ScanSource, Inc. (SCSC) Earnings

Management highlights

• Team delivered strong third quarter results with adjusted EBITDA, EPS, free cash flow, and ROIC all increasing versus prior year. • Improved hardware demand drove 9% growth in net sales with growth across most technologies, especially networking and security. • Launched a new converged communications business unit to deliver a unified ScanSource partner experience, combining specialty communications team and IntelliSys CX cloud-based solutions team. • Focused on helping channel partners grow by delivering innovative, converged solutions including new opportunities in AI, with examples of AI channel wins. • Strong results reinforce confidence in business model and focus on three-year goals: growing gross profit contributions from recurring revenue, expanding profitability, delivering strong free cash flow, and maintaining disciplined capital deployment. • Continue to explore acquisition opportunities and have capital allocation priorities including share repurchases.

Guidance

• Maintaining full-year projections for both revenue and adjusted EBITDA. • Raising expectations for FY26 free cash flow to at least $90 million. • Confident in ability to deliver full-year guidance but will be cautious with Q4. • Haven't given 2027 guidance yet, typically done when delivering fourth quarter results.

Segment performance

Specialty Technology Solutions: Net sales increased 9% year-over-year, gross profit increased 10% year-over-year to $81 million, approximately 15% of segment gross profit from recurring revenue, adjusted EBITDA grew 6% year-over-year to $24.7 million with an adjusted EBITDA margin of 3.3%. Intellisys and Advisory Segment: Net sales declined 1% year over year, Intellisys annualized net billings increased to approximately $2.88 billion, both segments' net sales and gross profits increased 4% quarter over quarter, adjusted EBITDA for the segment was $11 million, a sequential quarter growth of 6%, with segment adjusted EBITDA margin of 42%.

Analyst Q&A

• Q: Hey, Steve, in terms of the revenue guide for the full year, based on the strong core you have, if my math is right, that would suggest at a top side revenue growth of only 2% in the quarter, and on the downside would be a decline of 10%. Was that intentional in terms of what you're thinking about for the second quarter or the next quarter?

  A: When we look at our full year outlook that we gave last quarter, we said that we would need some large deals coming in, and we had growth projected for the second half. Q3 delivered on that, and we're confident that we can deliver our full year guidance, but we don't want to get over our skis as we look at Q4.

• Q: Is there a sense that business was pulled forward from fourth quarter into third quarter based on the world that's in chaos when it comes to memory pricing right now?

  A: What I would say on that, Keith, is the visibility is always hard on pull forwards and that kind of detail. But we don't believe that we saw material pull forwards in our Q3 results.

• Q: You guys called out resources sales being down in the quarter. I would assume those who sequentially grow every quarter. Was there anything unique that happened in the quarter that would cause that to be down?

  A: On resources, remember, that's our end customer-facing business. And what you'll see in that is there's recurring revenue and there's services revenue in that business. And so some of those services revenues can be up and down quarter over quarter.

• Q: How are Intellisys orders for the quarter? I know you guys mentioned billings were 2.88. Well, how do the orders do?

  A: One of the things that we're focused on is how do we accelerate new order growth? And that's one reason we really are focusing on establishing this new group, this new team. We believe that we need to put additional focus on new orders, especially through the VAR community. So this converged communications team is going to have as a primary goal to how do we get more partners selling Intellisys and getting the new order growth to accelerate. We would like to see that grow faster. So do I assume that order growth didn't grow for the quarter, year over year? No, we didn't say that. Our belief is that we are doing everything we've said we're going to do, but we want to go faster. And we don't believe it's growing at the rate we would like to see.

• Q: In terms of the SPS segment, Revenue was almost identical to the third quarter, but yet gross margins were 50 points higher. I know last quarter you guys called out freight costs due to more small and medium-sized businesses. Anything else that drove the improved gross profits for the quarter?

  A: I would say it's more mixed in that benefit. We've seen the freight costs normalized for us. We thought that that was going to be more of a one-time impact in the quarter. So I would say it's more of a mixed story in terms of the improved margins.

• Q: Just to follow up on the investments you're making and the Intellisys side of the business to drive faster growth. I know, um, you announced this new converged business unit, but you've done a number of things over the last 12 to 18 months to kind of stimulate that growth. Um, are you finding like, the impact of those, the impact of those investments and changes that you previously made or not, would you expect them to be, or has there been like increased competitive response? Like why, Why haven't you been able to get the growth on Intellisys where you think it should be?

  A: From my perspective, we've been very clear that we need to see acceleration of our new orders growth. We've been able to talk consistently over time about end-user billings being also the indicator of how's our revenue going to come in. new order growth, if you remember, has a lag between a new order and revenue for us. So we clearly have to not only continue doing what we were doing for new orders, but everything that I'm talking about today that's new, we won't see the results of that for anywhere from six to 18 months. And so really what I'm saying today is we're going to do more so that we can, a year from now, see even more of those results. This is the I would say the challenge with our Intellisys business is what we're seeing in new order growth now were actions we took a year ago, and we're saying we'd like to see better results, and we want to accelerate that, and we believe now is the time. And one more point, Greg, is we felt like we needed to get to this point in the year, the fiscal year, to make some of those decisions. When we said back in August that our strategy and our outlook for the year was X, we said we've got to have a strong second half, and some of our decisions would not be made for more investments until we got through the first half. Well, we're there, and we saw what happened in Q3, and so we have the confidence that we should do that now. So that's why now it's a timing question for us.

• Q: Maybe back to one of the first questions that was asked earlier. When we're looking into 2027, since we have to start to model that, I guess first, any guidelines or parameters you guys want to maybe give us as we look into modeling that, and then secondly, You know, maybe what do customer conversations look like in that, you know, around the first half of, you know, 2027? I know it's a little early, but, you know, kind of back to the polling question. Just curious if, you know, you're seeing a big, you know, drop off here potentially in demand as we move into that first half, 27, 2H, calendar 26. So just wanted to see what you guys were hearing on that front.

  A: Yeah, Logan, thanks for the question. I would just first start out by saying we haven't given 27 guidance yet. We typically would do that when we deliver our fourth quarter results. So we're a little bit early in talking about FY27 for us. But we're happy with where Q3 came in. We're confident in our Q4 forecast that builds to our full year guidance that we've given, the guidance range. There's some things in our business right now that have a lot of momentum. Mike talked about security and networking having a lot of momentum from a sales perspective. And what we saw this quarter that we haven't seen in previous quarters is most of our technologies show growth, which that's a great sign for us as we think about going into 2027 is to have that momentum.