Steel Connect, Inc. (STCN)·Q3 2024 Earnings Summary

Executive Summary

• Q3 FY2024 revenue declined 5% YoY to $43.86M while gross margin expanded 170 bps to 29.7% on lower materials costs and mix shift . Net income spiked to $71.66M on a one-time, non-cash $71.5M tax valuation allowance release; diluted EPS was $2.51 versus $0.36 YoY, not reflective of underlying operations .
• Underlying operating profitability softened: Adjusted EBITDA fell 15% YoY to $4.45M (10.1% margin), though it improved sequentially from Q2 ($3.70M) and Q1 ($3.31M) .
• Cash generation improved: Q3 operating cash flow was $8.77M and free cash flow $7.56M; cash and equivalents ended at $269.24M; net cash stood at $256.33M .
• Demand remained pressured in computing and consumer electronics, partially offset by new program wins; management highlighted client/program losses in these end-markets as the primary revenue headwind .
• Potential distribution optionality increased: ModusLink’s revolver amendment removed certain dividend caps (May 1, 2024), and a proposed litigation settlement contemplates a $6.0M cash payment to be distributed to common shareholders if court-approved .

What Went Well and What Went Wrong

What Went Well

• Margin resilience despite revenue pressure: Gross margin rose to 29.7% (+170 bps YoY) on lower materials costs and mix shift .
• Strong liquidity and cash generation: Q3 operating cash flow was $8.77M and FCF $7.56M; cash and equivalents of $269.24M with $256.33M net cash and $11.9M undrawn revolver capacity .
• Lower corporate overhead: SG&A decreased $3.5M YoY in Q3, primarily due to reduced legal and board fees at the corporate level .

Selected company language:

• “Gross profit percentage increased 170 basis points to 29.7% from 28.0%... primarily due to a decrease in cost of materials.”
• “Selling, general and administrative expenses during the third quarter decreased by approximately $3.5 million… due to… a decrease in legal fees and board fees.”
• “As of April 30, 2024, the Company had cash and cash equivalents of $269.2 million… ModusLink had readily available borrowing capacity of $11.9 million.”

What Went Wrong

• Top-line decline: Revenue down 5.0% YoY on lower volumes and program losses with existing clients in computing and consumer electronics, partially offset by new business .
• Underlying EBITDA compression: Adjusted EBITDA fell to $4.45M from $5.23M YoY, with margin down to 10.1% from 11.3% .
• Investment and FX drags: Q3 other gains included $3.66M interest income but were offset by $2.1M investment losses and $0.6M FX losses .

Financial Results

Quarterly trend (sequential)

YoY comparison (Q3 2024 vs Q3 2023)

Note: Q3 2024 net income reflects a one-time, non-cash $71.5M tax valuation allowance release; income tax benefit was $67.8M in Q3 2024 vs $0.9M expense in Q3 2023 .

Segment breakdown

KPIs

Guidance Changes

No formal quantitative guidance was provided in the Q3 press release or 10-Q .

Earnings Call Themes & Trends

No earnings call transcript was available in the company document set for Q3 FY2024. Themes below reflect management commentary from the press release and 10-Q.

Management Commentary

• “Net revenue for the third quarter decreased $2.3 million, or 5.0%... primarily driven by lower volumes and loss of programs associated with existing clients in the computing and consumer electronics markets, offset partially by new business revenue.”
• “Gross profit percentage increased 170 basis points to 29.7% from 28.0%... primarily due to a decrease in cost of materials.”
• “During the third quarter, the Company recorded income tax benefit of approximately $67.8 million… due to the Company's release of a portion of its valuation allowance… a one-time non-cash adjustment of $71.5 million.”
• Liquidity: “As of April 30, 2024, the Company had cash and cash equivalents of $269.2 million and ModusLink had readily available borrowing capacity of $11.9 million.”
• Capital returns flexibility: “On May 1, 2024… Second Amendment [to Umpqua Revolver]… removed certain caps and conditions on ModusLink’s ability to pay dividends.”

Q&A Highlights

No Q3 FY2024 earnings call transcript was available in the company document set; therefore, no Q&A themes or clarifications can be summarized from a call.

Estimates Context

• Wall Street consensus estimates (S&P Global/CIQ) for Q3 FY2024 were unavailable for STCN via our data connection at this time; as a result, we cannot provide vs-consensus comparisons. Values retrieved from S&P Global were unavailable due to missing CIQ mapping for this ticker.

Where appropriate, investors should anchor on underlying operating items (Adjusted EBITDA, gross margin, cash flow) this quarter given the significant one-time tax benefit .

Key Takeaways for Investors

• Underlying operations: revenue remains under pressure from computing/CE client volume loss, but margins improved YoY and Adjusted EBITDA rose sequentially through Q1→Q2→Q3, indicating cost/mix resilience .
• Non-recurring boost: the $71.5M non-cash tax valuation allowance release drove headline EPS; strip this out for run-rate profitability assessment .
• Cash-rich balance sheet: $269.2M cash and $256.3M net cash provide downside protection and optionality for capital deployment .
• Potential distributions: ModusLink revolver amendment removed dividend caps and a proposed $6.0M settlement payout is earmarked for distribution to common holders if court-approved—both potential catalysts for capital return .
• Watch demand trajectory: continued softness in computing/CE versus ramp of new programs will drive revenue recovery; monitor client concentration and end-market stabilization .
• FX/investment noise: other income is leveraged to interest on money market funds but subject to equity investment and FX volatility; expect quarter-to-quarter variability .
• Near-term focus: track sequential gross margin and Adjusted EBITDA progression, cash conversion, and any updates on legal settlements/governance that could unlock shareholder distributions .