ScanSource, Inc. (NASDAQ:SCSC) Q2 2023 Earnings Call Transcript

ScanSource, Inc. (NASDAQ:SCSC) Q2 2023 Earnings Call Transcript February 7, 2023

Operator: Welcome to the ScanSource Quarterly Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. . Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mary Gentry, Senior Vice President, Treasurer and Investor Relations. Ma'am, you may begin.

Mary Gentry: Good morning and thank you for joining us. Joining me on the call today are Mike Baur, our Chairman and CEO; John Eldh, our President; and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and then take your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our website. Let me remind you that certain statements in our press release and the earnings infographic and on this call are forward-looking statements. These statements are subject to risks and uncertainties that 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 earnings release we put out today and in ScanSource's Form 10-K for the year ended June 30, 2022, as filed with the SEC.

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 disclaims any duty to update any forward-looking statements to reflect actual results or changes in expectations, except as required by law. During our call, we will discuss both GAAP and non-GAAP results and have provided reconciliations between these amounts in the earnings infographic and in our press release. These reconciliations can be found on our website and have been filed with our Form 8-K filed today. I'll now turn the call over to Mike.

Mike Baur: Thanks, Mary, and thanks to everyone for joining us today. For the quarter, we delivered 17% net sales growth and adjusted EBITDA margin of 4.8% and record adjusted EBITDA for the quarter and the trailing 12-month period. This exceptional performance is a result of strong demand and operating leverage in our hardware and Intelisys businesses. Given our outstanding Q2 results, we are raising our full year outlook for FY '23 and now expect net sales growth of at least 6.5% and adjusted EBITDA of at least $176 million. We remain focused on executing our hybrid distribution strategy to drive profitable growth for both our customers and ScanSource. Our hybrid distribution strategy of selling hardware, SaaS (Software as a Service), connectivity and cloud services expands profitable growth opportunities in two ways.

First, our customers have a broader technology portfolio to meet demand in an increasingly digital world. These expanded offerings and capabilities allow our customers to meet the solution requirements of their end users. And second, we give our customers the opportunity to grow their revenues and build a successful stream of recurring revenue that will result in a more profitable business. We believe our hybrid distribution strategy is a win-win model, and it guides how we operate our business for sustainable growth and profitability. As ScanSource enters its 30th year of business. We are honored to again be named a World's Most Admired Company by Fortune Magazine. I'm pleased to see our Number 1 ranking in People Management. Our focus on people and culture has never been stronger as our employees strive to support our valued customers, suppliers and each other every day.

I'll now turn the call over to John to discuss our business performance.

Photo by Remy Gieling on Unsplash

John Eldh: Thanks, Mike. Q2 net sales topped $1 billion, an all-time sales record for continuing operations. We delivered 17% net sales growth highlighted by strong demand for our technologies and outstanding execution by our team. During the quarter, we met the demand by building our inventories as lead times from our suppliers improved. Our business is built for top-line growth, and we realized operating leverage in our outstanding bottom-line results. We are committed to helping customers execute on the expanded opportunity to sell hardware, SaaS, connectivity and cloud services. ScanSource is guiding our customers on their hybrid journey, starting with discussions with their account managers on their unique hybrid opportunities.

I'd like to share a recent hybrid example of how ScanSource is helping our customers transition their end users from on-premise telecommunications products to next-generation cloud-based communication solutions. In this example, one of many a traditional telecom bar transitioned an existing customer, a university with an on-premise communication platform to a hybrid cloud-based solution, along with handsets and headsets. Key to our value proposition was providing access to our team of solutions engineers who architected and designed the hybrid solution. This hybrid deal, a combination of recurring revenue and hardware shows how our customers trust ScanSource and our capabilities to provide new opportunities for growth and profitability. In our Specialty Technology Solutions segment, Q2 net sales increased 26% year-over-year, fueled by strong demand for our hardware technologies and increased big deals.

We had double-digit sales growth in devices that enable productivity, automation and the customer experience. This includes barcode scanners and printers, point-of-sale terminals, self-checkout systems, data networking and physical security, led by Zebra, NCR, Aruba, Access and Extreme Networks. One area to highlight is our physical security business where our dedicated technical support resources, configuration services, speed and efficiency create a competitive advantage for ScanSource. Moving on to our Modern Communications and Cloud segment. We delivered 4.5% net sales growth for the quarter. We had record Cisco sales with double-digit growth led by large enterprise projects in networking collaboration, growth in our federal business, growth in new customers and outstanding execution by our team.

The fastest-growing area in our Cisco portfolio is cybersecurity. We're driving growth by leveraging our cybersecurity specialist to host customer enablement and threat assessment workshops, expanding our customers' skills and opportunities. We are well-positioned for growth with our cloud communication solution offerings including UCaaS and CCaaS. As part of our Intelisys business, UCaaS grew 14%, led by RingCentral, 8x8 and Zoom and our CCaaS business grew 60%, led by Five9, Genesis, ICX, Talkdesk and Dialpad. While cloud communication solutions continue to grow, our on-premise communications business continues to decline. It represented only 10% of total segment sales in the quarter. Intelisys continues to be the leader in the agency space with end-user billings of $2.4 billion annualized.

Our customers look to us for thought leadership, enablement and education to drive growth and success across their businesses. Intelisys net sales growth increased 9% for Q2 and drove strong growth in recurring revenue profits. In summary, I'm very excited about our Q2 and first half results and wanted to send out a huge thank you to all our people for their dedication and commitment throughout the quarter and to our customers and suppliers for their ongoing trust and loyalty to ScanSource. Now I'll turn the call over to Steve, who will take you through our financial results.

Steve Jones: Yes. Thanks, John. For Q2, we delivered strong top-line growth with net sales exceeding $1 billion, up 17% year-over-year. Our Q2 results benefited from supply chain improvements late in the quarter. We estimate that over $40 million of our Q2 revenue was expected to ship in Q3 and but early availability allowed us to fill those orders in December. We delivered record profitability in Q2. Adjusted EBITDA of $48.8 million is an all-time record for ScanSource and highlights our consistent strong financial performance. We achieved 15.6% adjusted ROIC in the quarter. Gross profits for the quarter increased 7% year-over-year to $115 million, while our gross margin of 11.4% reflects a higher mix of big deals and less favorable sales mix for the quarter.

Our hybrid distribution strategy is winning in the market and strengthening our financial results. Our Q2 recurring revenues of $26.7 million grew 7% year-over-year and that business is close to 100% gross profit margin. For the trailing 12-month period, approximately 24% of our consolidated gross profits are from recurring revenue business. Our non-GAAP SG&A expense for the quarter of $71.9 million increased $2.7 million or 4% year-over-year, demonstrating operating expense leverage. Our record Q2 adjusted EBITDA of $48.8 million represents a 15% year-over-year growth and a 4.83% adjusted EBITDA margin, emphasizing the scalability of our business. Q2 non-GAAP EPS of $1.06 grew 4% year-over-year and includes interest expense of $5.1 million, significantly higher than in prior year.

Our higher interest expense reflects both higher working capital investments and the increasing interest rate environment. As we look to the full year, we believe our interest expense will be between $17 million to $18 million for FY '23 and compared to $6.5 million in FY '22. Now turning to the balance sheet and cash flow. Our strong balance sheet enabled us to invest in higher working capital to mitigate supply chain challenges and support the strong demand across our technologies. We used operating cash of $27 million for the quarter and $124 million for the trailing 12-month period. Year-over-year accounts receivable increased $166 million and Q2 DSO decreased quarter-over-quarter to 69 days. The overall health of our receivables portfolio is strong and Q2 was a record quarter for cash collections for the company.

Our balance sheet remains strong. From a net debt leverage perspective, we ended Q2 at approximately 1.8x trailing 12-month adjusted EBITDA. And finally, as Mike mentioned, we are raising our full year outlook. Our strong first half performance helps offset the macro uncertainties in the second half. We now expect sales growth year-over-year to be at least 6.5% and adjusted EBITDA to be at least $176 million. As we think about our cash flows, we expect to generate free cash flow in the second half, and we expect our working capital to improve in the second half. To help with analyst models, we expect a net expense range for interest expense, interest income and other expenses from $13 million to $15 million for fiscal year '23. We are updating our estimated effective tax rate, excluding discrete items, to range from 27% to 28% for the full fiscal year.

We'll now open it up for questions.

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