SCSC

ScanSource, Inc. (SCSC)

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Industry: Technology
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ScanSource, Inc. (SCSC)

F4Q09 Earnings Call

August 20, 2009 5:00 pm ET

Executives

Richard P. Cleys – Chief Financial Officer & Vice President

R. Scott Benbenek – President Worldwide Operations

Michael L. Baur – Chief Executive Officer & Director

Analysts

Reik Reed – Robert W. Baird & Co., Inc.

Brian Drab – William Blair & Company, LLC

Chris Quilty – Raymond James

Andrew Abrams – Avian Securities, LLC.

Anthony Kure – Keybanc Capital Markets

Andy Young – Thomas Weisel Partners

Gregory M. Macosko – Lord Abbett & Co.

Eric Indy – First Pacific Advisors

Presentation

Operator

I would like to inform all participants that your lines have been placed on a listen only mode until the question and answer portion of today’s conference call. The call is also being recorded. If you have any objections you may disconnect. (Operator Instructions) I would now like to turn the call over to Mr. Rich Cleys.

Richard P. Cleys

Thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended June 30, 2009. My name is Rich Cleys and with me are Scott Benbenek, President of Worldwide Operations and Mike Baur, CEO of ScanSource. We will review with you the quarter’s operating result 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 10K for the year ended June 30, 2008 filed with the Securities & Exchange Commission.

This afternoon the company released results for our fourth quarter ended June 30, 2009. I will start our discussion by providing overall sales and operating results. For the quarter ended June 30, 2009 the company generated worldwide net sales of $441 million. This represents a 20.4% decrease from the prior year same quarter revenue. However, sequentially or compared to our third quarter revenues increased 13.2%. Late in the quarter we did see strong sales results including the return of some larger project driven deals in North America that had been notably absent over the past six months. Mike will comment on each business unit’s results and outlook later in this call.

In our geographic segments, sales originating from our North American distribution segment decreased by 19.3% in comparison to the prior year quarter while the international segment saw sales decrease by 24.8% over the same period. When measured in local currency, the international segment sales decreased by 15.9% as the US dollar strengthened significantly between the two comparable periods.

Within our product lines we experienced a 25.9% decrease in worldwide sale of our POS, bar coding and securities product categories over the comparative prior year quarter. These product categories represent 60.5% of our total sales for the current quarter with the remaining 39.5% of our total sales originating from communication products. Our communication businesses experienced a decreased of 10% in comparison to the prior year quarter.

For the second consecutive quarter gross margin expressed as a percentage of sales has shown significant improvement in comparison to the prior year period. Gross margin as a percentage increased to 12.1% for the June 2009 quarter compared to 10.6% for the prior year quarter. I will briefly discuss some of the drivers of this favorability during the June quarter. First, the company continued to benefit from the strategic inventory purchases initiated in Europe during the March quarter that were discussed on last quarter’s conference call.

This buy in opportunity was designed to take advantage of anticipated vendor price increases introduced late in the March quarter. Accordingly, as the underlying inventory associated with these purchases was liquidated in the March and June quarters we recognized higher than normal gross margins on the related inventory sales. Also, during the June quarter in our international business we received the benefit from the recognition and collection of a number of aged vendor receivables. Important to point out that both of these items are onetime benefits. A more normalized margin for the June quarter approximates 10.8%.

Operating expenses decreased slight in the current quarter to $33.5 million versus $34.4 million in the comparable prior year period. While the company was able to reduce SG&A expenses below prior year dollar level operating expenses as a percentage of net sales increased to 7.59% in the current quarter compared to 6.2% in the comparative prior year period. The company continues to benefit from the results of our previously discussed cost reduction initiative that was implemented in January which has impacted all aspects of our business.

The economic downturn has allowed our organization the time to reexamine and rationalize every aspect of our cost structure. In some cases the savings yielded from this program were permitted to fall to the bottom line while in other cases we chose to reallocate or invest these savings in various opportunities for which we believe have the greatest potential for future growth. Third quarter cost reduction savings along with onetime gross margin benefits allowed us to implement programs to incent long term demand and to reward employees. The incremental cost for these programs is approximately $2 million.

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