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 [ph] Lyons, SCC's Finance and Principal 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 with changes and 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.

Thank you, 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 bar code unit and our Communications unit had record sales quarters. We had solid year-over-year sales growth for 3 of our 4 North American business units, POS and bar code, Communications, and security. In total, net sales for these 3 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 cost 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 on board, 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 is our new Chief Financial Officer. He joined ScanSource in mid-December and brings extensive financial leadership and international experience to the company. We're delighted to have Charlie as part of our team. With that, I'll turn 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 America 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, bar code, and Security product categories represented 65% of total sales for the quarter with the remaining attributable Communications products. POS, bar code, 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 margins 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…

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 3% decrease year-over-year and are basically flat sequentially. North America POS and bar code team achieved record quarterly sales. After lower big deals last quarter, this sales team closed more big deals in both point-of-sale and bar code with a higher average deal size. And 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 product 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 our record quarter with Ruckus. We also had record quarters with MOBOTIX, March Networks, and Bosch. Turning to North America 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. As partner conference in November, ShoreTel named ScanSource Communications as…

[Operator instructions] Our first question will come from Anthony Kure of KeyBanc.

Just to start with the guidance, you mentioned that typical seasonal decline for the March quarter is implied in your guidance. So I guess that answers that question, but I guess, you know, when I look at the margins, if I take the, you know, the mid-point, that $0.49, it implies, you know, operating margins coming down pretty substantially to about 2.9% is sort of my math at the mid-point of your guidance on the top line. I guess, what would be the main driver of that margin decline on that revenue level? Last time I had you in this range at 6.85 [ph], you know, margins were above -- operating margins were above 4%. Could you just talk about the difference there?

Tony, this is Charlie here. Let me take that one. Basically looking at the guidance, the mid-point, if you look at the March 2012 quarter, the characteristics of margins are very similar. The slightly, slightly higher gross margins than March 2012 and slightly less operating margins this year compared to last year. So they’re very, very much in line with what happened in March 2012 and if you use a 34% tax rate, you’ll pretty much come out with the number there.

Okay. So there really isn’t anything changed within the last 6 months, it’s really just a reflection of the lower volumes, that’s the big culprit for the margins?

Yes, that’s right.

Okay. And then, okay, so then if I look at the December quarter, you know, we heard a lot about that in other businesses, folks talking about the fiscal cliff or, you know, the uncertainty here in the U.S. Did you experience or have any hesitancy among your customers maybe pushing projects out sometime within calendar 2013, any hint of that?

Well, I think, Tony, the only thing that we would say that surprised us, okay, and that might have part of that was I think I referenced a couple 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 and 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 would -- we can only assume it was a more macro event. Again, the Catalyst projects generally are larger than any other business unit we have so that would be the one place I would point to.

Okay. And if I could just take it a step further on the seasonality, if you could just maybe provide some insight, you know, 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’s up, but I’m just wondering how much is the June quarter typically up?

Yes, and 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 and we don’t have a -- it’s a -- it’s actually, we’re flat year-over-year. And normally what happens is we do have a spike back up in June. We have 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 in 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 then that results in sales in the June quarter.

Okay. So I mean, sequentially though, you’re going to not have Juniper in the March quarter and you’re not going to have Juniper in the June quarter.

That’s right.

So would you care to take a guess at -- I mean, would that materially move the “normal seasonality” then because of the absence of Juniper?

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

Okay, is it a double-digit increase before Juniper?

Well, you’d have to go back and look and look at the quarters. I don’t have -- I’ve got probably 2 quarters here in front of me. Let’s just see. So in ’11, 2011, calendar year, we went from $614 million to $734 million. And in ’12 we went from $707 million to $754 million. So there’s 2 numbers for you.

Our next question will come from George Iwanyc of Oppenheimer.

When you look at your guidance, can you give us some more color on which areas you’re concerned about, and which areas you see as stronger and potentially as sources for upside?

George, this is Mike. I’ll tell you, just 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 and so we believe that that is still a good place for us to invest, is in our physical security business here in the U.S.

Okay. And you know, when you look at 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 specifically, but I can give you some general trends that we’ve seen, and for sure over the last couple years, our whole AIDC business has been impacted by the move to mobility, for sure. And the robustness of the mobile devices, they’re all Wi-Fi now and so, you know, years ago that wasn’t the case. So that’s also, I think, been additive this year because you’ve got so many enterprises that are adding employee-driven devices, the BYOD movement definitely also impacts our business. So you’ve got the personal and corporate enterprise devices as well as the devices people bring from home, we’re seeing a strong demand in our wireless vendors, frankly, across the board, whether it’s Ruckus, Aruba, our Cisco Wireless practice, we’ve got what we believe -- and Motorola as well, we believe we’ve got a very strong wireless offering and those vendors have all done very well with us this year. And we would expect that trend to continue.

Are the deal sites getting bigger in those areas and are there certain end-customer areas that are doing better, you know, hospitality or education?

I don’t have a lot of data on that. We don’t always know where our resellers sells it into 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 place -- space more so than they are in large enterprise.

Okay. And just following up on that, you mentioned the new Aruba Instant products specifically. You know, 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?

Well, our team is excited about the fact we’ve got 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 support teams, they’ve got 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 -- easy to sell, easy to deploy and our customers make good margins on it. So for us, we think that’s a good -- those are good signs for success this year.

[Operator Instructions] Our next question will come from Chis Quilty of Raymond James.

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

Yes.

And are there any lingering issues there to be concerned about?

No.

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

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

Okay. And I may have missed it, but I mean, 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 where they’re falling out?

Yes, Chris, so again, we’ve -- you’re right. We thought about that probably the most I can ever remember because what happened in ’12, 2012 calendar year was every vendor came into ’12 with higher expectations than the channel delivered. We weren’t alone in struggling against some of the targets. I think as we’re starting to see some of our vendor results communicated to us in the last couple 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’re hoping that as we sit down with them this quarter and start establishing goals for the year, 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, is that -- 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. It’s because we’re getting additional comfort that the vendors are not happy with the distribution landscape. And what they’re communicating to us is that they would like to see fewer distributors in the marketplace 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 valuated 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 2-tier only, value added. We do a lot of training/education, as you know, and we believe that more vendors will start rewarding us for that. And so, that’s why we would be 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 part of that thinking.

Okay. 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 there bigger problems with the product line or the end-market that might have an indication for, you know, Q3 and looking forward?

Well 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 marketplace telling, and Avaya is not a public company these days. But clearly, we were disappointed and so we expect that Avaya is too. And so, we would expect 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’ve not heard anything that tells us this is something that Avaya can’t fix. It’s not like they got beat because their biggest competitor stole a bunch of deals from them in the last 2 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 product or a technology question, it’s an execution point.

[Operator Instructions] Our next question comes from Rob Crystal of Goldman Sachs.

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 it a year, 2 years? How does that work?

Yes, Rob. We’ve 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 and so there’s 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, though generally 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 of a greenfield 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 than some of our other vendors where there’s already an existing channel and they need 2-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 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 sort of the terms for the year? Do you have to accrue at a lower level until you have what we’ll call more normalized to, you know, targets or what have you?

Yes, that’s actually probably fair. That’s probably fair to say that we’re -- we do count on these programs to award us for our investments in value-add services and 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 then I guess with the -- would sort of the converse be true, which is if you can’t get sort of more, we’ll call them ScanSource fair terms, would you look to manage operating expenses differently to drive back towards historical operating margins?

Yes, yes. We would do 2 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 on a quarterly -- we have a quarterly business review cycle with our top vendors anyway, so they’re already aware that we’re concerned about our SG&A and the second piece of it is we’re 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 then I’ll cede the floor would be, when you have -- have had 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 should we characterize that?

Well, I think we’re in a little bit of unusual territory in that if 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 hard 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’re going to be challenged to convince them, so then we’ll have to take some actions and I think they will not like it but they will, at least, understand it.

Our next question will come from Keith Housum of Northcoast Research.

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

Yes, so -- that’s Keith. We’re 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 at talking to some of the wireless networking vendors. We’re certainly talking to the Avayas and the Polycoms and the ShoreTels, et cetera. So it is a situation where we believe there’s room for another distributor for those companies, but it clearly does take a longer time than we like to bring that to fruition. So in the same time, as you know, our bar code business in that region has not grown as fast as we had wanted it to and as we had hoped it to when we first made the acquisition. So the management team is making sure that they’re not forgetting that they fundamentally are in the bar code and POS business right now and that’s why they’re trying to sign a few key vendors like NCR, like Ingenico, and then working on the communications business when they have extra cycles.

Okay. And the lack of growth or the discipline in the growth in the bar code sector, is that a function of the -- of FX translation or is it a function of the Brazilian economy or what do you think is driving that down there right now?

Well, I think our team would say it’s more economy driven. I think the reality is we have a significant relationship with a vendor there that is unique from the rest of our portfolio, a company called Bematech, they’re a principally a printer vendor. They’re a large player in the marketplace, the dominant receipt printer company in Brazil and we benefited when we started with them and made the acquisition that we were the only distributor. They did sign another small distributor shortly after we made the acquisition, so they -- in 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 2 years. So we’re somewhat dependent upon their success, as you know, that’s typical for ScanSource. There has to be some growth from our vendor if -- unless they’re going to ship more business to 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’re spending more of our time with because they represent growth for ScanSource down in Brazil.

Okay. 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 linecard and concentrating on just your best and brightest?

Yes, I think we have done some of that already and that as a distributor, you don’t like to separate from vendors, you know, you tend to focus or emphasis the ones that are frankly bringing you the profitability and the growth. And so we believe we’ve got us a strong relationship with our key security vendors today. We believe that some of them have already shown us through their actions that they’re willing to put more emphasis on 2-tier value-added distribution like ScanSource at the expense of some of their traditional distributor partners. So today, we’re 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 still aren’t breaking that out, correct?

That’s correct.

[Operator Instructions] And we have no further questions at this time.

Thank you for joining us today. Our next conference call to discuss March 31 quarterly 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.