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ScanSource Inc (SCSC) Q3 2024 Earnings Call Transcript Highlights: Navigating Challenges and ...

GuruFocus Research
·4-min read

  • Net Sales: $753 million, down 15% year-over-year.

  • Gross Profit Margin: 12.6%, higher than expected due to a mix of recurring revenues.

  • Free Cash Flow: $158 million for the quarter.

  • Intelisys Revenue Growth: 4% year-over-year.

  • Adjusted EBITDA: Expected to be at least $140 million for FY '24.

  • Net Sales Forecast: Expected to be at least $3.3 billion for FY '24.

  • Share Repurchases: $20 million for Q3, with a new authorization of $100 million announced.

Release Date: May 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • ScanSource Inc (NASDAQ:SCSC) reported strong free cash flow of $158 million during the quarter.

  • The company achieved a robust gross profit margin of 12.6%, benefiting from a higher mix of recurring revenues.

  • Intelisys, a part of ScanSource Inc (NASDAQ:SCSC), saw a year-over-year growth of 4%, with end user billings increasing by 7%.

  • Despite a challenging environment, the company managed to maintain strong gross profit and adjusted EBITDA margins.

  • ScanSource Inc (NASDAQ:SCSC) announced a new share repurchase authorization of $100 million, reflecting confidence in the business's long-term free cash flow generation.

Negative Points

  • Net sales declined by 15% year-over-year, with a significant drop in revenue from networking products, including Cisco networking.

  • The company experienced softer demand across its technology portfolios, leading to lower-than-expected sales.

  • ScanSource Inc (NASDAQ:SCSC) faced challenges in forecasting due to macro uncertainty and the normalization of supply and demand.

  • The gross profits in the Specialty Technology Solutions segment declined by 22% year-over-year.

  • There was a slight increase in days sales outstanding (DSO) to 71 days, reflecting sales timing issues at the quarter's end.

Q & A Highlights

Q: In terms of the declines you saw in networking and from Cisco this quarter, I think Cisco has talked about a couple of quarters of backlog of inventory at their customers that still needs to be deployed. Do you have a view on that? How long do you see this hangover lasting on the working side of the business? A: Tony Sorrentino, President of North America Hardware Business at ScanSource, responded that there is a lot of uncertainty around when the backlog gets worked through, attributing it to a combination of softer demand and the existing backlog. He indicated that there isn't a definitive answer on the duration of this issue.

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Q: In terms of this new agency initiative for Intelisys, is there any risk of channel conflict? Any channel conflict there bringing an agency in-house versus servicing your broader agency partners? And what does that do for the margins for the overall Intelisys business? A: Michael L. Baur, CEO of ScanSource, addressed concerns about potential channel conflict by explaining that the company plans to maintain a separation between the new entity and Intelisys, with a separate management team and data firewall. He emphasized efforts to inform partners first about potential conflicts. Stephen T. Jones, CFO of ScanSource, added that this initiative is expected to expand margin opportunities by participating in the agent commission structure.

Q: Can you give me a little perspective about today, like what is the makeup of the agency market? Are we primarily talking people, like 1 or 2 people and small million-dollar shops? Are we talking an end market that today does tens of millions of dollars of large shops? A: Michael L. Baur explained that the typical Intelisys partner has 10 employees or less and primarily functions as a sales organization without significant back office needs. He highlighted opportunities for improving efficiencies in contract renewals and scaling operations.

Q: Explain a little bit more on the margin question about agencies. I guess, I'm just looking for like a margin profile. A: Stephen T. Jones elaborated on the margin dynamics, noting that while Intelisys' EBITDA margins have been pressured recently, the new agency initiative could help recapture some of the margins that have shifted to agents. He emphasized the potential for this initiative to be margin accretive for the company.

Q: It looks like another good quarter of CCaaS and UCaaS billings growth. Can you just talk a little bit about the sales cycles you're seeing there? Has there been any change in sales cycles for either one or both those categories? A: Michael L. Baur noted no significant changes in sales cycles for CCaaS and UCaaS but mentioned increased interest in how AI can impact these areas. He acknowledged potential hesitations in purchasing decisions due to emerging technologies but confirmed strong growth in partner engagement.

Q: Are you seeing pricing pressure for the software vendors themselves and what kind of their charging in the UCaaS, CCaaS market? A: Michael L. Baur confirmed significant pricing pressure on seat prices in both UCaaS and CCaaS, explaining that agents need to sell more seats to maintain revenue levels due to declining prices.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.