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ScanSource, Inc. (NASDAQ:SCSC)

Preliminary Revenue Results Conference Call

April 7, 2008 10:30 am ET

Executives

Richard P. Cleys - Chief Financial Officer, Vice President - Finance

Michael L. Baur - Chief Executive Officer, Director

Analysts

Jeff Rosenberg - William Blair & Company

Chris Quilty - Raymond James

Reik Read - Robert W. Baird & Company

Operator

Good morning and thank you all for standing by. (Operator Instructions) I would like to introduce you to the ScanSource March 31st revenue release conference call. Mr. Rich Cleys is the conference leader and at this time, he may begin.

Richard P. Cleys

Thank you, Angie and thank you for joining us for the ScanSource conference call to discuss preliminary revenue results for the quarter ended March 31, 2008. My name is Rich Cleys, Chief Financial Officer of ScanSource and with me is Scott Benbenek, President Worldwide Operations, and Mike Baur, Chief Executive Officer. We will highlight revenue 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, 2007, filed with the Securities and Exchange Commission.

Normally we would not comment on revenue results at this time. However, given this quarter’s results, we felt it would be helpful to add what analysis we have completed to augment your understanding of our top line results. We also have had some exciting announcements in the last week that we felt were important to discuss.

I will start our discussion by providing overall sales results. We anticipate posting sales between $509 million to $515 million for the quarter ended March 31, 2008 and at the midpoint, that indicates an increase of approximately 4% over sales of $492.7 million for the same quarter last year. Anticipated sales results based upon our product groups shows year-over-year growth of 13% in AIDC and point of sale, along with a decrease of 10% year over year in communications products. That produced a 65-35 mix of AIDC POS versus communications products.

In our North American segment, we had three sales units that achieved the lower end of our revenue expectations. These units are ScanSource POS barcode, ScanSource security, and ScanSource communications. However, Catalyst Telecom fell significantly short of our expectations. During the quarter, orders were delayed and possibly lost due to problems associated with the rollout of a new software and support strategy associated with our Avaya enterprise products. We did not anticipate that the problems would affect our revenue so dramatically and fully expect the issues to be resolved before the end of the quarter, when a large percentage of our Catalyst revenue is historically booked and shipped. Normally our catalyst revenues historically are back-end weighted during each quarter and we see a dramatic surge in orders in the last few days of the quarter.

Significant changes to the new product strategy were just announced by Avaya and will take effect this week. We are still analyzing the potential impact of the changes announced but are encouraged as to the significance of the changes.

Although our international business grew 17% year over year, results were below expectations. This is in spite of the stronger Euro dollar rate during the quarter. Growth on an exchange rate adjusted basis was 8%. The international softness occurred late in the quarter. We are in the process of analyzing results and will be prepared to give more color on our April 24th earnings call.

We announced Friday night that we had completed the purchase of MTV Telecom Distribution PLC, a U.K. based distributor of voice and data solutions. MTV Telecom has a strong line of vendors, including Avaya SMB, Siemens, Panasonic, and [Swicks]. We have been looking for an opportunity to expand our ScanSource communications offering internationally. MTV Telecom, like ScanSource, offers in-depth sales and technical training resources to its reseller customers, ensuring successful delivery of total communications solutions to end users. The MTV Telecom management team will remain in place, led by Martin Hatcher, Chairman, and Natalie Forbes, Managing Director, and will report to Xavier Cartiaux, Managing Director of ScanSource Europe.

MTV Telecom sales for the previous 12 months were approximately $18 million. We think MTV Telecom’s similar structure, technical expertise, and line card teamed with ScanSource communication resources will give resellers opportunity to grow in the U.K. and beyond.

Last Wednesday, we announced the addition of GE Security to our security business line card. These products are available for sale this month and will give our dealer partners a wide range of options when looking for high quality, easily managed security solutions. The addition of GE Security products to our line card is yet another indication of our commitment to our security business partners.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Rosenberg from William Blair & Company. Your line is open.

Jeff Rosenberg - William Blair & Company

The first thing I wanted to ask you is when I looked at some of the incremental information you just gave on the revenue breakdown, my quick math suggests that the quarter was down modestly sequentially in North America on the bar code point of sales side. If that’s right, could you comment on whether or not while it wasn’t nearly as much the cause of the overall revenue shortfall as what happened to Catalyst, whether that was also weaker than you had expected?

Michael L. Baur

We haven’t done enough analysis yet of the North America bar code business to look at where all the revenue came in by vendor and area, but I would say that it was still a good quarter for us. They still had good growth but it was on the low end of our expectations, yeah. But we still felt like it was a good quarter.

Jeff Rosenberg - William Blair & Company

Okay, that helps and then on the Catalyst side, could you talk a little bit -- I mean, I realize there’s a lot of changes happening at Avaya but as you look at it from the customer perspective, any issues relative to customer concentration, larger customers with particular weakness or anything there as you look beyond the fixing of this issue with the software approach, how you can kind of handicap your ability to get back on a growth track there?

Michael L. Baur

Well, I think we don’t see any changes in our -- in the profile of our customers. The Catalyst business has always had larger customers, since they are a bar code POS business. That’s because of some of the acquisitions that happened in the telecom space over the last couple of years, so we really don’t see that significantly changing any time soon. We still are in a recruitment strategy with Avaya to find new resellers who want to sell a converged solution, not only Avaya products but also Juniper and Extreme, so we really feel like there is still opportunity for new customers to enter the space and Avaya is still a clear leader in the marketplace, so we have a lot of confidence still in the strategy as well as Avaya and unfortunately, the results just really were poor for us in this quarter.

And we came off of a quarter in December where we thought heck, March has got to be decent based on that and everything we saw, we thought they had everything pretty much in line. And then late in the quarter, we didn’t see the results come in like we had anticipated.

Jeff Rosenberg - William Blair & Company

Okay, and the last question I wanted to ask you was just you specifically said you are not in a position to comment on earnings but I just want to be clear whether or not that’s because you just don’t have the information or in the past when you’ve -- when there’s been any sort of variation in the revenue number, the implied lack of commentary on earnings was that despite the variance in revenue, that you were still comfortable with the range that you had previously provided in earnings. I just wanted to be clear on what you are able to or willing to communicate about earnings this morning.

Richard P. Cleys

I think it’s just too early for us to comment on earnings. We’ve got to get the books closed and roll things up and analyze them, so we know that the top line is off of what our original expectations are but I really have nothing more to say than that.

Jeff Rosenberg - William Blair & Company

Okay, so you are not standing by that earnings range or not, you’re just -- you just haven’t been able to do all the necessary work at this point.

Richard P. Cleys

We just don’t have the information right now to even speculate.

Jeff Rosenberg - William Blair & Company

Okay. Thanks.

Operator

Thank you. Chris Quilty from Raymond James, your line is open.

Chris Quilty - Raymond James

I was hoping you could comment a little bit on the European business and your sense there. I mean, I was looking back over the last two years and you’ve been putting up sort of steady 30%, 40% top line growth and you seem to have hit a bit of a massive deceleration here. Is it your sense that there were any competitive issues or company internal issues, or was this primarily just end market slow down?

Michael L. Baur

I think right now it is still too early for us to give you an exact answer. We are looking at all of those issues you just described. We’ve got our quarterly business reviews with all of our business units next week and by the 24th, we’ll have more color for that. But there was nothing that jumped out at us that we could speak to, other than the fact that they had a weaker finish than we had anticipated.

Chris Quilty - Raymond James

Okay, and shifting gears over to the MTV acquisition, can you comment on at least your early assessment of how you might choose to consolidate distribution activities or are those opportunities for synergies with what you’ve done on the AIDC point of sale business?

Michael L. Baur

Sure. Yeah, our plan for MTV is to basically leave this acquisition alone. They’ve got their own back room team. They’ve got their own warehouse. They buy and sell today only in the U.K. and so they buy in local currency, sell in local currency. So our strategy has been with this acquisition to basically let these guys execute on a plan that they already had in place. They just were announced as an Avaya mid-market enterprise distributor just a week ago as well, and so our goal here is to provide resources to them from the European Brussels headquarters as they need them but not to consolidate any of their functions today.

Chris Quilty - Raymond James

Okay, but obviously longer term, you are going to want to push that business on to the continent.

Michael L. Baur

Well, we clearly want to expand the communication business across Europe, yes, and so this will be a good starting point for us. And then we’ve got to look and see how well these guys do as a team and then see how we are going to start a communications business in Europe, whether it’s through expansion from the U.K. as kind of the center point or whether we make any other acquisitions.

Chris Quilty - Raymond James

So it sounds like you are probably going to let this thing run for a year or so, see what it does and then make your decision from there?

Michael L. Baur

You bet. That’s exactly right. But the management team is on board with that and they’ve got strong growth plans for this year.

Chris Quilty - Raymond James

All right. Thank you, gentlemen.

Operator

Reik Read from Robert Baird & Company, your line is open.

Reik Read - Robert W. Baird & Company

I guess a similar question on the North America front is that you seem to have a lot of things going for you in the bar-coding side with the smaller VAR recruitment, Intermec shifting some business over and things like that. Does the coming in at the lower end of the range have to do with a change in those or is this more of a macro issue where the macro maybe has slowed down a little bit more?

Michael L. Baur

Well, again it’s still too early to call but we still had double-digit growth year over year, so we felt like it was a good performance in the marketplace in North America.

Reik Read - Robert W. Baird & Company

But you don’t -- and I’m not arguing with that, Mike, but as you guys said, it came in a little bit below your expectations. So is it that the expectations were set at a certain level from a macro view and they fell short or as you guys say, is it too early to tell?

Michael L. Baur

Well, right now what we would normally be able to tell you on our earnings call would be if it was an across-the-board issue or specific technologies or vendors and of course, we try to avoid specific vendor comments but I don’t have anything that jumped out at me that I could analyze in the first few days here of the results, so we’ll hopefully give you more color on that on the 24th.

Reik Read - Robert W. Baird & Company

Okay, and then just maybe a little bit more discussion on the catalyst side of things. I mean, you talked about delayed orders or possibly orders that were completely lost. Can you give us a sense for what has to happen to maybe get back some of those delayed orders?

Michael L. Baur

Well, they announced -- Avaya did announce a change in this program last week to their top dealer council and then to distributors and to the rest of the channel that basically takes effect this week. And they’ve got those programs out there now, they’ve communicated them and we have -- hopefully we’ll have a little more sense of that even over the next two weeks to see what the early feedback is and that will certainly lead into our expectations for our Catalyst unit for this quarter. And we’ll have more info for that here of course on the 24th as well.

Reik Read - Robert W. Baird & Company

Okay. Is that a function of it’s just early and people are changing behavior due to the announcement and it’s not an execution issue, or is there some execution involved as well?

Michael L. Baur

No, you know what -- this isn’t a behavior issue. This is really more of a pricing issue, if I can say that, in that there was an offer put out there that wasn’t as competitive as it needed to be to the end customer and so the quotes and the offers by the dealer channel got held up and the end users were objecting to some of the terms and conditions of this new program and we’ve gone back with Avaya and reengineered the offer and we’ve got a lot of feedback from key dealers to say if we do this, will this work to unfreeze some of those orders and last week’s feedback was yes. We’ve got to see if that really results in orders.

Reik Read - Robert W. Baird & Company

And so that process is well underway though?

Michael L. Baur

Absolutely. We were working on this the last week of the quarter also saying what can we do to unfreeze some of these orders, even so we can have a decent finish. And the attempts we made the last week weren’t enough, so what Avaya announced last week we think will be reasonable in terms of trying to unstuck some of these orders out there in the marketplace. And then we’ll find out whether the dealers lost them or not, whether the end users went ahead and bought something else in the meanwhile.

Reik Read - Robert W. Baird & Company

So you’ll be able to give us a pretty good update when you release your full earnings?

Michael L. Baur

That’s our hope, yes.

Reik Read - Robert W. Baird & Company

Okay, great. Thank you.

Operator

Thank you. At this time, I am showing no other questions. (Operator Instructions)

Richard P. Cleys

Okay, well then thank you for joining us. Our regularly schedule March quarterly earnings call is expected to be on April 24th.

Operator

That does conclude today’s conference. You may now disconnect from the audio portion and thank you for your participation.

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