Q3 2022 Scansource Inc Earnings Call

May 10, 2022

Welcome to the <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, Senior 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 President and Steve Jones, Our Chief Financial Officer, we will be reviewing our operating results for the quarter and then take your questions.

Hosted and earnings Infographic that accompanies our comments and webcast in the Investor Relations section of our website, let me remind you that certain statements in our press release and the earnings if a graphic 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 statement.

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 32021 as filed with the SEC any forward looking statements represent our views only as of today and should not be rely.

Upon as representing our views as of any subsequent date scaled 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.

The amounts and the earnings Infographic and in our press release. These rescue reconciliations can be found on our website and have been filed with our form 8-K filed today.

Ill now turn the call over to Mike.

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

Our exceptional third quarter performance underscores the strength of our hybrid distribution strategy and outstanding execution by our people for.

For the quarter, we delivered 16% net sales growth and record non-GAAP EPS for the quarter and for the trailing 12 month period we.

We had strong demand in our specialty technology solutions, and modern communications and cloud segments excellent execution by our people drove our top line growth and profitability ahead of expectations.

We are raising our fiscal year 'twenty two outlook and now expect net sales growth of at least 10% and adjusted EBITDA of at least $165 million.

Our hybrid distribution strategy is working as evidenced by our sustainable more profitable business model.

We measure our success by looking at the gross profit composition from our recurring revenue that is from <unk>, telesis, and our SaaS and subscription business.

And is the fastest growing part of our business six years ago. We had no recurring revenue we started our hybrid distribution journey with the acquisition of <unk> in August 2016.

Today, our recurring business is approximately 25% of our gross profits on a trailing 12 month basis.

This is meaningful validation of our hybrid distribution strategy.

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

Thanks, Mike.

We're excited about this quarter's results where demand was strong and execution by our people across the company was amazing.

The unique relationship and collaboration between our customers suppliers and our people led to the strong demand we delivered impressive results with 16% year over year net sales growth and 21% year over year increase in gross profits our sales growth.

It was led by increases in large deals as suppliers prioritized allocation to vars, who are delivering to enterprise customers. One of our unique competitive advantages is providing partners with better intelligence about inventory availability.

So incredibly proud of how our sales supplier services and distribution center teams are performing are working together to serve our partners.

As Mike said earlier, our hybrid distribution strategy is winning and driving the growth of our recurring revenue let.

Let me give you a couple of examples of how vars are adopting the strategy and selling hardware and recurring revenue.

Our communications bar was working with an end user retailer that wanted to move from premise based communications to cloud at its 2200 locations.

Our team provided engineering support and a modern communication solutions, including hardware software and cloud connectivity.

A second example is a mobility and Barcoding bar, who is implementing an outdoor video surveillance solution for a construction company at over 3000 sites that needed connectivity to the cloud.

This wireless surveillance solution included surveillance cameras cellular Sim cards connectivity and remote monitoring.

These are two of many examples where our customers look to scan source and our hybrid capabilities to drive their recurring revenue growth.

In our specialty technology solutions segment, net sales increased 15% year over year fueled by robust demand for our hardware technologies increases in big deals and product availability.

A more favorable sales mix and increased supplier sales intent incentives drove higher segment gross profits.

We're a modern communications and cloud segment net sales increased 17% year over year.

Strong demand across hardware and digital benefited from product availability.

And we also saw double digit growth in Brazil.

Cloud and connectivity recurring revenue increased 18% year over year.

During the quarter, we held 97 partner regional and national events, many in person showcasing our strategy and capabilities across hybrid solutions.

Our events team delivered on unique.

The event experiences for our partner and suppliers, including educational summits, tradeshows reward excursions and keynote spotlights.

I am excited to see the execution and momentum of our hybrid distribution strategy I wanted to.

All our people for their outstanding efforts and dedication I'd also like to thank our suppliers and customers for their trust and loyalty and scan source.

Now Steve will take you through our financial results.

Yes, Thanks, Jon as Mike mentioned in his opening remarks, our exceptional financial results underscored the team's strong execution deep relationships with our suppliers and customers and strong demand for our technologies.

It was an outstanding quarter, where we delivered strong top line growth and record profitability for.

For the trailing 12 months period, our non-GAAP EPS was $4 <unk> and our adjusted EBITDA totaled $163 million. Both are company records and highlight our consistent strong financial performance.

We achieved 18% adjusted ROIC for Q3, as we balanced our working capital investments to support our growth and meet future demand.

Q3, net sales of $846 million.

Up 16% year over year reflects strong customer demand across our technologies and a modest benefit from supplier price increases.

Additionally, Q3 benefited by approximately $30 million of sales pull forward from Q4 due to timing of product availability near the end of the quarter.

<unk> net sales increased 18% year over year and includes the benefit of timing and supplier commissions.

Our gross profit grew 21% year over year to $107 million, our Q3 margins increased to 12, 6% up from 12, 1% in the prior year's quarter and includes a onetime benefit from supplier price increases of approximately 45 basis points.

Our non-GAAP SG&A expense for the quarter of $66 5 million increased $6 7 million or 11% year over year.

This includes people in it investments ahead of revenues, primarily in our modern communications and cloud segment.

Our Q3 results include approximately $3 million of onetime SG&A expense benefits, primarily due to a large bad debt recovery in the quarter.

Third quarter, adjusted EBITDA totaled $44 1 million up 38% year over year, reflecting a $5 to one adjusted EBITDA margin, which includes the benefit of the one time items we've discussed.

For fiscal year 2022, we estimate the effective tax rate, excluding discrete items to range from 25, 5% to 26, 5%.

Now turning to the balance sheet and cash flow.

We generated operating cash of $30 million for the quarter and $16 million for the trailing 12 months year over year working capital, which includes accounts receivable and inventory net of accounts payable increased $80 million or 18% year over year to support our sales growth.

Q3, DSO of 69 days increased quarter over quarter and year over year. This increase is primarily driven by sales timing concentration at the end of the quarter, adding approximately four days to our reported DSO.

On March 31, 2022, we had cash and cash equivalents of $44 million and debt of $182 million.

Our balance sheet remains very strong.

From a net debt leverage perspective, we ended Q3 at approximately eight times trailing 12 months adjusted EBITDA, demonstrating financial flexibility to support our growth and create long term value.

During the March quarter, we had approximately $8 $3 million in share repurchases under our $100 million share repurchase repurchase authorization.

As Mike noted in his opening remarks, we are raising our FY 'twenty to net sales growth and adjusted EBITDA expectations and our updated guidance includes the benefits of the onetime items the onetime items noted in the quarter.

We will now open it up for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Chris Mcginnis with Sidoti Your line is open.

Hey, good afternoon, Thanks for taking my questions and congrats on a nice quarter.

Thanks, Chris.

I was wondering if you could just start with <unk>.

Maybe Steve just what was the pull forward number in Q3 from Q4.

It's about $30 million, Chris and that really is.

Just availability that orders were.

When we've looked at them, we were thinking that orders were going to ship in Q4, but because that supply came in late and we were able to to meet those customer demands.

Great.

I guess this falls my next question.

Were you at all impacted by supply chain disruption in the period and I guess, how is availability changed throughout the quarter.

If you could just maybe comment on that.

Yes, it's still a challenging supply chain environment, Chris I think you hear that from our suppliers and you probably hear that from our peers as well.

For us that we were glad to get the inventory at the end of the quarter still strong demand and.

And lead times are still way ahead of what we saw last year.

Just kind of given I mean, not not looking at your trends today, but just to kind of fear in the marketplace around things slowing down any indication from any of your customer base, we're talking to the vars are.

Any concerns around that it doesn't appear so but just kind of getting your view on the overall market demand.

Hey, Chris This is John Thanks.

Thanks for the question.

And.

To date.

I would say no demand is still strong as you know we play in large and growing markets.

Specialized and we think we're positioned to win and things like.

The trends of digital transformation automation and employee productivity.

Work from anywhere all these kind of things are have been and continue to to drive our success.

Great.

Maybe John could you just talk a little bit about the acceptance of the hybrid model and I guess, just one by your customer base. So they feel more comfortable with it and then Additionally can you just talking about the competitive landscape are people moving to.

Similar model.

Provide a little bit more color on that thank you.

Yes, Thanks, Chris Great question, and something we love talking about.

When it comes to the hybrid distribution model really our strategy as we've talked about many times before is all about connecting devices to the cloud and enabling our partners to deliver an end user buying and consumption requirements.

And we are so excited.

Our strategy really is offering partners choice, while at the same time, reducing the complexity and friction.

In the buying process and shortening their time to value and revenue.

And we're seeing great adoption of this strategy as evidenced by the examples that I gave.

And we see great upside ahead.

Great and then maybe just on the competitive landscape of that or.

Did I Miss that I'll say thanks.

Yes. Thanks.

Look we as you know we have different competitors.

Different parts of the business.

But the reality is we have an amazing portfolio of the best suppliers and we have a large and growing partner base.

And based on these two things they are really putting us in a.

Kind of competitively advantageous position to deliver for our customers and wonder if we don't see that slowing down.

Great.

And if I didn't get to ask you about <unk> going be upset so can I just ask about the strength that continued strength. There is that just continued market share gains in and I guess, the the digital as well as maybe the hardware there.

Yes, I mean this is another topic, we love talking about as Brazil, I mean youre right. They continue.

To do a great job of executing and as we've talked about in the past we have an amazing leadership team down there and an amazing overall team.

That have a lot of maturity at a lot of a lot of experience and are using that to take share across the business.

Great.

And then just.

A little bit of share repurchase in the quarter can you just comment are you still in the marketplace or what your thoughts are with capital allocation. Thanks.

Yeah, Chris I'm going to I'm going to build on the back of what John said and really our theme is growth.

When we think about what we're going to use from a capital or capital deployment. If you look at what we've done in our working capital. It's just been an amazing year of building that working capital and we think there's lots of opportunity out there to grow and that will be our priority.

And then our priorities don't change so it would still be growth.

Making sure that our balance sheet is strong and then then returning any capital through share repurchases.

Great and I guess.

Steve on that I think you said 45 basis points from price increases and using that balance sheet, you still have that benefit in Q4 or is that kind of dissipated now.

Those are those.

Are those price actions are really kind of temporary for us and so we're not seeing those come back in Q4, when we think about that 45 basis points I would say that would be normalized out.

Normalized that out as we think of our forward looking guidance.

Sure no 100% I appreciate it.

All I had but thanks for taking my questions and congrats on a really strong quarter. Thanks.

Thanks, Chris.

I am showing no further questions at this time I would now like to turn the conference back to Steve Jones.

Yes. Thank you for joining US today, we know today is a very busy earnings release day, and some of our sell side analysts had some conflicts and weren't able to join US live, but we would be happy to follow up with any questions you might have.

We expect to hold our next conference call to discuss June 30 quarterly and full fiscal year results on Tuesday August 23 2022.

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

Thanks.

Okay.

Yes.

Okay.

Yes.

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Yes.

Okay.

Yes.

Okay.

[music].

Welcome to the scam 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, Senior Vice President Treasurer, and Investor Relations Ma'am you may begin.

Comments on webcast in the Investor Relations section of our website, let me remind you that certain statements in our press release and the earnings sense of graphics 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 scan sources Form 10-K for the year ended June 32021 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 <unk>.

Any subsequent date scaled 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 the earnings infographic and on our.

Press release. These rescue reconciliations can be found on our website and have been filed with our form 8-K filed today.

Ill now turn the call over to Mike.

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

Our exceptional third quarter performance underscores the strength of our hybrid distribution strategy.

And outstanding execution by our people for.

For the quarter, we delivered 16% net sales growth and record non-GAAP EPS for the quarter and for the trailing 12 month period we.

We are raising our fiscal year 'twenty two outlook and now expect net sales growth of at least 10% and adjusted EBITDA of at least $165 million.

Our hybrid distribution strategy is working as evidenced by our sustainable more profitable business model.

We measure our success by looking at the gross profit composition from our recurring revenue that is from <unk>, telesis, and our SaaS and subscription business.

And it's the fastest growing part of our business six years ago, We had no recurring revenue.

We started our hybrid distribution journey with the acquisition of Intel assists in August 2016.

Our recurring business is approximately 25% of our gross profits on a trailing 12 month basis.

This is meaningful validation of our hybrid distribution strategy.

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

Thanks, Mike.

Very excited about this quarter's results where demand was strong and execution by our people across the company was amazing.

So incredibly proud of how our sales supplier services and distribution center teams are performing are working together to serve our partners.

As Mike said earlier, our hybrid distribution strategy is winning and driving the growth of our recurring revenue let.

Let me give you a couple of examples of how vars are adopting the strategy and selling hardware and recurring revenue.

Our communications bar was working with an end user a retailer that wanted to move from premise based communications to cloud added 2200 locations.

Our team provided engineering support and a modern communication solutions, including hardware software and cloud connectivity.

A second example is a mobility and Barcoding bar, who is implementing an outdoor video surveillance solution for a construction company at over 3000 sites that needed connectivity to the cloud.

This wireless surveillance solution included surveillance cameras cellular Sim cards connectivity and remote monitoring.

These are two of many examples where our customers look to scan source and our hybrid capabilities to drive their recurring revenue growth.

In our specialty technology solutions segment, net sales increased 15% year over year fueled by robust demand for our hardware technologies increases in big deals and product availability.

A more favorable sales mix and increased supplier sales intent incentives drove higher segment gross profits.

We're a modern communications and cloud segment net sales increased 17% year over year.

Strong demand across hardware and digital benefited from product availability and we also saw double digit growth in Brazil.

Cloud and connectivity recurring revenue increased 18% year over year.

During the quarter, we held 97 partner regional and national events, many in person showcasing our strategy and capabilities across hybrid solutions.

Our events team delivered on unique.

Event experiences for our partner and suppliers, including educational summits, tradeshows reward excursions and keynote spotlights.

I'm excited to see the execution and momentum of our hybrid distribution strategy I want to thank all our people for their outstanding efforts and dedication I'd also like to thank our suppliers and customers for their trust and loyalty and scan source now.

Now Steve will take you through our financial results.

Yes, Thanks, Jon as Mike mentioned in his opening remarks, our exceptional financial results underscore the team's strong execution deep relationships with our suppliers and customers and strong demand for our technologies.

It was an outstanding quarter, where we delivered strong topline growth and record profitability for.

For the trailing 12 month period, our non-GAAP EPS was $4 <unk> and our adjusted EBITDA totaled $163 million. Both are company records and highlight our consistent strong financial performance.

We achieved 18% adjusted ROIC for Q3, as we balanced our working capital investments to support our growth and meet future demand.

Q3, net sales of $846 million up 16% year over year reflects strong customer demand across our technologies and a modest benefit from supplier price increases. Additionally.

Additionally, Q3 benefited by approximately $30 million of sales pull forward from Q4 due to timing of product availability near the end of the quarter.

<unk> net sales increased 18% year over year and includes the benefit of timing and supplier commissions.

Our non-GAAP SG&A expense for the quarter of $66 5 million increased $6 7 million or 11% year over year. This includes people in it investments ahead of revenues, primarily in our modern communications and cloud segment.

Our Q3 results include approximately $3 million of onetime SG&A expense benefits, primarily due to a large bad debt recovery in the quarter.

Third quarter, adjusted EBITDA totaled $44 1 million up 38% year over year, reflecting a five to one adjusted EBITDA margin, which includes the benefit of the onetime items we've discussed.

For fiscal year 2022, we estimate the effective tax rate, excluding discrete items to range from 25, 5% to 26, 5%.

Now turning to the balance sheet and cash flow.

On March 31, 2022, we had cash and cash equivalents of $44 million and debt of $182 million.

Our balance sheet remains very strong.

From a net debt leverage perspective, we ended Q3 at approximately <unk> eight times trailing 12 months adjusted EBITDA, demonstrating financial flexibility to support our growth and create long term value.

During the March quarter, we had approximately $8 $3 million in share repurchases under our $100 million share repurchase repurchase authorization.

We will now open it up for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Chris Mcginnis with Sidoti Your line is open.

Hey, good afternoon, Thanks for taking my questions and congrats on a nice quarter.

Thanks, Chris.

I was wondering if you could just start with <unk>.

Maybe Steve just what was the pull forward number in Q3 from Q4.

It's about $30 million, Chris and that really is.

Just availability the orders were.

When we've looked at and we were thinking that orders were going to ship in Q4, but because that supply came in late and we were able to to meet those customer demands.

Great.

I guess this solves my next question.

Were you at all impacted by supply chain disruption in the period and I guess, how is availability changed throughout the quarter.

So you could just maybe comment on that.

Yes, it's still a challenging supply chain environment, Chris I think you hear that from our suppliers and you probably hear that from our peers as well.

For us that we were glad to get the inventory at the end of the quarter still strong demand in.

And lead times are still way ahead of what we saw last year.

Any concerns around that it doesn't appear so but just kind of get your view on the overall market demand.

Hey, Chris This is John Thanks for the question.

And <unk>.

To date <unk>.

I'd say no demand is still strong as you know we play in large and growing markets.

Specialized and we think we're positioned to win and things like.

The trends of digital transformation automation and employee productivity.

Work from anywhere all these kind of things are have been and continue to drive our success.

Great.

John could you just talk a little bit about the acceptance of the hybrid model and I guess, just one by your customer base, where they feel more comfortable with it and then Additionally can you just talked about the competitive landscape are people moving to.

To similar model.

Provide a little bit more color on that thank you.

Yes, Thanks, Chris Great question, and something we love talking about when it comes to the hybrid distribution model really our strategy as we've talked about many times before is all about connecting devices to the cloud and enabling our partners to deliver an end user buying and consumption requirements.

And we are so excited.

Our strategy really is offering partners choice, while at the same time, reducing the complexity and friction.

In the buying process and shortening their time to value and revenue.

And we're seeing great adoption of this strategy as evidenced by the examples that I gave.

And we see great upside ahead.

Great and then maybe just on the competitive landscape of that or.

Did I Miss that I'll say thanks.

Yeah. Thanks look we as you know we have different competitors.

In different parts of the business.

But the reality is we have an amazing portfolio of the best suppliers and we have a large and growing partner base.

And based on these two things they are really putting us in a.

Kind of competitively advantageous position to deliver for our customers and windows.

Don't see that slowing down.

Great.

And if I didn't get to ask you about <unk> can I just ask.

The strength of continued strength there is that just continued market share gains in <unk> and I guess the.

The digital as well as maybe the hardware there.

Yes, I mean this is another topic, we love talking about as Brazil, I mean, youre right. They continue to do a great job of executing and as we've talked about in the past we have an amazing leadership team down there and an amazing overall team.

That have a lot of maturity at a lot of a lot of experience and are using that to take share across the business.

Great.

And then just.

A little bit of share repurchase in the quarter can you just comment are you still in the marketplace.

What your thoughts are with capital allocation.

Yeah, Chris I'm going to I'm going to build on the back of what John said and really our theme is growth. When we think about what we're going to use from a capital or capital deployment. If you look at what we've done in our working capital.

<unk> been an amazing year of building that working capital and we think there's lots of opportunity out there to grow and that'll be our priority.

And then our priorities don't change so it would still be growth.

Making sure that our balance sheet is strong and then then returning any capital through share repurchases.

Great.

Steve on that yes, I think you said 45 basis points from price increases and using that balance sheet, you still have that benefit in Q4 or is that kind of dissipated now.

Those are those price actions are really kind of temporary for us and so we're not seeing those come back in Q4, when we think about that 45 basis points I would say that would be normalized out.

Normalized that out as we think of our forward looking.

Guidance.

Now, 100% I appreciate it.

It's all I had but thanks for taking my questions and congrats on a really strong quarter.

Chris.

I'm showing no further questions at this time I would now like to turn the conference back to Steve Jones.

We expect to hold our next conference call to discuss June 30 quarterly and full fiscal year results on Tuesday August 23 2022.

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

Q3 2022 Scansource Inc Earnings Call

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