SCANSOURCE, INC. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Soft demand environment persisted in Q2, with net sales declining 4%. Despite this, gross profit grew and margin was strong. The hybrid distribution strategy offers multiple sales models for various technologies.
• Acquisitions like Resourcive and Advantix expanded recurring revenue opportunities. Advantix is a high-margin recurring revenue add-on in the barcode and mobility market.
• Focus on profitability and free cash flow. Ended Q2 with $111 million in cash and a net debt leverage ratio of 0.2x on a trailing 12-month adjusted EBITDA basis. Share repurchases totaled $24 million in Q2. Active pipeline of acquisition targets is maintained.

Segment Performance

• Specialty Technology Solutions: Net sales declined 16% year-over-year and 4% quarter-over-quarter. Gross profit was essentially flat year-over-year, with approximately 12% of gross profit from recurring revenue. Segment gross profit margin increased to 10.8% and adjusted EBITDA margin was 3.5%. Technologies in this segment with year-over-year growth include barcode mobility, physical security, and mobile connectivity (MCx).
• Intelisys & Advisory: Net sales and gross profits increased 4% and 3% year-over-year, including the addition of the Resourcive acquisition. Gross profit margin of 99% in this segment reflects a higher concentration of recurring revenue. Adjusted EBITDA margin was 41.1%. Q2 end user billings for Intelisys increased 5% year-over-year to bring the annualized net billing to approximately $2.77 billion, with double-digit year-over-year growth in CX (including UCaaS, CCaaS, and AI-enabled CX solutions) and SaaS. During the quarter, Channel Exchange, a new SaaS platform, was announced.

Guidance

• Reconfirmed annual guidance: net sales ranging 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. The second half is expected to see growth, though top line visibility is challenging due to no backlog. Recurring revenue helps stabilize gross profit predictability.

Risks

• Soft demand environment lasting longer than expected. Difficulty in closing large deals. Uncertainty in top line visibility as there is no backlog, making it hard to predict revenue.

Question and Answer Q: Talked about Q2 progression, guidance reaffirmation.

A: Mike Baur stated the soft demand was a large deal-driven miss, but they reaffirm the guidance as achievable with the second half still attainable. Steve Jones mentioned top line visibility is tough due to hardware sales but recurring revenue helps GP predictability.

Q: About quarter start, technology challenges, Intelisys strategy.

A: Mike Baur said they focus on second half attainability and sentiment in the channel. Keith Housum asked about technology challenges and Intelisys strategy; Mike Baur discussed new platform Channel Exchange, partner segmentation, and acquisition strategy focusing on creating a unique channel model rather than just rolling up revenues.

Q: Follow-up on Intelisys growth.

A: Mike Baur explained older technologies shift with renewals to newer technologies, still large in size, and older technologies can have single-digit growth rates rather than double-digit.