ScanSource, Inc. (NASDAQ:SCSC) Q3 2023 Earnings Call Transcript May 11, 2023
Operator: 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 objection, 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.
Mary Gentry: Good morning, and thank you for joining us. Joining me on the call today are Mike Baur, our Chairman and CEO; and Steve Jones, our Chief Financial Officer. John Eldh, our President, is under the weather and not able to join us today. We will review our operating results for the quarter and then take your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our Web site. Let me remind you that certain statements in our press release, in the earnings infographic, and on this call are forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, those factors identified in the earnings release we put out today and in ScanSource’s Form 10-K for the year ended June 30, 2022, as filed with the SEC.
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, except as required by law. During our call, we will discuss both GAAP and non-GAAP results and have provided reconciliations between these amounts in the earnings infographics and in our press release. These reconciliations can be found on our Web site and have been filed with our Form 8-K today. I’ll now turn the call over to Mike.
Michael Baur: Thanks, Mary, and thanks everyone for joining us today. Throughout fiscal year ’23, our team has delivered results ahead of expectations, and Q3 is no exception. This quarter, we delivered 5% net sales growth, strong gross and adjusted EBITDA margins, and positive operating cash flow. Our diversified portfolio of products and services strategy is working. Our channel customers trust us to broaden their technology offerings to meet the demand of end customers in this increasingly digital world. In addition, we give our channel customers the opportunity to build a successful stream of recurring revenue that will result in a more profitable and sustainable business. Since John is not able to join us today, I’ll provide the business performance update for him.
For Q3, both net sales and gross profit increased 5% year-over-year. We were able to meet customer demand with our strong inventory positions. As we enter Q4, we are seeing supply lead times return to normal levels for most of the products we sell, enabling us to be more efficient with our inventory levels. In our Specialty Technology Solutions segment, Q3 net sales increased 12% year-over-year, fueled by networking, security, and barcoding, and our Q3 segment gross profit increased 7%. We had strong sales growth in devices that enable productivity, automation and the customer experience. This quarter’s growth drivers included data networking, barcode scanners and printers, and physical security. Our sales team was recently named Aruba’s North America Distributor of the Year.
This recognition demonstrates our specialized expertise in this space and successful engagement with the Aruba team to execute growth strategies. Moving on to our Modern Communications and Cloud segment, Q3 net sales decreased 7% year-over-year, while gross profit increased 3% year-over-year. Strength in networking was offset by lower sales volumes in communications hardware as business shifts to the cloud. We had double-digit growth in our Cisco sales led by networking, growth in our federal business and the fast-growing cybersecurity business. We are well-positioned for growth with our cloud offerings, including UC as a Service, UCaaS, and Contact Center as a Service, CCaaS. As part of our Intelisys business, UCaaS billings grew 22%, and our CCaaS billings grew 56%.
While our cloud communication business continues to grow, our on-premise communications business continues to decline. For Q3, on-premise represented only 10% of the total segment sales, but less than 4% of total consolidated net sales for the company. Intelisys continues to be a leader in the agency space. Our Q3 end user billings increased 9% year-over-year and now exceed $2.4 billion annualized. Q3 Intelisys net sales increased 4% year-over-year. Our strong results for this quarter demonstrate how our diversified portfolio of technologies is driving our hybrid distribution success. Now I’ll turn the call over to Steve, who will take you through our financial results.
Stephen Jones: Thanks, Mike. Our team delivered Q3 net sales growth and adjusted EBITDA that exceeded our expectations. For Q3, we had 5% net sales growth and positive operating cash flow of $55 million. We delivered Q3 adjusted EBITDA of $45.7 million, and all-time record trailing 12-month adjusted EBITDA of $178.4 million. Gross profits for the quarter increased 5% year-over-year to $112 million with 12.6% gross profit margin with similar benefits from supplier price increases in both quarters. Our transformed business model generated Q3 recurring revenues of $28.7 million, up 4% year-over-year. For the trailing 12-month period, approximately 24% of our consolidated gross profits are now from recurring revenue business. Our SG&A expense for the quarter of $70.7 million increased $4.1 million or 6% year-over-year.
Our Q3 adjusted EBITDA of $45.7 million represents 3.5% year-over-year growth and a 5.1% — 5.16% adjusted EBITDA margin. Q3 non-GAAP EPS of $0.96 decreased 8% year-over-year and includes interest expense of $5.7 million, significantly higher than the $1.5 million in the prior year. Our higher interest expense reflects both higher interest rates and higher average borrowings. As we look to the June quarter, we believe interest expense will be approximately $5 million for the fourth quarter. Now turning to the balance sheet and cash flows, in Q3, we achieved positive operating cash flow of $55 million. We brought our working capital down $12 million quarter-over-quarter and expect continued improvements in the June quarter as we improve our inventory efficiency to reflect lead times returning to normal.
Year-over-year accounts receivable increased $42 million, and Q3 DSO increased to 70 days. Our balance sheet remains strong. From a net debt leverage perspective, we ended Q3 at approximately 1.5x trailing 12-month adjusted EBITDA. During the March quarter, we had approximately $10.7 million in share repurchases and have an outstanding authorization with approximately $70 million remaining. As a reminder, our top capital allocation priority remains investing in growth opportunities to drive long-term value. Finally, we are raising our full-year 2023 outlook for adjusted EBITDA to be at least $182 million and maintaining our year-over-year sales growth of at least 6.5%. In addition, for the full fiscal year, we expect positive operating cash flow and an effective tax rate of approximately 28%.
To help with analyst models, we expect a net expense for interest expense, interest income and other expenses to be approximately $14 million to $15 million for the full fiscal year 2023, which reflects approximately $4 million for our fourth quarter. We’ll now open it up for questions.
Q&A Session
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Operator: Certainly. [Operator Instructions] And our first question is coming from Jake Norrison of Raymond James. Your line is open.
Operator: And our next question will come from Greg Burns of Sidoti. Greg, your line is open.
Operator: And our next question will come from Matt Sheerin of Stifel. Your line is open.
Operator: [Operator Instructions] And our next question will come from Adam Tindle of Raymond James. Your line is open.
Operator: And our next question will come from Keith Housum of Northcoast Research. Your line is open.
Operator: I would now like to turn the call back to Steve for closing remarks.
Stephen Jones: Thank you, and thank you for joining us today. We expect to hold our next conference call to discuss June 30 quarterly and full fiscal year results on Tuesday, August 22 at 10:30 a.m.
Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.
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