Q2 2021 Scansource Inc Earnings Call
[music].
Welcome to the scans force quarterly earnings Conference call.
All lines have been placed in a listen only mode until the question and answer session.
Today's call is being recorded if anyone has any objections you may disconnect at this time.
I would now like to turn the call over to Mary Gentry, 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 are Mike Baur, our chairman and CEO, John <unk>, Our Chief revenue Officer, and Steve Jones, Our New Chief Financial Officer, who joined scans Force in December We will review our operating results for the quarter and then take your questions we posted.
The CFO commentary that accompanies our comments from webcast in the Investor Relations section of our website, let me remind you that certain statements in our press release and 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.
These risks and uncertainties include but are not limited to those factors identified in the earnings release, we put out a day in and scanned sources form 10-K for the year ended June 32020 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 view.
Hughes as of any subsequent date scans horse 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 our 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, Murray and thanks for joining us today, what a year. It has been a year ago. We discussed our one scan source sales team reorganization in North America, and introduce new executive leadership added Telesis and a few weeks later the challenges presented by the COVID-19 pandemic began to unfold per scan.
<unk> 2021 is a year for focus execution and growth.
Over the last few years.
We have been transforming our business to enable sales partners to deliver industry, leading solutions and respond to the new ways that in customers prefer to acquire technologies.
As you can see from our press release, our second quarter results improved substantially over the first quarter.
Excellent performance by our employees drove higher net sales and operating leverage on our SG&A expenses.
As we start the second half of our fiscal year. We believe we have built a foundation for growth.
And there are new market opportunities per scan source in 2021 that are larger than ever before.
I'd like to welcome Steve Jones, our new CFO to the scan source family.
Steve's background is an outstanding fit for <unk> because of his experience is working with the supplier going through digital transformation and a software company moving from licensing to subscription.
I will now turn the call over to John to discuss our sales performance for the quarter.
Thanks, Mike.
I'm very excited about this quarter sales execution and our growth momentum we.
We had 7% sequential sales growth from the from the September quarter are higher than expected net sales. This quarter are due to an increase in large deals and year end budget flush.
Our recurring revenue business, including an telesis SaaS and subscription is growing at double digit rates, representing higher margins and higher growth rates than our product business.
In his opening comments, Mike mentioned are one scan source sales reorganization.
A year later in North America, I am proud to report with our increased focus on customer satisfaction that we drove greater sales volume higher customer counts <unk>.
Larger average order sizes, and an increased number of orders I.
I really want to thank our employees for truly fighting through this change and restoring the trust confidence and loyalty of our customers and suppliers.
In our barcode networking and security segment.
Net sales increased 5% quarter over quarter led by large deals across mobility.
<unk> check out and video surveillance solutions.
And we also saw continued strength in networking and access points, enabling the remote working and learning trend, including strong E rate business, which is a federal program that funds the education market.
Despite supply chain challenges, which led to some shortages during the quarter. Our teams managed to deliver on time for our customers and maintained excellent service levels are.
<unk> Pos portal payments business, which has higher margins declined 28% year over year.
For communications and services, we saw an 11% quarter over quarter increase in net sales driven by the growth in cloud enabled endpoints headsets and phone provisioning in North America.
And the growth in data center and digital workplace technologies in Brazil.
Our <unk> business had another record quarter driven by the continued market shift to cloud based solutions Inc.
<unk> grew 15% year over year with even faster growth.
<unk> unified communications as a service at 35% and contact center as a service at 65%.
<unk> continues to be a key growth opportunity for us as a result, we plan to continue investing in and Telesis ahead of the market opportunity. We recently launched new digital tools for our sales partners, such as cable finder, which automates the process of buying cable services.
We also made investments in our go to market with a new inside sales team to support partner engagement for newly recruited partners and.
And in 2020.
We had great recruit we had a great recruiting year for new partners, increasing intelligence agent recruitment by some 22% over the prior year. We also continue to grow the number of our top platinum partners and we continue to see strong growth in their business.
<unk> offers the partner community.
Differentiated value through trusted relationships, the strongest supplier contracts and the most reliable commission management tool in the industry.
We provide partners with confidence and credibility by enabling them with the financial strength and stability of scan source.
While offering the broadest and deepest supplier portfolio across connectivity and cloud services.
In Brazil, our team achieved a record sales quarter in local currency led by large deals with double digit growth across the business, enabling us to take share.
In addition to success across our hardware solution, Brazil continues to build momentum across its digital portfolio, including top cloud providers, Microsoft IBM and Oracle.
In December our Brazil team also held a very successful virtual partner conference called Innovation Forum with over 4700 participants just amazing.
Despite COVID-19, we are leveraging our marketing spend to drive innovative digital events and virtual customer engagement. As an example scan sources discover opportunity helped sales partners understand the opportunities available in areas of vertical expertise.
Such as grocery education government and manufacturing, we're also promoting mobile solutions with our mobility future forward campaign, providing resources and tools for our partners.
And our anatomy of a <unk> win.
Is helping sales partners understand how adding contact center as a service solutions can increase productivity for customers.
In summary, we're very pleased with our second quarter performance and the momentum. We're building I'd also like to take this opportunity to thank our partners and suppliers for their continued commitment and dedication to growing their businesses with scan source.
Now Steve will take you through the financial results.
Thanks, John it's great to join the <unk> family and also great to have excellent quarterly results to discuss with you.
Our business continued to build sales momentum gained operating leverage on SG&A and.
This outstanding execution drove strong cash generation and a 12, 4% ROIC for the quarter.
Unless otherwise indicated this discussion reflects our results for continuing operations only.
For the second quarter, our net sales were $811 million down 2% year over year and up 2% year over year for organic growth.
Foreign currency translation negatively impacted non-GAAP sales by approximately $28 million.
Our gross profit were $86 million.
Down 12% year over year. The gross profit margin was 10, 6% down from the prior year, primarily due to sales mix and lower vendor program recognition.
As John mentioned, our higher margin Pos portal payments business declined year over year.
Our non-GAAP SG&A expense for the quarter of $59 $1 million declined $7 6 million or 11.
7% year over year, we realize the planned quarterly impact of our expense reduction plan announced in July.
For fiscal 2021, we estimate our effective tax rate to range from 28, 75% to 29, 75%, reflecting a higher impact of non deductible tax items and geographical mix.
Now turning to the balance sheet and cash flow, we generated strong operating cash flow of $44 million per the quarter and $215 million for the trailing 12 month period.
Working capital investment declined both sequentially and year over year.
We continued to strengthen our balance sheet and liquidity position. Our DSO remained stable at 60 days and with our net sales increase and lower inventory levels inventory turns increased to six nine times.
On December 31, 2020, we had cash and cash equivalents of $67 million and debt of $152 million.
We have a stronger balance sheet with lower leverage or net leverage total approximately one one times trailing 12 months adjusted EBITDA.
During the quarter, we completed the sale of our products distribution business in Latin America, and in Europe, and the U K. These divestitures were classified as discontinued operations in our second quarter fiscal year 2021 financial statements.
We are not providing forecast range for the third quarter because of the uncertainty around COVID-19 on our business.
Following our historical seasonal trend, we expect net sales to decline quarter over quarter.
I would now like to turn the call back over to Mike for closing comments.
Thanks, Steve.
This was a quarter of strong execution by our employees worldwide and this gives me confidence in the strategic direction, we are taking.
<unk> has the best sales partners and best suppliers.
With them, we are positioned for strong growth in the year ahead.
We will now open it up for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
If you'd like to withdraw your question press the pound key.
Again Thats Star then one to ask a question.
Our first question comes from the line of Adam Tindle with Raymond James.
Okay.
Okay. Thanks, Good afternoon, Mike I, just wanted to start with your comment where you talked about starting the.
The second half of this fiscal year, you have a foundation for growth.
The basis for that comment did you maybe finished the quarter strong that gives you some momentum going into the back half of the year and then secondly.
If it's possible I know you've talked about are Steve talked about seasonal sequential decline in Q3, but given your comments on.
A foundation for growth from the back half do you think you can grow year over year in Q3 off of that 745, you did <unk>.
Last year any directional color would be helpful. Thanks.
Yes, Hey, Adam Thanks for the questions first of all on the foundation for growth really what I was saying if you look back over last year and if you recall a year ago. When we talked about the December quarter. It was a disaster. We had customers that were upset at US we had just executed frankly a year.
And a half of sales reorganization.
And we were not executing as we had expected to so I believe what we accomplished in the last four quarters, even with Covid.
Proved has proven to us with these results when you look at what John talked about from some key metrics of more customers more spend on the average size orders and more orders and our ability to execute from.
From a distribution standpoint, a supply chain management standpoint, those are all the things that I feel very confident about and.
A year ago, I Couldnt say that.
And so if you take our products business, which is stabilized dramatically and resulted in a strong increase in sales.
<unk> been a couple of areas that we highlighted and you throw on top of that the continued growth in two areas and telesis and Brazil, We believe that the second half of the year will be good.
In terms of fiscal year, but as we've always experienced there is some.
Challenges growing from the December quarter to the March quarter. So that's really what we meant by a decline quarter to quarter. It was sequentially and Thats just the seasonal trend. If you go back and look many many years now again that may not be the way it works, but today I can tell you we still are.
Struggling with our ability to forecast the quarter as we said on the call we exceeded our expectations with the 811% of revenue.
<unk>.
I mean, it's a good it's a good feeling and I think that's what the company is trying to say today is we feel very good about our position in the market and our ability to execute.
Understood and can certainly appreciate the difficulty forecasting in this environment I guess as we think about over the intermediate term, let's say returning to growth.
How should we think about the cost structure as that occurs I know you've done a lot of work there you have the $30 million restructuring program.
Can you can you hold opex around this $60 million, so quarterly run rate level and drop through most of that growth on a forward basis or how should we think about that algorithm.
Yeah, that's a that's.
That's an excellent point that we have been discussing since the summer if you recall at him back in the summer when we announced the $30 million expense reduction plan, we intentionally did not reduce all of our investments in our growth opportunities. So we lap those somewhat intact as we talked about what we were trying to.
Accomplished and so we believe that we are extremely.
We focused and Steve being the new Guy He has already heard us talk about in a lot of means we've got to manage those operating expenses very very tightly while still leaving us room for some very specific investments for the future and I can just tell you from our board's perspective, when we had this discussion last week they were very clear.
That we need to make sure that we continue to invest for the long term in these strong high margin recurring revenue businesses and the tools and the people that John talked about earlier that we've added those are examples of how we will selectively increase the spending but we're going to be.
Very careful when we do it and how we do it with an eye that we still need to deliver as we've said many many times longer term of three 5% operating income percent, we're not there yet and we think it's more important to make sure. We take advantage of these high margin high growth opportunities.
<unk>.
Then it has to make a specific number in a quarter.
Understood if I could just get one last one for Steve.
I know, it's early but you've got a fresh pair of eyes I'd just be curious your view on the biggest pockets of opportunity to do things differently or perhaps emphasize and if you want to tie in any early thoughts on capital allocation that would be helpful. Thanks.
Yeah. Thanks.
The big opportunity is in <unk> I mean, we've seen growth there and we believe in that model I think that's our biggest opportunity is set out in front of us.
And I think Adam on the capital allocation, we believe that with the balance sheet, where it is today and with the performance of the team we want to continue to make sure. We have strong strong ability to fund the organic growth that we're seeing but I would also suggest to you with the improvement of the balance.
Stephen I just talked about this this morning, we do believe that as strategic opportunities for growth appear from an acquisition standpoint will definitely be taken a look at that going forward.
Okay. That's helpful. Thank you very much.
Great. Thank you.
Our next question comes from Keith <unk> with Northcoast research.
Good afternoon, guys, Steve weighted welcome aboard Greg.
During the call.
<unk>.
Steve I guess first question towards you I mean, it looks like the balance sheet. The inventories are low cost per year.
Receivable accounts payable are high.
As you look at your working capital levels as you exited the quarter what are your thoughts in terms of where they need to be going forward.
Yeah.
I'm happy to answer so I think where we are.
As we exit Q2.
<unk>.
We had some supply issues and so we're looking as we look to Q3, we're probably going to have to build back some inventory to catch those sales and to catch up.
Yes.
Expected.
Spending a little more on our supply chain issues can you.
More color on how it progressed through the quarter and does that give you a bigger than unusual pipeline going into the third quarter.
I'll.
Pass that over to John.
A little bit closer to a dime.
Yes sure Inc.
Look I mean as Steve said.
I said it in my comments, we definitely saw some shortages, but even despite those sort of shortages.
We beat our internal expectations for sales and sales volumes and maybe most importantly, we took great care of our customers working closely in conjunction with our suppliers to deliver a strong outcome for Q2.
And we're hopeful we'll see the same thing as we move into Q3.
Okay great.
To give you a pipeline going into the third quarter or it does.
Did those sales go elsewhere.
Sorry can you say that one more time, yes, the challenges at the end of the quarter in terms of the supply chain to those sales go elsewhere or does that give you a pipeline to start the third quarter with no. They didn't go somewhere else they will.
They will still be with us and come our way throughout the quarter.
Gotcha, and then Michael maybe one question for you I have got Ashcroft Pls portal.
It won't be surprising I guess this is more COVID-19 related but any thoughts you have on the significant drop in business for them during the quarter, what's the prospects for the third quarter.
Yes, I'll take it.
We are so excited still about that business and we are disappointed in the impact that COVID-19 has had kind of more than some of our other businesses and we wanted to make sure. We highlighted that there. They don't have any structural changes in their business. There is no lack of <unk>.
Market share opportunities.
So we are excited about it because it's still a higher margin business than our traditional business.
And it's a business that we have some very unique skills at delivering and it just so happens that when you look at this business year over year.
That business was challenged more than some of our others, we didn't see that coming but we wanted to make sure everyone knew that because not having as much of the high margin Pos portal revenue in the quarter as part of the reason our gross margins were lower and right now we don't know when it's going to come back, but we do have confidence it will.
We're just not sure exactly when.
Gotcha.
And then.
Last question from me.
Several factors build up to your recurring revenue stream can you give us an idea of how much recurring revenue as a.
Total percentage of revenue.
Mary I'm going to look to you to kind of.
See if we are willing to give some of that I'm not sure. His point about how much of our revenue is recurring.
Im not sure exactly what we're pointing to in our Q that Mike had helping sure.
The recurring revenue.
As a percentage of revenue is going to be very small however, the recurring revenue as a percentage that the gross profit contribution associated with the recurring revenue is going to be a much more noticeable number and what we can point you to is the recurring revenue from Intel.
<unk>, which is not all of our recurring revenue, but but the substantial piece of that.
And for the second quarter that was 19% of the gross profit coming from day in telesis recurring revenue.
Great. Thank you.
Our next question comes from Chris Mcginnis with Sidoti.
Yes.
Afternoon, Thanks for taking my questions nice quarter.
Okay.
Yeah.
I guess, just maybe maybe.
Some more line of question just the operating income as a percentage.
The big increase over the prior year can you just touch on the big driver of that.
Just the greater growth from.
From a service revenue.
Revenue.
I highlight that a little bit is that.
Hey, Chris It's Mike I'm going to see if I can try so on the comm segment Youre talking about the services contribution there right.
And remember in that segment, which I know these things arent as clean as they used to be and tell us. This is in there and so that's what drives a strong profitability in that segment is the telesis just as kind of a reminder, and within that also we had a strong contribution from Brazil, and Thats also a high margin high.
Growth and so those are the two key pieces of the growth in the comms doing so well is those two pieces.
Great. Okay, Thanks, Brian and Thats out of that higher margin growth.
Dropping down to the bottom line.
Can you just maybe expand on what's happening in Brazil is that right.
Is that just is that your interest.
Strong position there can you just maybe expand a little bit on.
The success, we're having in Brazil.
Yes, Chris it's Jon Thanks for the question. It's a great question and we're excited to answer look Brazil, we have a real positive momentum we have we've built it up now for the last couple of quarters.
Think a lot of it comes down to having a great team.
<unk>.
It's a senior team they've been together a long time, it's very stable.
And so a lot of it comes down to just the strength of the leadership team.
But we are also I would offer we're also seeing strength, there and taking share from.
From.
The departure of.
One other distributor, but also taking share from local regional distributors.
Great.
I think it's been a longtime comparable congrats on that.
From the decade market share gain.
And then just last question John you highlighted I think the 22%.
Growth from partner for analysis can you just I don't know if you buy the more contact from maybe where was that last year from growing for a long time and a great day rate.
Okay.
Well for continued growth.
Maybe just expand a little bit on that as well that partner growth.
Thank you.
Yes, I think Chris again.
The opportunities for <unk>.
Our substantial where we play there we play in large and growing markets.
And so we are seeing.
Increased.
Partner recruitment there from a number of places, but one of the key areas as vars are recognizing the ever increasing importance, especially with the advent of COVID-19 of moving to recurring revenue and offering greater cloud based solutions for their customers and as a result, it is helping to fuel our recruitment.
And were.
Fingers crossed we're hopeful to see that continue.
Moving forward.
And Chris I would add one more comment if I can.
Year ago, we moved a couple of our senior executives from the traditional <unk> business, who know a lot of these partners over there arent Morgan and Paul constantly joining Mike Ketchum as the team that really is leading that business. So in the year those guys have done a fantastic.
Nick job.
Recruiting new partners and getting our best partners growing even faster so yes, just great execution.
I appreciate you taking the time to answer my questions and good luck.
Thank you.
That concludes today's question and answer session I would like to turn the call back to Mr. Bauer for closing remarks.
Great. Thank you for joining us today, we expect to hold our next conference call to discuss March 31 quarterly results on Monday may 10th 2021.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
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Sure.
Net.
Yes.
Yes.
Yes.
Yes.
Sure.
Okay.
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Sure.
Yes.
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[music].
Welcome to the scans fourth quarterly earnings conference call.
All lines have been placed in a listen only mode until the question and answer session.
Today's call is being recorded if anyone has any objections you may disconnect at this time.
I would now like to turn the call over to Mary Gentry, 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 are Mike Baur, our chairman and CEO, John <unk>, Our Chief revenue Officer, and Steve Jones, Our New Chief Financial Officer, who joined scans Force in December We will review our operating results for the quarter and then take your questions we posted.
The CFO commentary that accompanies our comments from webcast in the Investor Relations section of our website, let me remind you that certain statements in our press release and 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 shut such.
These risks and uncertainties include but are not limited to those factors identified in the earnings release, we put out today and in scan sources form 10-K for the year ended June 32020 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 view.
Hughes as of any subsequent date scan source 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 our 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, Murray and thanks for joining us today, what a year. It has been a year ago. We discussed our one scan source sales team reorganization in North America, and introduce new executive leadership added telesis.
In a few weeks later the challenges presented by the COVID-19 pandemic began to unfold.
Per scan source 2021 is a year for focus execution and growth.
Over the last few years.
We have been transforming our business to enable sales partners to deliver industry, leading solutions and respond to the new ways that end customers per <unk> to acquire technologies.
As you can see from our press release, our second quarter results improved substantially over the first quarter.
Excellent performance by our employees drove higher net sales and operating leverage on our SG&A expenses.
As we start the second half of our fiscal year. We believe we have built a foundation for growth.
And there are new market opportunities for scan source in 2021 that are larger than ever before.
I'd like to welcome Steve Jones, our new CFO to the scan source family.
Steve's background is an outstanding fit per scan source because of his experience is working with the supplier going through digital transformation and a software company moving from licensing to subscription.
I will now turn the call over to John to discuss our sales performance for the quarter.
Thanks, Mike.
I'm very excited about this quarter sales execution and our growth momentum we.
We had 7% sequential sales growth from the from the September quarter are higher than expected net sales. This quarter are due to an increase in large deals and year end budget flush.
Our recurring revenue business, including an telesis SaaS and subscription is growing at double digit rates, representing higher margins and higher growth rates than our product business.
In his opening comments, Mike mentioned are one scan source sales reorganization.
A year later in North America I'm proud to report with our increased focus on customer satisfaction that we drove greater sales volumes higher customer accounts larger average order sizes and an increased number of orders.
I really want to thank our employees for truly fighting through this change and restoring the trust confidence and loyalty of our customers and suppliers.
In our barcode networking and security segment net sales increased 5% quarter over quarter led by large deals across mobility.
<unk> check out and video surveillance solutions.
We also saw continued strength in networking and access points, enabling the remote working and learning trend, including strong E rate business, which is a federal program that funds the education market.
Despite supply chain challenges, which led to some shortages during the quarter. Our teams managed to deliver on time for our customers and maintained excellent service levels are.
<unk> Pos portal payments business, which has higher margins declined 28% year over year.
For our communications and services, we saw an 11% quarter over quarter increase in net sales driven by the growth in cloud enabled end points headsets and phone provisioning in North America.
And the growth in data center and digital workplace technologies in Brazil.
Our <unk> business had another record quarter driven by the continued market shift to cloud based solutions Inc.
<unk> grew 15% year over year with even faster growth.
For unified Communications as a service at 35% and contact center as a service at 65%.
And tell US this continues to be a key growth opportunity for us as a result, we plan to continue investing in and Telesis ahead of the market opportunity. We recently launched new digital tools for our sales partners, such as cable finder, which automates the process of buying cable services.
We also made investments in our go to market with a new inside sales team to support partner engagement for newly recruited partners and.
And in 2020.
We had great recruit we had a great recruiting year for new partners, increasing intelligence agent recruitment by some 22% over the prior year. We also continue to grow the number of our top platinum partners and we continue to see strong growth in their business.
<unk> offers the partner community.
Differentiated value through trusted relationships, the strongest supplier contracts and the most reliable commission management tool in the industry.
We provide partners with confidence and credibility by enabling them with the financial strength and stability of scan source.
While offering the broadest and deepest supplier portfolio across connectivity and cloud services.
In Brazil, our team achieved a record sales quarter in local currency led by large deals with double digit growth across the business, enabling us to take share.
In addition to success across our hardware solution, Brazil continues to build momentum across its digital portfolio, including top cloud providers, Microsoft IBM and Oracle.
In December our Brazil team also held a very successful virtual partner conference called Innovation Forum with over 4700 participants just amazing.
Despite COVID-19, we are leveraging our marketing spend to drive innovative digital events and virtual customer engagement. As an example scan sources discover opportunity helped sales partners understand the opportunities available in areas of vertical expertise.
Such as grocery education government and manufacturing, we're also promoting mobile solutions with our mobility future forward campaign, providing resources and tools for our partners.
And our anatomy of a <unk> win.
Is helping sales partners understand how adding contact center as a service solutions can increase productivity for customers.
In summary, we're very pleased with our second quarter performance and the momentum. We're building I'd also like to take this opportunity to thank our partners and suppliers for their continued commitment and dedication to growing their businesses with scan source.
Now Steve will take you through the financial results.
Thanks, John it's great to join the <unk> family and also great to have excellent quarterly results to discuss with you.
Our business continued to build sales momentum gained operating leverage on SG&A and.
This outstanding execution drove strong cash generation and a 12, 4% ROIC for the quarter.
Unless otherwise indicated this discussion reflects our results for continuing operations only.
For the second quarter, our net sales were $811 million down 2% year over year and up 2% year over year for organic growth.
Foreign currency translation negatively impacted non-GAAP sales by approximately $28 million.
Our gross profit were $86 million.
Down 12% year over year. The gross profit margin was 10, 6% down from the prior year, primarily due to sales mix and lower vendor program recognition.
As John mentioned, our higher margin Pos portal payments business declined year over year.
Our non-GAAP SG&A expense for the quarter of $59 $1 million declined $7 $6 million or 11, 11% year over year, we realize the planned quarterly impact of our expense reduction plan announced in July.
For fiscal 2021, we estimate our effective tax rate to range from 28, 75% to 29, 75%, reflecting a higher impact of non deductible tax items and geographical mix.
Now turning to the balance sheet and cash flow, we generated strong operating cash flow of $44 million per the quarter and $215 million for the trailing 12 month period.
Working capital investment declined both sequentially and year over year.
We continued to strengthen our balance sheet and liquidity position. Our DSO remained stable at 60 days and with our net sales increase and lower inventory levels inventory turns increased to six nine times.
On December 31, 2020, we had cash and cash equivalents of $67 million and debt of $152 million.
We have a stronger balance sheet with lower leverage or net leverage total approximately one one times trailing 12 months adjusted EBITDA.
During the quarter, we completed the sale of our products distribution business in Latin America, and in Europe, and the U K.
These divestitures were classified as discontinued operations in our second quarter fiscal year 2021 financial statements.
We are not providing forecast range for the third quarter because of the uncertainty around COVID-19 on our business.
Following our historical seasonal trend, we expect net sales to decline quarter over quarter.
I would now like to turn the call back over to Mike for closing comments.
Thanks, Steve.
This was a quarter of strong execution by our employees worldwide.
And this gives me confidence in the strategic direction, we are taking.
<unk> has the best sales partners and best suppliers and with them. We are positioned for strong growth in the year ahead.
We will now open up for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
I would like to withdraw your question press the pound key.
Again Thats Star then one to ask a question.
Our first question comes from the line of Adam Tindle with Raymond James.
Okay. Thanks, Good afternoon, Mike I, just wanted to start with your comment where you talked about starting in the second half of this fiscal year you have a foundation for growth just the basis for that comment did you maybe finished the quarter strong that gives you sort of momentum going into the back half of the year.
And secondly, if.
If it's possible I know you've talked about are Steve talked about seasonal sequential decline in Q3, but given your comments on.
Foundation for growth from the back half do you think you can grow year over year in Q3 off of that 745, you did <unk>.
Last year any directional color would be helpful. Thanks.
Yeah, Hey, Adam Thanks for the questions first of all on the foundation for growth really what I was saying if you look back over last year and if you recall a year ago. When we talked about the December quarter. It was a disaster. We had customers that were upset at US we had just executed frankly a year.
And a half of sales reorganization.
And we were not executing as we had expected to so I believe what we accomplished in the last four quarters, even with Covid.
Proved has proven to us with these results when you look at what John talked about from some key metrics up more customers more spend on the average size orders and more orders and our ability to execute from.
From a distribution standpoint, a supply chain management standpoint, those are all the things that I feel very confident about and.
A year ago, I, Couldnt say that and.
So if you take our products business, which is stabilized dramatically and resulted in a strong increase in sales.
A couple of areas that we highlighted and you throw on top of that the continued growth in two areas <unk> telesis in Brazil, we believe that the second.
Half of the year will be good.
In terms of fiscal year, but as we've always experienced there is some.
Challenges growing from the December quarter to the March quarter. So that's really what we meant by a decline quarter to quarter. It was sequentially and Thats just the seasonal trend. If you go back and look many many years now again that may not be the way it works, but today I can tell you we still are.
<unk> with our ability to forecast the quarter as we said on the call we exceeded our expectations with the 811% of revenue.
And.
I mean, it's a good it's a good feeling and I think that's what the company is trying to say today is we feel very good about our position in the market and our ability to execute.
Understood and can certainly appreciate the difficulty forecasting in this environment I guess as we think about over the intermediate term, let's say returning to growth.
How should we think about the cost structure as that occurs I know you've done a lot of work there you have the $30 million restructuring program.
Can you can you hold opex around this $60 million, so quarterly run rate level and drop through most of that growth on a forward basis or how should we think about that algorithm.
Yes.
That's an excellent point that we have been discussing since the summer if you recall at him back in the summer when we announced the $30 million expense reduction plan, we intentionally did not reduce all of our investments in our growth opportunities. So we left those somewhat intact as we talked about what we were trying to.
To accomplish and so we believe that we are extremely focused and Steve being the new Guy. He has already heard us talk about in a lot of meetings. We've got to manage those operating expenses very very tightly while still leaving us room for some very specific investments for the future.
And I can just tell you from our board's perspective, when we had this discussion last week. They were very clear that we need to make sure that we continue to invest for the long term in these strong high margin recurring revenue businesses and the tools and the people that John talked about earlier that we've added those are examples.
Of how we will selectively increase the spending but we're going to be very careful when we do it and how we do it with an eye that we still need to deliver as we've said many many times longer term of three 5% operating income percent, we're not there yet and we.
It's more important to make sure we take advantage of these high margin high growth opportunities.
And then it has to make a specific number in a quarter.
Understood if I could just get one last one for Steve.
I know, it's early but you've got a fresh pair of eyes I'd just be curious your view on the biggest pockets of opportunity to do things differently or perhaps emphasize and if you want to tie in any early thoughts on capital allocation that would be helpful. Thanks.
Yeah. Thanks.
Yes, I think the big opportunity is in <unk> I mean, we've seen growth there and we believe in that model I think that's our biggest opportunity is set out in front of us.
And I think Adam on the capital allocation.
We believe that with the balance sheet, where it is today and with the performance of the team we want to continue to make sure. We have strong strong ability to fund the organic growth that we're seeing but I would also suggest to you with the improvement of the balance sheet as Steve and I just talked about this this morning, we do believe.
Leave that as strategic opportunities for growth appear from an acquisition standpoint will definitely be taken a look at that going forward.
Okay. That's helpful. Thank you very much.
Great. Thank you.
Our next question comes from Keith <unk> with Northcoast research.
Good afternoon, guys, Steve weighted welcome aboard glad to have you joined the call.
<unk>.
Steve I guess first question towards you I mean, it looks like the balance sheet the inventories our railroad.
Sales of our costs there were high.
As you look at your working capital levels as you exited the quarter what are your thoughts in terms of where they need to be going forward.
I'm happy to answer.
I think where we are where we are.
As we exit Q2.
We had some supply issues and so we're looking as we look to Q3, we're probably going to have to build back some inventory to catch those sales and to catch up.
Yes.
As expected.
Staring with more on our supply chain issues can you.
Provide a bit more color on how it progressed through the quarter and does that give you a bigger than unusual pipeline going into the third quarter.
Al.
Pass that over to John Hayes.
A little bit closer to a dime.
Yes sure Inc.
Look I mean as Steve said.
I said it in my comments, we definitely saw some shortages, but even despite those sort of shortages.
We beat our internal expectations for sales and sales volumes and maybe most importantly, we took great care of our customers working closely in conjunction with our suppliers to deliver a strong outcome for Q2.
And we're hopeful we'll see the same thing as we move into Q3.
Okay, great. Thank you.
To give you a pipeline going into the third quarter are those.
Did those sales go elsewhere.
Sorry can you say that one more time, yes, I think the challenges at the end of the quarter in terms of the supply chain to those sales go elsewhere or is that give you a pipeline to start the third quarter were no. They didn't go somewhere else they will.
They will still be with us and come our way throughout the quarter.
Gotcha, and then Michael maybe one question for you I got to ask about Pls portal.
It won't be surprising I guess this is more COVID-19 related but any thoughts you have on the significant drop in business for them during the quarter and what the prospects for the third quarter.
Yes, I'll take it.
You know we are so excited still about that business and we are disappointed in the impact that COVID-19 has had kind of more than some of our other businesses and we wanted to make sure. We highlighted that there. They don't have any structural changes in their business. There is no lack of <unk>.
Market share opportunities.
So we are excited about it because it's still a higher margin business than our traditional business.
And it's a business that we have some very unique skills at delivering and it just so happens that when you look at this business year over year.
That business was challenged more than some of our others, we didn't see that coming but we wanted to make sure everyone knew that because not having as much of the high margin Pos portal revenue in the quarter as part of the reason our gross margins were lower and right now we don't know when it's going to come back, but we do have confidence it will.
We're just not sure exactly when.
Gotcha.
And then.
Last question from me.
Several factors build up to your recurring revenue stream can you give us an idea of how much recurring revenue as a.
Total percentage of revenue.
Mary I'm going to look to you to kind of.
See if we are willing to give some of that I'm not sure. His point about how much of our revenue is recurring.
Im not sure exactly what we're pointing to in our Q that Mike had helping cure it.
The recurring revenue.
As a percentage of revenue is going to be very small however, the recurring revenue as a percentage is that the gross profit contribution associated with the recurring revenue is going to be a much more noticeable number and what we can point you to is the recurring revenue from Intel.
<unk>, which is not all of our recurring revenue, but but the substantial piece of that.
And for the second quarter that was 19% of the gross profit coming from day in telesis recurring revenue.
Great. Thank you.
Our.
Next question comes from Chris Mcginnis with Sidoti.
Afternoon, Thanks for taking my questions per quarter.
Okay.
<unk>.
I guess, just maybe maybe.
So more of a line of questions.
Operating income as a percentage sales.
Mutations in the.
The big increase over the prior year can you just touch on the big driver of that is that just the greater growth from.
From a service based revenue.
Just highlight that a little bit.
Tom.
Hey, Chris It's Mike I'm going to see if I can try so on the comm segment Youre talking about the services contribution there right.
And remember in that segment, which I know these things aren't as clean as they used to be and tell us. This is in there and so that's what drives a strong profitability in that segment is the telesis just as kind of a reminder, and within that also we had a strong contribution from Brazil, and Thats also a high margin high <unk>.
And so those are the two key pieces of the growth in the comms doing so well is those two pieces.
Great. Thank you.
And that part of that higher margin will drop down to the bottom line.
And can you just maybe expand on what's happening in Brazil.
Is that just is that strong.
Strong position there can you just maybe expand a little bit on.
The success, we're having in Brazil.
Yes, Chris it's Jon Thanks for the question. It's a great question and we're excited to answer look Brazil, we have a real positive momentum we have we've built it up now for the last couple of quarters.
I think a lot of it comes down to having a great team.
It's a senior team they've been together a long time, it's very stable.
And so a lot of it comes down to just the strength of the leadership team.
But we are also I would offer we're also seeing strength, there and taking share.
From the.
The departure of.
One other distributor, but also taking share from local regional distributors.
Right.
I think it's been a long time from congrats on that.
From a decade market share gains.
And then just last question John you highlighted I think the 22%.
Growth partner for analysis can you just I don't know if you buy more contracts from maybe where was that last year. That's all from growing for a long time line is integrated right.
It seems like that.
Well for continued growth.
Can you just expand a little comment as well that partner growth.
Thank you.
Yes, I think Chris again.
The opportunities for <unk>.
Our substantial where we play there we play in large and growing markets.
And so we are seeing.
Increased.
Partner recruitment there from a number of places, but one of the key areas as vars are recognizing the ever increasing importance, especially with the advent of COVID-19 of moving to recurring revenue and offering greater cloud based solutions for their customers and as a result, it is helping to fuel our recruitment.
And were.
Fingers crossed we're hopeful to see that continue.
Moving forward.
And Chris I would add one more comment if I can.
Year ago, we moved a couple of our senior executives from the traditional <unk> business, who know a lot of these partners over there arent Morgan in podcasting, joining Mike Ketchum as the team that really is leading that business. So in a year those guys have done a fantastic.
<unk> job.
Recruiting new partners and getting our best partners growing even faster so yes, they just great execution.
Okay.
I appreciate taking the time to answer my questions. Good luck.
Thank you.
That concludes today's question and answer session I would like to turn the call back to Mr. Bauer for closing remarks.
Great. Thank you for joining us today, we expect to hold our next conference call to discuss March 31 quarterly results on Monday may 10th 2021.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.