Q2 2020 Earnings Call
Welcome to the Scansource quarterly earnings conference call all lines have been placed 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.
I would now like to turn the call over to make gentry, Vice President Treasurer, and Investor Relations Ma'am you may begin.
Thank you and welcome to Scansource is earnings conference call for the quarter ended December 31st 2019. Our call will include prepared remarks from Mike Baur, our chairman and CEO, Jerry Lions, our CFO John out 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 and the Investor Relations section of our website.
Certain statements made on this call, including or expectations for sale operating performance, earning their value of contingent consideration operating cash flow tax rate interest expense planned divestitures our results for the third and fourth quarter 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 risks and uncertainties include.
But are not limited to those factors identified in the earnings release that we put out today and in 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 and should not be relied upon as representing our views as it then.
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 result, and have provided reconciliations between these amounts in the CFO commentary and in our press release.
These reconciliations can also be found on our website and have been filed with our form 8-K, I'll now turn the call over to Mike.
Thanks, Mary and thank you for joining us today.
For the quarter, we missed our sales forecast primarily from lost sales as we reorganized or North American bar sales team.
As we discussed on prior calls we are executing our one scansource strategy. The goal of our ones cancer strategy is to increase customer value by cross selling and growing recurring revenue.
We're setting up or bore sales teams to sell solutions connectivity cloud and SaaS, including offerings from our Intelisys, an M.T. acquisitions.
Strategy behind one scansource, it's become customer centric.
Provide more value and enable growth for our customers.
Beginning in April we combined our five North American bar business units into one.
We reorganized our teams by customer segments.
We changed customer assignments.
We introduced team selling.
We implemented Salesforce CRM.
And we adopted a new sales compensation plans.
With these changes in the realignment of our sales teams, we created customer disruption and negatively impacted our service levels.
Since April as we encountered issues, we made adjustments.
And now following this quarter sales results, we will make more changes.
During this quarter, we had another record quarter with the and tell US the sales partners. This business grew 19% year over year.
With the cloud suppliers growing even faster at 68%.
One of our key objectives with Intelisys has been to recruit and sell through more vars, while still growing the agent channel.
Today out of 4000, approximately 4000 to tell us the sales partners, approximately 15% or Scansource Lars.
Over a year ago in order to accelerate the growth of the more sales channel. We started our ignite program to identify and recruit bars to join the Intelisys sales community.
The ignite team is focused on the street Scansource strategic sales partners and working with the Scansource account executive to introduce bars to the financial benefit of recurring revenue.
We've learned that bars require education, and a financial investment to participate successfully.
Yes.
As an example of a success so far a long time Barco strategic bar recently won a multiyear contract to supply thousands of mobility devices and recurring revenue in the form of connectivity services.
These services will be worth minimally $300000 and recurring commissions each year to the bar.
The ignite team is currently working with over 600 key accounts in the Scansource bar base.
This gives us confidence to accelerate our efforts to integrate worked closely by aligning with the one scansource strategy and creating a teaming approach.
Now Jerry will take you through the financial results in or outlook for next quarter.
Thanks, Mike that's sales for our second quarter declined 5% year over year.
Principally from lower sales volumes in North America.
Higher than expected declines in our premise based communications business.
Because of the lower sales volumes, the GAAP diluted EPS and the non-GAAP diluted EPS fell below our forecasted range.
In August we announced plans to divest certain physical products businesses outside of the United States, Canada in Brazil.
These businesses had net sales of 156 million for second quarter and at December 31, 2019 had working capital of $167 million.
Oh process is underway to sell these businesses and based upon the interest we have received we anticipate having an agreement by the end of the third quarter fiscal year 2020.
Consolidated net sales for our second quarter totaled $990 million down 5% year over year.
And also down 5% on an organic basis.
Foreign currency translation negatively impacted sales by approximately $7 million.
Net sales for our worldwide Barcoding barcode networking and security segment declined 2% year over year, 4.4% on an organic basis.
This reflected lower sales volumes in North America, partially offset by growth in mobile computing and in our payments business.
Sales for a worldwide communications and services segment declined 12% year over year or 14% on an organic basis.
Primarily from significant headwinds in our premise based communications business in North America.
We also had a record quarter for and tell us is where sales increased 19% year over year.
We also added $11 million of SaaS sales from an empty acquisition.
Excluding the planned divestitures non-GAAP gross profit dollars for the quarter decreased 5% year over year.
Our second quarter fiscal year 2020, non-GAAP gross profit margin was 11.8%.
Down slightly from the year ago period of 11.9%.
Up from the prior period of 11.6%.
SGN, a expenses increased $2.2 million from the prior year quarter to $83 million for the second quarter fiscal year 2020.
We have made investments for our recurring revenue and services based businesses.
Our investments also include the digital capabilities, we've added with the acquisitions of NT.
RPM and campaign go.
Our second quarter fiscal year, 2020, non-GAAP operating income was $28.6 million or 3.4% of net sales.
Compared to 34.6 million or 4% in the prior year quarter.
We have a 45 million dollar contingent consideration liability on our December 31, 2019 balance sheet.
And this reflects the present value expected future earn out payments for Intelisys acquisition.
For second quarter fiscal year 2020, we recorded an expense for the increase in fair value contingent consideration a $3.2 million for analysis.
For third quarter fiscal year 2020 forecast, we estimate the change in fair value.
Contingent consideration to be an expense of approximately $1.9 million.
For fiscal year 2020, we estimate the effective tax rate, excluding the planned divestitures to range from 25% to 26% excluding discrete items.
Now turning to the balance sheet and to cash flow.
We generated strong operating cash flow of $71 million for our second quarter and trailing 12 month operating cash flow of 143 million.
We expect to generate positive operating cash flow during.
Fiscal year 2020.
Working capital investments declined 7% quarter over quarter, 8% year over year.
The planned divestitures had approximately 167 million in working capital at December 31, 2019 down 37, and a half million from the June 30 2019 balance.
With the completion of planned divestitures, we would expect to use those proceeds to pay down debt.
At December 31, 2019, we had cash cash equivalents $42 million and debt of $358 million.
Our net leverage totaling approximately 2.3 times trailing 12 month adjusted EBITDA.
ROI see was 9.9 for the second quarter fiscal year 2020.
Since August 18, 2018, we have invested $81 million in our campaign go RPM NT acquisitions that built strategic capabilities for recurring revenue, but have not yet contributed to our EBITDA growth.
Now turning to our forecast, we're providing our third quarter forecast, excluding the planned divestitures.
For the third quarter fiscal year 2020, we expect GAAP net sales to range from $865 million to $915 million a non-GAAP net sales excluding the planned divestitures to range from 725 million to 775 million.
For the next two quarters, we're planning to see quarter over quarter net sales growth inline with our historical seasonal trends.
Historically sales are down 10% quarter over quarter for the March quarter, and up 10% quarter over quarter for the June quarter.
For the full year fiscal two point year 2020, we expect annual sales growth of less than 1%.
For our third quarter forecast, we expect GAAP diluted earnings per share to range from 16 cents to 26 cents per share a non-GAAP diluted earnings per share to range from 44 cents to 54 cents per share.
The GAAP EPS does not include any noncash charges from write downs or losses associated with the planned divestitures as those cannot be reasonably estimate at this time.
For the March quarter, we expected gross profit close to 12%.
In a non-GAAP operating income margins below 3%.
With the lower sales volume, we're not getting the SGN a leverage that we originally expected in our forecast for the year.
For the fiscal year 2020, we expect our non-GAAP operating margin to be a little over 3% in line with our expected sales volumes.
We are assuming approximately $3.3 million for interest expense in the third quarter, we estimate the tax rate excluding planned divestitures to be in the range of 25% to 26% for fiscal year 2020, excluding discrete items.
Now I'd like to turn the call back over to Mike for closing comments.
Thanks, Sherri, we are confident that completing or one scansource go to market transformation to drive recurring revenue growth.
Is the right strategy for our business.
After we complete this transformation, we expect to be able to deliver fiscal year 2021 results reflect our strategy, including moving ROI see above 10% and delivering double digit non-GAAP earnings per share growth.
We will now open it up for questions.
Thank you ask a question you will need to press star one on your telephone to withdraw your question pressed upon Keith please standby, while we compile the Kenny roster.
First question comes from Adam Tindle with Raymond James Your line is now open.
Good afternoon, and this is not as seen on for Adam and Thanks for taking my question I wanted to start with some of the commentary around the North America sales reorganization and lost sales can you just talk about the timing.
Timing of the impact for that are you expecting it to be a continued headwinds throughout the rest of the fiscal year and then are you seeing any customer attrition related to this or is it just the case and the sales to those customers.
Hey, Madison. This is Mike so as we said in our prepared remarks that we started this process in April.
And as you heard on the call.
We gave a little more color in all the different things we were doing since April such as new Salesforce CRM system different compensation plans.
Moving customers from one team to another and what we learned was that that with a lot of moving pieces and we didn't see the impact of that until this past quarter from a negative perspective now that we know what happened in and in certain cases, we have customers that said hey.
I'm not happy with a new sales person or sales team I want somebody different or I'm going to go away, we had to make some adjustments as we said in some cases customers, especially we think about the customers that may be orin.
That are not buying from us regularly they decided to go somewhere else for now what we believe is in our four and its implied in our forecast for Q3 and will we indicated about Q4 seasonality that we believe we should experience we're planning for a normal season.
I will change from December.
That means normally we would go from December quarter to the March quarter and declined 10%, that's what we're forecasting.
We then would say from March to June quarter, historically, we grow 10%. We're forecasting that are we're suggesting today that would be what we are planning for so we're planning to get through this.
And but yes, we've lost customers. We believe we can get many of them back, but we know we have to make some changes quickly.
Okay, that's really helpful color.
Just a follow up here on cash flow, obviously, a bright spot here in the first half I know you kind of that you're sticking by the positive comment for the full year, but can you just help us level set expectations for the second half on cash flow do you expect that a you know the second half looking at it from a standalone perspective is gonna be positive as well I just don't.
To get ahead of ourselves from a modeling standpoint there.
Medicines, Jared I think that that's right, we should expect it to be positive for the second half as well.
We.
Obviously.
We had some working capital come down which was good the volume coming down which isn't a good thing, but it drives cash flow for us so.
We do expect in short answer your question, we do expect the second half to be positive.
Okay. Thanks for taking my questions.
No problem.
Thank you. Our next question comes from Keith you some with Northcoast Research. Your line is now open.
Good afternoon, guys. It Mike you're referring to these changes you made the North American Vars.
We started that April was lifted takes a long for the ramifications to be felt like three quarters to really see the impact of that.
Sure well part of what we decided to do was make sure that we made some adjustments as we saw some either deficiencies are gaps or things weren't working quite well. So we made some changes all along and then what we learned was in some cases those changes Warren.
And a customer gave us the benefit of the doubt in the June quarter.
Then in the September quarter May have said, Okay. You guys don't get this fix whatever this is in their particular case.
Then we're going to go somewhere else and we gave our our forecast back in November for the December quarter, we were looking out at what we knew at that point in time, and we're looking at October's sales results and they gave us confidence in November to still called the December number as we did so.
We we would say that in the from the Middle of November to the ended December is when it really became obviously was not obvious that we had a big sales disconnect volume disconnect until then.
Okay and that disconnect pipe continued into the first quarter unless why your guidance for next quarter is probably below expectations.
Well, it's probably this Keith is probably more like we took what happened in December and we said.
You know in any other December quarter, it's always going to be down in the March quarter. So we're really looking at December as the guide not what we do a year ago. It's what we do in December analyst forecasts that is going to be less than that because that's just historically if we don't.
If we have the business we had in December. This is what we expect to do obviously, we'd like to do better and if we win customers back Ratably. It will it will do better on our forecast.
You mentioned that you have more changes to make what gives you confidence the changes that you make is going to win back these customers.
Well, we obviously have talked to a lot of and we talk to our sales teams and we believe that these are self inflicted.
In the example is we just made some customers mad because we took their sales rep and may be promoted their rep. Because it really good to another team because we thought they could provide the coming more value in that disconnect with their rep is not something that you could easily replaced what's going to take probably a visit by an executive.
If we value that customer ghosts today, I would talk terms that hey, we're going to put a new team in place we can't bring Johnny back, but we got Sally in this thing the here's why they can help you better. So this is going to be more blocking and tackling and what we did in the design and we've tried not to disclose all the details for our for competitive reasons, but as an.
As Apple we now have a large group of account executives that we didn't have before prior to April.
Account executives are essentially or a field sales team.
We didnt have that for these customers. So we believe the new structure Willow Lake enable us to go have those conversations and win back to business.
Okay, if any to squeeze one more on here and I won't change gears on yes, I know, we're very early in the Corona virus, but obviously, we're hearing rumblings about supply chains and potential disruption.
I guess, where you're here what are you hearing from vendors right now and perhaps customers in terms of how they're thinking about the supply chain impact this because any worse.
But we.
We sent a.
Message out to our teams to give us an update and based on what we've heard so far there are some potential minimal disruptions or some of the vendors are saying they don't have their workers returning to the factory following the new year, yet that there might be a one or two week disruption as kind of what we're hearing if we.
You heard anything that was like no problem. It was one or two weeks Keith in a supply chain scenario.
Okay.
Alright, Thanks, guys appreciate it yes.
Thank you.
Under to ask a question you wanting to press star one on your telephone.
Our next question comes from Chris Mcginnis Sidoti Company. Your line is now open.
Good afternoon, Thanks for taking my questions.
I just wanted to ask a little bit around around the cloud services were offering you talk about one of the headwinds being an investment by then but.
Hi, This vars can you just maybe talk a little bit about what that investment is and how you're getting them over that hump.
Yes sure Chris Thanks for the question Yeah, we created this ignite team and put together a.
Strategy in a blueprint and a playbook that we design so that our team would go sit down with the Vars principles.
CFO and is the president and CFO owner and sit down and say here's here's how this works to add recurring revenue to a traditional hardware var means that you're going to have to invest in salespeople in selling process is that you won't get a return on for three years.
That is the typical return by making an investment in recurring revenue once you get to three years managed our print money, but that's the financial best when we walk them through that investment we try to help them.
Minimize it and take some risk out, but that's what we mean by financial investment. This is why it's not easy slight takes longer than everybody realizes but once you get it going it's a fantastic way to move your business from a hardware business that has a value to a recurring revenue and harbor business that has a much.
Higher.
Valuation, which gives the owners a better exit path.
And that's our pitch if you want to having more valuable business you must do this and we can help.
Okay. Thanks for that and then that's just lastly in terms of.
The guidance you provided for Q2 versus where you came in at least at a lot of that was obviously the the change in Salesforce.
Can you just maybe talk a little bit about the end market demand within communications and just was there an escalation from the trends you're seeing from Q1 did you too. Thanks.
Sure Yeah, we so we would say for the Miss last quarter.
This quarter about two thirds was our own salesforce reorganization in the third was.
Continued decline from premise to cloud and that did accelerate more than we had forecasted. So I would say, yes. There definitely is still a steeper curve happening than we had forecast back in November. So we do believe in this quarter were also we're forecasting that and we're starting to.
As we model out.
You know the rest of the year from a planned investment we clearly are making sure. We're moving some of those investments where it makes sense away from our premise based.
Strategy towards a cloud based strategy. So we will be doing that reallocation of resources from the cloud to the cloud from the premise business.
Okay. Thanks for I appreciate it good looking to Patrick.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Mike Babich for any closing remarks.
Thank you for joining us today, we expect to hold our next conference call to discuss March 31st quarterly results on Monday May 11 2020.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].