Q2 2025 ScanSource Inc Earnings Call
Welcome to the scanned 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 if anyone has any objection.
Objections, you may disconnect at this time.
Speaker Change: I would now like to turn the call over to Mary Gentry, Senior Vice President Finance and Treasurer Madam you may begin.
Mary Gentry: Good morning, and thank you for joining us.
Mike Baur: Call will include prepared remarks from Mike Baur, our chair and CEO and Steve Jones, Our Chief Financial Officer, We will review our results operating results for the quarter and then take your questions. We posted an earnings it's a graphic that accompanies our comments and webcast in the Investor Relations section of our website as you know.
Mike Baur: 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 for the year ended June 32024.
Mike Baur: Forward looking statements represent our views only as of today and <unk> disclaims any duty to update these statements except as required by law.
Mike Baur: Our call, we will discuss both GAAP and non-GAAP results and have provided reconciliations on our website and in our form 8-K, I'll now turn the call over to Mike.
Mike Baur: Thanks, Mary Thanks to everyone for joining us today.
Mike Baur: The soft demand environment is lasting longer than we expected in large deals remained a challenge in Q2.
Mike Baur: After our Q1 sequential quarter growth, we expected sequential quarter growth for Q2, but that did not happen and it did net sales declined 4%.
However, in a soft demand environment, we delivered gross profit growth and strong gross profit margin.
Mike Baur: We are executing our hybrid distribution strategy, providing flexibility and choice with multiple sales models for hardware SaaS connectivity and cloud are channel partners Trust us to broaden their technology offerings and enable them to sell more of the technology stack, including devices software services.
Mike Baur: To meet the end customers' requirements. In addition, we give our channel partners the opportunity to build a successful stream of recurring revenue that will result in a more profitable and sustainable business.
Mike Baur: With our recent acquisitions, we have expanded recurring revenue opportunities for our channel partners.
Mike Baur: We acquired resource at our advisory business to build the channel model of the future to drive more value by understanding and customer needs.
Mike Baur: This includes increased offerings up next Gen technologies, like CX cyber security and AI.
Mike Baur: We have a plan to develop tools and resources that will also enable our intelligence channel partners to more efficiently serve the technology needs of end customers.
Mike Baur: After our first full quarter of operations with advantage of managed connectivity experience <unk> provider. We are excited about the reception of this opportunity by our channel partners.
Mike Baur: This represents a recurring revenue opportunity for many of our Vars and a great example of a hybrid solution combining devices and recurring revenue.
Mike Baur: The advantage solution is a high margin recurring revenue add on to mobile devices and a way to add more value in the barcode and mobility market.
Mike Baur: We also see the advantaged solution as a way to drive hardware demand by opening up new hybrid opportunities.
Mike Baur: Looking ahead, we are well positioned for profitable growth when demand returns.
Mike Baur: I'll now turn the call over to Steve to take you through our financial results and our outlook for fiscal year 2025.
Speaker Change: Thanks, Mike for Q2, the business continued to experience soft demand, while our topline was below our expectations. We saw strong gross profit margins led by higher mix of recurring revenue, which for Q2 represents 32% of our consolidated gross profit.
Speaker Change: Our more profitable mix translated into a higher adjusted EBIT margin for.
Speaker Change: For Q2, our consolidated net sales declined 15, 5% year over year. However, our adjusted EBITDA only declined to 8%.
Speaker Change: For the quarter, our business delivered strong gross profit margins of 13, 6% and adjusted EBITDA margins of four 7%.
Speaker Change: non-GAAP net income decreased 4%, while non-GAAP diluted EPS was flat year over year.
Speaker Change: We remain focused on delivering strong profitability and free cash flow for the full year and believe that our first half financial performance supports our current annual guidance range.
Speaker Change: This is the second quarter reporting under our new business segments.
Speaker Change: These segments better align with the different sales models, we use in executing our hybrid distribution strategy and as a reminder, both segments have recurring revenue.
Speaker Change: And our specialty technology solution segment, net sales declined 16% year over year and 4% quarter over quarter.
Speaker Change: This includes a double digit decline for large deals and FX headwinds and our Brazil business.
Speaker Change: Gross profit was essentially flat year over year, reflecting a higher concentration of recurring revenue and improved vendor rebates.
Speaker Change: For the segment the percent of gross profit from recurring revenue increased to approximately 12% segment gross.
Speaker Change: <unk> profit margin increased to 10, 8% and adjusted EBIT margin was three 5%.
Speaker Change: While we've not seen a broad based recovery in our portfolio. We do have technologies in this segment with year over year growth, including barcode mobility, physical security and mobile connectivity MTX.
Speaker Change: And our intelligence and advisory segment, net sales and gross profits increased 4% and 3% year over year, including the addition of the resources acquisition.
Speaker Change: Gross profit margin of 99% in this segment reflects the higher concentration of recurring revenue.
Speaker Change: Our adjusted EBITDA margin of 41, 1% reflects our continued SG&A investment to drive billings growth.
Speaker Change: Q2 end user billings for Entellus, this increased 5% year over year to bring the annualized net billing to approximately $2 $77 billion, including double digit year over year growth in CX, which includes Ucas sea cast an AI enabled <unk> solutions.
Speaker Change: We also saw double digit growth for our SaaS business.
Speaker Change: During the quarter, we announced channel exchange, our new SaaS platform, replacing our empty Cascade platform.
Speaker Change: With channel exchange, we now have a way for our intelligent trusted advisers to deliver more SaaS solutions to end customers.
Speaker Change: Year to date, we generated $34 million in free cash flow. However for the quarter, we used $8 million of free cash flow due to late quarter timing for both sales and vendor payments.
Speaker Change: As we've said we're building a cash culture and our teams remain focused on generating free cash flow as it is a key metric in our annual variable compensation plans.
Speaker Change: Going a bit deeper on our balance sheet and cash flow, we continue to execute our plans to improve our working capital efficiency, while maintaining appropriate inventory levels to meet channel partner demand and supporting ourselves with our trade credit offerings.
Speaker Change: We ended Q2 with $111 million in cash and a net debt leverage ratio of two times on a trailing 12 month adjusted EBIT basis.
Speaker Change: Adjusted ROIC for the quarter is 13, 3% and includes a full quarter contribution from our acquisitions.
Speaker Change: Q2 capital allocation again demonstrates our planned to balance acquisitions and share repurchases, while maintaining a strong balance sheet with modest.
Speaker Change: Net debt leverage of one to two times adjusted EBITDA.
Speaker Change: Share repurchases totaled $24 million for Q2, and as Mike said, we're pleased with the performance of our two acquisitions and what they bring to our channel capabilities and our strategic plans.
Speaker Change: We continue to have an active pipeline of acquisition targets and we will maintain our discipline in evaluating these opportunities.
Speaker Change: For the remainder of FY 'twenty five we believe demand will improve but are still in a cautious tech spending environment.
Speaker Change: We are reconfirming, our annual guidance of net sales ranging between $3 1 billion and $3 5 billion.
Speaker Change: Adjusted EBITDA, ranging between $140 million and $160 million and free cash flow of at least $70 million.
Speaker Change: We will now open it up for questions.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Yourself from the queue you May press Star one again please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: From the line of Greg Burns of Sidoti Your line is open Gregg.
Speaker Change: Good morning.
Speaker Change: Just wanted to talk about maybe the current demand environment, a little bit in more detail.
Speaker Change: As far as how the quarter progressed can you just talk about maybe.
Speaker Change: The sequential cadence throughout the quarter did it worsen as the quarter.
Speaker Change: Progressed and it improves how did the quarter play out in terms of maybe where you expected. When you gave guidance list last quarter end, and where where you ended up this quarter. Thank you.
Greg: Hey, Greg Good morning, Mike.
Speaker Change: Yes, I'll try to be careful because we don't normally talk about how it progressed during the quarter, but if you think about how a.
Speaker Change: December quarter normally progresses for our business most of our suppliers with maybe one exception have calendar year ends and as a result, they typically are very focused on closing out some business by the end of December so typically that quarter is very heavily weighted in the.
Speaker Change: December month of that quarter. So.
Speaker Change: It's not significantly different than our other quarters, but it's significant enough to where we expected to have some large deals happen by the end of the quarter, which means really the end of December and so as we gave our guidance earlier.
Speaker Change: We thought that we would have a typical increase in large deals and to have a double digit decline year over year was the surprise and so we really believe this was a large deal driven.
Speaker Change: If you will on our expectations for that business for the for the specialty hardware business historically.
Speaker Change: Okay.
Speaker Change: And then are you you maintained your full year revenue and EBITDA guidance. Despite the missed this quarter.
Speaker Change: Are you seeing anything or hearing anything from the channel that gives you confidence that the back half gets a little bit stronger as the mid point of guidance still so a good spot to think about how are you thinking more towards the low end now.
Steve: Well, Greg this is Steve and thanks for the question.
Steve: We still believe that we have a chance to be in a range and I think that's where we're kind of kind of thinking about the business. We still believe that there is growth opportunity in the second half and Thats. What we said when we actually came into the year. We thought the first half would be down in the second half would have growth. Our problem is with our top line most of our top line comes from the hardware, which you.
Steve: We ship everyday so we're taking orders we don't work with backlog. So our visibility is tough in that environment. We do have the recurring revenue streams that helped us on the GP line and that helps our GP become more predictable, but the top line is really hard for us to have visibility on.
Steve: Okay. Thank you.
Steve: Okay.
Speaker Change: Thank you once again to ask a question. Please press star one on your telephone again Thats Star one to ask a question.
Speaker Change: Our next question.
Speaker Change: Comes from the line.
Speaker Change: Keith Awesome of Northcoast Research your question. Please Keith.
Speaker Change: Good morning, guys I appreciate it thank you.
Speaker Change: I know you guys, usually don't talk about the current quarter here, but we are kind of the extraordinary times. It seems how is this quarter starting out for you guys are seeing any signs that there is a recovery I think about is anticipating that following the presidential elections that we filed in November.
Speaker Change: Well Kate this Mike we're not going to report on the quarter that we're in today, we don't think thats appropriate I think the real message that we're sending this morning as we've talked to our teams about how do they feel about the second half.
Speaker Change: And as the second half still attainable for our business based on the guidance. We've previously given and so we spent a lot of time with our teams re confirming that the guidance. We've given is still achievable and so as Steve said, a few minutes ago. The second half was always going to be a challenge.
Speaker Change: It's a little more challenging now and for us to reaffirm we believe we have confidence that the business will start to grow again, but trying to discern between where we're sitting right now versus.
Speaker Change: First as Steve said.
Speaker Change: We're not we're not certain only because we don't have backlog as you know Keith So our challenge again to do what I know many of you do which is talk to your partners in the channel get their senses and for US there's always.
Speaker Change: And I would say this I would say a sense of cautious optimism as you go into a year like this is coming off of last year I think all of our channel partners believe that this year will be better and so were basing this on on sentiment more than we are on any certainty on revenue that's come in already.
Speaker Change: On sentiment at this stage and on thinking about what is it that could make us hit the higher end of our expectations versus the lower end, we feel very comfortable with our with our guidance.
Speaker Change: Okay. That's helpful. I appreciate it.
You guys did note a few of the technologies that were doing better but on a broad basis. The challenges that you saw in the quarter or are they pretty broad based across most of your technologies that you guys sell or is there a few that was worse than others.
Speaker Change: Well as you know Keith I decided last quarter that we Werent I'll talk about the technologies and that changed my mind, because obviously you guys needed, especially with the results of the quarter some indication of what the heck's going on and where is there.
Speaker Change: The so called Green shoots we're not in and clearly barcode mobility came through we feel very good about that we've already talked about that.
Speaker Change: And by saying that in physical security was good by saying that we ended up though not talking about the other areas and so across the rest of the business.
Speaker Change: We didn't have a great story, and so without getting into any detail about any one of them. Once you get outside of what we talked about earlier there was a challenge in the quarter that we didn't expect and however, we expect that to attain our annual guidance. We will have to have some of those <unk>.
Speaker Change: Other technologies come back to life during the next two quarters and so we do have expectations for that.
Speaker Change: Keith and I might add Mike Mike talked about in his comments about the large deals that we saw across the board that there were some pockets of large deals that came through but overall the large deals are really the story of what surprised us.
Speaker Change: Okay. That's helpful and I guess last question for me ill tell us. This business you guys have called out how that is becoming more competitive.
Speaker Change: You got to volume versus price this year, our price versus volume I should say it looks like excluding acquisition am I wrong.
Speaker Change: System revenue actually dropped.
Speaker Change: Year over year, and I guess is there any changes in the dynamics of that business. As you guys are pursuing your acquisition strategy and any tweaks that you have your acquisition strategy.
Speaker Change: After this current few quarters.
Speaker Change: So a couple of comments and <unk> business was essentially flat year over year.
Speaker Change: And what we are seeing a couple of things as they are still competitive pressures out there for sure as you know Keith we talked about that and probably for the last year and a half maybe even two years now and one of the things we've done in the last six months is one we've got a new president Ken Mills, who has come in and taken a fresh look at hey, what are some of.
Speaker Change: The challenges that Intel assist is facing in a competitive landscape and what we have learned and what we are doing are really two things I'll talk about the day one that we mentioned on the call already is that we created a new platform called chat, we're calling channel exchange used to be called anti Cascade as a way to.
Speaker Change: Recruits new suppliers to intelligence there were some suppliers that we could not attract in the past to provide their technologies to the <unk> channel and so this platform is what some of the suppliers required for us to become a distributor and this now allows us to have.
Speaker Change: Offers for the <unk> channel community Channel partners that our competitors don't have so none of our other TST competitors have a product in a tool like channel exchange. So that's number one and number two can has put together a new partner segmentation strategy to make sure that were true.
Speaker Change: <unk> the partners that may be there are long.
Speaker Change: Loyal partners, who have given us a lot of bid.
Business over the years make sure we're treating them in a way that's different from some of our long tail partners. So we're doing more partner segmentation and we're aligning our value proposition appropriately and what that means is if we have a partner that doesn't need all the value added services that will make sure that we give them the best possible Commission split.
Speaker Change: So I think this alignment of our offers.
Speaker Change: Specific to the partner is something Ken is bringing in now having said all of this is going to take a few quarters before we see the results of this but we believe it's the right long term strategy to build the Intel assist growth back on a competitive standpoint.
Speaker Change: Okay.
Speaker Change: Our strategy is still to keep on acquiring some of these agents to help grow this business and with the Chinese wall in between <unk> business in those.
Speaker Change: So on the resource side, that's how we started of course, we said that we believe that the market or competitive market has has really forced our hand all of our competitive distributors were doing the same thing. So yes, we started by buying one and our plan right now is to be careful about.
Speaker Change: Just buying and rolling up revenues Thats not our interest we really want to create this channel model of the future and it might be that we acquire some <unk>.
Speaker Change: Complementary.
Speaker Change: Assets it doesn't have to be just rolling up agents. So really we're not looking to rollout EBITDA as it is to create a model that we believe can be more successful that we can then use to teach and educate the other entellus as channel partners. So I would say it's not.
Speaker Change: Just a roll up it's really more of how do we create this unique channel model that we believe will be more successful and the end users will start to gravitate to it. So I think he can also grow organically.
Speaker Change: <unk> fairly significantly.
Speaker Change: Great. Thanks, Good luck. Thank you.
Speaker Change: Thank you once again to ask a question. Please press star one on your telephone again Thats Star one to ask a question.
Speaker Change: Okay.
Speaker Change: We do have.
Speaker Change: A follow up question from.
Speaker Change: Greg Burns of Sidoti Your line is open Gregg.
Greg Burns: Hi, I just wanted to follow up a little bit and tell us. This.
Speaker Change: In terms of.
Speaker Change: What are you seeing growth there you mentioned some of the areas, where you're seeing double digit growth in the areas that I guess that would imply that are declining.
Speaker Change: How big of a piece of that.
Speaker Change: That business or are they still in do you expect maybe the the declines there either.
Speaker Change: The declining portions of that business to moderate or are they getting to a point where.
Speaker Change: They're kind of have de Minimis impact and you might just see a natural lift with the mix.
Speaker Change: Proving in that business.
Greg Burns: Yes, Greg I think it's more like this is so the older technologies are not growing but they're not necessarily decline in either what we're seeing is these are contracts that as they get renewed some of them get renewed with newer technologies and so the technology does shift, but but those businesses are still very low.
Greg Burns: Large and one of the dynamics that we haven't talked about in a while that still can happen even in the older technology and I'll use just.
Greg Burns: Network our circuits as an example, there are still principally sold by the suppliers on a direct basis, principally and we still believe that some of the suppliers just like we're talking about advanced technologies guests, what they are too and they're looking for a lower cost ways to fulfill those contracts that will still be.
Greg Burns: In effect and be offers for many many years to come and we believe there is still going to be some shift to the channel from the direct side of those businesses, even with older technology, sometimes actually if it's older technologies.
Greg Burns: The suppliers don't want they are.
Greg Burns: Hi, compensated sales teams to focus on them they want to focus on new so we believe these older technologies can still have a long life, but no. They won't have double digit growth rates like we called out that doesn't mean, we don't have single digit growth rates in those older technologies just to be clear.
Greg Burns: Okay. Thank you.
Greg Burns: Yes.
Greg Burns: Thank you.
Steve Jones: I would now like to turn the conference back to Steve Jones for closing remarks, Sir.
Steve Jones: Yes. Thank you and thank you for joining us we expect to hold our next conference call to discuss March 31 quarterly results on Thursday may eight at approximately 10 30 a M.
Steve Jones: This concludes today's conference call. Thank you for participating you may now disconnect.
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Steve Jones: [music].
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