Q3 2021 Scansource Inc Earnings Call

Welcome to the scan <unk> 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.

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 Chief Financial Officer will review, our operating results for the quarter and then take your questions. We posted a CFO commentary that accompanies our.

Comments and webcast and 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 statements. These risks and uncertainties include but are not.

And so to those factors identified in the earnings release, we put out today and and scams horses 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 food views as of any subsequent date.

Source disclaims any duty to update any forward looking statements to reflect actual results or changes and 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 and the CFO commentary and in our press release. These reconciliations also.

Can be found on our website and have been filed with our form 8-K, I'll now turn the call over to Mike.

Thanks, Mary and thanks, everyone for joining us today.

Last quarter, we highlighted that 2021 is a year for focus execution and growth as demonstrated by our strong third quarter results.

We are excited about the foundation for growth, we have built and our market growth opportunities.

First we are helping our channel partners accelerate their digital transformation over.

Over the last four years, we've been transforming our business to enable sales partners to deliver industry, leading solutions and respond to the many as a service ways and customers prefer to acquire technologies.

Secondly, the hybrid office and work anywhere trends provide opportunities for our you can see cash cloud enabled end points and connectivity.

Third we are well positioned from mobility opportunities and markets, such as retail hospitality grocery manufacturing and warehousing.

And our final opportunity to highlight is security both physical security with video surveillance and cyber security.

For the third quarter excellent performance by our employees drove the achievement of a 345% non-GAAP operating margin and a 13, 6% return on investment invested capital.

Our employees have done a remarkable job supporting our channel partners with focused execution and growth.

I will now turn the call over to John to discuss our business performance for the quarter.

Thanks, Mike.

And I'm excited by the energy and momentum we are seeing and the business as evidenced by the broad based performance we delivered in Q3.

Our customer and supplier relationships are strong and as a result, we continue to deliver joint success.

Our employees continue to inspire me with their resilience customer focus and ability to execute.

And our barcode networking and security segment, we were encouraged by the demand recovery across our technologies led by growth and mobility self checkout video surveillance and networking solutions, we had record sales of mobility products, delivering 42% year over year growth.

<unk>.

Large deals supporting the mobile everywhere trend, including warehousing and logistics curbside pickup and e-commerce drove our growth for.

And for video surveillance, we delivered double digit growth and are seeing strong demand and customers open and stalled projects commence.

We are also seeing a stronger need and application of outdoor surveillance systems and cameras to support both public safety requirements and the increase in exterior curbside pickup.

Our payments business, which has higher margins from service offerings wrapped around hardware increased 13% quarter over quarter supported by the reopening of the economy.

Within our communications and services segment, we continue to see growth and expansion across our video audio and collaboration products.

These solution stacks fueled by the shift to cloud are enabling the hybrid workplace to support work from anywhere.

Collaborations and huddle room technology, refreshes and applications across education for hybrid learning. Thanks.

Thanks to the strong effort of our communication and collaboration for Us and integrated integrators. We had impressive sales growth in next generation cameras video bars displays headsets microphones and control panels and we're encouraged by the increasing demand and appreciate our.

Strong partnerships with leading collaboration suppliers.

In Brazil.

Strong financial performance continued with strength and large deals expanded margin and impressive returns on working capital.

We experienced double digit growth across barcode and mobility networking.

And digital workplace solutions. In addition to its success across hardware solutions, our business and Brazil continues to build outstanding momentum across both SaaS and cloud solutions.

And telesis continues to be a key recurring revenue growth opportunity for us or tell us as business grew 12% year over year with even faster growth.

For unified Communications as a service at 36% and contact center as a service at 67%.

We see strength and our intelligence business as our customers continue with their workload migrations to the cloud.

We are encouraged by the accelerated adoption of the agency model by the var community since our 2016 acquisition as witnessed by the 69% year over year growth in new supplier billings through Vars.

In the last year, we have increased our investment and sales support engineering resources digital training technical certifications and enablement tools and technologies to support our partner community and ensure their continued success.

I'd like to recognize the outstanding efforts of our teams this past quarter as they work closely with our suppliers to minimize the impact of supply chain challenges for our customers.

We are experiencing increased lead times across most of our technologies and anticipate that this will continue through the fall and finally key to our mission to being at the center of the solution delivery channel, we continue to create and innovate on new opportunities.

For our partners to grow.

During the third quarter, we launched scan sources discover opportunity series.

Which showcase growth opportunities and areas of vertical expertise, including grocery and healthcare education government and manufacturing. This is an ongoing program featuring vertical thought leadership content blogs web seminars and events panel discussions and podcasts the discover.

Opportunity series will enable all routes to market to drive growth and incorporates ideas and solutions for both upfront revenue as well as recurring revenue and services.

Now Steve will take you through the financial results.

Thanks, John as Mike mentioned, we are very pleased with the financial results for our quarter and very proud of our employees, who continue to execute and deliver value to our channel partners for Q3, our profits grew faster than sales, we expanded both our gross profit and operating profit margins and gain operate.

And leverage on our SG&A expenses.

Our third quarter net sales of $730 million were in line with our historical seasonality, which was where we expected entering the quarter.

Third quarter revenues were down 2% year over year or flat year over year on a constant currency.

Our growth profits grew 4% year over year to $88 million gross profit margins increased to 12, 1%.

The higher gross profit margins reflect higher vendor sales program achievement, a more favorable sales mix and higher than normal margins for Brazil.

Our non-GAAP SG&A expenses for the quarter of $59 $8 million declined $6 7 million or 10% year over year.

We realize the quarterly impact of the expense reduction plan, we announced in July.

We will add strategic head count for our intelligence business and and other areas with growth opportunities.

For fiscal 2021, we estimate the effective tax rate to range from $28, two 5% to $29, two 5%, reflecting a higher impact from non deductible tax items and geographic mix.

Now turning to the balance sheet and cash flow cash flow from operations consumed $60 million for the quarter, mainly from working capital investments to keep inventories level aligned with our anticipated customer demand for.

For the trailing 12 months ended March 31, 2021, we generated operating cash flows of $129 million.

Year over year, we reduced working capital investment by $74 million of.

A 14% year over year decline and strengthened our balance sheet.

Q3, DSO came in at 63 days versus the previous year's 61 days with much of the increase due to the timing of our sales and the quarter.

Our third quarter inventory turns of five eight times are in line with our expected range.

On March 31, 2021, we had cash and cash equivalents of $49 million and debt of $199 million or net leverage total approximately one seven times trailing 12 months adjusted EBITDA, which is within our targeted range.

I'd now like to turn the call back over to Mike for closing comments.

This was another quarter of strong execution by our employees worldwide and it gives me great confidence and our strategic plan to drive profitable growth.

We will now open it up for questions.

If you'd like to ask a question at this time. Please press the star and the number one key on your Touchtone telephone to us.

John on your question press the pound key.

And that is star then one to ask.

Quick question at this time.

Our first question comes from Adam Tindle with Raymond James.

Hi, This is Katherine Lee on for Adam.

Just wondering as inflation and price increases rippled throughout the economy and especially through this industry can you. Please talk about how inflation generally flow through your financial model and what are you observing from customer behavior and areas, where price has increased thus far and should we may be see margin improvement for skin for us as this unfolds.

Hey, Catherine This is Mike Let me, let me try and take a shot at that and historically and distribution.

Theres not a lot of impact on inflation and the near term I mean, we basically have our price is set in the marketplace by our suppliers and our suppliers' dictate what the value proposition is in general for everyone in the distribution supply chain. So at this point obviously.

As certain expenses go up for suppliers.

We expect that they will pass those through overtime, but we don't view that as a near term.

Item, that's going to affect our business.

Okay. That's good to hear and then also you have two significant competitors that are emerging over the next six months, what's your reaction to this and what does this mean for your company.

Well thanks for the question, but we don't comment on our competitor strategic plans of their actions. So we'll let them speak for themselves, but thank you for the question.

Our next question comes from can you tell us that.

Search.

Good afternoon, guys and congratulations on the profitability for the quarter.

Michael John I'm, just trying to reconcile I guess the year performance with some of your largest vendors and all.

Obviously saw a lot greater growth and their revenue and line. This quarter can you, perhaps getting a little bit more color or context about I guess, you guys not keeping up perhaps their revenue growth this quarter.

And Keith This is Mike I'll take a shot at first again, thanks for the kind comments on the margins you know, we have probably I'm going to take a stab at it here John 500 suppliers of all sizes. We have a group of about say 15 that are probably 80% of our revenue and.

And I would say, we look very closely at market share within that top 15.

And we continue to see very strong.

<unk> when we sit down with those suppliers and say how are we doing in the channel and in the part of the channel that we compete in and so sometimes there is confusion about how a vendor or supplier is doing and yet some of the business that they're doing well and maybe is not a piece of business that goes through <unk>.

And your distribution so with.

Where we choose to compete and can't compete we've not seen that happen, we're actually increasing our market share with those key suppliers.

Got it and I appreciate it and then I guess.

And on the supply chain challenges that you see again.

So a few things one if you can give us perhaps a little bit more color in terms of if.

It's one area or Youre seeing more of a challenges from the challenges on our logistical versus growth finished products and then finally the impact that had on the current quarter results and.

Will that perhaps have an impact on the results for the rest of the year.

Hey, Keith Thanks for the question and.

I think you heard and in <unk>.

My prepared remarks debt.

As it relates to supply chain and lead times, we have been affected.

Like everybody else and it's that is the same issues in terms of.

Kind of shipping delays and also chips right chip shortages.

And we actually did not see a big impact in Q3, and thanks to the strong work that are <unk>.

Apply chain team is doing in conjunction with <unk>.

Suppliers.

We feel that the impact and this quarter would be manageable and minimal.

Great. Thanks, I appreciate it.

As a reminder, that installer and Warren if you'd like to ask a question at this time.

Our next question comes from Chris Mcginnis with Sidoti.

Good afternoon, and thanks for taking my call and.

My question's on <unk>.

Congrats on a nice quarter.

Okay.

One question last time, you highlighted Pos portal and just that you were expecting that to underperform can you just talk about maybe how that performed on the quarter and your expectations kind of going forward and how that's.

Performance.

Yeah, great. Thanks for the question.

And we were.

We were pleased with Pos portal and their performance.

In the quarter and maybe more importantly, we were pleased with the signs of reopening of the economy and main street. So we're looking for.

Positive signs ahead.

Yeah.

And the.

I think you highlighted the profit profile coming out of Brazil is that a sustainable number and can you just talk about maybe the competitive landscape.

And that environment and install a positive operating.

Yeah. Another good question, Brazil, they had another great quarter and they are demonstrating really strong consistency.

They are absolutely capitalizing on things like the digital transformation that we're seeing.

Happening in Brazil, and I would tell you I think one of the things that's driving their.

Their performance. The most is we're seeing real synergies from them combining.

And two companies.

You remember, Brazil really is a.

Collection of CDC, which was the barcode business and then network, one which was more of a networking and compute company and so bringing those two companies together has really helped to drive consistency.

Consistency and performance and healthier margins.

Okay.

Maybe just talk about the outlook for.

And so M&A is that market and maybe opened up for you and Thats environment.

And maybe just elaborate a little bit on.

And that strategy as well.

Yes. Good afternoon, Chris This is Steve Jones, Thanks for the comment and the question I would say that we're still open to M&A opportunities for sure as we look forward, it's going to just be have to be the right fit and the right opportunity for us, but certainly would be on our and on our strategic plan.

Sure.

And then I guess, just and thinking about.

And next quarter the demand trends.

All right I may have missed us a.

Our commentary on the quarter, but you expect I guess any expectations for next quarter in terms of on demand trends and.

And now you've seen that playing out yes, Chris. Thanks for the question, we're actually not going to give guidance for Q4 at this point.

We've just not and are positioned to do that right now.

Sure I understand.

And thanks for taking my questions and good luck and Q4.

Thank you.

Again that is started and one if you'd like to ask a question at this time.

We have a follow up from the line of keto similar Telecom research.

Hey, guys, just one more follow up here.

From a bit more about the tell us this business and its ability to I guess pull forward some more business and I think.

And are you guys and I apologize I can't remember, which talked about how youre seeing new supplier billings through the vars and 69% from perhaps a little bit more context of real world. Examples on how it can tell us and help us drive for new business sort of ours.

Yes, Keith Great question and this is an area of real excitement for us if you remember back when.

When we made the acquisition of intelligence. It was always one plus one head to equal three or more and we are now seeing really strong evidence.

Of not only greater recruitment, but greater participation.

By the var community.

And revenue growth and supplier and net billings. So we're excited about what we're seeing there and.

Looking forward to.

Really doubling down on the effort to continue taking good care of our agents, but also continuing to grow the var population and the participates in the agency model.

And is that coming through better education or training classes or how are you guys able to engage them better.

Well, it's and it's a number of things it's definitely better education.

And our cloud University helps them with training.

Continued innovation around our tools and technologies.

But it will also we've invested in and tell us this and we will continue to invest and Intel us us in terms of account managers and technical resources and the resources that are necessary to help bars.

Get enabled and get comfortable participating and in those cloud markets.

Thank you and.

Keith US Mike just one more add on us.

And what we've learned is the typical time for any new partner in that ecosystem, whether they're a traditional agent and telecom agent or var takes them about three years from where they actually see success. So this is taking this takes a lot longer than we would typically see recruiting new partners.

And our products and services business and so that's why we're seeing US happen now and this has been four and a half year since we acquired and tell us is so.

Slower than we would all like but the evidence is it's working and it will continue to build going forward. So we're excited about debt.

Great. Thanks, Okay.

That concludes today's question and answer session I would like to turn the call back to Mike Garland for closing remarks.

Great. Thank you for joining us today, we expect to hold our next conference call to discuss June 30 quarterly and full fiscal year results on Tuesday August 24 2021.

This concludes today's conference call. Thank you for participating you may now disconnect.

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