Q4 2020 Scansource Inc Earnings Call
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Hello, and welcome to Scansource quarterly earnings Conference call.
All lines have been placed and they listen only mode until the question and answer session.
Today's call is being recorded.
Anyone has any objections you may disconnect at this time.
I would now like to turn the call over to marry Gentry, Vice President Treasurer, and Investor Relations Ma'am you may begin.
Good afternoon, and thank you for joining us joining me on the call today, our 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 in fiscal year, and then take your questions we pay.
Most of the CFO commentary that accompanies our comments and webcast and the Investor Relations section of our website, let me rewriting remind you that certain statements in our press release in the CFO commentary 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. This form 10-K for the year ended June Thirtyth 2020 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 CFO commentary and in our press release.
These reconciliations.
So can be found on our website and have been filed.
Thanks, Mary and thanks for joining us today.
We see today's call is a continuation of the call. We held on July 23rd to discuss the actions, we're taking to address the business impact of the cobot 19 pandemic.
And prepare our business for the next phase of growth.
On our call, we announced our fourth quarter net sales of $636 million, which reflect negative impacts from the cobot 19 pandemic on the var channel and end user demand.
As we worked on our fiscal year 2021 annual plan, we continued to see the impact of Kobin 19 on our business.
We recognize the need to match, our SGN a cost with sales volume declines as a result of the cobot 19 pandemic.
We have size the cost savings to reach an appropriate profitability level as we expect our sales volumes begin to increase throughout fiscal year 2021.
At the same time, we decided it was strategically important to continue investments and our high growth higher profitability areas.
While the coated 19 pandemic had a significant impact on our quarterly financial results.
I'm proud of how our teams have executed in the value, we delivered to our suppliers and customers.
We have taken the necessary actions to strengthen our balance sheet improve our cost structure and continue to drive investments in our higher margin var cloud platform and our agency business.
I'll now turn the call over to John to highlight what is working well in our bar business and our Asia business.
Thanks, Mike.
For me the highlighted the quarter was how well our teams executed well also dealing with massive disruption from cobot 19 pandemic.
We delivered exceptional specialized customer service as we transitioned to working remote as a reminder, this is a high transaction volume business, where we process hundreds of thousands of transactions quarterly.
With an average order size of approximately $2000.
Throughout the quarter I was pleased to see the number of active customers and customer sentiment get better each month.
Of course, we do missing or customers and suppliers in person and look forward to resuming more in person meetings.
Govan Nineteens challenges are especially critical for small businesses and many of our customers are small business owners.
Early in the quarter, we compiled and distributed and extensive cobot 19 guide to help our partners better navigate government aid programs, including the cares Act and PPP program resources, we realize that our customers needed even more working closely to support them, we put together customized.
Financial solutions to help them survive and thrive during these challenging times. In addition, as a part of driving loyalty and satisfaction with our customers. We offered educational webinars designed to promote our go remote and work from home solutions.
We also offer to Webinars series on channel financial health, including the value of developing a recurring revenue practice.
Next I'd like to highlight some positive trends in our bar business during the fourth quarter, our top selling product categories included mobile computing.
Mobile printing.
Networking video surveillance cameras.
And unified communications hardware software and services.
The new normal is driving more mobile use cases, such as applications in E commerce delivery curbside pickup and warehouse expansion.
Our heritage of specialized expertise in these technologies continues to be a differentiator.
In our retail and hospitality business, we are seeing growing demand for self checkout solutions in stores, an increase deployment of contact list mobile enablement mobile enabled payment devices.
And we've continued to see significant growth.
In everything we required for work from home from headsets to access points for Wi Fi.
And in our emerging technologies unit, we're now selling thermal imaging cameras that provide temperature measuring information solutions solutions like this help our partners get their customers ready.
For return office requirements.
Although we want to highlight another part of our business that we're calling value added deployment services.
These are essentially services, we attach to hardware that drive higher gross margin and profitability.
In our payments business, we perform value added services, such as key injection and configuration on over 70% of devices prior to ship it.
Leveraging our many years of success in payment provision provisioning, we are expanding our provisioning services to support cloud based service providers, who need to deliver ready to use voice handsets directly to end user customers.
A little over a year ago, we added digital distribution capabilities with the Cascade cloud platform with our acquisition of empty in July 2019.
During fiscal year 2020, we expanded use of the platform for our Microsoft business in the U.S. and in Brazil.
With the Cascade platform powered by partner insights, we are helping our sales partners more easily sell strategic cloud solutions and build recurring revenue.
For our business in Brazil, we've been expanding our routes to market and launched a master agent practice similar to or Intelisys business in the us.
Our software sales increased to approximately 30% of sales in Brazil, representing cyber security suppliers and Microsoft cloud.
During the fourth quarter our team in Brazil was recognized with multiple excellence in distribution awards that were voted on by our reseller community.
Lastly, we continue to be excited about the growth in our Master agency business for years ago, We acquired Intelisys still today, the largest master agency in the United States.
To add a high growth recurring revenue model for the channel.
We have seen opportunities for growth in the indirect channel accelerate as suppliers recognize that the agents communities strong customer relationships lead to slower churn rates.
We have also seen cloud suppliers ucas seek as another X as a service suppliers choose the agent model as a strategic route to market intelligence captured a leading market position with these offerings for our agent sales partners.
For both fourth quarter end fiscal year, 2020, Intelisys had 15% year over year sales growth for fiscal year 2020, Intelisys annual supplier billings exceeded $1.6 billion, our net commissions associated with those billings, which is what.
We report as our net sales totaled $57 million for the fiscal year.
For our Ucas and seek as suppliers our fiscal year 2020, net commissions grew over 50% for the fiscal year 2020, approximately 27% of our ucas orders and 18% of our seek as orders came from bars, we can.
Continue to see increases in bars, joining the Intelisys agent community fourth quarter was a record recruiting quarter for the intelisys over for Intelisys overall, and also a record recruiting quarter for volumes.
For the fourth quarter more than half of the new Intelisys recruits where vars. The intelisys agent business is a way for vars to add higher margin solutions and recurring revenue.
This is further evidence of our strategy to deliver services that add value to both the agent and var communities.
I'm excited about our future and see early signs of momentum and progress towards our goal of successfully delivering our fiscal year 2021 plan.
Now Jerry will take you through our financial results.
Thanks, John.
Ill open with a review of all that has occurred since our last earnings call in May.
You'll remember that we didnt provide any guidance for the fourth quarter, given the uncertainty around the cobot 19 pandemic.
What we did indicate back in May was that we expected our fourth quarter results to be down sequentially.
Both in terms of revenue and EPS.
On July 20, Threerd, we announced fourth quarter non-GAAP.
Sales of $636 million.
Additionally, on July 20, Threerd, we announced a $30 million cost reduction plan to reduce our SGN a.
On August 10th we announced our group and agreement to sell our Latin America business outside of Brazil.
With the announcement of the agreement to sell the Latin America business outside of Brazil, and the progress that we have made.
In our efforts to sell our European business, we're now accounting for these businesses as discontinued operations.
Our fourth quarter results for discontinued operations.
$10 noncash loss to establish a valuation allowance and a fork and $14 million for noncash impairment charges.
So going forward, our us GAAP numbers will be for continuing operations only.
Unless otherwise indicated this discussion reflects our.
Results for continuing operations.
For the fourth quarter, our net sales were $636 million down 22% year over year for down 19% organically.
Foreign currency translation negatively impacted non-GAAP sales by approximately $20 million.
And as expected Cobot 19 has impacted our sales volumes negatively in our wholesale bar business in both segments.
This includes the acceleration of the decline in our premise based communications business.
We had a record sales quarter for our Master agency business, Intelisys, where sales increased 15% year over year.
Our gross profits were $74 million.
Down 23% year over year gross profit margin of 11.7% is up from 11.4% for the March quarter.
Our March quarter gross profit included inventory charges following the conversion to a new warehouse management system.
We implemented an action plan to address the warehouse discrepancy and we're back to more typical warehouse operations throughout the fourth quarter.
During the fourth quarter, we performed our annual test of goodwill for any impairment.
And as a result of the Cobot 19 pandemic our tests of goodwill concluded that we had an impairment.
In the fourth quarter, we had a pretax noncash impairment charge charges.
$120 million.
The remaining goodwill on our balance sheet is approximately $214 million.
Our SGN a expenses for the quarter, excluding a $5.7 million, Brazil tax recovery.
Was $64 million versus $63 million year over year.
So while our sales and gross margins were down our adjusted SGN, a was not down in the fourth quarter.
We have addressed SGN, a cost issue with our $30 million annualized expense reduction plan.
This plan, which we began implementing in July is designed to better align the cost structure for our business with lower sales volumes as result of the coded 19 pandemic.
In the first quarter fiscal year 2021, we expect to record at an estimated.
Pretax cash charge of approximately $9 million for severance and related benefits.
For the fourth quarter, we recorded a 700000 dollar charge for the change in fair value of contingent consideration.
Our final earn out payment to the former owners of Intelisys will occur later this calendar year.
The amount of the contingent liability as of June Thirtyth 2020 was $46.3 million.
The impairment charges decreased the effective tax rate for fiscal year 2020.
And for fiscal year 2021, we estimate the effective tax rate to range from 28.5% to 29 in that 5%, reflecting a higher impact from nondeductible tax item.
A few comments about the full year results.
Our net sales for the year were $3.05 billion down 6% year over year for down 5% organically.
Our Intelisys agency business grew 15% year over year.
And our gross margins for fiscal year, 2020 were 11.7% down from the 12.1% the previous year as a result of lower supply power supplier program recognition.
Our non-GAAP operating income for the year was $79 million or 2.6% of sales versus $129 million or 4% in the previous year.
The majority of the reduction in operating income as a result of lower sales volumes.
Now turning to the balance sheet and cash flow.
We generated strong operating cash flow of $74 million for our fourth quarter and $182 million for fiscal year 2020.
Working capital investment declined 25% year over year.
We are able to strengthen our balance sheet because of the strong and close relationships, we have with our customers and suppliers.
Our financial services team stays very close to our customers more like a financial adviser and works to develop customize financial solutions. So we can continue to successfully operate together during the pandemic.
Our dsos came in at 63 days versus the previous year 58 days and much of this increase is due to the timing of sales and the providing customized financial solutions.
We reduced our June 32020 inventory by 17% year over sorry quarter over quarter, and 18% year over year.
Now I'd like to turn the call back over to Mike for closing comments.
Thanks, Sherri, we have a plan in place to advance our business and believe our close relationships with our customers and suppliers are the foundation for the value we bring to the channel.
I look forward to updating you on our steps forward and are improving financial results.
We will now open it up for questions.
Thank you ladies and gentlemen, the asked the question you will need to press Star then one when your telephone.
To withdraw your question first about Keith.
Let's start one asked the question.
Please standby Bobby couple of acuity.
Our first question comes from.
Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon, Mike I just wanted to start last we spoke demand picture with so what cert.
I think it's got a whole lot better, but I was asking about the model and if the current run rate of revenue kind of in that $650 million quarter range that you just printed EUR 2.5 billion annualized was the right way to think about future quarters. Just wondering as we sit here today a month later, if you've got any more clarity on revenue our away we kind of think about.
Normalized topline for your company.
Yes, Adam Thanks, we certainly.
We'd like to think it will start growing again from the June quarter as we looked at working on our plan for Aflac 21.
And which led US to these 30 million dollar cost reduction exercise as you know we had do in that exercise make some assumptions about aflac 21.
And our challenge is of course, not knowing when we will see that business starting to come back, especially on the obviously the bar side of our business. Our intelligence business has continued as we said to do very well, we continue to see that growth in that business, but we do believe that our bar business will.
Grow in F lot 21, we just saw today don't have any more visibility than we did a month ago as to how to ratably communicate that so we're we're on the sidelines doing everything we can to be ready for growth and making sure that we can achieve the appropriate levels of profitability.
Especially as we get some decent topline growth.
Okay, That's fair and I just wanted to clarify 30 million of savings I think you're also you've talked a little bit about investments that you're making which makes sense for businesses that are working like a telesis is that 30 million a number because it's it's about a buck a share of benefit to EPS line and.
Wondering if I'm not thinking about incremental investment what causes it that Chris.
Adam. So this is Jerry that number is a is in that number we've got some investments baked in to that to that $30 million.
Okay. That's helpful and Mike maybe just if you could double click on those investments any you talked about the higher margin far cloud platform agency businesses, where you're investing.
Maybe just.
So.
What we should look forward to start seeing those pay off whereas the expected return or outcome in the financials.
Well I'll see if I can try to help on the Intelisys side.
As you know.
When we make investments we've been in two different areas one is head count.
In head count traditionally for us or people that are doing one of two things one is.
Channel managers, we call and these are the sales teams that are calling on agents and bars more and more now to help them find customers sell opportunities along with our suppliers in a joint selling as we historically and this is in the four years, we've owned Intelisys when we add channel managers.
We pick up new business, he the new recruits or more business for existing channel. However, again the pay offer that is generally out a couple of years is generally where the channel managers recruit and develop but a new channel manager unless they come to us with some existing relationships with.
By the way many of them do.
We don't see the return on investment for Awhile, but we believe we need to continue to invest in them. This year, just like we did last year, which will pay off over the next two to three years. The other part of that investment in Intelisys is in tools.
Tools tools to help customers sell and manage their business better through the suppliers.
And I'll reference our RPM acquisition from two years ago. So those type of tools are really a differentiator and it's why more agents and bars choose intelisys over our competitors.
And then if you think about just again any other investments the as we mentioned the bar cloud platform Cascade, We believe that's a way for vars too.
Better develop their long term business and that business also a generally as long as for our subscription or SaaS business and so you don't see the impact of that significantly in the first few quarters as you ramp up new customer. So again. These are more long term investments, but we have belief.
That to the right investments, which will bring us long term value.
Okay, maybe just last one for me Gerry you mentioned cash flow that certainly been a bright spot.
Just want to set proper expectations and thinking about future cash flow are there items that perhaps don't repeat that we should be thinking about as we think about fiscal 21 anything maybe related to like divested working capital or something like that that benefited this quarter.
Hum and anything that doesn't repeat I think Adam mostly what's in the cash flow is.
Our normal items I don't recall, there being anything in there that abnormal too.
Obviously, we have a counter cyclical balance sheet those things.
As the business slowed down we generated more cash, but theres nothing I.
I think that I can think of this unusual in there.
Okay, and make Mike maybe updated thoughts on capital allocation.
You know from our perspective.
I can't remember, what we actually said back in.
Back in May so I'm looking to Jerry has really that Hasnt changed Adam it's really.
Organic growth.
And if theres a theres an acquisition out there we would do that.
The non plan right now there's no acquisitions plan, we're using our capital to fund our current operations correct.
Got it thank you.
Well thank you.
Thank you. Our next question comes from alone Keith Housum with North Coast Research. Your line is open.
Thanks, Good afternoon guys.
Yes, and Jerry I was hoping has identified a little bit of color on perhaps July and August to give us a sense of is there any type of recovery happening from the downturn, who saw last quarter.
Keith I think what.
Well I would say and micro John can chime in but what I would say is when you look it at how the quarter.
Grassed.
So April was.
A steeper decline well he's had a different way April had.
It was probably the low point.
May got a little better in June got better from there. So I think thats, what I would say from a from a revenue perspective, when you look year over year.
Quarter got a little stronger as we went on obviously were down 20 something percent. So it's it's not.
It's a relative statement.
Yeah, Keith this Mike I mean from my perspective, we've got every one of our key suppliers focused on trying to find ways to stimulate growth in the channel.
And so there are more programs more initiatives underway and as we referenced on the call. We actually signed a new vendor in the middle of the crisis thermal scan vendor and we think is interesting, but we got more programs that we believe we're going to have to do with the suppliers to get growth coming in the pandemic.
I've not seen any kind of a dramatic change in the trajectory of volume at this point nothing thats significant.
Gotcha, and then come back to our.
Our goal you guys have had over the past several years again back to that 3.5% to 4% operating margins.
As you stand today is it safe to say and as we see a dramatic impact in a very pickup in the business throughout the year your pay on lucky to get that here in fiscal 2001.
Well certainly for the year I don't see that happening for us to be able to achieve that during the year at some quarter as possible and so we built in a combination of the expense reductions and what we think will be some growth in the business number one coming from the Intelisys side.
Of the business and our var cloud to cloud platform of Cascade, but really we've got to see some growth from the traditional var business and if we get that and we certainly have modeled out hey, what happens if we start growing again, what happens if we grow another 50 million from here or $60 million one.
Hundred million in what does that due to the profitability and so what we did by taking the 30 million out as the number is we believe that if we get a reasonable amount of growth from here.
We will get back to the 3.5% before the end of the year for the ended the fiscal not for the year, but for a quarter before the end of the year just over clicker Yep.
Got it and then.
The pass you pause you guys talked about the investment in software if production provider has more color on the progress over the past few months in terms of your investment software and is there one or two area that we're going to unlikely to see that before the others.
Yes for sure John talked about Microsoft and our success there we had a big task to get that platform.
Frankly, running in Brazil, and so after we bought the anti Cascade platform last July.
Job number one for those guys with getting it to work in Brazil and by the way that was no easy task that took us longer than we thought but we had significant growth again in Brazil in cloud in Microsoft for the quarter and Thats continuing so that that was objective number one objective number two was working with some very soon.
Specific suppliers I won't name, who they are into them up on the platform could we haven't announced some yet but we've got a significant.
Existing scansource supplier that sales a lot of software and services that we needed to migrate.
From just selling it as a normal by sale through our S&P system and move it to the Cascade platform and so we're in testing on that with that supplier right now and for the September quarter, we'll have a significant revenue going through the platform. So we will talk to you about that November we're excited about it okay gotcha.
Next question for me Jerry I appreciate some of the commentary regarding the the finance department, but can you speak too about the credit quality that you're seeing in a quarter and are you seeing credit deteriorate and is that a concern that he perhaps have an immediate term.
Yes sure Keith.
Yes, so we haven't really seen credit deteriorate and we've had them.
Had lots and lots of conversations obviously with our customers.
And our team works.
Very very closely with our customers.
And we we think we provide a great deal of value to those customers.
We're constantly working with and trying to figure out how to get deals done in a way that provides value to our company into their company.
And so.
Been pleasantly surprised at how resilient.
The customers have been.
And Jerry Chief I can just to add to that I think one of the things that we talked about last quarter and this quarter was our efforts to help our best partners and we had a seminar series Webinars series as John described on best practices and what the right.
Financial health of a var, whose into recurring revenue business, how much better they are and I believe we've got these strong relationships from this team of financial services Abawi key thats. It thats a significant amount of headcount that we devote to making sure we have a relationship with those customers, we don't outsourced that to an.
Any credit insurance, we don't outsource it took collection company and so as Jerry said I have been pleased not surprise, we're pleased that our partners our customers Trust us and they want to buy from US Dave They will pay us and not pay some of their other distributor partners and we know that that's not that's not.
You get over one quarter or too this is because these customers.
On our var business, we've had relationships with many of them for over 10 years.
Great. Thanks, guys.
Thank you.
Thank you.
Our next question comes from the line of Chris Mcginnis with Sidoti and company. Your line is open.
Good afternoon, Thanks for taking my question.
I was wondering if you could maybe just talk about the competitive landscape and.
And maybe this is an opportunity as well.
And where.
Given the difficult environment.
Great.
Well.
Thanks.
Chris I'll take a first receive John wants to jump into we've got many many competitors.
In Brazil, we sold the dominant player there in the Intelisys business as we said, we're still by far the largest master agent in the us in our business. We've had a lot of competitors really take some market share in different quarters over the last few years and I would say.
From listening to our teams that market share and wallet shares a big part of our strategy for Aflac 21 and.
And maybe John.
If you want to add something to that but maybe it's the way the teams restructure this year.
Yeah, Chris just trying to nail. Thanks for your question I would I would.
Absolutely agree with might that wallet share and market share or key priorities for us and part of what we've built over the last several years this ability to be able to offer on Prem hybrid cloud and agency capabilities and these are all coming together to be.
We think of as real competitive differentiators.
Add greater value to our customer base our partner base.
That drives greater loyalty.
Greater consideration from them and helps us to to take take share from competitors.
Great I appreciate that thanks for taking my question.
Thank you.
I'm not showing any further questions in queue I would now like to turn the call.
Mike Baur for closing remarks.
Thank you for joining us today, we expect to hold our next conference call to discuss September Thirtyth quarterly results on Monday November nine 2020.
Ladies and gentlemen.
Today's conference call. Thank you.
Just the pacing you may now disconnect everyone have a wonderful.
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