ScanSource, Inc. (SCSC) Earnings Call Transcript & Summary

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions] 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, Finance and Treasurer. Please go ahead.

Good morning, and thank you for joining us. Our call will include prepared remarks from Mike Baur, our Chair and CEO; and Steve Jones, our Chief Financial Officer. We'll review our operating results for the quarter and the year and then open the line for your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our website. As you know, certain statements in our press release, infographic and on this call are forward-looking and subject to risks and uncertainties that 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 30, 2026. Forward-looking statements represent our views only as of today, and ScanSource disclaims any duty to update these statements, except as required by law. During our call, we'll discuss both GAAP and non-GAAP results. We've provided reconciliations on our website and in the press release included in our Form 8-K filed earlier today. I'll now turn the call over to Mike.

Thanks, Mary, and good morning, everyone. I appreciate you joining us today. We finished our fiscal year with a strong fourth quarter, and I'm pleased with the progress our team made throughout the year. Our results reflect disciplined execution, improving demand across the business and momentum toward our 3-year strategic goals. Sales were up 17% year-over-year in the fourth quarter and 6% for the full year. This growth reflects outstanding performance by our account management teams, including sales, engineering, financial services and operations and the deep relationships that we've maintained over decades with our partners. We were able to respond successfully to the increased demand for our technologies from our channel partners. For the second half of our year, we saw renewed growth for key technologies, including physical security, mobility, networking, CX, cloud compute and connectivity. Our business has returned to growth, and we believe we're at the beginning of a stronger growth trajectory. We're excited about today's announcement that we signed a definitive agreement to acquire MicroAge. And I want to start with why we believe this is such a strong fit for ScanSource. The acquisition expands ScanSource's TAM, adds new services capabilities and provides greater visibility into end user needs. First, MicroAge's technologies, many of them are new to ScanSource, expand our TAM in high-growth technologies like cloud, cybersecurity, data center and AI. And second, MicroAge brings additional services offerings to enable ScanSource channel partners to partner and co-sell new technologies, capabilities, including cloud migration and management, cybersecurity services, next-generation AI data center implementation and AI solutions development. We see great opportunities ahead to help our trusted advisers and our solution providers take advantage of these new services that will become available from MicroAge. We built ScanSource over the years by identifying technologies that are transitioning to the channel and require specialized expertise to deliver value to the end user. That's the driving force behind our converged communication business unit we started last quarter. As we all know, the communications market has been moving from on-prem to cloud for many years in a market where everything is connected. That's where our converged communications team comes in, helping our partners capture the full stack of opportunities. The idea is simple: help solution providers sell more cloud recurring revenue, help Intelisys trusted advisers attach more edge devices and build on these successes to accelerate growth. We are proud to have 3 long-standing brands in one channel company. ScanSource has been serving the channel for 34 years, Intelisys also for 34 years, and MicroAge is celebrating its 50th anniversary this year. All 3 companies have built decades-long relationships with channel partners and end users across most industries. ScanSource's differentiation is building specialized expertise while developing deep relationships with channel partners and end users founded on trust. I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2027.

Thanks, Mike. Our Q4 results reflect strong demand and profitable growth across our technologies and reporting segments. Net sales and gross profits saw strong mid-teen year-over-year growth, while our non-GAAP EPS grew 43% to $1.46 a share, a record for the company. Our full year results reflect strengthening second half demand and the return of large deals. Our FY '26 full year results align well with our 3-year goals with net sales for products growing 5.9% year-over-year, while recurring revenues increased 10.6% year-over-year. Consolidated gross profit increased 7% year-over-year, the higher end of our range, with the gross profit contribution from recurring revenues increasing to 34% of the consolidated results. We grew our business and delivered annual free cash flow of $114 million with cash conversion of non-GAAP net income of 124%. Turning to our segments. I'll start with Specialty Technology Solutions. Net sales for the quarter increased 18% year-over-year, led by broad-based North America hardware sales growth across our technologies. Gross profit increased 16% year-over-year to $94 million. Adjusted EBITDA increased 28% year-over-year to $36.7 million, with an adjusted EBITDA margin of 3.96%. For the full year, segment revenues increased 6% to $3.12 billion, while gross revenue -- gross profits increased 8.4% to $338 million, with approximately 15% of segment gross profits coming from recurring revenues. In our Intelisys & Advisory segment, Q4 net sales and gross profits grew 7% and 8% year-over-year, respectively. Adjusted EBITDA for the segment was $9.4 million with an adjusted EBITDA margin of 36.4%. For the full year, segment revenues grew 3.1% to $101 million. Intelisys FY '26 net billings increased to approximately $2.88 billion. Going a bit deeper on our balance sheet and cash flow. We ended Q4 with $88 million in cash and a net debt leverage ratio of approximately 0 on a trailing 12-month adjusted EBITDA basis. For the full year, we generated $114 million in free cash flow, 124% conversion of our non-GAAP net income. Share repurchases totaled $27 million for the quarter, taking our full year share repurchases to $98 million. As of June 30, 2026, we had approximately $121 million remaining under our share repurchase authorization. Adjusted ROIC was 18.2% for the quarter and 14.7% for the full year, reflecting our disciplined approach to both working capital and capital allocation priorities. As Mike discussed, we signed a definitive agreement to acquire MicroAge, which is expected to close by the end of Q1. The planned acquisition is an exciting opportunity to advance our 3-year goals and aligns with our capital allocation priorities, expanding our total addressable market, our technology stack, our capabilities and our channel reach with accretive margins and positive free cash generation. Our capital allocation priorities remain the same: maintain a strong balance sheet with leverage of 1 to 2x adjusted EBITDA and be disciplined in capital deployment, including strategic acquisitions and share repurchases. We are providing an annual outlook, excluding the benefit from the planned acquisition of MicroAge. On an organic basis, we expect revenues to increase between 6% and 10%, believing we will see continued strong demand across our technologies and with normal lead times. We expect adjusted EBITDA to be between $158 million and $165 million, reflecting an expected 4.6% to 4.65% adjusted EBITDA margin. Free cash flow, we expect to generate at least $85 million in free cash flow. We expect the FY '27 effective income tax rate to range from 27.5% to 28.5%. We plan to update our annual outlook, including with -- including the MicroAge acquisition during our FY '27 Q1 earnings call. We'll now open up for questions.

[Operator Instructions] Our first question comes from Greg Burns with Sidoti.

Can you just talk a little bit about the outperformance for the fourth quarter and the full year relative to your guide? What came in stronger than you were expecting? And -- it doesn't seem like it, but are you seeing -- I think last quarter, there was a little caution around macro risks and maybe supply shortages around memory, but it doesn't seem like that's impacting your business. What's the risk of that going forward as we head into fiscal '27?

Greg, this is Steve. So, I would say what we saw this year when we think about the full year was really what we thought was going to happen coming into the year. We believe we were going to have a stronger second half growth performance. As we saw the second half unfold, what we saw was actually a very strong demand environment and the return of those large deals that we continue to talk about being in our pipe as the fourth quarter unfolded. So we were very pleased like many other technologies that we saw this strong demand. When we think about the macro environment, of course, we're always cautious about what's going on in the macro environment because it's out of our control. And we believe that in our guide that we're not going to -- we're not expecting to see any kind of supply disruption, and we still believe we're going to see continued strong demand.

Okay. Can you just maybe give us a little insight into product categories, where you were seeing particular strength or whether or not -- it sounds like it was across the board, but is there any particular areas of strength worth highlighting?

No. Greg, it's Steve. I think it was across the board. We saw all year long that physical security has been a great performer for us. But as we saw the second half, it's been very broad-based.

Okay. Okay. And then just flipping over to MicroAge. Could you give us a little better understanding of their revenue mix? How much is it product versus maybe services?

Greg, it's Mike. Yes, I think we're going to wait to talk more about the details of MicroAge after Q1 once we get it closed, and there'll be some revenue in the quarter to stand by for that. But just in general, what we were looking for, frankly, for the last year was a company that had a services strategy that we could not only buy into from their perspective, meaning selling their services business growing into their customer base, but also a services business that we could scale and have some of those services work with our existing channel partners. We found MicroAge as a company that had a services business, but also comes out of a traditional reseller business for 50 years. And so this company, for sure, comes out of the legacy hardware model, moved into services and now have been very successful at the blend of selling hardware and providing services, whether they're some managed services, professional services. So, we really like the composition, and we'll talk more about that after our Q1 call.

Okay. And then just lastly, what's -- is there any risk of like channel conflict here for you?

We think the risk is very low, but we're also -- as we said when we acquired Resourcive a couple of years ago, if any of our partners feel like there's some channel conflict with their customers, we're going to do our best to make sure we prefer our existing channel partner if they're already an account and MicroAge shows up. But here's what the research really is showing across the IT landscape is -- and this is from third-party research experts that most end users today at mid-market and enterprise companies are working with 6 or more partners all the time. So, we believe that MicroAge has a motion into their community. By the way, they're really only selling to about 2,500 or so end users, which is a very small number. But where MicroAge's lane is, is very clear. We might today have someone else in there selling products -- for example, we could have a security VAR in their selling security and not even know MicroAge is there, and we might have an agent in there selling connectivity. And today, all 3 could be in the same account and not even know each other is there because the end users today, again, from what the research shows, the IT end user today is comfortable working with a small set of partners as a team, not having one partner do it all. And so we really believe that just offers more opportunity for our channel partners today to actually go to market alongside MicroAge and vice versa. And that's really the model that we're talking about. And we'll do everything we can to make sure no one feels like they've gotten disenfranchised. And we think our long-standing relationships with our partners have given us permission to be able to do this.

Our next question comes from Keith Housum with Northcoast Research.

Congratulations on a great quarter. Great to see the leverage from the model coming through. Steve, as we look at the guidance and we kind of think about the tougher comps that you're going to have in the second half of the year, is it fair to say that you expect more -- a stronger, I guess, percentage growth in the first half of the year compared to second half of the year?

Yes, Keith, thanks for the question. Yes, I believe that is the way if you look at a percentage year-over-year growth that it's going to lay out. I think our first half has easier comps. The second half, especially with this fourth quarter, is going to be a tougher comp. But that is all captured in our 6% to 10% expectations.

Yes. And based on your guidance, I'm assuming the pipeline coming out of the quarter and the conversations you had at quarter end was just as strong as the prior quarter, if not even better.

Yes. I would say that our account management teams were very busy going through the end of June.

Great. Great. And then you guys had a press release with Hewlett Packard Enterprise adding Juniper to your line card for networking. Can you perhaps talk about your expectations for when that might start to kick in and benefit you guys and how you're thinking of the addition of one vendor? I know one vendor doesn't always make the numbers, but Juniper, you guys do carry and Aruba, of course, you were there first. So, it's important to you guys. Maybe help us understand how you're thinking about that benefit.

It's Mike. I'll comment on that. I would say right now, one of the challenges that we've already faced is Juniper has some supply chain constraints. They've had such a big year already that by adding us, our partner opportunities are going to be a little slower to be fulfilled. And so they've got some -- they just got some incredible pipelines of deals and opportunities. And so I think it will be slower than we would have wanted it to be and what we thought even a quarter ago. So, it's going to develop throughout, I would say, slowly through the first half of our year. And then by the time we get to the second half, we should be in full swing with Juniper from not only being able to sell, but also to deliver. So, there's going to be a little bit of backlog from us being able to get product to sell until we get to the second half.

Do you think in the second half of the year, they can be a noticeable contributor to growth?

I think let us talk about that as the year unfolds because again, some of these constraints are not anything we have control over.

Right. I appreciate it. Your quarter was the strongest quarter. Did you guys have any new customer wins to help to drive that? Or was it true just broad demand across the board?