Q1 2020 Earnings Call
Scansource quarterly earnings conference call all lines have been placed it in 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.
Alex trying to call over to marry Gentry, Vice President Treasurer, and Investor Relations Ma'am you may begin.
Thank you and welcome to scan sources earnings conference call for the quarter ended September Thirtyth 2019, or call will include prepared remarks, Mike, our our chairman and CEO and Jerry lines, Our CFO John held our Chief revenue Officer is also joining US we will review our operating results for the quarter.
And then take your question, we posted a CFO commentary that accompanies our comments and webcast in the Investor Relations section of our website certain statements made on this call, including or expectations for sale operating performance, earning fair value of contingent consideration operating cash flow tax rate.
Interest expense plain divestitures <unk> results for the second third and fourth quarters of fiscal year 2020 are forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These results in a certain these include but are not limited to those factors identified in the.
Earnings release that we put out today and its Scansource is Form 10-K for the year ended June Thirtyth 2019 as filed with the FCC.
Any forward looking statements represent our views only as of today it should not be relied upon as representing her 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 were discussing those.
GAAP and non-GAAP result, and I provided reconciliations between these amounts and the CFO commentary and in our press release. These reconciliations can also be filed on our website and I've been filed with our form 8-K, Mike Baur will now begin or discussion with an overview of our results.
Thanks, Mary and thank you for joining us today.
We're pleased to deliver net sales of $1 billion for our first quarter up 3.5% year over year. This was the second full quarter of operations with our new one scansource sales Rocco.
We're pleased with the progress, we're making to drive more growth and value for our sales partners and their customers.
We expect it slightly higher revenues then we achieved.
The shortfall can be attributed to the shift to cloud and our communications business, we forecast at higher premise based communication business than we delivered.
At the same time, we're very pleased to see the accelerated growth of our you Cas business, including sales through our agent and var channels, which grew 60% year over year.
Our suppliers, including a buyer and ringcentral.
And eight by eight and poly have recently announced cloud offerings that will give us additional recurring revenue opportunities for agents in bars.
We are ideally positioned to take advantage of this ucas shift due to our excellent lineup of suppliers and large and growing routes to market.
Our performance for the first quarter reflects progress in executing our strategic plan, we've identified six key growth initiatives for the year.
First as we just discussed we're growing our you can see Cas business through partnerships with cloud providers don't want access to our routes to market to accelerate the move to the cloud for in customers.
With our communication suppliers, we're developing easy to sell you caf and seek s. offerings for both agents in bars.
Second our strong market demand for video surveillance is expected to continue during fiscal year 2020, and we see opportunities to gain market share for the first quarter fiscal year, we had a record quarter from physical security, which is a large and growing market for channel our security channel has been asking for honey.
Well security products for many years and we are delighted to add Honeywell commercial security as a new supplier.
Third Brazil represents a high margin high growth opportunity for Scansource.
As one of the largest solution providers in Brazil, we give our suppliers and customers the greatest scale in reached to grow their business.
We expect our Microsoft business to grow faster with the new SAS capabilities, We recently acquired.
This quarter, we put sales integration tools in place to sell across all technologies in Brazil as one scansource.
Our fourth opportunity, we had a record quarter for in Calluses, which continues to be the largest master agent in North America.
With 14% year over year growth across the supplier portfolio of connectivity clouding cable.
We shared our plans to accelerate growth for Intelisys with our 1400 participants at this year's channel connect in October .
We highlighted $100 million in new investments, we've made to help our sales partners accelerate growth, including the Mt RPM and campaign go acquisitions.
We've added new channel managers and solution engineers, and we've added new sales tools and partner portal enhancements.
Yes for Pos portal in fiscal year 2020.
We see excellent payments opportunities at margins that reflect a higher mix of services, including lifecycle management and hot spares.
This includes double digit margins through successful execution of our contract deployment business.
Our six area of growth is our SaaS business, which we believe will be a cornerstone of our recurring revenue practice.
With empties Cascade cloud platform, which we acquired on July 1st we have a highly automated tool that allows configuration provisioning and billing services.
Our SaaS suppliers today, our Microsoft Symantec into Cronus, and we plan to add many more.
December we plan to go live with the SAS platform in Brazil for Microsoft.
In January we plan to launch Microsoft for both the agents and the bars in the United States.
Meetings.
Meetings teens and calling.
We will help our sales partners more easily sell strategic cloud solutions and build recurring revenue practices.
I go back.
Okay, sorry about that had little disconnect.
Now I'd like to welcome John held our Chief revenue Officer to todays call John joined the Scansource team on October Onest and is responsible for driving profitable sales growth across our multiple routes to market and across all geographies. In addition to his experience building and leading.
Field channel and inside sales teams.
John brings a deep understanding of the SaaS business and extensive experience, helping companies transform to a subscription base sales model.
John will be instrumental in helping us execute on our business goals and drive operating excellence throughout our business.
With that I'll now turn the call over to Jerry to discuss our financial results in more detail and our outlook for next quarter.
Thanks, Mike for the quarter, our net our GAAP net sales non-GAAP net sales non-GAAP diluted EPS subtract near the midpoint of our forecast range.
GAAP diluted EPS of 45 cents includes a higher than expected expense for the change in fair value of contingent consideration for Intelisys.
Better than expected actual results.
Our non-GAAP operating income and non-GAAP gross profit margin were lower than our forecast principally from lower than expected results.
From our business in Brazil.
However, we expect our results in Brazil to improved since the completion of our one scansource integration plan.
In August we announced plans to divest certain physical products businesses outside of the United States, Canada and Brazil.
These businesses had net sales of 156 million for the first.
Quarter fiscal year 2020.
And at September Thirtyth, 2019 had working capital of 180 $180 million.
During the quarter, we began a process to sell these businesses.
Based on the significant interest we have received we anticipate having an agreement by the end of a third quarter fiscal year 2020.
Consolidated net sales for the first quarter totaled $1.1 billion up 3.5% year over year were up 3.4% on an organic basis.
Foreign currency translation had a minimal impact on net sales.
We had strength in our worldwide barcode networking and security segment with net sales up 6.5% inorganic growth up 8%.
This was led by strong growth in North America across key technologies, including mobile computing.
Video surveillance and payments as well as a higher volume of big deals.
Net sales for our worldwide Communications and services segment declined 3% year over year or 6% on an organic basis, primarily from significant headwinds in our premise based communications business in North America as Mike indicated earlier.
We had a record quarter for intelisys, including our ucas business growth of 60%.
Excluding the planned divestitures non-GAAP gross profit dollars for the quarter increased 2% year over year.
Our first quarter fiscal 2020, non-GAAP gross profit margin was 11.6%.
Down from the year ago period and from the previous quarter.
SGN, a expenses increased $4.6 million from the prior year quarter to $83 million for the first quarter fiscal year 2020.
We've made significant investment in operating expenses to support the planned growth for fiscal year 2020.
This is these expenses include the execution of our sales transformation plan called one scansource.
Our investments also include the digital capabilities Weve added with the acquisitions.
He RPM and campaign go.
Our first quarter fiscal year 2020, non-GAAP operating income was $27.5 million or 3.2% of net sales.
Compared to $32.7 million were 4.1% in the prior year quarter.
We have an $80 million contingent consideration liability on our September Thirtyth 2019 balance sheet.
And this reflects the present value of expected future earn out payments for Intelisys acquisition.
The first quarter fiscal year 2020, we recorded an expense for the increase in the fair value of contingent consideration of $2.5 million for analysis.
For our second quarter fiscal year 2020 forecast, we estimate the change in fair value of contingent consideration to be an expense of approximately $1.8 million.
For the first quarter fiscal year 2020, the effective tax rate was 26%.
And for fiscal year 2020, we estimate the effective tax rates, excluding planned divestitures to range from 25% to 26% excluding any discrete items.
Now turning to the balance sheet and the cash flow.
We generated strong operating cash flow $47 million for the quarter, primarily from the timing of accounts payable.
We expect to generate positive operating cash flow during the fiscal year 2020.
The lower working capital quarter over quarter includes a 25 million dollar working capital reduction from our planned divestitures.
The planned divestitures had approximately $180 million in working capital at September Thirtyth 2019.
With the completion of the planned divestitures, we would expect a significant cash benefit and anticipate using that cash to pay down debt.
At September Thirtyth, 2019, we had cash and cash equivalents of $26 million.
And debt of $370 million.
Our net leverage totaled approximately 2.4 times trailing 12 months adjusted EBITDA.
Our Oh I see was 9.6% for the first quarter fiscal year 2020.
During the past year, we've invested.
$81 million for our campaign go RPM and MP acquisitions that have built strategic capabilities for recurring revenue.
But have not yet contributed to our EBITDA growth.
And with the completion of the planned divestitures, we would expect or ROTC to improve as well.
Now turning to our forecast, we're providing our second quarter forecast, excluding the planned divestitures.
And then our CFO commentary we've included reconciliations to show our non-GAAP operating results, excluding the planned divestitures for the last five quarters.
For the second quarter fiscal year 2020, we expect GAAP net sales to range from $1.3 billion to $1.9 billion, a non-GAAP net sales excluding the planned divestitures to range from 880 million to 940 million.
The midpoint of our non-GAAP sales forecast range reflects organic sales growth of approximately 4%.
We expect GAAP diluted earnings per share to range from 54 cents per share to 59 cents per share.
And the non-GAAP diluted earnings per share to range from 80 cents per share to 85 cents per share.
The GAAP EPS does not include any non cash charges.
From any planned divestitures at those as those cannot be reasonably estimated at this time.
For the quarter, we expect gross profit margin closer to 11%.
In a non-GAAP operating income margin close to 3.5% for the ongoing businesses.
We are assuming approximately $3.8 million for interest expense in the second quarter fiscal year 2020.
We estimate the tax rate to be in the range of 25% to 26% for fiscal year 2020, excluding any discrete items.
As we look to the second half of our fiscal year 2020, we are executing plans to drive annual sales growth between 4% and 6%.
We also expect our non-GAAP operating margin to reach our 3.5% target for the remainder of fiscal year 2020, excluding the planned divestitures.
With that I'd like to turn the call back over to Mike for closing comments.
Thanks, Jerry before we close I want to take this opportunity to welcome DRAM Anita.
End, Chief Information Officer, a first citizens Bank and trust to our board of directors.
We are delighted to have DD on our board to share her expertise and information technology and believe her experience leading an organization that relies on delivering a secure digital customer experience will lend insight to scansource.
Throughout fiscal year 2020, we are executing our strategic plan to sell devices software as a service services and recurring revenue.
Our routes to market our competitive advantage in the marketplace.
By offering digital and physical solutions with value added services. We believe we will be at the center of the solution delivery channel.
We will now open it up for questions.
Thank you to ask a question you would need to press star one on your telephone to draw your question pest pounds.
Again that star one to ask a question.
Please standby, while we composites una roster.
And our first question comes from Adam Tindle with Raymond James Your line is open.
Okay. Thanks, and good afternoon I just wanted to start Mike maybe I think it'd be helpful to kind of bridge near term trends that we're seeing versus the longer term vision.
So in terms of near term I think ex divestitures in this quarter sales growth was up mid single digits, but non-GAAP operating income was down almost 20% and next quarter based on guidance sales are going to be up low single digits, but again next divestitures operating profit dollars down double digits I know theres more than what these numbers are just telling us so hoping.
Bridge the gap on the core business in terms of why we're seeing shrinking profit dollars with revenue growth and I'd imagine part of the explanation is at least due in part to these investments which will happen before we see the ultimate impact of those so help us see the other side of that on which financial metrics you're focused on that we can follow along with the plan unfolds.
Sure Adam.
The one we've said for long time, and Weve restated begin today that operating income 3.5% is our goal and that we can get back to that for the balance of 2020, and we think thats a very good number based on the investments we've made so we're having to achieve.
Significant profitability at the gross margin line to do that we recognize that we've added significant ESG today. When we made these acquisitions and the acquisitions that we've made in the last year. These.
Whether its.
The anti Cascade RPM campaign go these acquisitions are still to deliver the operating leverage that we all want and so we believe in our core legacy business. We just look back at that per minute.
The goal there is to ensure that we're still having a very profitable business in those businesses that we are staying in as the reason that we decided to stay in North America, and our device business and in Brazil, We believe operating margins there can be.
Very good for a long time, and we believe we have the scale in those two markets to achieve that so yes, we're not.
We're not finished with our ability to get leverage on our estimate by any stretch. So we think three and a half for the rest of this year is a really good target.
Okay. That's helpful and maybe just building on that I think Jerry had mentioned in the prepared remarks that gross margin was going to be down near 11% in Q2, as we think about the back half the three and half percent operating margin is that going to also kind of come with.
A higher level of gross margin just what's the bridge to get kind of from current operating margin trends to the three and half percent is it more volume is at higher gross margin just break it apart for us. Thanks.
Sure. Adam This is Jerry I think you're you're spot on right, we're expecting our gross margins to continue to expand that percentage.
So thats part of where that where we have confidence in that 3.5%.
Okay.
Maybe just a question on cash flow Jerry I think you talked about expecting positive operating cash flow for the here.
And I think you also quantified the impact from divestitures to cash flow could you remind me of that number and that positive operating cash flow comment is that X divestitures, and we should add to benefit on top of that.
Yes, so Adam.
So we had 47 million positive cash flow in the quarter, we had our working capital decreased from the divestitures about 25 million if you think about.
I was trying to.
To sell these businesses were trying to get the.
The investment there down.
Just from the standpoint of that's going to make it more attractive to.
Potential buyers.
We are expecting back to your comment about the.
The full year, we are expecting operating cash flow to be positive for the full year and that is.
When we are we're giving those numbers on the cash flow that's.
Currently those include.
The divestitures in there.
Okay, and maybe just wrapping it up can you just I think you talked about using the proceeds to pay down debt can you talk about that that decision what other alternatives that you considered and why paying down debt is the best use of capital.
Well I think at this point in time, we just feel like.
Sure.
And we're at close to where we think our our top of our targeted ranges. So where we said we want to be somewhere between one and a half in two and a half times leverage.
Okay, and paying down debt at this point seems to make more sense.
We've talked earlier on earlier calls about our.
Our acquisition strategies.
I don't really see anything out there that we needed to be acquisitive on so I think that really.
Paying down debt as the best.
Best for our investors.
Maybe just to.
Clarify on that because.
The stock trading below book value is there something in that way share repurchases wouldn't make sense, because a lot of distributors operate around two and a half times leverage I think ratings agencies typically copy out at three times trends apparently are getting better in the back half of the year margins are expanding that things are on the upswing. So.
Maybe just the consideration for share repurchases and whatnot.
Hey, Adam as Mike one thought or one comment is when we.
Now with investors over the last three years, we had quite a bit of discussion around this topic and we found that more investors than not.
We're not in favor of share repurchases. They really wanted to make sure we had our balance sheet in in pristine shape. So that if something does come along we are prepared to take advantage of that and I think thats been our history of our board considers this quite frequently and at this point listening to our.
He shareholders. We believe this is the direction they want us to go it doesn't mean, we won't listen to them again, we're going to be up.
Visiting with many of them over the next few months and we'll certainly take a pole.
Okay. Thanks, Mike.
You bet.
Thank you and our next question comes from Keith Housum with Northcoast Research. Your line is open.
Good afternoon guys.
Hey, Mike.
The color on the communications segment, if I look at last year, you guys were able to have some pretty good growth.
I heard your comments, suggesting that the move to you cash was bigger than you expect to this quarter was there anything unique that perhaps accelerated this quarter that we're seeing an acceleration of the strategy. This the trend we've been seeing for the past several quarters correct.
Yes, so Keith I think what we're seeing is this is not just us. This is the market has absolutely gotten much more excited about this idea of moving more and this is an end customer driven desire to move towards the cloud in.
You see specifically.
In a more concerted effort and so we've got a lot of feedback from our channel partners. We've gotten feedback obviously from a from our suppliers and when you see the data that's out there customers are all wanting to at least try to get some of their you see into the cloud doesn't mean everybody's going to move their premise equip.
But.
Quickly, but the numbers were looking at there's around 315 million legacy seats out there that are up for grabs and so I think that size of that market that's been fairly.
Stable has attracted the attention of for sure. The key suppliers that we have in our portfolio and said, they're driving more incentives for the channel to do this so I think what youre seeing is the suppliers that we've referenced on our call today, they've got programs to drive this even faster because.
As for many of them moving to the cloud gives them an opportunity to win new market share. So I think it's an exciting time to be in and we're glad to be playing a key role in that.
Is there any to a rule of thumb that you might be able to offer us in terms of.
As a seed or as a project moves to the cloud how's the impacts both revenue and profitability. This revenue go down, but profitably increases or how can we think about that going forward.
Well, we don't have any specific numbers will share. We today, we're still trying to decide how much of that we want to share because we're in this unusual position of being the only distributor that owns a master agent business also and so we want to kind of keep some of that confidential, but in general in general for us and for suppliers.
Moving to a recurring revenue model is a long term much more profitable business and so we have incentive just like all of our suppliers do and our vars and our agents to establish a recurring revenue business because we all believe that by doing that we also ensure better customer satisfied.
Actually in a better customer experience. So if you're looking at what the customers want the in customers. That's what's driving our interest in this space and that's why we want to offer.
Options to stay in premise, if a customer wants to as long as they want to and offer the option move to cloud. So it's up again its longer term Keith I think it's more profitable for everyone in the channel.
Gotcha Okay.
Turning gears or would present can you provide a little more color on the pain points you had in Brazil, This quarter and how we should think about it going forward.
Sure you mentioned this one scansource.
Strategy and this is a follow on from.
Putting network, one or acquisition down there that.
Frankly, we are just now integrating this year in with our former CDC business, if you recall or barcode business. So we decided earlier this year to really get leverage on that asked you nay tried to share some of the routes to market with some of the new technologies because many of the network one technologies should be sold to the barcode channel.
And we worked and so we had to go down a process of integrating the tools the systems.
The training for our teams to allow that to happen and so that's what happened last quarter and to be honest, we had some disruption doing that reassigning. Some accounts similar to what we did here in the U.S. and now we've got two quarters behind this in the US Brazil just had their first quarter. So we think it's behind us and we're moving forward.
And that business as you know is always been very profitable for us in Brazil. It's like once you get in there with a strong value proposition, it's hard for someone to displace you. So we're we're bullish on our business in Brazil, especially on the long term and and our suppliers like Microsoft are delighted to have a standard.
Great. Thank you.
Thank you and as a reminder, if you would like to ask a question press Star one your telephone.
Our next question comes from Chris Mcginnis with Sidoti and company. Your line is open.
Absolutely thanks for taking the questions.
I just want to follow Mike Im one of the Universal easy you talked about.
On the security side and the expansion with Honeywell, just talking about maybe how bigger than opportunity that is and how.
How long is that runway some one of your where your big ones for one.
Yes, Thanks, Chris.
Weve elected not to talk about the size of the business at this point, but but we mentioned that because it is a big opportunity that basically.
A security channel partner.
I had only one place to buy Honeywell scurry products up until recently and with the spin out of this Honeywell commercial security from Big Honeywell.
They want to grow Honeywell security products and they've been wanting to for years, we've been talking to these guys for three years I believe and our channel is clamoring for the products. They have great products. They were under distributed frankly, and so I believe.
For us, it's a little bit of market share grab we're going to go hard at it and we're going to take some market share and it will be significant or we wouldn't have mentioned today.
Okay.
And as John ill, then room ill just wondering if you could maybe just comment a little bit about the opportunity TC no it's pretty early but.
Understood.
How are you thinking about.
Geared towards this point thanks.
John what you telling about your early days I am here I'm in the room.
Thanks.
For the question and nice to meet you and it's been a fantastic first six weeks on board here at Scansource and I would offer that I think the.
The opportunity for for US is even as even bigger overtime than initially anticipated. This is.
An incredible opportunity, where we were able to leverage our heritage in the hardware business, while at the same time expanding too.
Large and growing markets differentiating.
Rents to market. So now not only do we have the.
The opportunities with divorce, but also with the agent channels and in our.
In our.
Payments business, the eye as fees and isos and so we are really.
Create an ecosystem.
Of size and scale.
And plan and large markets and I think that overtime. The addition.
Of moving into the SaaS platforms that we just announced through NT provide excellent opportunities across routes to market and puts us and our partners our customers in a much stronger position moving to recurring revenue and.
So those are the opportunities that I'm seeing.
Great.
Thanks, and then just one last question Gerry just so I understand is it beer exiting.
20 23.5 or.
You should be about in the back half the year I just want to make sure but now the progression of that thank you.
Sure Chris.
We're expecting really to be at three and a half really for the remainder of the year.
So for that every quarter from this point forward Thats what were expecting to have happened.
Alright, Thank you very much and good luck in Q2.
Great. Thank you.
Thank you Im showing no further questions at this time I'd like to turn the call back to Mr.
Mike Baur for any closing remarks.
Great. Thank you for joining us today, we expect to hold our next conference call to discuss December 30, Onest quarterly results on Tuesday February 4th 2020.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.