Q2 2024 ScanSource Inc Earnings Call
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 chair and CEO and Steve Jones, Our Chief Financial Officer, We will review our operating results for the quarter and then take your questions. We posted an earnings into graphic that accompanies our comments and webcast in the investor relation.
<unk> section of our website as you know certain statements in our press release info graphic and on this call are forward looking statements and subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and uncertainties include the factors identified in our earnings release and in our Form 10-K for the.
Yeah.
Welcome to the scans source 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.
The year ended June 32023.
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.
<unk> looking statements represent our views only as of today and scan source disclaims any duty to update these statements except as required by law during our call. We will discuss both GAAP and non-GAAP results and have provided reconciliations on our website and on our form 8-K, I'll now turn the call over to Mike.
Good morning, and thank you for joining us joining me on the call today are Mike Baur, our chair and CEO and Steve Jones, Our Chief Financial Officer will review, our operating results for the quarter and then take your questions. We posted an earnings if a graphic that accompanies our comments and webcast in the investors.
Thanks, Barry and thanks, everyone for joining us today as we entered fiscal year 2024, we identified strong free cash flow and focus on and tell US. This is key for our success.
Our second quarter, we achieved the same with free cash flow of $61 million in entellus this growth of seven 5%.
<unk> section of our website as you know certain statements in our press release info graphic and on this call are forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and uncertainties include the factors identified in our earnings release and in our Form 10-K.
Our business fundamentals remain strong however, we were disappointed at our lower than expected net sales for our hardware business as it turns out we were too optimistic in a changing demand environment second quarter net sales declined 13%, reflecting lower demand from our portfolio.
For the year ended June 32023 forward looking statements represent our views only as of today and scan source disclaims any duty to update these statements except as required by law.
Of technologies.
Net sales for our <unk> technology services business grew seven 5% and drove our recurring revenue growth.
During our call we will discuss both GAAP and non-GAAP results and have provided reconciliations on our website and our form 8-K, I'll now turn the call over to Mike.
Q2 end user billings increased 10% year over year and exceed $2 6 billion annualized.
Thanks, Barry and thanks, everyone for joining us today as we entered fiscal year 2024, we identified strong free cash flow and focus on <unk> Telesis is key for our success for.
This includes billings growth and contact center as a service <unk> of 24%.
Ucas of 18%.
As long standing channel advocates and thought leaders, we meet our partners, where they are and help them grow their business.
For our second quarter, we achieved this aim with free cash flow of $61 million in entellus this growth of seven 5%.
Recent example is our series of Amp for growth educational events, we held the first one last week, featuring AI and communication platform as a service C pass opportunities.
Our business fundamentals remain strong.
However, we were disappointed at our lower than expected net sales for our hardware business.
As it turns out we were too optimistic in a changing demand environment second quarter net sales declined 13%, reflecting lower demand from our portfolio of technologies.
During Q2 barcode mobility point of sale security and communications hardware sales declined more than we expected.
As we have discussed in previous quarters strong growth continued from our Cisco portfolio of products and services and our networking products.
Net sales for our <unk> technology services business grew seven 5% and drove our recurring revenue growth.
Q2 end user billings increased 10% year over year and exceed $2 6 billion annualized.
Our hardware technologies are at different stages of their demand cycles.
During the supply chain crisis over the last couple of years, we experienced broad based demand across our technologies.
This includes billings growth and contact center as a service <unk> of 24%.
And.
We used our strong balance sheet to minimize inventory shortages, while enabling our customers to meet stronger than normal demand in.
End users purchased inventory ahead of their needs and they are taking time to deploy these products.
In this environment forecasting demand is very challenging and as a reminder, at scan source, we work with know backlogs and no bookings.
For the quarter, our adjusted EBITDA and improved working capital efficiency generated another strong quarter of free cash flow.
I'll now turn the call over to Steve to take you through our financial results for the quarter and our outlook for fiscal year 2024.
Thanks, Mike Q2 demand was softer than we expected while revenues were lower our business delivered EBITDA margins consistent with our expectations and strong free cash flow.
We continue to improve our key working capital metrics and recurring revenues grew led by seven 5% year over year growth in <unk>.
Q2, net sales of $885 million declined 12, 5% year over year, while gross profit margins of 11, 4% were in line with the prior year.
While we expected a year over year revenue decline the recovery for our barcode and mobility technology is occurring slower than we expected and we saw a slowdown sooner than expected and physical security.
These technologies are reported in our specialty technology and solutions segment, which saw a revenue decline of 17% year over year, and a corresponding 17% year over year decline in gross profit.
In our modern communication and cloud segment revenues declined 5% year over year growth in sysco, partially offset lower sales of communication devices.
Gross profits in our modern communication and cloud segment declined 9% year over year, reflecting an unfavorable product mix.
For the quarter, we delivered $61 million and free cash flow with solid progress on improving our working capital efficiency.
Inventory levels and paid for inventory days continue to improve reflecting both a return to normal supply chain lead times and our expectation of demand occur.
Accounts receivable balances are moving with revenue as we would expect.
We are setting the business up to continue to deliver positive free cash flow when our business returns to growth.
Now going a bit deeper into the balance sheet and cash flow we.
We are pleased with the progress, we're making with working capital investment.
Our goal is to increase inventory turns while maintaining appropriate inventory levels to meet customer demand.
We gained working capital efficiency as demonstrated by improvements in our working capital metrics.
Q2 inventory turns increased to five one times the fastest in five quarters.
For the quarter, we delivered $61 million and free cash flow with solid progress on improving our working capital efficiency.
Days sales outstanding also improved and declined to 68 days the lowest in five quarters.
Inventory levels and paid for inventory days continue to improve reflecting both a return to normal supply chain lead times and our expectation of demand.
Our balance sheet remains strong from a net debt leverage perspective, we ended Q2 at approximately eight times trailing 12 months adjusted EBITDA with ample liquidity within our existing credit facility to support our strategic plans.
Accounts receivable balances are moving with revenue as we would expect.
We are setting the business up to continue to deliver positive free cash flow when our business returns to growth.
We have an active pipeline of M&A opportunities. However, we believe there is ample room on our existing $65 million authorization to return cash to shareholders through share repurchases for the remainder of FY 'twenty four while maintaining our target leverage ratio of one to two times trailing.
Now going a bit deeper into the balance sheet and cash flow.
We are pleased with the progress, we're making with working capital investment.
Our goal is to increase inventory turns while maintaining appropriate inventory levels to meet customer demand.
Selling 12 months adjusted EBITDA.
Looking ahead to the second half of FY 'twenty for the company expect revenue headwinds to continue.
We gained working capital efficiency as demonstrated by improvements in our working capital metrics.
Q2 inventory turns increased to five one times the fastest in five quarters.
And we are updating our guidance to reflect our current view of near term demand.
We are managing our SG&A spending to match our revenue growth expectations for FY, 'twenty, four and beyond by redirecting resources and investing in our entellus. This recurring revenue business.
Days sales outstanding also improved and declined to 68 days the lowest in five quarters.
Our balance sheet remains strong from a net debt leverage perspective, we ended Q2 at approximately <unk> eight times trailing 12 months adjusted EBITDA with ample liquidity within our existing credit facility to support our strategic plans.
For FY 'twenty four we now believe that our net sales will be at least $3 5 billion in.
And adjusted EBITDA to be at least $155 million.
Which reflects an EBITDA margin of four 4%.
We have an active pipeline of M&A opportunities. However, we believe there is ample room on our existing $65 million authorization to return cash to shareholders through share repurchases for the remainder of FY 'twenty four while maintaining our target leverage ratio of one to two times.
For Q3, we expect net sales to be down 6% to 8% quarter over quarter, which is better than our typical Q3 seasonality.
We are maintaining our free cash flow outlook of at least $200 million.
As we continue to improve our working capital efficiency.
Selling 12 months adjusted EBITDA.
To help with analysts' models, we expect a net expense for interest expense interest income and other expenses to range from $9 million to $10 million for the fiscal year 'twenty four.
Looking ahead to the second half of FY 'twenty for the company expect revenue headwinds to continue.
And we are updating our guidance to reflect our current view of near term demand.
Our estimated effective tax rate, excluding discrete items is expected to range from 27% to 28% for the fiscal year.
We are managing our SG&A spending to match our revenue growth expectations for FY, 'twenty, four and beyond by redirecting resources and investing in our <unk> recurring revenue business.
Our updated guidance reflects our expectation of the near term demand environment, we remain confident in the resilience of our business and our ability to be well positioned for a return to growth.
For FY 'twenty four we now believe that our net sales will be at least $3 5 billion in.
I'll now turn the call back over to Mike for closing comments. Thanks, Steve.
And adjusted EBITDA to be at least $155 million.
We are building a cash culture at <unk>.
Which reflects an EBITDA margin of four 4%.
In fiscal year 'twenty four for the first time, we included free cash flow was part of our annual outlook.
For Q3, we expect net sales to be down 6% to 8% quarter over quarter, which is better than our typical Q3 seasonality.
Our aspiration is sustainable and predictable free cash flow that we can forecast and counsel and excellent use of free cash flow is to fund growth of high margin and working capital light recurring revenue.
We are maintaining our free cash flow outlook of at least $200 million as we continue to improve our working capital efficiency.
To help with analysts' models, we expect a net expense for interest expense interest income and other expenses to range from $9 million to $10 million for the fiscal year 'twenty four.
We will now open it up for questions.
Thank you to ask a question. Please press star one on your telephone and wait for your name to be announced.
Our estimated effective tax rate, excluding discrete items is expected to range from 27% to 28% for the fiscal year.
To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our updated guidance reflects our expectation of the near term demand environment, we remain confident in the resilience of our business and our ability to be well positioned for a return to growth.
Our first question comes from Greg Burns with Sidoti. Your line is now open.
Good morning.
You talked about the different.
I'll now turn the call back over to Mike for closing comments. Thanks.
Points in the cycle for different technologies.
Thanks, Steve we are building a cash culture at <unk> and.
There's been weakness on the mobility.
Point of sale.
In fiscal year 'twenty four for the first time, we included free cash flow was part of our annual outlook.
That side of the business, but in terms of.
Networking and some of the other areas they seem to be holding up well, but we've seen commentary from like Cisco talking about order pace slowing down and kind of a similar dynamic where customers have.
Our aspiration is sustainable and predictable free cash flow that we can forecast and counsel and excellent use of free cash flow is to fund growth of high margin and working capital light recurring revenue.
Preorders are taken delivery of product and they're implementing it now so are you seeing a slowdown in that area of the business.
We will now open it up for questions.
Thank you to ask a question. Please press star one on your telephone and wait for your name to be announced.
Due to that dynamic.
Hey, Greg It's Mike, Yes, that's exactly right what we experienced in Q2 is that our networking business did grow however, it didn't grow at the rate that maybe it had been so I would say, we still had growth.
To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from Greg Burns with Sidoti. Your line is now open.
Pretty good growth year over year, but we definitely saw signs of it starting to slow down.
Good morning.
You talked about the different.
And we also mentioned in our prepared remarks that the security part of that business, our physical security surprised us in the quarter. It slowed down in Q2, and we didn't anticipate that.
Points in the cycle for different technologies in.
So there's been weakness on the mobility.
Point of sale.
That side of the business, but in terms of.
Networking and some of the other areas they seem to be holding up well, but we've seen commentary from Cisco talking about order pace slowing down in kind of a similar dynamic where customers have.
Okay.
And.
I've seen headlines around some some.
Businesses moving away from.
Preorder or taken delivery of product and they're implementing it now so.
Self checkout kiosks I don't know if thats, a large part of your business or if that's something meaningful that you've seen.
Are you seeing a slowdown in that area of the business.
Impacting.
Due to that dynamic.
<unk> there, but it is.
Got it.
Hey, Greg It's Mike, Yes, that's exactly.
That's in any way kind of impactful on year could you just talk about that dynamic possibly.
Right, what we experienced in Q2.
That changed in the market.
Is that our networking business did grow however, it didn't grow at the rate that maybe it had been so I would say, we still had growth.
Yes.
I would say during the last two years, we did talk very frequently about the growth of self checkout, we actually have a strong relationship with NCR and some key partners that deployed self checkout.
Pretty good growth year over year, but we definitely saw signs of it starting to slow down.
And we also mentioned in our prepared remarks that the security part of that business, our physical security surprised us in the quarter. It slowed down in Q2, and we didn't anticipate that.
At least two years during.
During Covid post COVID-19.
And that business definitely did slow down last quarter.
We saw most of that coming but still.
As you as you noted Greg we've seen the same stories in the press that some of the retailers are done with their installation plans and so they've slowed down any new purchases, we still believe that.
Okay.
And.
I've seen headlines around some some.
Businesses moving away from.
Self checkout kiosks I don't know if thats, a large part of your business or if that's something meaningful that you've seen.
For us it's an area that we expect to continue to have point of sale self checkout opportunities, but theyre going to be smaller the larger retailers acted first and what we're seeing now is the price points and that customers are smaller than they were in the prior year.
Impacting demand there but.
If that's in any way kind of impactful on year could you just talk about that dynamic possibly.
That changed in the market.
Yes.
I would say during the last two years, we did talk very frequently about the growth of self checkout.
Yeah.
Okay, great. Thank you.
Please standby for the next question.
We actually have a strong relationship with NCR and some key partners that deployed self checkout.
The next question comes from Mike Latimore with Northland Capital. Your line is open.
At least two years during Covid post COVID-19 and that business definitely did slow down last quarter.
Okay.
Okay, great. Thank you.
We saw most of that coming but still.
On the Ucas billing growth rate I think you said it was 18% I believe it was 10% in the September quarter.
As you as you noted Greg we've seen the same stories in the press that some of the retailers are done with their installation plans and so they've slowed down any new purchases.
Any any reason for that acceleration.
Hey, Mike Mike.
Nothing particular, I think we continue to.
Still believe that for us it's an area that we expect to continue to have point of sale self checkout opportunities, but theyre going to be smaller the larger retailers acted first and what we're seeing now is the price points and the customers are smaller than they were in the prior year.
Do well in the space.
We did recently received an award you may have seen the press release ring Central said that for 2023 calendar year, we were the.
Technology services distributor of the year and so we do believe within that part of the business, we're doing very well versus our competitors.
Okay, great. Thank you.
So for us it could've been Mike just to be very candid a market share opportunity that we took in that particular space with <unk> being one of the key players as you know, but our <unk> business.
Please standby for the next question.
The next question comes from Mike Latimore with Northland Capital. Your line is open.
Has continued to be strong and.
And we will see what happens going forward.
Okay.
Great and then as you think about the Ucas and cattle business for calendar 'twenty four.
Okay, great. Thank you.
On the Ucas billing growth rate I think you said it was 18% I believe it was 10% in the September quarter.
Is there any reason for these growth rates to either accelerate or slow.
Well I think what I would say is this is we still are talking about you cast at <unk> with our partners. They still have a lot of questions and where the.
Any any reason for that acceleration.
Hey, Mike Mike.
Nothing particular, I think we continue to.
The discussions are going now and we just had this amped event last week with partners and everybody is talking about <unk> and AI.
Do well in the space.
We did recently received an award you may have seen the press release ring Central said that for 2023 calendar year, we were the.
Tends to be a big part of the discussion how its AI going to be part of the CCAR flashy Ucas story, and so I think that's going to continue to make the the end user customers interested in talking about it because now you have a way to leverage either your existing ucas implementation.
Technology services distributor of the year and so we do believe within that part of the business, we're doing very well versus our competitors and so for us it could've been Mike just to be very candid a market share opportunity that we took in that particular space with ring being one of the key players as you know, but our <unk> business.
That doesn't use AI or maybe look at something new and so I think AI added to see Cas and <unk> will be a driver of demand for us in 'twenty four.
<unk> continued to be strong and.
And we will see what happens going forward.
Great and then as you think about the Ucas and cat business for calendar 'twenty four.
That makes sense great. Thank you.
You bet.
As a reminder to ask a question. Please press star one one on your telephone.
Is there any reason for these growth rates to either accelerate or slow.
One moment for our next question.
Well I think what I would say is this is we still are talking about you cast at <unk> with our partners. They still have a lot of questions in one.
The next question comes from Adam Tindle with Raymond James Your line is now open.
The.
The discussions are going now and we just had this amped event last week with partners and everybody is talking about <unk> and AI.
Okay. Thanks, Good morning, Mike I, just wanted to ask on maybe the cadence of the quarter, obviously below expectations, but I'd be curious how things progressed as the quarter went how it exited versus began and any comments that youre seeing on more real time demand here in January and February.
To be a big part of the discussion how its AI going to be part of the CCAR flashy Ucas story, and so I think that's going to continue to make the the end user customers interested in talking about it because now you have a way to leverage either your existing ucas implementation.
Yes.
Hey, Adam.
I won't talk about January or February other than the guidance that we just gave reflects what we've seen so far but I will say this back to Q2.
Doesn't use AI or maybe look at something new and so I think AI added to see Cas and <unk> will be a driver of demand for us in 'twenty four.
Definitely December we saw a slowdown would be my comment is that typically for most of our suppliers and this is typically historically, it's a good quarter, because especially some of our larger long standing partners. They tend to have.
Mhm.
That makes sense great. Thank you.
Okay.
As a reminder to ask a question. Please press star one one on your telephone.
Budget flush if you will at the end of the year, that's very common didn't happen. So we didn't see some of the end of the year buying and we did see a slowdown in the December month, and I think that was reflective in the results, we had and lots of reasons for that but all we could here.
One moment for our next question.
The next question comes from Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, Good morning, I, just wanted to ask on maybe the cadence of the quarter, obviously below expectations, but I'd be curious how things progressed as the quarter went how it exited versus began and any comments that youre seeing on more real time demand here in January and February.
It was there was not this additional budget flush and so as a result of that.
Again, even if January comes in better than historical we want to make sure that we're careful about how we guide for this quarter and next quarter. Because this is such a changing demand scenario. We just haven't seen this in a long time, we spent the last two and a half years.
Hey, Adam.
I won't talk about January or February other than the guidance that we just gave reflects.
What we've seen so far but I will say this back to Q2 of.
Definitely December we saw a slowdown would be my comment is that typically for most of our suppliers and this is typically historically, it's a good quarter, because especially some of our larger longstanding partners they tend to have.
With demand increasing across our technologies and now things are <unk>.
Much more difficult for us as a company that has an average order size of around $2500 and no bookings and no backlogs to forecast.
Our budget flush if you will at the end of the year, that's very common didn't happen. So we didn't see some of the end of the year buying and we did see a slowdown in the December month.
The understandable and Mike I think Steve May have mentioned in his prepared remarks about redirecting resources.
I just wondered if you could maybe give us a little bit more color on what goes into the logistics behind that it makes sense, but just kind of wonder if you could share some of the strategy for that.
And I think that was reflective in the results we had.
Lots of reasons for that but all we could here was there was not this additional budget flush and so as a result of that.
For us one of the key investment areas as people always has been and so I would say we will continue to add head count in that area of for example, we talked about this amp event. We did last week, we're going to do events like that across the calendar year, and we will probably add more as demand.
Again, even if January comes in better than historical we want to make sure that we're careful about how we guide for this quarter and next quarter. Because this is such a changing demand scenario. We just haven't seen this in a long time, we spent the last two and a half years.
<unk> said this is what our partners need to here, we've got a history of educating the intelligence community on new technologies and Theres a lot to talk about this year. So we also need frankly to beef up our in house experts on these technologies and we've got some very very smart people, but we need to add more and we think thats why.
With demand increasing across our technologies and now things are <unk>.
Much more difficult for us as a company that has an average order size of around $2500 and no bookings and no backlogs to forecast.
<unk> Partners Trust, our telesis team because they can come to us for independent advice on what are the key technologies. They should invest in also for this year, so youre going to see us add primarily head count in the <unk> as an investment thesis.
The understandable and Mike I think Steve May have mentioned in his prepared remarks about redirecting resources.
I just wondered if you could maybe give us a little bit more color on what goes into the logistics behind that it makes sense, but just kind of wonder if you could share some of the strategy for that.
Okay, and maybe just one more for me I think it's important that you mentioned building a cash culture and I know investors.
Well for US one of the key investment areas as people always has been and so I would say we will continue to add head count in that area. For example, we talked about this amp event. We did last week, we're going to do events like that across the calendar year, and we will probably add more as demand.
Like to hear that it makes a lot of sense.
If I looked at your guidance here it looks like at least $200 million of free cash flow.
For the year is what you're talking about.
If you could maybe just double click on capital allocation priorities I mentioned that because depending on the second of the day here in the market that the company is.
Tells us that this is what our partners need to here, we've got a history of educating the intelligence community on new technologies and Theres a lot to talk about this year. So we also need frankly to beef up our in house experts on these technologies and we've got some very very smart people, but we need to add more and we think thats why.
Valued at a market cap less than $1 billion, and you've got $200 million of free cash flow would seem to be a really good opportunity to consider share repurchase given that sort of a yield but just curious how you would evaluate our capital allocation priorities, especially share repurchase. Thanks.
<unk> Partners Trust, our <unk> team is because they can come to us for independent advice on what are the key technologies. They should invest in also for this year, so youre going to see us add primarily head count in the <unk> as an investment thesis.
Yes, Adam Thanks for the question this is Steve.
As we've talked about in the past, we really have two priorities for our capital allocation and that is share repurchases and M&A that would help drive our recurring revenue and as we've talked about in our in our remarks, we've got about $65 million remaining on our current.
Okay, and maybe just one more for me I think it's important that you mentioned building a cash culture and I know investors.
Authorization, we think that's ample to go through FY 'twenty four for us in terms of repurchases.
Probably like to hear that it makes a lot of sense.
But those would still be our two or two or two <unk>.
If I looked at your guidance here it looks like at least $200 million of free cash flow.
<unk> allocation priorities and then always looking at our leverage ratio as well as kind of the balancing act of our capital allocation.
For the year is what you're talking about.
If you could maybe just double click on capital allocation priorities I mentioned that because depending on the second of the day here in the market that the company is.
Got it thank you.
I show no further questions at this time.
Valued at a market cap less than $1 billion, and you've got $200 million of free cash flow would seem to be a really good opportunity to consider share repurchase given that sort of a yield but just curious how you would evaluate our capital allocation priorities, especially share repurchase. Thanks.
I would now like to turn the call back to Steve Jones for closing remarks.
Thank you and thank you for joining US today, we expect to hold our next conference call to discuss March 31 quarterly results on Tuesday may seven at approximately 10 30 a M.
Yes, Adam Thanks for the question this is Steve as.
As we've talked about in the past, we really have two priorities for our capital allocation and that is share repurchases and M&A that would help drive our recurring revenue and as we've talked about in our in our remarks, we've got about $65 million remaining on our current.
This concludes today's conference call. Thank you for your participation you may now disconnect and have a great day.
Authorization, we think thats ample to go through FY 'twenty four for us in terms of repurchases.
But those would still be our two are too.
Two capital allocation priorities, and then always looking at our leverage ratio as well as kind of the balancing act of our capital allocation.
Got it thank you.
I show no further questions at this time.
I would now like to turn the call back to Steve Jones for closing remarks.
Thank you and thank you for joining US today, we expect to hold our next conference call to discuss March 31 quarterly results on Tuesday may seven at approximately 10 30 a M.
This concludes today's conference call. Thank you for your participation you may now disconnect and have a great day.
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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, 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 will review, our operating results for the quarter and then take your questions we posed.
Posted an earnings if a graphic that accompanies our comments and webcast in the Investor Relations section of our website as you know certain statements in our press release and for graphic and on this call are forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
These risks and uncertainties, including the factors identified in our earnings release and in our Form 10-K for the year ended June 32023 forward looking statements represent our views only as of today and scan source disclaims any duty to update these statements except as required by law during our call we will discuss.
Both GAAP and non-GAAP results and have provided reconciliations on our website and our form 8-K, I'll now turn the call over to Mike.
Thanks, Barry and thanks, everyone for joining us today as we entered fiscal year 2024, we identified strong free cash flow and focus on telesis is key for our success for.
For our second quarter, we achieved this aim with free cash flow of $61 million and <unk> growth of seven 5%.
Our business fundamentals remain strong.
However, we were disappointed at our lower than expected net sales for our hardware business.
As it turns out we were too optimistic in a changing demand environment second quarter net sales declined 13%, reflecting lower demand from our portfolio of technologies.
Net sales for our <unk> technology services business grew seven 5% and drove our recurring revenue growth.
Q2 end user billings increased 10% year over year and exceed $2 6 billion annualized.
This includes billings growth and contact center as a service <unk> of 24%.
And <unk> of 18%.
As long standing channel advocates and thought leaders, we meet our partners, where they are and help them grow their business. A recent example is our series of Amp for growth educational events. We held the first one last week, featuring AI and communication platform as a service <unk>.
S opportunities.
During Q2 barcode mobility point of sale security and communications hardware sales declined more than we expected as.
As we have discussed in previous quarters strong growth continue from our Cisco portfolio of products and services and our networking products.
Our hardware technologies are at different stages of their demand cycles.
During the supply chain crisis over the last couple of years, we experienced broad based demand across our technologies.
We used our strong balance sheet to minimize inventory shortages, while enabling our customers to meet stronger than normal demand.
End users purchased inventory ahead of their needs and they are taking time to deploy these products.
In this environment forecasting demand is very challenging and as a reminder, at scan source, we work with know backlogs and no bookings.
For the quarter, our adjusted EBITDA and improved working capital efficiency generated another strong quarter of free cash flow.
I'll now turn the call over to Steve to take you through our financial results for the quarter and our outlook for fiscal year 2024.
Thanks, Mike Q2 demand was softer than we expected while revenues were lower our business delivered EBITDA margin consistent with our expectations and strong free cash flow.
We continue to improve our key working capital metrics and recurring revenues grew led by seven 5% year over year growth in intelligence.
Q2, net sales of $885 million declined 12, 5% year over year, while gross profit margins of 11, 4% were in line with the prior year.
While we expected a year over year revenue decline the recovery for our barcode and mobility technology is occurring slower than we expected and we saw a slowdown sooner than expected and physical security.
These technologies are reported in our specialty technology and solutions segment, which saw a revenue decline of 17% year over year, and a corresponding 17% year over year decline in gross profit.
In our modern communication and cloud segment revenues declined 5% year over year growth in sysco, partially offset lower sales of communication devices.
Gross profits in our modern communication and cloud segment declined 9% year over year, reflecting an unfavorable product mix.
For the quarter, we delivered $61 million and free cash flow with solid progress on improving our working capital efficiency.
Inventory levels and paid for inventory days continue to improve reflecting both a return to normal supply chain lead times and our expectation of demand.
<unk> receivable balances are moving with revenue as we would expect.
We are setting the business up to continue to deliver positive free cash flow when our business returns to growth.