ScanSource Inc. Q3 2023 Earnings Call
Yeah.
Welcome to the scans or its 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 morning, and thank you for joining us joining me on the call today are Mike Baur, our chairman and CEO and Steve Jones, Our Chief Financial Officer, John Eldar, President is under the weather and not able to join US today, We will review our operating results for the quarter and then take your questions we posted.
And earnings at the graphic 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 Infographic 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 it is scanned sources Form 10-K for the year ended June 32022, that's filed with the SEC any forward looking statements represent our views only as of today and should not be relied upon as well.
Presenting our views as of any subsequent date.
<unk> 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 that or any sense of graphics and in our press release.
These reconciliations can be found on our website and have been filed with our form 8-K today I'll now turn the call over to Mike.
Thanks, Mary and thanks to everyone for joining us today.
Throughout fiscal year 'twenty three our team has delivered results ahead of expectations in Q3, it's no exception. This quarter, we delivered 5% net sales growth strong gross and adjusted EBITDA margins and positive operating cash flow.
Our diversified portfolio of products and services strategy is working our channel customers Trust us to broaden their technology offerings to meet the demand of end customers in this increasingly digital world in.
In addition, we give our channel customers the opportunity to build a successful stream of recurring revenue that will result in a more profitable and sustainable business.
Since John is not able to join US today I will provide the business performance update for him.
For Q3, both net sales and gross and gross profit increased 5% year over year.
We were able to meet customer demand with our strong inventory positions.
As we enter Q4, we are seeing supply lead times returned to normal levels for most of the products, we sell enabling us to be more efficient with our inventory levels.
In our specialty technology solutions segment, Q3, net sales increased 12% year over year fueled by networking security and Barcoding and our Q3 segment gross profit increased 7%.
We had strong sales growth in devices that enable productivity automation and the customer experience.
This quarter's growth drivers included data networking barcode scanners, and printers and physical security or.
Our sales team was recently named Aruba is North America distributor of the year. This recognition demonstrates our specialized expertise in this space and successful engagement with the Aruba team to execute growth strategies.
Moving on to our modern communications and cloud segment.
Q3, net sales decreased 7% year over year, while gross profit increased 3% year over year.
Strength in networking was offset by lower sales volumes and communications hardware as business shifts to the cloud we.
We had double digit growth in our Cisco sales led by networking growth in our federal business and the fast growing cyber security business.
We are well positioned for growth with our cloud offerings.
<unk> UC as a service Ucas and contact center as a service ccas.
As part of our intelligence business, you cast billings grew 22% and our <unk> billings grew 56%.
While our cloud communications business continues to grow.
Our on premise communications business continues to decline.
For Q3 on premise represented only 10% of the total segment sales, but less than 4% of total consolidated net sales for the company.
And telesis continues to be a leader in the agency space. Our Q3 end user billings increased 9% year over year, and now exceed $2 $4 billion annualized.
Q3, and tell us as net sales increased 4% year over year.
Our strong results for this quarter demonstrate how our diversified portfolio of technologies is driving our hybrid distribution success.
Now I'll turn the call over to Steve who will take you through our financial results.
Thanks, Mike our team delivered Q3, net sales growth and adjusted EBITDA that exceeded our expectations for Q3, we had 5% net sales growth and positive operating cash flow of $55 million.
We delivered Q3 adjusted EBITDA of $45 7 million, an all time record trailing 12 month, adjusted EBITDA of $178 $4 million.
Gross profit for the quarter increased 5% year over year to $112 million with 12, 6% growth gross profit margin with similar benefits from supplier price increases in both quarters.
Our transformed business model generated Q3 recurring revenues of $28 7 million up 4% year over year for the trailing 12 month period, approximately 24% of our consolidated gross profits are now from recurring revenue business.
Our SG&A expense for the quarter of $77 million increased $4 1 million or 6% year over year.
Our Q3, adjusted EBITDA of $45 $7 million represents three 5% year over year growth and a five 1% five 6% adjusted EBITDA margin.
Q3, non-GAAP EPS of <unk> 96 <unk>.
Decrease 8% year over year and includes interest expense of $5 $7 million significantly higher than the $1 5 million in the prior year.
Our higher interest expense reflects both higher interest rates and higher average borrowings.
As we look to the June quarter, we believe interest expense will be approximately $5 million for the fourth quarter.
Now turning to the balance sheet and cash flows in Q3, we achieved positive operating cash flow of $55 million.
We brought our working capital down $12 million quarter over quarter and expect continued improvements in the June quarter, as we improve our inventory efficiency to reflect lead times returning to normal.
Year over year accounts receivable increased $42 million in Q3, DSO increased to 70 days.
Our balance sheet remains strong.
From a net debt leverage perspective, we ended Q3 at approximately one five times trailing 12 month adjusted EBITDA.
During the March quarter, we had approximately $10 $7 million in share repurchases and have an outstanding authorization with approximately $70 million remaining.
As a reminder, our top capital allocation priority remains investing in growth opportunities to drive long term value.
Finally, we are raising our full year 2023 outlook for adjusted EBITDA to be at least $182 million and maintaining our year over year sales growth of at least six 5% in.
In addition for the full fiscal year, we expect positive operating cash flow and an effective tax rate of approximately 28%.
To help with analysts' models, we expect a net expense for interest expense interest income and other expenses to be approximately $14 million to $15 million for the full fiscal year 2023, which reflects approximately $4 million for our fourth quarter.
We will now open it up for questions.
Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And one moment for our first question.
And our first question is coming from Jake Nordson of Raymond James Your line is open.
Perfect just a couple from me so.
If you could just talk about linearity in the quarter did you see any deals from <unk> get pulled into <unk>.
Or you can virtually seeing anything get pushed out delayed a couple of quarters, just any color there would be helpful.
Yes, Hi, this is Steve Thanks for the question and thanks for joining US today I would say that we did not see a big pull in in Q3 that on our results and we really haven't seen anything in Q4 push out. So I think the linearity is very normalized for us we haven't seen anything change in our in our demand patterns.
Okay, Perfect and then last one for me. So I'm curious why you guys think <unk> will only be down around 4% when other peers have been calling for high single digit declines in 2023 is this a function of backlog or mix just whats underpinning your confidence there.
Yes, I think it's where we are in the quarter I mean, we're five weeks in we're giving you kind of our best look at where we think we're going to end over the next few weeks.
Okay perfect. Thank you.
One moment for our next question.
And our next question will come from Greg Burns of Sidoti Greg Your line is open.
Good morning.
Wanted to follow up on that last question for the outlook for the balance of the year.
Did see a little bit.
Cautious commentary from some of your larger partners.
So I just wanted to get a sense of what youre seeing in the market or youre not seeing.
Sales cycles, extending buying decisions, maybe getting getting put on hold anything that might.
Give you a little bit of.
Sense of caution as we look out over the next six to 12 months.
Hey, Greg it's Mike Good morning.
Maybe a comment would be this is that if you look at what the sales growth is implied in our Q4.
Full year guidance.
It's actually modest growth from Q3 to Q4, we think that's in keeping with this macro environment. We're in we're certainly cognizant.
What our suppliers are announcing our business as you know and as we've talked about especially today is we've got a balanced portfolio that allows us to compete where the markets are moving and we believe that was evidenced in our Q3 results is that we saw growth in certain areas that really allowed us to.
Frankly exceed our expectations and however, again, we're trying to be cognizant of the environment. We're in today and we believe our our guidance for Q4 as appropriate.
Okay, and then in the <unk>.
The modern communications segment.
The communications part of the business.
Could you give us the relative growth rates of.
<unk>.
The on Prem versus cloud portions of those business businesses.
Yes, Greg as we talked about on the on the on Prem side, it's about 10% of our total segment growth and it's declining still double digits and that's been a continuation that we've seen in that business over the past few years, So I wouldnt say, its accelerating or decelerating, it's pretty consistent and now it's really de minimis.
In terms of the the total amount of revenue that is driving for our company.
Okay.
Thank you.
One moment for our next question.
And our next question will come from Matt Sheerin of Stifel. Your line is open.
Yes, Thanks, and good morning, I had a couple of questions. One regarding your comments about the growth in networking, specifically double digit growth with Cisco.
How much of that is related to just very strong backlog and component constraints in that backlog getting filled then are you seeing that.
That backlog start to come down as those your var customers trying to fulfill those orders.
Hey, Matt, it's Mike I'll tackle that one.
In general we don't speak a lot about backlog, because we tend to be able to.
Meet our customers demand appropriately based on what they believe the end user needs and as an example, Cisco and as an example has been very good at responding to specific customer lead time needs and so we really saw after the last couple of quarters that we.
We're able to do a better job much better job of meeting customer demand and so I would say it did contribute that we're able to get the supply we need but we just saw an acceleration in the networking space overall, including Cisco and I think thats really the store.
Three of the quarter for US is Cisco benefited as did Aruba, who we also mentioned on the call and we have other networking suppliers too. So I think in general for scan source, we felt that space for our customers our var customers was very strong.
And do you expect that to continue into this quarter.
We do we think thats, an ongoing need for the marketplace and it's one that our customers tell us is.
The end users are doing a great job of forecasting that demand for our team.
Okay. Thank you and just a question on inventory.
Still up significantly year on year it sounds like.
Given the ease and the component constraints that youre going to be working that down can it gives you an idea.
What to expect in terms of inventory days or other metrics.
But one of the things I'll tackle the just.
The overall thinking on and then let Steve talk about metrics, but I would say in general Matt we want to make sure we don't Miss.
A deal we want we don't Miss a customer's need and so we've always as a company, we've probably leveraged our balance sheet historically to have higher inventory levels to meet customer demand. So that we don't lose a customer for that reason and we also believe that our customers or our customers were there first and primary does.
<unk> of choice for products like these and we want to we want to maintain that however, having said that as you know we also have historically used our balance sheet to be opportunistic and some of our inventory purchases so as opportunities those opportunities.
Amish.
And as we see that we're able to meet demand with lower inventory strategically we will lower our inventory levels.
Got it okay. Thank you very much.
As a reminder to ask a question. Please press star one on your telephone.
Remove yourself from the queue. Please press star one one.
And our next question will come from Adam Tindle of Raymond James Your line is open.
Okay. Thanks, Good morning, I, just wanted to ask Mike I think if I heard this correctly, obviously very strong.
Growth in Ucas, and seek has double digit growth in those and that's becoming a bigger portion of the business. I think you also mentioned that net revenue, including Intel axis was up maybe 4% or so in the quarter and if I got that right. Just curious any commentary on on that business in particular, I think we've been accustomed to very strong double digit.
Growth rates in the past and I know, it's getting larger so.
Maybe any commentary on the growth rate of that piece of the business and the net revenue the puts and takes at that level.
Sure you bet.
The other metric that we're we've always been tracking and I think it's maybe for this quarter, specifically a really good indicator of our strategy as our end user billings grew 9% versus 4% on the net sales for <unk> and what that tells US is that we're not losing market share at the end customer what's happening there.
As we're getting margin pressure and we've talked about this for a few quarters now that we've made it.
Our specific strategic decision to make sure that we don't lose customers and so our goal is even if we take a lower margin. We're willing to do that that does result in lower revenue also since the way. This business works as you know, it's netted down to where the revenue is very small because the margins at 100%.
So I think it does reflect the fact that we're the dominant player. We're the leader and that we believe that the leader is always going to have others compete on price and we're having to see and meet more price competition in the market.
Understood that makes sense.
Guess, maybe brought more broadly in terms of the competitive dynamics, you've obviously got the.
One of the larger players out there is still going through a major integration.
Just curious not just <unk>, specifically, but distribution broadly opportunities that youre seeing as a result of the competitors that are maybe a little bit distracted. If you can speak to the competitive environment that'd be helpful.
Well I'll try not to talk about our competitors, but I will comment.
Comment that we did beat all of those guys as the Aruba distributor of the year and so we were really proud of that because as you recall Aruba was acquired by HP and we were not an HP distributor before and so I was really pleased with our team's performance.
To be able to compete head to head with some of the broad line distributors in that space, where frankly, we believe our specialized knowledge wins, even over price in that space. So we're up I'm pleased with that I think the whole networking part of our business has historically been the most competitive place and for the.
The fact that we're winning right now suggests that we understand our customers what they need and what they expect from a distributor so I'm real proud of that.
Okay and last one from me, Steve I think you mentioned in your comments that supplier pricing action was basically.
No impact on a year over year basis, but.
Obviously impacting the model positively from price increases are you able to pin that down and help quantify that and help us to think about the expectations for that piece going forward I just don't want to get ahead of ourselves that that's something that's going to ultimately.
Reverse itself at some point.
Yes, Hi, Adam Thanks, Thanks for the question, it's a good one.
I would say that when we think about it from a margin impact I would say, it's similar to what we said last year, which is about 60 basis points on our margin we are.
Are seeing price actions decline as the.
The market shifts a bit.
On some of our major on some of our major suppliers. So I think when we think about sustainability. That's the way I would kind of frame. It is it's about a 60 basis point impact for this quarter, but.
That price action as we think about for our business it pushes out in the quarters because as we have inventory remember this Adam as we have inventory that will rollout in our inventory turns so when Mike talked about some opportunistic buying and our inventory levels that does help us there.
Okay, Yes, that's very helpful. Thank you very much.
One moment for our next question.
And our next question will come from Keith <unk> of Northcoast Research. Your line is open.
Good morning, guys, Hey, Mike just following up on your policy conversation, there and the pricing action there.
And are we at risk or is it just that risk of seeing a price decline and being more permanent average looks like you guys are having and where could that go in the future.
Well I didn't quite catch that.
I'm sorry, the background.
No it's around <unk> telesis, and the pricing, but give me a little more.
Yes.
Alright.
I'm going to take us right here.
In terms of our pricing for <unk>, you mentioned that coming down for the quarter. As you guys have been more price competitive I guess, what's the anticipation that that is.
Permanent move for the business.
Are we at risk risk, becoming more of a hardware type margins going forward now several years out.
Well I think what I think what's different about the Intel USCIS margin pressure is this is that it's had a unique impact for <unk>.
On a revenue and typically in our hardware business as you know Keith if we have margin pressure. We can still have strong revenue growth. So really for me. We're just trying to be careful that we don't.
And then the wrong impression that a lower growth rate is suggesting we're losing market share, which we don't believe we are and that we're willing at these margins to maintain that because.
For all of our investors know this is a extremely profitable business on the operating income line and the EBITDA line and remember with the limited working capital required for this business to its a strong long term strategic play even at growth rates of 4%. So so we believe that might.
<unk>, but we're comfortable that we need to maintain market share. While this is going on.
Got it appreciate that and then Steve working capital that you guys brought down accounts payable accounts receivable quite a bit more of the inventory in the quarter and I can appreciate the commentary that you had mentioned on maturity happy inventory, but also the beautiful part about your businesses, Brian you guys see the decline in business everyday on working capital.
Is there thoughts about how much more on working capital you guys have taken on what's you guys going to do with the excess cash that way you guys.
Throw it more toward your data perhaps share repurchases.
Well Keith it's a great question on on the working capital and yes, as we as we see the.
Supply chain improve we'll be able to adjust our working capital, particularly our inventory levels.
And the next quarter and really for the next few quarters, it's going to take a while to move this through.
The whole cycle in terms of our what we would do with the excess cash that we would generate the additional cash that would throw off of that working capital decline again. It goes back to our three priorities if our balance sheet is strong and we're at the lower end of our.
Leverage ratio and if we don't have a growth opportunity that we report into it would just go back in terms of share repurchases.
Got it I appreciate it guys. Good luck. Thanks.
Alright, thank you.
Good morning.
I would now like to turn the call back to Steve for closing remarks.
I would now like to turn the call back to Steve for closing remarks.
Thank you and 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 20.
At 10 30 a M.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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