceeded our plan with record quarterly sales from Avaya, Acme Packet and AudioCodes. Lower margins for bigger deals and a product mix that included more data sales contributed, however, to lower gross margins. We recently made some vendor changes here, expanding our relationships with Avaya and ShoreTel and ending our distribution of Juniper. With Avaya we have added Radvision's video conferencing solutions to our European product offerings, and last week announced the addition of Avaya in France.

With ShoreTel we are expanding our distribution to include the Germanic region and the Benelux regions. In Latin America, our business includes operations in Brazil, Mexico, and Miami where we serve the US based exporters, the Caribbean, and the rest of South America. In Brazil, our sales results are consistent with the slower economic growth in the country and the results of our key vendors. Sales in local currency grew year over year but declined for the sequential quarter. We had fewer big deals due to the weaker economy and stronger competition for projects.

However, our margins came in better than expected. We have recently signed NCR and Engenico as new vendors, and we have recently held sales campaigns with DemaTek and Motorola to drive sales in to new customers and markets. In Miami, slow sales for the month of December contributed to lower quarterly sales. Year over year we had good growth from AIDC and security vendors, and good growth in Colombia, Panama, and El Salvador. During the quarter we held reseller training sessions, including IP video training in El Salvador and Motorola training in Colombia. In Mexico, we had a record sales quarter in good quarterly growth from most vendors though we still missed our sales plan. In November we held an event to launch ScanSource as a new Plantronics distributor in Mexico.

Turning now to our next fiscal quarter. We believe net sales for the quarter ending March 31, 2013 could range from $675 million to $695 million. And our earnings per share could range from $0.48 to $0.50 per diluted share. This sales range is consistent with our typical seasonal decline from the December to the March quarter.

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

(Operator Instructions)

Anthony Kure of KeyBanc.

Good evening, everyone. How are you?

We're good. Let's just start with the guidance. You mentioned the typical seasonal decline for the March quarter is implied in your guidance. So, I guess answer that answers that question but when I look at the margin, if I take the midpoint, that $0.49 that implies operating margins coming down pretty substantially to about 2.9% is sort of my math at the midpoint of your guidance on the top line. What would be the main driver of that margin decline on that revenue level? Last time I had you in this range at $685 million operating margins were above 4%. Can you talk about the difference there?

This is Charlie. Let me take that one. Basically looking at the guidance--the midpoint, if you look at the March 2012 quarter, the characteristics of the margins are very similar. The slightly, slightly higher gross margins, March 2012 and slightly less operating margins this year compared to last year. They are very much in line with what happened in March 2012. If you used a 34% tax rate you'll pretty much come out with the number there.

So, there really isn't anything changed within the last six months. It's really just a reflection of the lower volumes? That's the big culprit for the margins?

That's right.

So, if I look at the December quarter. We've heard a lot about, in other businesses, folks talking about the fiscal cliff or the uncertainty here in the U.S, did you experience or have any hesitancy among your customers pushing projects out sometime within calendar 2013? Any hint of that?

I think the only thing we would say that surprised us that might have been part of that was I referenced a couple of times on the call, we were disappointed with our results in Catalyst. And the Catalyst business typically is a big project business for us, and in the December quarter we normally have some big deals that happen very late in the quarter. I would say we were disappointed with some of the projects or big deals that did not happen in December in Catalyst. We don't know, and we never get full visibility, into how many of those projects are temporarily pushed, or were any of them canceled, but that would be the one place that I would say we saw some weakness, and we can only assume it was a more macro event. The Catalyst projects generally are larger than any other business unit we have, so that would be the one place that I would point to.

And if I just want to take it a step further on the seasonality, if you could provide some insight, obviously you did for the March quarter. What is the typical seasonal trend into the June quarter as far as your records go? I know it was up, I just wonder how much is the June quarter typically up.

In one other comment too on that seasonality trend, if you go back and look at what we sold in Juniper last year in the March quarter, we really don't have a decline year over year. It's actually, we're flat year over year. Normally what happened is we do have a spike back up in June. We had almost every year, a stronger June than we do in March. Most of our vendors, as you know, don't really get all their programs in place as early in the March quarter as we would all like and they would all like. So we really don't see a lot of programmatic demand generation activities until late in the first quarter, and that results in sales in the June quarter.

Okay, so sequentially though you're not going to have Juniper in the March quarter. You're not going to have Juniper in the June quarter. Would you care to take a guess -- would that materially move the quote, unquote normal seasonality because of the absence of Juniper?

No, no. I don't think so. I think we have always had a March to June increase, always.

Is it a double digit increase?

You'd have to go back and look at the quarters. I have probably two quarters here in front of me. Let's just see. So, in 2011 calendar year, we went from $614 million to $734 million, and in 2012 went from $707 million to $754 million. So there are two numbers for you.

Okay. Thank you.

George Iwanyc with Oppenheimer.

Thank you for taking my questions. When you look at your guidance, can you give some more color on which areas you are concerned about and which areas you see a stronger and potential sources for upside?

Sure, George. This is Mike. I will tell you in general, if you think about what we just experienced, we saw I would think, almost surprising good demand in North America. We would have thought that our international business would have done better than it did, so based on how we exited December, we expect North America to still be okay. And our expectations would be that we would improve our results in our international operations and we certainly are still very excited about the growth we're seeing in our Security business. Our Security business saw significant double-digit growth again, year over year. So we believe that is still a good place for us to invest, is in our Fiscal Security business here in the US.

And when you look at your various segments, can you give us an idea of how much mobility and -- Wi-Fi is contributing to each area and what this mix looks like over the next few quarters?

We don't break out the numbers typically, but I can give you some general trends that we have seen. For sure over the last couple of years, our whole AIDC business has been impacted by the move to mobility for sure. And the robustness of the mobile devices, they are all Wi-Fi now, so years ago that wasn't the case. That's also and additive this year because you have so many enterprises that are adding employee driven devices. The BYOD movement definitely also impacts our Business.

So if you've got the personal and corporate enterprise devices, as well as the devices people are bringing from home, we are seeing a strong demand in our wireless vendors frankly, across the board, whether its Ruckus, Aruba, our Cisco wireless practice, we've got what we believe -- and Motorola as well, we believe we have a very strong wireless offering, and those vendors have all done very well with us this year. We would expect that trend to continue.

Are the deal sizes getting bigger in those areas and are their certain end customer areas that are doing better; hospitality, or education?

I don't have a lot of data on that. We don't always know where our resellers sells in the end market. I would say not necessarily. I would say to you that most of our deals are in the small to medium enterprise space more so than they are in large enterprise.

Okay. And just following up on that, you mentioned the new Aruba Instant product specifically. How do you see that product line positioning in the small to medium business space and what kind of opportunity do you have with that?

Our team is excited about the fact that we have a strong offer there that we believe gives our customers who have not been in the wireless space recently, who have not made a lot of investments in their installation and support teams. They have an offer here that is easy for a customer to deploy and to add value to. So we actually like the characteristics of this product. It's easy to sell, easy to deploy, and our customers make good margins on it. So for us, those are good signs for success this year.

Right. Thank you very much.

Thank you.

(Operator Instructions)

Chris Quilty, Raymond James.

Good afternoon, gentlemen.

Hello, Chris.

I was wondering is it fair for us to assume that the personnel departures and the tax issues in Europe were probably related?

Yes.

Other any lingering issues there to be concerned about?

No.

So primarily accounting issues and nothing really related -- nothing that would really impact operations or sales?

Right. I think the amount of money that we indicated was an expense in the quarter. We believe that's an appropriate accrual for this entire issue.

Okay. And I may have missed it, and I think you talked in general about vendor programs and when they kick in, but at this point have you renegotiated most of your vendor programs and are you satisfied with where they are falling out?

Chris, you're right. We thought about probably the most I can ever remember, because what happened in 2012 calendar year was every vendor came into '12 with higher expectations than the channel delivered. We weren't alone in struggling to get some of the targets. I think as we're starting to see some of our vendor results communicated to us in the last couple of weeks and into the public market in the last few days, we think that our vendors clearly didn't perform themselves the way they wanted to.

So, we are hoping that as we sit down with them, this quarter, and start establishing goals for the calendar year and for each quarter, that we'll have goals that represent our efforts and represent our investment, and we get an appropriate margin for that. So, some of that is still work to be delivered by us and our vendors, and then the story, I think, will be more clear to us in April on our next call.

Got you. And you had mentioned you still like security and see it as an area of investment. Are there still acquisition related investment opportunities or is that mostly internal through sales and vendor recruitment and those types of activities?

It's more the latter. We are getting additional comfort that the vendors are not happy with the distribution landscape. And what their communicating to us is that they would like to see fewer distributors in the market place in general, and that's something that we have certainly tried to encourage for our benefit, but we believe that if we continue to have a value added model, that we will be rewarded for that. And that some of our key vendors are starting to recognize that.

So we're encouraged by some of the vendor comments around we really like what you guys do as a distributor; two tier only, value-added, we do a lot of training and education as you know, and we believe that more vendors will start rewarding us for that. So that's why we're willing to do things like invest in more business development people, have more marketing programs that are monies that we're spending in advance of earning reimbursement or co-op money from vendors. So that would be the kind of investments. Today we're not looking at an acquisition that would be part of that thinking.

And final question on the Catalyst business, the disappointing Q2 results here. Do you see that as more of an isolated quarter issue or are their bigger problems with the product line or the end market that might have an indication for Q3 and looking forward?

I try not to tell any vendor's story in too much detail, especially if it's one that they haven't been in the market place telling. And Avaya is not a public company these days but, clearly we were disappointed and we expect that Avaya is too. So, we would expect that their management team and their product teams would figure out what it is that resulted in a lack of performance. So, maybe the easy answer is we expect it to get better.

We have not heard anything that tells us that something that Avaya can't fix. It's not like they got beat because they're biggest competitor stole a bunch of deals from them in the last two quarters at the expense of our channel. We haven't heard that. So it's more some things that Avaya can address and fix, and we believe our channel partners are standing by ready to go sell the products that they have. It's not a technology question, it's an execution point.

Got you. Thank you very much.

Thanks, Chris. See you.

(Operator Instructions)

Rob Crystal, Goldman Sachs.

Hey, Mike. I was hoping you could touch on the NCR relationship as a new vendor. Sort of in the scope of when a new vendor--how long it takes to ramp to what you would call a more steady state. Is that a year? Two years? How does that work?

Thanks, Rob. We have always been hesitant to put a timeline on new vendor results because the story would always be that the vendor wants us to sell to totally new customers and we want to sell to some of their existing customers. So there is this balance between how much business can we go after today with our existing knowledge of how we sell their technology, who do we already have relationships with. So generally it is dictated by how many of our existing customers are selling a product like NCR.

So our issue right now is there's not a lot of them doing that. It's more a green field opportunity, even for NCR. There's not this large backlog or this large inventory of customers who have been asking for ScanSource to be approved as a new distributor. So, it's a little different from some of our other vendors where there is already an existing channel and they need two step distribution to enable the channel. So that's why this one will take longer, and I would say certainly we don't expect it to be material to our revenues over the next couple of quarters.

And then sort of back to Chris and Tony's questions about margins. Is it fair to think of next quarter as a lower gross margin quarter until you are able to negotiate the terms for the year? Do you have to accrue at a lower level until you have what will call more normalized targets or what have you?

That's actually probably fair. It's probably fair to say that we do count on these programs to reward us for investments in value-added services. So, our SG&A is built on an assumption for gross margin by key vendor. And so yes, I think that's a fair way to describe it.

And I guess with -- would sort of the converse be true, which if you can't get -- if you can't get sort of more, we will call them, ScanSource fair terms, would you look to manage operating expenses differently to drive back towards historical operating margins?

Yes. We would do two things. We would one, be very clear with the vendor before we do that so we don't surprise them. And historically those are conversations we have on a routine basis. We have a quarterly business review cycle with our top vendors anyway. So they are already aware that we're concerned about our SG&A and, the second piece of it is we are equally concerned about our investment in the balance sheet. So, we're looking at our inventory turns and our payment terms with those vendors where we have lower gross margins than we would normally have preferred and frankly deserved, to provide the services we're doing. So, it's a combination of a look at the expenses and a look at the balance sheet investment that we will be talking to them about.

And I guess the last one, and I will cede the floor, when you have situations like this in the past, Mike, your success in, shall we call it getting what you want, tends to be pretty good or how shall we characterize that?

I think we're in a little bit of unusual territory in that the vendors aren't growing, it's harder for us to be that -- as successful. So I'm just being honest on that. If our vendors don't grow this year, it's going to be harder to accomplish that. So I am expecting that the market for our vendors will be better in '13 than '12. If that doesn't materialize then we are going to challenge to convince them. So then we will have to take some actions and I think they will not like it, but they will at least understand it.

Great. Thank you.

Thanks.

Keith Poston, Northcoast research.

Thank you. Mike, can you shed a little bit of light on what's happening in Brazil and the ability to spread the business into the unified communications and the physical security space? Any success in doing that?

Thanks, Keith. Were not doing anything in physical security at this stage. It's unified communications for sure. We're talking to our key vendors there. No big vendors yet signed. AudioCodes has been signed. We're looking to talk to some of the wireless networking vendors. We're certainly talking to the Avayas, and the Polycoms, and the ShoreTel's, etcetera.

So it is a situation where we believe there is room for another distributor for those companies, but it clearly does take a longer time than we like to bring that to fruition. And at the same time, as you know, our barcode business in that region has not grown as fast as we had wanted it to, as we had hoped it to when we first made the acquisition. So the management team is making sure they're not forgetting that they fundamentally are in the barcode and POS business right now, and that's why they're trying to sign a few key vendors like NCR, like Engenico, and then working on the Communications business when they have extra cycles.

In the lack of growth or the disappointing growth in the barcode sector, is that a function of FX translation, or is this a function of the Brazilian economy or what do you think is driving that down there?

I think our team would say it's more economy driven. I think the reality is we have a significant relationship with the vendor there that is unique from the rest of our portfolio. A company called Bematech. They are principally a printer vendor. They are a large player in the marketplace. The dominant receipt printer company in Brazil. And we benefited when we started with them, when we made the acquisition, that we were the only distributor. They did sign another small distributor shortly after we made the acquisition. And their business itself, they're public in Brazil, their business has not grown like they wanted it to in the printer business in the last two years. So, we are somewhat dependent upon their success.

As you know, that's typical of ScanSource. There has to be some growth from our vendor unless they are going to shift more business to the channel. In this case, there's not a lot more shift business. They do have some direct resellers and we do sell to some of them. But that's not a huge opportunity for us that we're working on right now. So we are dependent on the other vendors in the portfolio to drive our growth, the Motorolas, the Zebras, the Honeywells, and those are the key vendors that we are spending more of our time with because they represent growth for ScanSource down in Brazil.

And I apologize if you guys covered this already before, but in the physical security segment just as a whole, you talked in the past about trying to consolidate some of your vendors. Can you spend a moment talking about, are you seeing the more consolidation among those vendors and how are you guys coming in terms of consolidating your line card and concentrating on just your best and brightest?

I think we have done some of that already, in that, as a distributor you don't like to separate from vendors. You tend to focus or empathize the ones that are frankly, bringing you the profitability and the growth. So we believe we've got a strong relationship with our key security vendors today. We believe that some of them have already shown us through their actions that they are willing to put more emphasis on two-tier value-additive distribution like ScanSource at the expense of some of their traditional distribution partners. So today, we are getting better comments that our vendors, the key ones, prefer to have fewer distributors and that over time, that will be to our benefit.

All right. And I'm assuming you guys aren't breaking that out, correct?

That's right.

Thanks, guys. Appreciate it.

(Operator Instructions) Please stand by for further questions. And we have no further questions at this time.

Thank you. Thank you for joining us today. Our next conference call to discuss March 31st earnings is expected to be on April 25, 2013.

Thank you for your participation on the conference call today. At this time all parties may disconnect. [end of transcript]