Q4 2023 ScanSource Inc Earnings Call
Speaker 1: Welcome to the ScanSource 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 of the Music**
Speaker 2: on the call today are Mike Bauer, our Chairman and CEO , John Eld, our President, and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and for the fiscal year and then take your questions. We posted an earnings infographic that accompanies our comments and webcasts in the investor relations section.
Speaker 2: 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 scanned sources Form 10-K for the year ended June .
Speaker 2: and should not be relied upon as representing our views as of any subsequent date.
Speaker 2: ScanSource 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 were discussed both GAAP and non-GAAP results and have provided reconciliations between these amounts in the earnings infographic and in our press release.
Speaker 2: These reconciliations can be found on our website and have been filed with our Form 8K today. I'll now turn the call over to Mike.
Speaker 3: Thanks, Mary, and thanks everyone for joining us today. Our business is built on relationships, and we recently confirmed the value of the trust we have with our customers, suppliers, and employees we developed over 30 years. As you know, on May the 14th, we discovered that ScanSource was subject to a cyber attack.
Speaker 3: that had a broad impact on the company. Thanks to the amazing work of our employees working together with external cybersecurity experts, ScanSource's core systems were restored and operations resumed on May 26. I am very proud of the exceptional execution teamwork.
Speaker 3: and customer service are employees displayed throughout the cyber attack and system restoration. For fiscal year 2023, we delivered 7% annual net sales growth, exceeding our full year 2023 outlook. We had record adjusted EBITDA of $180 million.
Speaker 3: and a 4.75% adjusted EBITDA margin. Looking back on fiscal year 2023, we are very pleased with the progress we've made with our midterm.
Speaker 3: three to four year goals that we introduced a year ago. Our midterm goals are net sales growth per year of five to seven and a half percent, adjusted EBITDA margin of 4.5% to 5%, mid-teens adjusted ROIC, mid-teens adjusted ROIC,
Speaker 3: Despite recent weakness in some of our technology markets, our business remains healthy, with revenues and profits growing. The ScanSource diversified portfolio of products and services is our strategy for long-term growth in the specialized technology markets we have chosen. These highly specialized markets reward the company not only with revenue growth, but also with higher profit margins because of our focus. ScanSource wins market share with the deep knowledge from our sales teams, specific value-added tools and services, and more.
Speaker 3: and a working capital strategy that flexes based on specific supplier and customer requirements. As we enter fiscal year 2024, strong free cash flow and focus on Intellisys are keys for our success.
Speaker 3: Now that the supply chain challenges are behind us, we expect our normal business model that balances days on hand of inventory and days sales outstanding with gross margins to return.
Speaker 3: with the support of our key suppliers and customers.
Speaker 3: we are executing a multi-quarter working capital improvement plan with a focus on reducing inventory levels.
Speaker 3: I will now turn the call over to John to discuss our business performance.
Speaker 3: Thanks Mike. Our Q4 results demonstrate the resilience of SkiingSource's business amidst a significant disruption to our business generated by a cyber attack. It was rewarding to see the execution and great work by our team in collaboration with our customers and suppliers. The Intellis' business continued to function as normal throughout Q4.
Speaker 3: we were unable to use our core systems to accept orders, receive inventory, or ship products for two weeks in May.
Speaker 4: Our customers and suppliers were appreciative of our consistent and continuous outreach and collaboration during this outage.
Speaker 4: Our teams worked hard to minimize the impact of our outage on our customers.
Speaker 4: Our working capital results were disappointing for Q4. We're not achieving the appropriate inventory days on hand commensurate with expected slower growth. We are working with our suppliers and customers to reduce our inventory levels quickly and get back to normal.
Speaker 4: We are seeing slowing market demand and enterprise project delays in mobile commuting and point of sale. We continue to see strong demand and growth in networking and video surveillance, fueled by more intelligent technologies. As we head into fiscal 2024, we expect sales growth to accelerate throughout the year, down slightly in the first half, and then return to growth in the second half. Moving on to our modern communication and cloud segment, Q4 net sales and gross profit increase 1% year over year. Strength in networking offset lower sales volumes and communication harden.
Speaker 3: As you heard earlier, we are focused on inventory reduction and free cash flow for FY24. Q4 adjusted EBITDA of $40.2 million increased 4% year over year. For the full year, sales increased 7% year over year, exceeding our guidance. Adjusted EBITDA of $180 million up 8% year over year was an all-time company record. Full year non-GAAP EPS of $3.85 is a decrease year over year of 3%. While our operating income grew 11% year over year, our operating income grew 11% year over year.
Speaker 3: As we look to FY24, we expect our business model to work as it has in the past, appropriately reducing the working capital to achieve our profitability and ROIC goals, while still meeting our customer demand. As Jon mentioned in his comments, our teams are working hard, supplier by supplier, to course correct our inventory positions. This focus by management on improving our working capital efficiency will allow us to generate significant free cash in FY24. Now turning to the balance sheet in Cashflow.
Speaker 3: Q4 inventory turns improved quarter over quarter to 4.4 times, but are well below our normal operating levels and our targeted levels for the quarter. DSO grew to 72 days, and our AR balance grew quarter over quarter faster than revenues. As John stated earlier, employees across the company are very focused on improving these metrics over the next few quarters. Our balance sheet remains strong. From a net debt level perspective, we ended Q4 at approximately 1.6 times trailing 12 months adjusted EBITDA. During the June quarter, we had approximately $5 million in share repurchases and have an outstanding authorization with approximately $66 million remaining.
Speaker 3: With our supply chain normalizing, we'll be focused on operating the business at more historic working capital levels. Operating cash will also benefit from the counter cyclical nature of our business model and growth in our recurring revenue, which requires almost no working capital. Historically, when we grow in mid-single digits, we generate operating cash and that, along with inventory efficiency improvements, will drive at least $150 million in free cash flow and lower our interest expense for the full fiscal year. For FY24, our capital allocation priorities are $100,000.
Speaker 1: A reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question comes from Greg Burns with S dodi. Your line is open. Morning. Would you be able to quantify the impact of the cyber attack to revenue and earnings in the quarter? Hi, Greg, thanks for the question. Thanks for joining us today. This is Steve.
Speaker 3: Okay, great. And then you mentioned, I guess, with the working capital and free cash flow improvements, that's going to be coming down. Could you just give us your expectations for net interest expense for the year for fiscal 24? Greg, you know, when we look at our net interest expense, we think that's going to be somewhere in the $5 to $6 million range as we look at it right now.
Speaker 5: Okay. And then last quarter you mentioned some pricing pressure in the Intellisis division. It looked like buildings and revenue kind of grew in line this quarter, so maybe that's
Speaker 1: it wasn't of any kind of significance for the quarter. Okay, thank you. One moment for our next question. Our next question comes from Keith Housum with North Coast Research. Your line is open. Good morning, guys. And congratulations on working through the quarter, I think better than a lot of it.
Speaker 6: And I'm guessing a lot of it's going to be due to the fact that you guys have a little more diversification, but also the focus on the SMBs. But perhaps elaborate a little bit more on what you're seeing for the first half of the year, which gives you, I guess, the guidance of perhaps slightly down for the first half.
Speaker 4: due to a slowdown in the barcoding and POS and mobility segment, which we believe will also begin to rebound as we turn the corner into our second half. At the same time, we believe we will still see positive strength across our security, physical security and networking segments. Great. And John , coming from conversations that you're having with the end customers, what's the source of your confidence there?
Speaker 4: kind of continuous contact with our partner community that's in touch with the end customer and also the supplier community. So we triangulate, you know, gross the three of us.
Speaker 4: Yeah, you know, as we look to the supply chain overall, we see that we are back to kind of pre-COVID and pre-supply chain lead times. There's some slight pressure still in networking, but for the most part, we are, you know, moving forward with supply chain lead times back to normal. Gotcha. Here's one more question for me, and I'll turn it back over to you. In terms of M&A, you know, it's an area that you guys haven't been that active in the market over the past several years. I guess, how would you guys rank the use of capital now in terms of your prioritization between M&A?
Speaker 7: we see that ScanSource can differentiate.
Speaker 4: Firstly, I'm hoping you guys could double click on the guidance and what that embeds in terms of IntelliSys performance, and then if you could double click on the sort of pricing strategy around IntelliSys and if you could provide more color on if you're still pricing for market share gains and what should be expected for fiscal 24. Yeah, Jake, thanks for the question. When we look at IntelliSys for FY24, we are expecting a 7% growth rate.
Speaker 4: Yeah, Jake, we saw a, we saw as you can imagine a slowdown of our larger deals in the quarter, but we actually saw kind of a positive bounce back of our, of our run rate business in the quarter. Perfect. That's all for me. Thank you. Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced.
Speaker 1: Yeah, Jake, we saw a, we saw as you can imagine a slowdown of our larger deals in the quarter, but we actually saw kind of a positive bounce back of our, of our run rate business in the quarter. Perfect. That's all for me. Thank you. Thank you. As a reminder to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. One moment for our next question.
Speaker 1: And we have a follow-up from the line of Greg Burns with Sdodi. Your line is open. I just wanted to ask about the Logitech relationship that you, I guess, entered into this quarter or recently. How does that typically work when you add a new vendor to your…
Speaker 5: line card. Does it take a while for that to ramp up? Do you expect that to be meaningful to your 2024 revenues? Thanks.
Speaker 3: That's a hard thing to change. And when we look at our accounts receivable year over year and we look at the growth in the business, we don't feel like we're that far off. And we feel like our accounts receivable are healthy. We're gonna make some improvements in those DSOs, but really our focus is on the inventory levels. If you look at the level of inventory that we're operating at, and now that we're looking especially at a slowdown in the first half.
Speaker 1: Great, thank you. You bet. Thank you. I'm showing no further questions at this time. I would like to turn it back to Steve Jones for closing remarks. Yeah, thank you for joining us today. We expect to hold our next conference call to discuss September 30th quarterly results on Thursday, November 9th at approximately 1030 a.m. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.