Q3 2020 Earnings Call
She calls the recording if anyone have any objections you may disconnect at this time.
I would now let's turn the call over he married Eurthree, 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 March 31st 2020 or call will include prepared remarks from Mike Baur, Our chairman and CEO John out our Chief revenue Officer, and Jerry Lions, Our Chief Financial Officer, We will review our operating results for the quarter.
Her 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 earnings per share plans. If that's the church the impact of Cobot 19, fantastic and the fair value as contingent consideration for the fourth.
Quarter of fiscal year 2020 are forward looking statement.
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 skin sources form 10-K for the year ended June Thirtyth 2019 and form.
Thank you for the quarter ended March 31st 2020 as filed with the FCC.
Any forward looking statements represent our views only as of today it should not be replied relied upon as representing our views as of any subsequent date.
Scansource disclaims any duty to up say 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 and the CFO commentary in in our press release.
These reconciliations can also be found on our website and I've been filed with her form 8-K, I will now turn the call over to Mike.
Thanks, Mary and thank you for joining us today.
I wanted to open our call with some comments on how we are addressing the global pandemic and our business operations. During this unprecedented times.
Our top priority is protecting the health and safety of our employees around the world.
In mid March we implemented work from home for office based employees.
Global Scansource team swiftly and seamlessly made the transition to work from home and we're meeting the needs of our customers and suppliers with the same levels of productivity and service as if we were in the office.
Our company culture remains strong because of how we have adapted using virtual tools and creativity to keep our employees connected.
However, nothing replaces face to face interactions completely which is how we have conducted our business relationships for many years and we look forward to see in our customers and suppliers when we're able to do so safely.
Our industry is deemed into central business, which allowed us to continue operations at our distribution centers.
Hi, I'm tremendously proud of power Scansource team has operated safely at our distribution centers. This includes adapting to new processes around social distancing cleaning sanitation and use of protective equipment.
In most cases, we maintained our high service levels, although we have incurred higher expenses from additional staffing an expedited shipping.
I missed the challenges of the global pandemic, we reached our forecasted net sales for the third quarter with growth across almost all of our technologies in North America and in Brazil in local currency.
This included accelerated sales for work from home solutions from job real Poly HP Aruba, eight by Ringcentral zoom and Microsoft as companies made the move to remote workers.
With the acquisitions, we've made over the last few years, we invested in significant digital capabilities.
And as a result, we gained great customer facing software solutions.
We recently brought together our software development teams from across the company.
Including teams from a telesis NT, Pos portal and RPM to form a single software development group.
This group will put their combine talent in effort into delivering partner revenue growth partner automation and partner convenient solutions.
We believe our software development group will be a competitive differentiator, enabling us and our partners to strengthen customer relationships and drive more growth.
I'll turn the call over now to John to highlight how we are positioning our business in the near term opportunities we see.
Thanks, Mike.
The quarter started in January and February with consistent and positive results in all areas of our business except for premise based communications.
With the disruption caused by the Cobot 19 pandemic in March we achieved solid Q3 performances as our customer sees on work from home solutions as well as cloud and SaaS alternatives.
As you heard from Mike, we too we're able to death quickly and pivot to work from home by leveraging many of today's and incredible voice video and collaboration technologies and we delivered on our net sales forecast for the quarter.
You know hardware business, we saw significant uptake in our work from home solutions, including cameras speakers and headsets. We also saw increased sales of mobile data collection devices scanners and networking technologies.
We participated in projects directly related.
To the cobot 19 pandemic by delivering health care scanners for diagnostics and testing.
Fitting telemedicine cards, helping equipped field hospitals, and enabling businesses for curbside delivery and pick up.
In the March quarter, we launched new digital cloud based offerings, including zone, a buyer cloud office and Microsoft in the United States.
In this challenging environment for our traditional bars. We're also seeing a surge in new partner recruitment for intelisys, including more scansource bars, starting to sell cloud solutions in the third quarter, 50% of the new partner recruits for until a since were born in it.
Discussion in March we launched our go remote campaign designed to enable partners to deliver end to end work from home solutions to their customers.
These solutions include Ucas Sicad collaboration.
And where headsets connectivity and security with offerings from our leading suppliers as part of our campaign. We were also providing partners with our definitive guidance are going remote.
And we'll be hosting or go remote virtual summit on June 4th 2020.
We have built in our providing enablement programs to support the health and financial wellness of our partner community.
We compiled and distributed and extensive cobot 19 resource guide to help our partners better navigate the numerous yet complex government aid programs. We're also introducing a channel recovery educational series to keep our partners informed about sales marketing and financial.
Grams for our partner community during these challenging times.
We're very pleased that many of our suppliers have stepped up to partner with us and provide significant channel support programs to help our sales partners.
He survived but also recovered during and after this crisis Cisco Honeywell HP Aruba extreme networks access epson, datalogic as well as more than 50 emerging to mid sized suppliers are providing a variety of financial assistance programs.
With him through Scansource, we're ensuring that our partners are aware of all the ways, our suppliers and Scansource are working to help and support said.
Now Jerry will take you through the financial results and our outlook.
Our next quarter.
Thanks, John I'll open with an overview of our results versus our third quarter forecast.
We achieved our forecast range for net sales, while EPS was below our forecasted range.
The lower EPS includes a 4.5 million dollar expense for inventory charges.
Following the conversion to new inventory management system, which went live last November.
These charges increased our cost of goods sold which lowered gross profit for the third quarter.
Excluding the four and a half million dollar charge, which negatively impacted our EPS by approximately 11 cents.
Our non-GAAP operating results were in line with our forecast expectations.
We implemented in inventory action plan to address the warehouse inventory discrepancy that are back to typical warehouse operations during the month of April.
In August we announced plans to divested certain physical product businesses outside the United States, Canada and Brazil.
Businesses had net sales of 128 million for our third quarter and working capital of $155 million March 31 2020.
We've had no significant loss of head count during the quarter.
We have identified potential buyers for these businesses.
And we are in due diligence and purchase purchase agreement negotiations with those buyers.
Well the cobot 19 pandemic has slowed down the process and the timing we still see strong continued interest in anticipate having agreements by the end of the June quarter.
Consolidated net sales for our third quarter totaled $872 million down 2% year over year end up 0.5% on an organic basis.
Foreign currency translation negatively impacted non-GAAP sales by approximately $13 million.
Net sales for our worldwide barcode networking and security segment declined 2% year over year, 4.8% on an organic basis.
We had lower sales and parts of our North America business.
Partially offset by growth in other areas across our diversified technologies.
Net sales for our worldwide Communications and services segment declined 3% year over year now were up 3% on an organic basis driven by growth in Brazil in local currency.
We had accelerated growth for work from home solutions in March which more than offset the continued headwinds in our premise based communications business in North America.
We had a record quarter for Intelisys, where sales increased 12% year over year.
Starting this quarter, we changed to net revenue recognition for software and service sales part in tea business.
Both net sales and gross profit for Mt were $1.7 million for the third quarter.
Excluding the planned divestitures non-GAAP gross profit dollars for the quarter decreased 12% year over year.
This decrease included a 4.5 million dollar expense for inventory that I mentioned previously.
As a result, our third quarter fiscal year 2020, non-GAAP gross profit margin was 11.4%.
Below the 12% gross margin, we expected in our third quarter forecast.
As Gionee expenses increased $1.2 million from the prior year to $79 million for the third quarter fiscal year 2020.
We have made investments in our growing recurring revenue and service based businesses.
Our investments also include the digital capabilities, we've added with the acquisition of anti.
This is part of our strategy around or software development group, which Mike mentioned earlier.
Our third quarter fiscal year, 2020, non-GAAP operating income was $14.8 million or 2% of net sales compared with $30.6 million or 4.1% in the prior year quarter.
We have a 46 million dollar contingent consideration liability on our March 31, 2020 balance sheet.
And this reflects the present value of expected future earn out payments for our Intelisys acquisition.
For the third quarter fiscal year 2020, we recorded an expense for the increase in fair value of contingent consideration.
Point $6 million or $600000 for analysis.
For our fourth quarter fiscal year 2020, we estimate the change in fair value of contingent consideration to be expense and expense of approximately $1.3 million.
For fiscal year 2020, we estimate the effective tax rate to range from 29.5%, 30.5% excluding discrete items.
This estimate increased.
From the impact of lower forecasted earnings and changes in the geographical mix.
Now turning to our balance sheet and cash flow.
We generated strong operating cash flow $32 million for our third quarter and trailing 12 month operating cash flow was 148 million.
Working capital investment declined 5% quarter over quarter, and 12% year over year.
The planned divestitures had approximately $155 million on working capital at March 31st 2020 down approximately 50 million from the June 32019 balance.
At March 30.
First 2020, we had cash and cash equivalents of $35 million and debt of $321 million. Our net leverage ratio totaled approximately 2.2 0.4 times trailing 12 month adjusted EBITDA.
With the economic disruption due to cope with 19.
Enter the June quarter with uncertainty around near term customer demand.
Accordingly, we're not providing a forecast range for net sales or earnings per share for the fourth quarter fiscal year 2020.
We expect our sales and earnings per share to be down sequentially for the fourth quarter as compared to the third quarter.
While we're not providing a forecast range I can share with you that our net sales for the month of April declined 22% year over year for GAAP net sales.
For the month of April non-GAAP net sales, excluding the negative impact of foreign currency translation.
A 17% year over year decline.
Now I'd like to turn the call back over to Mike for closing comments.
Before we close I want to take this opportunity to welcome our new director, Jeff Roadtec to our board of directors.
Jeff has served as chairman and CEO of Hyperion solutions, as President and COO of Ingram Micro and also spent 16 years at Fedex.
With Jeffs leadership experience in enterprise software and technology solutions industries as well as his extensive logistics experience.
We look forward to Jeff's guidance is Scansource continues to advance our digital strategy.
With our investments in software and cloud solutions, we are well positioned to deliver digital initiatives through our multiple sales channels.
Our world class team of employees working with the best group of technology suppliers in the world position us well to help our sales partners achieve unusual success.
We believe we are prepared to weather the storm or the cobot 19 pandemic.
We will now open it up for questions.
Thank you, ladies and gentlemen to ask the question, we need to press Star line on your telephone.
So your question please press the pound.
Please stand, though because obviously when he left there.
Hi, good question.
And our first question comes from Adam Tindle with Raymond James You May proceed.
Addison on for Adam I appreciate the color into April trends, but I was wondering did those declines moderate as April progress.
In other words do you think we're kind of through the trough the of the declines in the second derivative is getting modestly better.
Hi, This is Mike now we're speaking so I think the color. We gave so far as all were willing to talk about.
It's still early in the quarter, clearly and one month.
It's not clear yet what that means and as all of our quarters are we never know exactly what the.
What's going to happen in the first month of the quarter, but certainly.
Being down 22% has us concerns and it's something that we're looking at closely as to understand what this might indicate for the rest of the quarter.
Okay I understand it's a very dynamic environment and then just a follow up you mentioned that you had some higher costs related to safety measures as well as some expedite cost and I was just wondering if you could potentially give us sense of magnitude of these and then just to the extent that you have any color do these types of costs start to.
When you late next quarter or are you expecting any tailwind or any incremental headwinds from these thanks.
Yes medicine. This is Jerry and I think what we're trying to do there is just give a sense that we had a little bit of increased costs in the March quarter, we're really expecting that to Uh huh.
Come to more fruition in the June quarter, but we don't really have a sense of exactly what that number is yet.
Okay understood I appreciate the time.
Sure.
And our next question comes from Keith Housum.
Host research.
Krissy Sir.
If.
You could you please limit your line.
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Keith This is Jerry if your we can't hear you if you are speaking.
Hello.
Here we go.
Jerry can you hear me.
Yes, I can alright, thanks I appreciate it.
Crazy Times I were all entering into a major you're asking about the the credit quality can you just give me a little bit color in terms of I guess additional steps you guys are taken to make sure. The credit quality is maintained and then just remind us what happened in the I guess the recession. It does 90000, Tad and how did your credit quality hold up.
Yes, sure Keith so.
As you have figured out as we've all figured out 2008 in 2009 are completely different than.
On this.
Episode that we're in right that was a.
Absolutely a financial crisis, we've got a lot more people.
Impacted.
Then we had in 2008 in 2009.
So we're reviewing this is being completely different.
So what we're doing is we're we're reaching out to all of our customers.
And making sure that they're all face.
And that they are.
How their businesses are doing how they're experiencing and.
If they need our help we are.
Along with our suppliers, we're designing programs for those people to to be able to.
We continue to do business and to thrive.
We really haven't seen.
Again for Us I think Keith.
The impact of Cove. It really is is starting to take shape in this june quarter really wasn't taking shape in in the March quarter, So, but we're monitoring people's credit very closely.
Gosh I appreciate it and then yes, I think about your Pos portal business do a is it safe to assume that also was not a big impact to last quarter, and we'll probably see more of an impact now because if I remember correctly Pos portals primary customers are more retailers and restaurants more skewed to a small medium size business on a correct.
Well so.
There's a.
Just two or three different channels that they go through.
There's some very large contract customers that we deal with they may have small medium businesses that they deal with.
And then we also go through.
Independent software vendors and yes, those are more small to medium, but I wouldn't I wouldn't say that they're all hospitality your retail.
We have.
Has seen a little bit of a decline there just just think about again people sheltering in place.
Most credit card transactions I think are taking place with credit card not present.
So.
Okay I appreciate and if we can squeeze one more question in here I guess asking me little more color on the inventory adjustment if I understood you're right you guys for the system in back in November.
Perhaps how did you guys come out with the adjustment now and are we all done with any adjustments going forward.
Sure so.
In the December quarter key we were as with any new system. You know, we're spending time getting acclimated to the new system.
New processes, and new procedures, and really just trying to take care of of our customers make sure that they were all satisfied.
And as we got further into the March quarter we.
Began to realize that we had.
Some been level accuracy issues.
Which caused us to need to increase.
The amount of activity that we were doing whether those be cycle counts.
Sure.
Getting our IP and other resources involved.
Thats those.
Those activities have resulted in a number of changes.
That I think as we are not I think as I indicated have made better results for April.
You know we're anticipating that.
That that trend will continue but just remains to be seen but we're confident that the worst is definitely behind us.
So was this an issue where are you guys I thought you had inventory you didn't or vice versa.
Yes, basically Keith we would go to a been.
And with the system was saying Hey, we think we have 10, but we had six.
And so part of what we found out in the March quarter was.
You know we're thinking okay. It's not been six in been 12, well as we got further along the process that we do in the warehouse.
It is something called a linear cycle count. So we're really have 36000 bins and our warehouse and we're literally accounting one by one by one so as we got further along we figured out that.
Accuracy was working to find it in another been.
Okay got it thanks, guys. Good luck.
Sure. Thank you.
Once again, ladies and gentlemen, if you have a question or comment. Please press Star then one on good telephone.
And our next question comes from Kirk Mcginnis.
Okay and company.
You may begin.
And Chris to start was born after that.
You start with maybe the impact.
Covance, having maybe on it.
On the just different geography compete within is one being more impacted and how do you see that playing out.
Keith This is sorry, Chris this is Jerry.
So I think what we saw is.
You know kind of what we all read in the newspaper or saw.
Is that.
Europe was definitely impacted for us sooner.
We saw some of our.
Our offices need to be.
Closed down or work from home sooner than we did in the U.S.
Then it was the U.S.
And then lastly, really flat ham or Brazil, and so.
Our business is followed exactly what you've seen in the in the news.
Okay.
And sales seemingly kind of in the same range in size, 22% nothing track differently in any of the Andean region.
So.
Think thats, an overall number but they're all they're all reasonably similar Abby, maybe Brazil's a little bit better at this point, but.
Reasonably similar.
Great.
But I think last quarter, obviously, there were some machines around.
Reorganized sales force can you just talk maybe a little bit.
How there how that's performing.
The a little bit longer in terms of we them coming back obviously, a really good quarter.
No.
Reported so maybe just an update on that self reorganization.
John why don't you take that one.
Yeah, Curt good afternoon, nice to talk to you.
Kurt I think the yes, let's say risk reward.
Sorry.
Chris No they got it wrong, it's okay.
[laughter], Okay, but I definitely did hear turns that makes me feel better [laughter] no no I know dogs I understood. Thanks.
I was going to be in real trouble, if I'm like this where I heard Kurt I wrote it down anyway, Curt Chris we.
We actually.
Our happy with our progress with that reward.
That we were in the midst of that if you remember we were called one scansource.
And it definitely took longer than we were.
Hoping for but in the last quarter, we worked hard to rebalance the teams.
To put us in a position of better coverage and better capacity.
We were able to do more training.
Spend more time.
And.
Call outs with those most effects adjusted Mers and.
Develop more mature processes that were missing at the beginning of the transition and so we think we've made great progress clearly more a.
More work to do but we're very happy with where we've gotten too and.
That was seen in evidenced by the.
By the results in the quarter in terms of net sales.
Right.
And then maybe just a little bigger.
Picture question, but to.
Maybe just a little bit too early input.
Maybe talk about some of the opportunities outside when you've already seen.
Maybe an opportunity will take share how this maybe changes that business kind of going forward and some of your thought process.
Growth in and maybe kind of Capex was it thanks.
Yes.
Absolutely I think I think from my vantage point.
Chris One I think about it I think.
Kind of shorter term, if you're looking at trying to verticals clearly, we're going to continue to see growth in healthcare and.
Pharmacies in grocery.
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We will also continue to see positive growth in kind of that barcode scanning space I mean, we saw that specifically in those industries.
You think about when you show up to the grocery store and you go to.
Pick up your your items that are now curbside, there's somebody there was a barcode.
Scanner checking you out.
So all of that we can continue to see growth and we also can continue to see growth in China main street retail as it relates to contact ellipse technologies versus the traditional technologies and obviously, we will continue to Seadrill just as we did this fast.
Lumped in particular in last quarter in work from home technologies, and I think last but definitely not least them and those are those are credible not the hardware front.
And you heard Mike referencing that earlier with our relationships that we announced with zoom and Microsoft and things were doing with with brings central.
Others.
Great. Thanks for that I really appreciate it and good luck in Q4.
Thanks, Thanks, Chris.
Ladies and gentlemen, this concludes that you any portion of today's conference I would now like turn the call back over to my salary for any closing remarks.
Ladies and gentlemen. This concludes today's conference call. Thank you participating you may now disconnect everyone have a good day.
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