Q4 2019 Earnings Call
All lines have been placed I mean listen only mode.
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, Vice President Treasurer and Investor Relations.
Ma'am you may begin.
Thank you and welcome to Scansource is earnings conference call for the quarter and year ended June Thirtyth 2019, with me today are Mike Baur, our chairman and CEO and Gary Lyons, Our CFO , We will review our operating results for the quarter in here and then take your questions a CFO commentary that accompanies our comments and webcast is posted in the Investor Relations section of our website.
Certain statements made on this call, including our expectations for sales operating profit performance, earning a fair value of contingent consideration operating cash flow tax rates interest expense planned divestitures and results for the first quarter of fiscal year 2020 and fiscal year 2020.
Our 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 that we put out today and in Scansource. Its Form 10-K for the year ended June Thirtyth 2018, as filed with the FCC any forward looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Scansource disclaims any duty to update any forward looking statements to reflect actual results or changes in expectations as required by law, we will be discussing both GAAP and non-GAAP results during our call and have provided reconciliations between these amounts in the CFO commentary and in our press release. These reconciliations can also be found on our website and have been filed with our form 8-K, Mike Baur will now begin our discussion with an overview of our results.
Thanks, Mary and thank you for joining us today.
And looking at our financial results for the quarter, we did not finish our fiscal year as strongly as we started.
For fiscal year 2019, we delivered record net sales of $3.9 billion.
GAAP EPS of $2.24.
And record non-GAAP , EPS up 8% year over year.
During the fiscal year following our strategic plan, we began making significant investments in our employee teams systems and processes as well as developing new digital tools to enhance our value to our sales channel and our suppliers as we began fiscal year 2020.
We have identified six key growth initiatives for the year.
First we believe we have the best sales channels to grow the collaboration business, including unified Communications contact Center and cloud.
For example, our Cisco partners have embraced the new digital solutions offers with Webex in a significant way.
Our Cisco subscription business has more than doubled year over year.
Now with our new Cascade cloud platform from entity, we are adding capabilities to accelerate our Cisco collaboration subscription business for our sales partners with new building choices.
Second strong market demand for video surveillance is expected to continue to grow at double digit rates during 2020.
We believe our channel sales partners represent the best routes to market for the leading video camera suppliers in the industry and the demand for video management software continues to develop.
Our third area of growth is in the Intelisys cloud business, which continues to grow at 60% year over year for fiscal year 2019, with our top cloud suppliers.
We are the number one or number two master agent or the majority of the unified communications as a service providers, including Ringcentral eight by eight and Mitel.
Fourth for Pos portal in fiscal year 2020, we see excellent payments opportunities at margins that reflect a higher mix of services. These opportunities include higher complexity from integrated payments and new types of contract deployment business with independent software vendors.
Our fifth area of growth for 2020 is in Brazil, where we've combined our teams as one scansource and continue to have strong year over year growth led by our SMB business, Cisco and enterprise businesses.
We are also growing our business as a Microsoft cloud provider in this region.
And are enhancing the NT cascade cloud platform for the Brazil market.
The Cascade platform enhancements will strengthen and grow the cloud services business for our suppliers in Brazil.
And six we are excited to add digital distribution capabilities within these cascade plow flap platform, which we acquired on July Onest.
The Cascade solution provides scansource partners with a highly automated tool that allows configuration provisioning and billing services for our current suppliers Microsoft's Symantec Anna Cronus.
It is a scalable platform that is already built and operational with over 1800 active sales partners.
During fiscal year 2020, we plan to add more software cloud and subscription suppliers, including Cisco to Cascade to help our sales partners more easily sell strategic cloud solutions and build recurring revenue practices.
During fiscal year 2019, we implemented a new go to market structure.
And added new capabilities to become a solution oriented customer driven organization.
We began making these investments over a year ago, beginning with our North American sales marketing and supplier teams.
During the March quarter, we completed the consolidation of five Scansource business units in North America.
And if started delivering a new one scansource team approach.
This transformation of our sales force in North America is designed for topline growth and for selling solutions services and recurring revenue.
As part of a strategic review of our business. We made the decision to divest certain businesses outside of the United States, Canada, and Brazil, which we announced in a press release earlier today.
Scansource will continue to operate and invest in its digital distribution business in these geographies, including its recent acquisitions in NT campaign go and until such global.
We determined that we need a certain amount of scale to maximize our value added model and this led to the focus on Brazil, Canada, and the United States for our physical product distribution business.
These actions are positioning us for faster than market growth for fiscal year 2020.
And we are expecting 5% to 7% annual net sales growth in our fiscal year 2020 plan.
I will now turn the call over to Jerry to discuss our financial results in more detail and our outlook for next quarter.
Thanks, Mike we had a disappointing finish to our fiscal year with sales and EPS below our expected range for the quarter, we missed our forecast range, primarily from lower sales volumes.
Earlier today, we announced the planned divestiture of certain physical product businesses outside of the United States, Canada, and Brazil is planned divestitures had a fiscal year 2019 net sales of $623 million at June Thirtyth, 2019 had working capital investment of $205 million.
The non-GAAP operating income for these planned divestitures was approximately breakeven for the full fiscal year 2019.
Consolidated net sales for the fourth quarter.
Totaled $961 million down, 3% year over year or down 2% on an organic basis.
Foreign currency translation negatively impacted sales by $15 million.
The lower sales volume reflected lower big deals that we believe were delayed not lost.
We have been struggling to grow certain areas of our business due to significant headwinds from our premise based communications suppliers.
Additionally, during the fourth quarter, we missed some sales from partners, who were impacted by our sales team transformation efforts in North America.
Gross profit dollars for the quarter.
Decreased 3% year over year, consistent with the lower sales volume.
Our fourth quarter fiscal year 2020 gross profit margin.
Was 11.4%.
Consistent with a year ago period and down from the previous quarter.
As we indicated last quarter the previous quarter margin included higher vendor programs, which we did not expect to continue at those levels.
SGN, a expenses increased $1.1 million from the prior year quarter to $78 million for the fourth quarter fiscal year 2019.
We have made significant investments in operating expenses to support the planned growth for fiscal year 2020.
These expenses were fully realized last quarter as we executed our new sales transformation plan called one Scansource, we will gain leverage on these expenses as our teams drive a higher top line revenue.
Our fourth quarter 2019, non-GAAP operating income was $29.4 million or 3.1% of net sales.
Compared to $30.8 million or 3.1% in the prior year quarter.
We have a $78 million contingent consideration liability on our June 32019 and balance sheet.
And this reflects the present value of expected future earn out payments for Intelisys acquisition.
For fourth quarter year 2019, we recorded an expense for the increase in fair value of contingent consideration of $3.7 million from telesis.
For our first quarter 2020 forecast, we estimate the change in fair value of contingent consideration to be an expense of approximately $1.6 million.
For the fourth quarter 2019, the effective tax rate was 28.7%.
Our NIM on non-GAAP items include the net impact from a favorable tax settlement in Brazil.
Partially offset by the write off of the deferred tax asset in Latin America.
And for fiscal year 2020, we estimate the effective tax rate, excluding the planned divestitures to range from 25% to 26% excluding any discrete items.
Now for a few comments on our full year results.
For fiscal year 2019, net sales of 3.9 billion represented a 1% increase from the prior year or 2% on an organic basis.
Gross margins for fiscal year, 2019 were 11.7% up 34 basis points from the prior year.
In fiscal year 2019, we had a few things that benefited our margin we had vendor price increases related to tariffs and we had higher levels of opportunistic inventory purchases.
We're not expecting these events to recur in fiscal year 2020.
We are however, expecting faster growth from our higher margin businesses.
Our SGN a for the year is up 6% due to expenses for companies acquired during the year and additional investments for our.
For our sales organization, including Salesforce CRM.
We're expecting sales growth to leverage the investments made in ESG in a throughout fiscal year 2020.
Fiscal year 2019, non-GAAP operating income increased 4% to 128.5 million.
Our non-GAAP operating margin of 3.3%.
Now shifting to the balance sheet.
Cash from operations use $3 million this quarter and used $27 million for the year. The negative cash flow reflects the higher level of working capital investments, including our opportunistic inventory purchases.
We expect to generate positive operating cash flow during fiscal year 2020.
In addition, the planned divestitures, we announced earlier today had approximately $205 million in working capital at June Thirtyth 2019, and we would expect a significant cash benefit from those planned divestitures.
For the quarter, we had inventory turns of 4.7 times, which are slower than our typical range.
And this reflects the higher inventory levels from the opportunistic inventory purchases and lower than planned sales in the fourth quarter.
We do expect inventory levels to be lower at the end of the first quarter due up due to higher sales volumes.
Our days sales outstanding came in at 62 days up from 60 days in the prior quarter and 59 days in the prior year quarter.
At June Thirtyth, 2019, we had cash and cash equivalents of $24 million in debt of $360 million.
Our net leverage totaled approximately 2.3 times trailing.
12 month, adjusted EBITDA and ROI see was 12% for fiscal year 2019.
During fiscal year 2019, we invested $32 million for acquisitions that build capabilities, but have not yet contributed to our EBITDA growth.
Now turning to our forecast we are providing our first quarter forecast, excluding the planned divestitures that we announced earlier today.
We expect GAAP net sales for the first.
Quarter fiscal year 2020 to range from 970 million to $1.03 billion and our non-GAAP net sales, excluding the planned divestitures to range from $830 million to 890 million.
The midpoint of our non-GAAP sales forecast range reflects organic sales growth of approximately 4%.
GAAP diluted earnings per share are expected to range from 47 cents per share to 52 cents per share.
The non-GAAP diluted earnings per share to range from 70 cents per share to 75 cents per share.
I'd like to point out that the GAAP EPS does not include any non cash charges from write downs or costs associated with the planned divestitures.
And for the quarter, we expected gross margin.
Closer to 11.4% for the ongoing businesses and a non-GAAP operating margin close to 3.5% for the ongoing businesses.
Before this forecasted period, we are assuming approximately $4.4 million in interest expense.
And we estimate the tax range.
Also to be at 25% to 26% for the full fiscal year 2020, excluding discrete items.
With that I'd like to turn the call back over to Mike for closing comments.
After our strategic review of our business, we are executing our plan for higher margins and higher growth.
We are being driven by a commitment to shift from supplier driven initiatives to an end customer driven growth strategy that is serviced by a network of knowledgeable channel sales partners.
By offering digital and physical solutions with value added services. We believe we will be at the center of the solution delivery channel.
The plans we have for fiscal year 2020 will showcase the results of these efforts.
We will now open it up for questions.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
If your question has been answered all your wish to remove yourself from the question queue. Please press the pound check once again Thats star one on your Touchtone telephone to ask a question.
To prevent any background noise, we ask that you. Please place your line on mute. Once your question has been stated.
Our first question comes from the line of Adam Tindle of Raymond James Your line is open.
Good afternoon. This is not us and on for Adam and thanks for taking my questions.
I wanted to start you have several long term financial targets out there with two key ones being 3.5% to 4% operating margins and mid teens ROI seed. So how should we think about operating margin operating margin and ROI see after the divestiture given this was likely dilutive to these metrics.
Yes, Hey, medicines as Gerry so.
It is we certainly think that.
Our operating margin can get to that 3.5%. That's a that's a more short term sort of outlook.
But as we said previously on the ROI see it's going to take some time to get that number.
Up to a higher number of mid teens. So we we indicated we finished at 12.
12% in order to get that number up to where we need we're going to need another 12 to 18 24 months something like that.
Okay. That's helpful. And then just as a quick follow up I wanted to clarify are you only pursuing a sale of the non digital distribution business or is the is there a chance that this could potentially cause or write down and if so how much would that be.
Yes, so what Weve announced at the moment is that there is the planned sale and Thats. The only plans that we have at the moment.
Okay. That's helpful. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Keith Housum of Northcoast Research. Your line is open.
Good afternoon, everyone you guys as we look at the POS Barcoding segment, obviously, some very disappointing results there.
How much of that was impacted by the businesses that you are going to be divesting versus the businesses are going to be retained.
Keith we did have some disappointing results in the barcode segment.
I think we indicated on the call that.
Most of that was just lower sales volume.
And part of that was in really all geographies really lower sales volume.
So we're expecting that.
We're going to improve in both segments.
Based upon.
Executing on these planned divestitures, though.
Okay is post and post divestitures.
What will be the impact to your vendor lineup I mean is there any risk to the existing relationships that you have in terms of your ability to earn rebates going forward or volume incentives or anything of that nature.
Keith its Mike.
We're certainly not expecting that because today, we get really no.
Program benefits across geographies, all the suppliers negotiate terms and conditions and rebate targets based on what we do in a particular geography. So for example, our revenue in Europe does not affect our rebates and programs and benefits in North America and vice versa.
Got it I appreciate it.
Last question, if I may get inventory levels were extremely high and yes.
We ask you thought you guys would have worked out a little bit more on you did I understand sales are at this point in the quarter, but is there anything is preventing the inventory. This would mean, we're down further or is it just a matter of the sale has got to catch happening that way too much and is it really just one or two vendors or is it really across the entire platform.
Yes, it certainly is a bit of a sales issue, but we also indicated that we were opportunistic in some of our bonds.
So I wouldn't I wouldn't say, it's across the board it's more it's more.
Pointed at certain places.
But we are.
Absolutely committed to driving those numbers down.
Partly because we're going to have a higher sales volume and partly because we're going to.
Do things a little differently than we have in the past.
Hey, guys I apologize I ask one more in here what gives you the confidence that you guys may have higher sales volume.
And the next in the lunch you compare to what you had in the fourth Q.
Well one of the things that we indicated to Keith is the sales structure changes that we made we actually started that a year ago in July and we really phased in a bigger group of our customers into that new sales structure in March.
And so we recognized even then that even though we had learned a lot in the nine months. Prior once we turned on this new structure, which really was a big transformation for our go to market and by combining five sales forces into one.
There was definitely some.
Disruption and some customers that hey, I now have a new sales person or sales team.
How does this work and so we believe that some of the revenue definitely was lost in the quarter and that we'll get that back once the new sales team start to perform we believe our customers based on feedback.
Like this new structure, they maybe didnt understand it at first but we believe that they will actually they will benefit from it and we will do.
Okay. Thank you.
Thank you once again to ask a question. Please press Star then one on your touched on telephone again Thats Star one on your Touchtone telephone to ask your question. Our next question comes from the line of William Gibson of Roth Capital Partners. Your line is open.
Thank you.
With regard to the divested businesses could you give us a little more color on what products are involved.
Sure so.
In Europe its both its both segments at both communications products and point of sale barcode, primarily barcode products in Europe .
In Latin America, it's the same as well so it's both communications and barcode.
And in terms of use of funds once that are divested.
Is that you can pay down any debt.
Yes, well, we yes, we certainly will pay down debt. We also have other investments that we want to make we.
These these regions are performing at the rate that we need them to perform so we're going to invest some of those dollars and a higher performing areas that we still have which would be.
You asked as we've indicated in Brazil as we've indicated.
Thank you and then one last question.
When you report first quarter results well the businesses to be divested show was discontinued operations or will they be included.
Yes, well so there are some.
There's a bunch of accounting guidance around that and Theres a number of tests that we have to.
That we have to meet and at this point, it's not it's not clear whether we can meet those tests.
So they will either be broken out as discontinued operations or we will we will create some sort of a non-GAAP reconciliation to get you from what we report too.
To a non-GAAP without these operations.
Thank you.
Sure.
Thank you. Our next question comes from the line of Chris Mcginnis subsidy and company. Your line is open.
Good afternoon, Thanks for taking my questions.
Just to follow up on the.
Divestitures, what would have been the organic growth I guess for 2019, if you are.
If you look back and except to the planned divestitures.
Hold on one sorry, let me find that piece of paper Chris.
Would have been around 3% organic.
And sorry, just indicated by the micro sand, but that 5% to 7% I think furniture is maybe the targeted range for full year.
What's the biggest components or the.
The improvement.
You're expecting on the growth rate.
Yes, I think what we identified at the first part of our comments today, Chris were the six growth areas and we believe that these growth areas are some that are very important and that are growing at much higher rates and we gave the example of the collaboration area and specifically the Cisco Webex opportunity and what's what's and what's interesting is how quickly the opportunities for selling subscription revenue. For example is doing well and probably much better than we were actually reflecting in our results from last year. So that was that was one example, obviously the video surveillance. Another example, we've been talking about for a few years now continues to do to be growing at better than.
Traditional market rates and so when we look at that we add intelisys Pos portal, obviously, our new Cascade platform.
And then what we call digital tools in general we believe we have the opportunity to take market share by helping our channel partners make more money selling products and services and software and digital from Scansource next year, and we believe that will lead us to take market share and that's up better than 5% strategy for new that will.
Okay. Thanks.
Can you just maybe elaborate a little bit on what Cascade brings to you and how that changes going to stretch that that perhaps you would that change in strategy and go to market. Thanks.
Yes, sure one of the key areas that we needed as part of our strategy was a platform. So that a sales partner one of our borrowers or one of our agents or any of those types of sales barge could go to a central place and place an order first they have to be able to.
Configure what they call provision software and choose Microsoft as the example of the shell, Microsoft Azure or 365 or their CRM or any of their software products. Today, you have to have a configuration tool and so we looked at building one years ago, We decided a few years ago, we need to buy one to bill one was going to take us too long and we weren't sure would be the right place to invest our resources. So we have a platform that lets us work with many suppliers. Microsoft One example to configure provision.
The software that a customer needs and in customer needs. Then you have to be able to bill it and either in the Intelisys model, we had a billing model.
Where the suppliers bill the software or the solution to the connectivity, but we had a lot of vars that want to build the software or they want us to build it. So what cascade is a billing its a configuration platform, but also a billing platform. Then following that it's also a way to keep up and track all of the products. You sold. So then we had this tool called partner insights that actually takes the data that we are using to provide this provisioning in sales and allow a sales partner to be much more knowledgeable about what products a customer owns and when the renewals are how do you sell them more in the future based on the growth of their business. So this becomes a real important tool to a channel partner and that's why we believe this is significant and will impact us positively in 2020.
Great and maybe one last question and then also.
If you could break this out but how much is now of the business maybe around the services.
I know it's been a few years now on this investment so.
Can you disclose that yet or is it still maybe not enough to disclose.
Well, we're looking at different ways, we can disclose it when we looked at the example, we gave in our call around the Cisco Webex and talked about it doubling in.
In revenue year over year, we want to be more clear than that if we can and so we're trying to gather the right.
Right metrics and also some of this new digital revenue comes in that.
As a commission and more as a 100% margin much like the.
Intelisys model works. So you don't get the benefit necessarily at the topline as you do at the margin line. So we do have some of the products that may look like they're being sold in a subscription model, but still arent. So it's kind of a combination of how suppliers and our channel partners want to purchase and have someone build the product. So we are working on that we hope to give you more clarity on that.
Maybe as soon as next quarter.
Great. Thanks for taking my questions and good luck in Q1. Thank you.
Thank you once again, ladies and gentlemen, Please press Star then one on your touched on telephone to ask a question again Thats star one on your Touchtone telephone to ask a question.
I have a follow up question from Keith Housum of Northcoast Research. Your line is open.
Thanks, guys.
Mike you outlined those six strategies, our six catalysts for growth going forward can you quantify how much revenue those fixed costs currently provide.
Not today, but we'll certainly be talking about a more over the next few quarters want to definitely be able to give you more insight into that though but this was the first up.
Opportunity, we had to really refresh our growth areas and we thought this would be a great place to start but stay tuned we'll give you more in the future.
Okay got it and then the follow up to that.
Jerry you mentioned that with the cash will get from the divestitures here you guys will make investments in growth areas and this will these be investments that we'll see come through the income statement are they for these be through additional acquisitions.
Keith.
I would think there would be more through the income statement.
Because.
I think when we look at our.
Look at our portfolio now we think you know you've seen our investor slides right you've seen.
The things that we've outlined we think now we've we've basically filled most of those holes are all the holes that we needed to fill so we're not we're not really expecting that we're going to need to make any other.
Acquisition investments, Okay. So is it too early to say that.
Margins operating margins going forward will be 3.5% or higher or are now.
Well I think with Madison's question earlier I indicated that was that's a short term we should be able to get to their short short term yes.
Okay, even with those investments okay.
Yes, yes, okay. Thank you guys.
You're welcome thank you.
Thank you.
At this time I'd like to turn the call back over to chairman and CEO , Mike Baur for any closing remarks Sir.
Thank you appreciate you joining us today, we expect to hold our next conference call to discuss our September Thirtyth quarterly result on Tuesday November 12 2019.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may disconnect. Your lines at this time.