Q1 2023 Scansource Inc Earnings Call
Yeah.
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 morning, 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 will review, our operating results for the quarter and then take your questions. We posted an earnings infographic that accompanies our comments.
To Mike.
I'd like to highlight three areas that contributed to our record EPS.
Number one our consistent topline growth gives us leverage on our SG&A and five of the last six quarters, we delivered double digit net sales growth the strong demand across our technologies, coupled with our trusted customer and supplier relationships are making a difference in our ability to achieve above.
<unk> proven the scalability and flexibility of our business in Brazil in spite of macro events in the region.
The intelligence business model enabled us to build our first recurring revenue stream we.
Device distribution and recurring and recurring revenue we have transformed the company into the leading hybrid distributor that we are today.
Thank you Mike for Q1, we delivered 10% net sales growth and 12% gross profit growth Q1 was another quarter highlighted by strong demand for our technologies and outstanding execution by our team and our partners, while navigating ongoing supply chain challenges.
For the first time ever we brought together our bar and agent communities to discuss how they can accelerate growth across hybrid opportunities our messaging resonated very well with our partners and created enthusiasm for driving hybrid solutions and growth.
What was also evident is the importance and value of our customer relationships.
And how critical these deep relationships built on common goals and trust are to our mutual success and growth.
Want to send out a heartfelt thank you to our marketing and events team for designing architected and producing this incredible event.
Our outstanding Q1 performance demonstrates how our hybrid strategy and capabilities are enabling partner's success and growth.
Let me give you an example of how our hybrid strategy is winning business and existing customer looking to add more capabilities brought their cloud and on Prem communications business out to RFP.
Through our extensive hybrid capabilities, including our CX practice, our solutions and technical engineering capabilities and our professional services referral program. We won the business, bringing all their cloud and our hardware business to scan source, we doubled our hardware business from $10 million.
$20 million and added a continuing stream of ucas and seek as subscription revenues innovative solutions like this are driving incremental value and recurring revenue for our hybrid partners and scan source.
The supply chain challenges are continuing but this environment plays to our execution strengths, including our position as the largest or second largest customer for many of our suppliers.
When shipments are complete.
Pos and payment terminals self checkout systems and video surveillance solutions, we continue to see strong demand and growth in these areas led by Zebra Honeywell MCR to Chiba and hard work.
Modern communications and cloud segment delivered 3% net sales growth, we had incredible growth with Cisco are Q1, Cisco net sales grew close to 50% year over year led by large enterprise projects are key areas of growth are technologies that enable remote work for the enterprise <unk>.
<unk> continues to lead in the agency space for fiscal year 2023, we expect double digit year over year net sales growth for entellus is driven in large part by the strength of our relationships and the trust and credibility, we foster with our partners and suppliers.
In Brazil over the last five years, we achieved scale and operational excellence across the business because we've achieved critical mass. This business has been able to self fund its growth while achieving its expected net profitability.
As an example of our team's operational excellence and ability to mitigate risk our Brazil business unit received recognition and certification from the Brazil government in the areas of importation controls and anti corruption.
Now I'll turn the call over to Steve who will take you through our financial results.
Our non-GAAP diluted EPS of $1 seven and.
We achieved 15, 6% ROIC for the quarter as investments in working capital allowed us to take advantage of strong demand.
Q1, and tell US this net revenue increased 7% year on year, However, and telesis had double digit net commission growth, which are the ongoing commissions, we earn on partner sales, while supplier rebates were lower due to timing.
For the trailing 12 months period, approximately 24% of our gross profits are from our recurring businesses.
Our non-GAAP SG&A expense for the quarter of $71 6 million increased $7 7 million or 12% year over year.
This increase is primarily attributed to higher people costs from wage increases and head count investments to support our high growth areas.
Our Q1, adjusted EBITDA of $45 3 million reps.
<unk> represents a 9% year over year growth rate and a four 8% adjusted EBITDA margin.
$3 4 million.
Our higher year over year interest expense reflects both higher interest rates and the investments in working capital that helped drive our higher growth rates and profitability.
Now turning to the balance sheet and cash flow.
Our strong balance sheet enables us to invest in higher working capital to support the strong demand across our technologies and the need of our customers and suppliers.
We think it's the right investment to make when we can deliver a 15, 6% adjusted ROIC like we did in Q1.
We used operating cash of $48 million for the quarter and $116 million for the trailing 12 months period.
We believe our higher working capital investment driven by higher accounts receivable and higher inventory levels as temporary as we support our sales partners and suppliers and a strong demand environment.
Year over year accounts receivable increased to $155 million or 26% year over year increase in Q1, DSO increased to 71 days higher than our typical range.
To support the strong demand environment, we are using collared extended terms both project specific and time based on a targeted basis with good payers.
Our investments support long project Rollouts due to availability and partial shipments.
Our supply chain challenges ease, we would expect our collared payment terms and DSO to come back down.
The overall health of our receivables portfolio is very strong.
Year over year inventory increased $182 million.
<unk>, 37% increase year over year, and Q1 inventory turns slowed to five one times slower than our typical range.
Our working capital investments have enabled us to achieve double digit sales growth in five of the last six quarters.
Our inventory is current and we have stock rotation price protection and obsolescence protection with our suppliers to mitigate downside risk.
On September 32022, we had cash and cash equivalents of $40 million and debt of <unk>.
$326 million.
Our balance sheet remains strong from.
From a net debt leverage perspective, we ended Q1 at approximately one seven times trailing 12 month adjusted EBITDA.
During the September quarter, we had no share repurchases under our $100 million share repurchase authorization.
On September 28, we amended and extended our credit facility for $500 million in committed facilities with a new maturity date of September 28 2027.
It was an opportune time to complete the new facility with a strong banking group and favorable pricing grid.
Our amended credit facility provides us with the financial flexibility to support our near term growth opportunity and our midterm goals that we introduced last quarter and are included in our latest investor presentation available on our website.
Finally, we are reaffirming our full year 2023 outlook of at least five 5% per year over year net sales growth and at least $174 million for adjusted EBITDA.
We expect faster growth in the first half of FY 'twenty three than we than we see in the second half of the year.
As we think about our cash flows we expect to use cash in the first half of the year and generate free cash flow in the second half.
We expect our increased investments in working capital to continue through December quarter, and expect Q2 interest expense to be similar to Q1.
For our fiscal year 2023, we estimate the effective tax rate, excluding discrete items to range from 26, 4% to 27, 4%.
We are very pleased with our start to FY 'twenty three and how we are executing on our hybrid distribution strategy.
I will now open it up for questions.
Certainly and ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of.
Greg Burns from Sidoti Your question. Please.
Hi, good morning.
I just wanted to dig in a little bit more on the net sales growth on the modern communications side of the business.
Given the kind of the growth you called out.
From an telesis and the ucas market and the <unk> market as well as what you saw from Cisco.
So there are other offsets to get to that.
3%.
Total net sales growth what is driving that it feels like.
Some of the areas, we are growing a lot faster than that 3%.
Greg This is Jeff Thanks for your question.
Yes, we saw.
A decrease actually about 26% year on year on the on Prem Coms business and that was primarily driven by three suppliers.
That we saw in the quarter.
Okay.
No.
How much of that business is now.
Greg we still have we still have a long tail on the on Prem communications.
We are always wondering when that that bottoms out and we try to guess at that but it's still a long tail on that one in our business.
Okay.
What percent of modern communications is still made up does that make up.
That's a good question, Greg I don't as we switched over to looking at hardware and comes together.
Right.
Sorry, Greg Thanks for that Mary, it's less than 15% of the total segment okay.
Okay perfect. Thanks.
And then the.
The decline in the.
The gross profit is that just a mix issue because typically I would expect.
The gross gross profit to grow faster than revenue on that side of the business given.
And tell US this is accounted for.
Okay.
And then on the.
Technology side of the business.
Is there a specific.
<unk> secular trends driving demand there is.
Because I know that business performed well during the pandemic given the need for remote computing.
And.
Payment payment terminal upgrade cycles, but is there or is that just continuing or what is what.
What is the.
Seeing driving demand.
The first piece, but automation and worker productivity continued to be strong for us.
Mobility, physical security and yes, Pos and payments self checkout and then on.
On the modern Com side it continues to be.
Enabling remote work, enabling returned to office and collaboration.
Okay, great. Thank you.
Thank you once again, if you have a question at this time. Please press star 111 moment for our next question.
And our next question comes from the line of Keith Hughes from Northland, Ken Post Research your question. Please.
Good morning, guys I appreciate it.
Just focusing a little bit more on the specialty side.
Some of your largest barcode vendors that you mentioned earlier is where you are having success.
Put out some pretty cautious guidance for the fourth quarter, and obviously investors have ideas about the rest of the year, but obviously you guys are seeing some strength from them. So perhaps you guys can speak a little bit more about your visibility for the next quarter and what are you assuming your excitement is coming from there.
Hey, Keith it's John Thanks for the question.
Yes look we had a.
We had a strong quarter and we're excited about what was happening in barcode and mobility.
As you know we saw some.
Challenges with one of our with one of our suppliers in some some of their transitions from one distribution center to another but we were able to work through that we had strong.
Strong inventory tour strong inventory flows to US Q1, and Q2 and we feel good about big deals.
And I guess, most importantly, as you know we just have the <unk> channel connect conference that I referenced and there was.
Incredible enthusiasm amongst our barcode mobility partners at that event for continuing strength in demand.
Great I appreciate that in speaking of coming back to your question before about Cisco and I understand that right that Cisco is now.
<unk> grew sales, 50% in your market indications segment.
Keith This is Steve Thats, correct, that's where a lot of our Cisco.
Revenues citizen that modern communication and cloud great.
From an investor standpoint concerning how sustainable is that growth. There obviously, it's beneficial offerings from a loss in the on Prem business, but is that something I guess investors have a lot of confidence that type of growth can continue I guess as long as we see the on Prem.
Challenges.
Yes, we believe so Keith we believe that's a very strong business for us and we're in a good position to take advantage of the opportunity in that in that space.
Great.
Okay.
Keith It's Mike just I.
Can't resist.
The Cisco distributor of the year again in Brazil.
The fact that we're growing so much with Cisco suggests that the customers prefer us because they have other choices.
I think the the records that were achieving is just evidence that we've got the right combination of services.
And relationships that Cisco appreciates and so we're not the biggest Cisco distributors you know, but we believe we're the best platform.
And my understanding is Cisco is having their challenges with the supply chain equipment, especially if networking and meraki equipment.
Are you guys, having the two effects by growing our reseller base or are you getting access to more products.
Maybe any color you can provide on how you guys are achieving that growth.
Yes.
Hey, we're going we're going around the horn here now you're back to me Keith I think.
We were able to.
To deal with any supply chain constraints in Q1, very well as you know we took some inventory in our own distribution centers, but did.
Drop ship.
We also are seeing.
A lot of large enterprise projects as customers move from Wa.
What was the.
The early days of Covid, and just trying to put technologies together short term now theyre moving towards longer more sustainable enterprise projects and I think the last thing that we're so excited about is we're bringing on a ton of new Cisco partners.
I think we brought in brought on over 30 plus partners. This past quarter. So we've been working hard and like Mike said I think the mere fact that they are coming to US is a testament to that.
Cisco preferred.
And I guess one more question. This is <unk> 30 is now May you added how what's kind of baseline are we comparing that to.
Thank you for the question.
Once our baseline for Cisco to keep that as something that we don't disclose.
Yes no.
I guess im sorry based on revenue based on in terms of.
Our partners have you brought on three new partners does that compare to several hundred partners already or is that even larger.
Yes, again, Keith that's not something that we disclose in terms of a number we just really are saying that the 30% to say when we look at our overall base, that's quite a bit to bring on in one quarter, yes, okay. Great fair enough. Thank you appreciate it.
Thank you once again, if you have a question at this time. Please press star one one on your telephone.
Okay.
This does conclude the question and answer session of today's program I'd like to hand, the program back to Steve Jones for any further remarks.
Yes, Thank you and thank you for joining US today, we expect to hold our next conference call to discuss December 30, <unk> quarter quarterly results on Tuesday February the seventh at approximately 10 30 a M.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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