SCANSOURCE, INC. Q1 FY2025 earnings call

• Delivered strong free cash flow and EPS growth in soft demand environment with hybrid distribution success focusing on specialty technologies and recurring revenue. • Realigned reporting segments based on different sales models, both including recurring revenue. • Over the last 8 years, transformed from traditional hardware distributor to leading hybrid distributor via acquisitions like Intelisys. • In August, closed acquisitions of Resourcive and Advantix; launched Integrated Solutions Group. • Ended Q1 with $145 million in cash and zero net debt leverage on trailing 12 months adjusted EBITDA basis. • Q1 share repurchases totaled $28 million.

The company realigned reporting segments based on sales models. The Specialty Technology Solutions segment had net sales decline 12% year-over-year but grew 4% quarter-over-quarter. Gross profit declined 7% year-over-year, with segment gross profit margins at 10.4% and adjusted EBITDA margins at 3.6%. The Intelisys & advisory segment saw net sales and gross profits both increase 4% year-over-year. Gross profit margins in this segment are nearly 100%, and adjusted EBITDA margin is 38.3%. Q1 end-user billings for Intelisys increased 6% year-over-year to approximately $2.74 billion annualized.

• For FY '25, net sales are expected to be between $3.1 billion and $3.5 billion, adjusted EBITDA ranging between $140 million and $160 million, and free cash flow of at least $70 million. • Active pipeline of acquisition targets and room to continue share repurchases while staying within targeted net leverage ratio of 1x to 2x adjusted EBITDA.

• Soft demand environment impacting overall results. • Currency fluctuations, such as the strengthening dollar affecting regions like Brazil. • Competitive pricing pressures in the channel which could impact margins.

Q: Could you give more insight into product categories within Specialty Technology?

A: With new segmentation, all former technologies are combined into one segment, and they focus on planning business around segments rather than specific technologies.

Q: Was Brazil a relative underperformer? What's the reason?

A: Brazil's underperformance is due to FX, with the strengthening dollar depressing growth rate and currency fluctuations impacting sales motion.

Q: Any change in competitive environment on Intelisys side?

A: No new change, and when setting annual guidance, they took into account growth opportunities and partner segmentation strategy.

Q: How does competitive pricing impact ScanSource?

A: Historically, they help partners secure deals, with almost over 50% of projects having special pricing based on value provided, so no new pricing pressure.

Q: Adjustments to SG&A in the quarter?

A: Adjusted headcount mainly in North America sections, expecting about $10.5 million worth of annualized savings, with part reflected in the quarter and building in Q2.

Q: Key performance metrics for acquisitions?

A: Look for higher-margin, working capital light, recurring revenue businesses, and consider ROIC from growth after acquisition.

Q: View on CCaaS and AI?

A: AI is expected to drive adoption of new technologies, and they'll be aligned with partners on new directions like AI.

Q: Thoughts on gross margin throughout the year?

A: Need to look at segment level as mix between segments impacts consolidated margins; first half lighter on hardware may cause margin pressure, but overall trends depend on segment performance.

Q: Weighing share repurchases vs M&A?

A: Guided by long-term growth, expanding margins and ROIC, which are guiding principles for decision-making.