Richard Cleys - VP of Finance and CFO Mike Baur - CEO

Jeff Rosenberg - William Blair & Company Chris Quilty - Raymond James Ajit Pai - Thomas Weisel Partners

Thank you for standing by and welcome to Year-End Earnings Call. At this time, all participants are in a listen-only mode until the question-and-answer period. (Operator Instructions). Today’s conference is being recorded, and if you have any objections, you may disconnect at this time. Now, I’d like to turn the meeting over to your host for today’s call, the CFO of ScanSource, Mr. Richard Cleys. Sir, you may begin.

Thank you, Matt, and thank you for joining us for the ScanSource conference call to discuss financial results for the quarter and year ended June 30th, 2008. My name is Rich Cleys, and with me is Mike Baur, CEO of ScanSource. We’ll 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 risk 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 the 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 30th, 2007, and the company’s annual report on Form 10-K for the year ended June 30th, 2008 to be filed with the Securities and Exchange Commission. I will start our discussion by providing overall sales and operating results. The company posted sales of $554 million for the quarter ended June 30, 2008, an increase of 6% over sales of $524.3 million for the same quarter last year. Measuring sales based upon our product groups, shows year-over-year growth of 11% in AIDC and point-of-sale, along with a 3% year-over-year decrease in the communication products for the quarter ended June 30, 2008. That produced a 65-35 mix of AIDC POS versus communication products. Gross margin was 10.6% for the June 2008 quarter compared to 10.5% for the same period last year. This quarter’s margin of 10.6% was favorably impacted by improved cost on European POS and bar code product purchases as well as favorable program results, which more than offset lower program benefits from vendors in North America. Operating expenses were $34.4 million or 6.2% of sales, compared to 6.5% for the prior year. On a non-GAAP basis, operating expenses remained constant at 6.2%. Included in the prior year’s expenses was special committee expenses of $2 million related to the company’s stock option review. In the current year quarter the company increased headcount with the acquisition of MTV Telecom Distribution PLC, a U.K. based distributor of voice and data solutions. Operating income for the June 2008 quarter increased 17% to $24.2 million from the prior year. Operating income as a percent of sales was 4.36% compared to the prior year quarter of 4.33%, or an increase of $1.5 million. The prior year operating income percentage of 4.33% reflects exclusion of special committee cost. Net interest expense was $570,000 compare to $1.9 million for the prior year quarter. Interest expense decreased over the prior year quarter primarily due to lower debt balances into a lesser extent lower interest rates. The tax rate for both the June 2008 and 2007 quarters was 39%. Net income for the June 2008 quarter increased to $14.5 million or 2.6% of sales compared to the prior year quarter of $11.3 million, which was 2.2% of sales. Excluding special committee cost non-GAAP net income for the June 2007 period was 2.4% so the non-GAAP comparison of net income as a percent of sales is 2.6% for 2008 to 2.4% for 2007. We were pleased with our return on invested capital this quarter, which had 22% as within our historical range of 20% to 25%. Balance sheet metrics and cash management were as follows. Inventory returns were 6.9 times at the end of June 2008 improved from the 6.7 turns posted in the June 2007 quarter and 5.8 turns for the March 2008 quarter. The number of days sales and receivables, DSO was 59 at June 30, 2008 compared to 60 days posted in June 2007 and 59 days posted in March 2008. Paid for inventory days were a positive 2.7 days for June 2008 quarter and a positive 2.9 days for the June 2007 quarter. At March 2008 our paid for inventory days were a positive 14.5 days, the quarter-over-quarter improvement in paid for inventory days was driven by lower inventory purchases, primarily in our telecommunications business units and higher quarter-over-quarter accounts payable. As we have stated in the past accounts payable can be impacted by the timing of payments. Embedded in the higher accounts payable days, our checks written but not cleared. Checks written but not cleared decreased to $26 million compared to $30 million in March. Our interest bearing debt was $64 million at June 30, 2008 compared to $111 million at June 30, 2007. At March 31, 2008, our interest bearing debt was $100 million. The reduced debt at June from the March 31, balance reflects $53 million of positive cash flow from operations, less about $10 million of capital expenditures and acquisition expenditures. Mike will now give you an update on our business.

Thanks Rich. The June quarter performance was very good coming off a disappointing March quarter. However, we still have concerns around one of the significant problems from last quarter still affecting our Catalyst Telecom revenue. The other key problem affecting us last quarter regard to key European vendors pricing policy, that issue has been resolved and we are pleased to get it behind us. Also in this quarter we completed the acquisition of MTV Telecom, and are looking forward to building out our European Communications business. I will discuss these issues in detail shortly. First, I will comment on each of our reporting segments. Both American distribution includes sales into the United States and Canada posted sales of $447.8 million a growth rate of 2.9% for the June quarter on a year-over-year basis. Our North American discussion will start with Catalyst Telecom. As we discussed before Avaya has struggled with a launch of Communication Manager 5.0. This product is an upgrade of an existing software offering, but has new terms and conditions that have installed the rollout and acceptance of the product. Although changes announced in April were expected to be positive, our results were not as we expected in the June quarter. Recent meetings with the new of Avaya’s senior management team cause us to believe that they will resolve any remaining issues by the end of September. We anticipate that our Avaya business will return to normal for the December quarter and we expect to recapture some of the business delayed. Catalyst data were achieved this quarter with several other key vendors including Juniper, Extreme and Aruba setting a record sales results for those three vendors. In May during the quarter, in Myrtle Beach, Catalyst Telecom held our annual Partner Conference for the massage centered on the key marketplace issues effecting dealers as well as status of convergence efforts among the dealer base. Also we presented how to take advantage of the available tools and resources that Catalyst have to offer that could help our dealers create new efficiencies in their business. Next, I will discuss ScanSource Communications. ScanSource Communications team in North America had a very good quarter with strong results from our Polycom video and audio products. We have continued to gain market share and we believe that video conferencing market will continue to grow well. Our Plantronics and AudioCodes business also grew very well on a year-over-year basis. This June in Las Vegas, ScanSource Communications exhibited at Infocom ‘08, the largest audio/video tradeshow with almost a 1,000 exhibitors and over 34,000 attendees. With an interactive booth that featured live HD video conferences from the show floor back to our Kansas City sales office and Greenville headquarters, ScanSource Communications team that individually was 64 of our current customers and add 188 new prospects. Team also collected end-user [leads] which we share with our reseller partners to help grow their business. Next, I’ll discuss our North American POS and bar coding unit. This unit delivered another solid quarter, while experiencing a more challenging competitive environment. We’re very pleased with results from our AIDC vendors across the board, but our POS business seeing the slowdown at the end of the June quarter. We did see some benefit from a key vendors’ decision to shift more of their resellers to two-tier distribution. This shift will continue over the next few quarters and will result in better service for the customers. We expect to win a significant share of this business opportunity. We’ll now update you on our third technology area, ScanSource Security. This business unit had a very good quarter due to strong results from our video surveillance products from Axis, and Panasonic, and our wireless networking vendors including Tropos, Alvarion, and our new vendor Firetide. We continued to invest in headcount and marketing programs during the quarter as to reach new customers. Our card printer business also did well in the quarter, but somewhat below expectations. One of our key differentiators of no sales to end users continues to be well received, especially by larger system integrators to find themselves competing against other existing security distributors. Our second reporting segment is international distribution. Our international business, which includes Europe, Latin America and Mexico, posted sales of $106.2 million, a growth rate of 19%. When measured on a local currency basis, our international business grew by 7%. Beginning with Europe, we had another disappointing quarter on a revenue growth basis. Our pricing problem from the March quarter was resolved, but we started to see our larger customers delayed projects during the quarter. Number of large deals was down substantially over the prior year; however, we did see a gross margin improvement as a result of fewer large deals leading to a favorable mix of customers acquiring more of our value-added services. Turning to Latin America and Mexico, we saw very good results in most countries, except for Mexico. Mexico was hurt by the lack of large deals and projects that they had in prior years. Also helping our business this quarter was a strong start in April following a weak March due to an early Easter this year. Our Miami based export business was strong across all vendors, but especially with Motorola, Metrologic, Zebra and Epson. We expect Mexico to improve from the June quarter. One reason for improvement is that we are working closely with a key AIDC vendor on their recent decision to encourage direct resellers to purchase from two-tier distribution. This decision will improve customer service and expand the channel by making it easier to do business in Mexico. We will continue to invest in education and marketing programs on behalf of our manufacturers in the region. Next, I will update you on our newest business unit. In early April, we announced the acquisition of MTV Telecom, a communications distributor based in England. Our strategy has been to keep MTV Telecom separate from our European AIDC POS business and allow them to stay focused on growing the communications business in the U.K. MTV Telecom is a value-added distributor for Avaya, Siemens, Panasonic and Swyx with a focus on servicing the SMB market. The combination of MTV Telecom’s experience and communications and ScanSource Europe’s financial and logistics expertise should lead to a stronger value proposition for customers and vendors in the U.K. We are excited about the growth opportunities ahead of us in the U.K. and Europe. We are not separating up the revenues for MTV Telecom at this time, but will remind you that their revenues for the 12 months prior to the acquisition were approximately $18 million. We will conclude this part of the call with our expectations for the September 30, 2008 quarter. We think total revenues for the June quarter could range from -- for the September quarter could range from $530 million to $550 million, and EPS could range from $0.45 to $0.48 per share. As we discussed, we continue to experience shortfalls in our Avaya revenue. If the Avaya issue was already resolved, we believe our September forecast would have been $35 million higher in revenue and fix entire in EPS. At this time, we will be glad to answer your questions.

Thank you, sir. (Operator Instructions). Our first question comes from Jeff Rosenberg of William Blair & Company. Your line is open. Jeff Rosenberg - William Blair & Company: Hi, thanks. I guess the first question is, when you had originally talked about your margins coming into this quarter, you expected some lingering difficulties in terms of gross margins from the shortfalls in the June quarter and the purchase prices that resulted from that and vendor incentives, etcetera. It sounds you outperformed those concerns. Can we talk a little bit about what happened there?

Well, as you know Jeff – hi, Jeff, first of all. This is Rich. As you know we were working on the international pricing issue with our vendors and we resolved that, so that we were able to get the benefit of that resolution from the first day of the quarter, all the way through the end of the quarter. In addition, we had some good program results, which benefited us during the quarter, which we had not projected. So, we had a strong international margin versus what our expectations were. Jeff Rosenberg - William Blair & Company: Okay. And as we look to the embedded guidance on margins, would you just talk about for September just without having the chance to quickly do the math. It sounds like we are not expecting operating margins to stay quite as strong as they were in Q4. Is that gross margin issue? Is that some increase in operating expenses? What’s happening there to bring margins back in a little bit?

Yeah. I think that at 10.6% we have these issues, these benefits in the European operations. We don’t expect all of those benefits from the programs to repeat. So, I think a more normalized margin expectation would be about 10.3%. As far as the SG&A goes, if you adjust out some one-time things, the SG&A run-rate should be about what it has been. So, if you would have model on expectation in the neighborhood of about 3.8% operating margin, that will probably work with our mid-point guidance of $0.46 and $540 million. Jeff Rosenberg - William Blair & Company: Okay. And then I guess the last question I’ll ask you for now is on your description of the impact of not having yet resolved the Avaya issues. And Mike, can you talk a little bit about, I mean, obviously normally, you get quite a kick in the September quarter from them seasonally a bit finish their fiscal year, what you are seeing there relative to the fact that there are not private? How [does all] that factor and what you would have expected and then how we should think about going into December relative to the fact that normally we would have expected you to see a little bit of retrenchment there from the seasonal strength. But maybe that’s somewhat of a silver lining that you sort of build in December, I mean how should we think about that?

Yes, Mike. As I said in the call, we have got a new Avaya senior management team there. Todd Abbott and Jeremy Butt, both of them used to work together at Symbol Motorola, and they understand and they have communicated that some of the strategies Avaya pull in the past we’re not going to continue going forward. And I think one of those particularly was, there was such a push on September the year end for Avaya as a public company becoming a major focus for everybody, and there were promising things that caused every December to be down that shouldn’t been normally. I think we went in every December quarter in the past talking about, well, how much business might have been pulled in the September quarter from December. So, good news is these guys are all about sales out. I would say the thing that I keep hearing from the new Avaya team is, let’s measure this business the way it really is, which is on a sales out basis. Let’s don’t keep looking at how much our distribution and reseller partnership want to buy. So, I think they are instating a whole new level of new discipline within the company. Fortunately, it’s going to take a while. Todd and Jeremy joined in late May, early June, and they came in after the changes that had been contemplated by the previous management were communicated to us, and some of those changes helped us. But in general, we still are down substantially from where we would have been. And when I look at the differences September and December and what business could move, could still be there available to us and our dealers and still be available in December, we sat down with our teams and made some calculations, and that’s where we came up with the number. And most of this is because this has to do with upgrading the installed base. And so the installed base is less of a concern, not totally less, but less of a concern of losing the business to competition. It’s more of a decision by end customer to a make decision to upgrade based on the value proposition and total cost of ownership. And so, we think these are complicated issues clearly, but that the team is well aware of them, and now we expect to have resolution and a new strategy in place as we exit the September quarter. And actually gives us confidence that December will be substantially better than December is typically are Jeff Rosenberg - William Blair & Company: Okay. Thanks.

(Operator Instructions). Our next question comes from Chris Quilty from Raymond James. Your line is open. Chris Quilty - Raymond James: Thanks gentleman. I just want to follow-up on that gross margin question, if just to make sure I understand the sequential improvement in margins was almost entirely due to the vendor program and foreign exchange or was that only 50% of the sequential improvement?

It was our international vendor program improvement as well as foreign exchange. Chris Quilty - Raymond James: And that was the vast majority of --

It was more than the change. Chris Quilty - Raymond James: Okay.

So there was actually if you look at the domestic program net-net all business units domestic then actually was sequentially down. Chris Quilty - Raymond James: Okay. So what you are seeing is the European vendor program goes away, you keep the foreign exchange gains and North America stays about the same or little better, little worse?

It won't be worse for the North American and you are right on the international beat the program will not repeat but the foreign exchange should be sustainable. Chris Quilty - Raymond James: Okay. And speaking of geographic, we went through a tough period in the AIDC market for past year and half or so where North America had been pretty weak and Europe remain strong. I am hearing some chatter that North America is looking a little bit stronger from the hardware vendors, but now there is incompetent worry that Europe may be slowing which your sense of where geographically the market look good and bad?

Yes Chris, this is Mike. I think we would concur with that is that we saw fewer large deals in Europe this quarter especially in the U.K. and Ireland. And that's why we still have a significant amount of business as you know. And so we would concur that especially though the U.K. area was weaker than we had expected. And our guys has told us that there were larger deals that we had a year ago and even a couple quarters ago and we didn’t feel that kind of a funnel for the June quarter. And so we do have a softer view towards Europe right now because of that. Chris Quilty - Raymond James: Okay. And when you look at the U.S. marketplace, are you seeing strength either for point of sale or AIDC by certain verticals or applications in areas that were geographically?

We are not really other than my comment about POS took a pretty big slowdown at the, it was actually very end of the quarter. Lot about mid June any large POS fields were kind of put on hold, so that affects us and we think that may continue. I think both Europe and North America and Latin America are all offset by one of our largest vendors deciding to move their one tier guys who are generally the large resellers to two tier distribution. And so we believe that's given us an offset to the particular market condition that we were always talking about. Chris Quilty - Raymond James: Okay. And the recent spike in the U.S. dollar, Rich your thoughts there?

The situation that we have with that particular vendor, we are protected going forward for a period of time, so that we are not going to have an adverse impact on exchange rates. Chris Quilty - Raymond James: Okay. So, no net effect from foreign currency moves.

No, I think we are in a much better shape now for foreign currency fluctuation as Dollar versus Euro, than we were 90 days ago. Chris Quilty - Raymond James: Okay. Great. Thank you, gentlemen.

Thanks.

Our next question comes from the Ajit Pai of Thomas Weisel Partners. Your line is open. Ajit Pai - Thomas Weisel Partners: Yes. Good afternoon.

Hi, Ajit. Ajit Pai - Thomas Weisel Partners: Just a couple of quick questions. I think, the first one is, just looking at, I think you have addressed the [accountancy]. It was not showing any material deterioration, but could you give us some indication of whether some of your customers are seeing the impact of credit markets impacting their business.

Yes, Ajit, this is Rich. We read everything about the economy that you guys do to and we’re keeping close tabs on the situation especially with a number of our customers. Right now, what we’re seeing in terms of our ability to grant credit is we’re still utilizing the same underwriting policies and criteria and see that as continuing, but that, we’re constantly looking at that. So, we don’t want to be caught unawares. So --

And I would add just to it. Also, I think in the last year or 18 months, Rich’s team has done a great job in getting more financial information from our customers we never used to have. So, we get a lot more current financial data to make these underwriting decisions on, than we had a year and half ago, and I think that’s helping us. Ajit Pai - Thomas Weisel Partners: Got it. And then very broadly when you are looking at maybe the past five quarters, I think the company has been delivering broadly decelerating growth. In that kind of environment, shouldn't you be, soon the investment in the business especially on the receivable side and on the inventory side also sort of be seeing some moderation and sort of cash flow generation, like historically if you go back over the past several years it hasn’t been so material but given the current environment and given that deceleration shouldn’t the cash flow generation start accelerating in this environment right now?

Well, I think it has Ajit, I think for the year if you look at cash flow from operations will be at about $62 million from operations, we got about $53 million in the fourth quarter we had a blip in the March quarter that’s effected by timing but overall with a deceleration in growth we do generate cash flow and that’s exhibited by our change in overall debt. Ajit Pai - Thomas Weisel Partners: Got it. And then given that you are entering this environment right now, how would you prioritize the uses of that cash, that you are beginning to generate?

Well, we pay down the debt first. Ajit Pai - Thomas Weisel Partners: Okay.

And we do look at, as we look at our business going out, we know that this current forecast is a tight forecast for the September quarter, but we think that our underlying business model is still strong. So, we continue to invest in security, we are going to be investing more in our international communications business and those we see growth opportunities in the future. Ajit Pai - Thomas Weisel Partners: Right, and when you looking at...

…quarter. Ajit Pai - Thomas Weisel Partners: You have been acquisitive in the past and right now when you are looking at the current environment especially as some market slowdown, are you seeing the environment, the number of opportunities increased, are they the same as they have always been. Are there areas that you find would be good additions discounts right now?

Ajit, this is Mike, yeah I will take that one. We have seen an increase and opportunities in the marketplace both domestically and internationally. And I would say we have been quite busy taking look at some of those we have got two key areas that we are focused on that we will prefer to focus on even though we will look at lot of other opportunities. Well, but right now security and European communications opportunities are things that we take a look at. So, we want to make sure we have acquisition opt in within our gun site if they are appropriate. You bet. Ajit Pai - Thomas Weisel Partners: Okay. And the last question would just be on the security side, could you give us some color as to the big changes that have happened and the vendors you have been working with maybe over the past 9 months or 12 months the changes like -- in your mix today relative to what you had about a year ago?

Well, I think, what we have done is try to be more focused in our vendor approaches, try to put more of our efforts around not just singing a lot of vendors but very key vendors where our lan cards grown substantially but lot of those vendors really don’t have the kind of distribution agreement and distribution strategies that we would agree with. And so, we’re really not of the size with many of those vendors but we can impact their decision on how to go to the market. So, as a result we focused on fewer vendors from that standpoint, Panasonic is a great example of how they change their model, they have selected two years ago to focus only three distributors in North America we are one of them, and that’s benefited us. We have also focused on some new vendors to security that companies like Axis and Tropos and Alvarion, some of these guys that are coming more added from the data side and the IT side because they are looking for distributor who is not just in their low voltage, old security world but also able to educate and develop new channels, and so that’s I think the change over the last year. Ajit Pai - Thomas Weisel Partners: Got it. Thank you so much.

Thank you.

At this time I have no further question in queue.

Okay. Well, if there are no further questions, our next conference call is scheduled for -- our September results our conference call would be expected to be on October 23, and thank you very much. Thank you, Matt.