• Net Sales: Declined 15.5% year-over-year for Q2.
• Gross Profit Margin: Achieved 13.6% for the quarter.
• Adjusted EBITDA Margin: Recorded at 4.7% for Q2.
• Non-GAAP Net Income: Decreased by 4% year-over-year.
• Non-GAAP Diluted EPS: Remained flat year-over-year.
• Free Cash Flow: Generated $34 million year-to-date; used $8 million in Q2.
• Cash Position: Ended Q2 with $111 million in cash.
• Net Debt Leverage Ratio: 0.2 times on a trailing 12-month adjusted EBITDA basis.
• Adjusted ROIC: 13.3% for the quarter.
• Share Repurchases: Totaled $24 million for Q2.
• Specialty Technology Solutions Segment: Net sales declined 16% year-over-year.
• Intelisys & Advisory Segment: Net sales and gross profits increased 4% and 3% year-over-year.
• Recurring Revenue: Represents 32% of consolidated gross profit for Q2.
• Annual Guidance: Net sales between $3.1 billion and $3.5 billion; adjusted EBITDA between $140 million and $160 million; free cash flow of at least $70 million.

• Warning! GuruFocus has detected 5 Warning Signs with FFWM.

Release Date: January 30, 2025

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

Positive Points

• ScanSource Inc (NASDAQ:SCSC) delivered strong gross profit growth and maintained a robust gross profit margin despite a challenging demand environment.
• The company is executing a hybrid distribution strategy, offering flexibility and choice with multiple sales models for hardware, SaaS, connectivity, and cloud.
• Recent acquisitions have expanded recurring revenue opportunities for channel partners, enhancing the company's technology offerings.
• The Advantix solution represents a high-margin recurring revenue opportunity, combining devices and recurring revenue to add value in the barcode and mobility market.
• ScanSource Inc (NASDAQ:SCSC) generated $34 million in free cash flow year-to-date, demonstrating a focus on building a cash culture and improving working capital efficiency.

Negative Points

• Net sales declined 4% sequentially and 15.5% year-over-year, missing expectations due to a soft demand environment and challenges with large deals.
• The specialty technology solutions segment experienced a 16% year-over-year decline in net sales, with significant FX headwinds in the Brazil business.
• Non-GAAP net income decreased by 4%, and the company faced a flat year-over-year non-GAAP diluted EPS.
• The company used $8 million of free cash flow in the quarter due to late quarter timing for sales and vendor payments.
• The demand environment remains uncertain, with cautious tech spending and limited visibility on top-line growth due to the lack of backlog.

Q & A Highlights

Q: Can you discuss the current demand environment and how the quarter progressed? Did it worsen or improve as the quarter went on? A: Michael Baur, CEO: The December quarter is typically heavily weighted towards the end of the month due to suppliers' calendar year ends. We expected large deals to close by the end of December, but experienced a double-digit decline year-over-year, which was unexpected. This was primarily due to a miss in large deals within our specialty hardware business.

Q: Despite missing this quarter, you maintained your full-year revenue and EBITDA guidance. What gives you confidence in the second half of the year? A: Stephen Jones, CFO: We believe there is growth opportunity in the second half. While our top line visibility is challenging due to the nature of our hardware business, our recurring revenue streams provide more predictability on the gross profit line. We remain confident in our guidance range.

Q: How is the current quarter starting off, and are you seeing any signs of recovery? A: Michael Baur, CEO: We are not reporting on the current quarter, but we have reconfirmed with our teams that the guidance for the second half is still achievable. We are basing this on sentiment and cautious optimism from our channel partners rather than current revenue certainty.

Q: Regarding the Intelisys business, is there any change in strategy after recent quarters? A: Michael Baur, CEO: Intelisys was flat year-over-year, facing competitive pressures. We have introduced a new platform, Channel Exchange, to attract new suppliers and offer unique solutions. We are also implementing a new partner segmentation strategy to better serve our partners.

Q: In terms of Intelisys growth, are the declining areas of the business becoming less impactful? A: Michael Baur, CEO: Older technologies are not necessarily declining but are being renewed with newer technologies. These older technologies still have a long life and can experience single-digit growth rates, even if not double-digit.

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