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    Scansource Inc (SCSC)

    Q4 2024 Earnings Summary

    Reported on Mar 14, 2025 (Before Market Open)
    Pre-Earnings Price$48.91Last close (Aug 26, 2024)
    Post-Earnings Price$46.30Open (Aug 27, 2024)
    Price Change
    $-2.61(-5.34%)

    What went well

    • Strategic Acquisitions Driving Growth in High-Margin, Recurring Revenue Businesses: ScanSource is acquiring high-margin, recurring revenue businesses like Resourcive and Advantix, which are scalable and expected to be accretive to adjusted EBITDA. These acquisitions enable the company to expand into advanced technologies such as AI and private 5G, and help their VAR partners sell more of the technology stack.
    • Strong Financial Position Enabling Both Acquisitions and Share Repurchases: With a strong balance sheet, including $185 million in cash and a net debt leverage ratio below 0, ScanSource has the capacity to pursue growth through acquisitions while also returning capital to shareholders via share repurchases. The company plans to balance acquisitions and share repurchases, maintaining a modest net leverage target of 1x to 2x adjusted EBITDA.
    • Leadership Focused on Accelerating Growth and Expanding Market Opportunity: The appointment of Ken Mills as President of Intelisys brings a leader with a strong background in different channel approaches, positioning the company to return to double-digit growth in its Intelisys business. Additionally, the acquisition of Resourcive brings in a strong management team to drive growth in the advisory channel.

    What went wrong

    • The company anticipates a challenging demand environment to continue in the near term, particularly in the first half of the fiscal year, making it difficult to predict top-line growth. This uncertainty is reflected in their wider guidance ranges and acknowledgment that "predicting the top line growth... is hard".
    • The recent acquisitions are small and "not significant to the consolidated results for FY '25", indicating that growth from acquisitions may be limited and may not sufficiently offset the soft demand in core businesses.
    • The company has little visibility into demand, relying heavily on partners for orders with no backlog, which makes accurate forecasting challenging and could lead to potential revenue shortfalls. As stated, "it's very hard for us to know what's coming" and "we have very little backlog to give us an indication of demand".

    Q&A Summary

    1. Acquisition Impact on Guidance
      Q: What's the expected contribution from recent acquisitions to fiscal '25 guidance?
      A: Stephen Jones stated that the recent acquisitions are included in fiscal '25 guidance but are small and not significant to consolidated results. The focus is on acquiring higher-margin opportunities that are low in working capital, which are accretive to EBITDA and overall contribution.

    2. Guidance Process and Predictability
      Q: How was building fiscal '25 guidance different from fiscal '24?
      A: Stephen Jones explained that predicting top-line growth is challenging due to market changes. They learned from last year and provided wider ranges for guidance to reflect uncertainty. The company is focusing on driving free cash flow and making good decisions on working capital.

    3. Capital Allocation Strategy
      Q: What's your strategy between M&A and share buybacks?
      A: Stephen Jones indicated there's room to do both acquisitions and share repurchases. With strong free cash flow and $185 million in cash, they plan to pursue disciplined acquisitions while returning capital to shareholders through share buybacks. They're not concerned about leverage ratios for fiscal '25.

    4. Demand Outlook vs. Supplier Comments
      Q: Why is your outlook cautious despite positive supplier comments?
      A: Mike Baur noted that while some suppliers like Cisco and Zebra report positive signs, predicting demand is hard for a distributor like ScanSource. They provided a wide range for guidance due to timing uncertainties, believing the first half of the fiscal year will be hard to forecast, with expectations of improvement in the second half.

    5. Margins and Recurring Revenue
      Q: Are the new acquisitions high-margin businesses?
      A: Stephen Jones confirmed that the acquisitions are primarily recurring revenue businesses with higher margins. Resourcive reports close to 100% gross margin, while Advantix also has very high margins, though slightly lower due to a mix of services.

    6. Hardware Portfolio Challenges
      Q: Any challenges in the hardware portfolio affecting growth?
      A: Mike Baur acknowledged challenges in the Comms segment, partly due to Cisco's impact. However, they expect the Specialty business to return to growth as customers refresh products. Overall, they anticipate better performance going into fiscal '25, despite some segments still declining.

    7. Barcode Market Outlook
      Q: What's your view on the barcode market after Zebra's comments?
      A: Mike Baur is excited about creating the ISG group, led by the Advantix acquisition, which will drive hardware demand. They believe having recurring revenue and selling mobility devices strengthens their position, expecting to outperform competitors in barcode spaces next year due to the Advantix acquisition.

    8. Scalability of Acquired Companies
      Q: How scalable are the newly acquired businesses?
      A: Stephen Jones stated that both Resourcive and Advantix are scalable plays with unique capabilities. They are small companies with the right management teams, and the acquisitions are expected to help sell more hardware and differentiate their offerings in familiar technologies.

    9. Intelisys Leadership Change
      Q: What's the impact of Ken Mills joining as President of Intelisys?
      A: Mike Baur expressed that Ken Mills brings a strong background in different channel approaches, providing more strategy and vision. They are very bullish on the TSD model and believe they can get back to double-digit growth at Intelisys.

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