SCANSOURCE, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Business Performance: Each segment achieved year-over-year gross profit growth and higher EBITDA margins. Business presidents expanded roles to include strategy, acquisitions, etc.
• New Segments and Leaders: New segments announced in Q1, with business presidents as experienced technology leaders driving growth.
• Innovative Programs: AI master class for Intelisys channel partners, and efforts to build new programs/services for channel partners.
• Hardware Demand: Improved hardware demand, return of large deals, with most North American technologies growing year over year.
• Integrated Solutions Group (ISG): Launched with Advantix acquisition, driving growth in wireless connectivity solutions and high-margin POS Portal payments business.
• Intelisys Initiatives: Adding value through AI certifications, cybersecurity training, and expanding supplier base via channel exchange.
• ResourceTip Vision: Building channel model of future, assisting customers in deploying complex technologies, with a significant enterprise customer win.
• Brazil Business: Well-diversified, prepared for growth when demand improves, though macro uncertainties and FX impact top line.

Segment Performance

• Specialty Technology Solutions: Net sales declined 7% year over year and 6% quarter over quarter, primarily due to lower sales in Brazil (netted down revenue and FX headwinds). Gross profit increased 3% year over year, with a higher mix of recurring revenue (including Advantix contribution) and improved vendor program recognition. Segment gross profit margin was 10.9%, adjusted EBITDA margin 3.4%.
• Intelligence and Advisory: Net sales and gross profits increased 16% year over year, including the positive contribution from the ResourceTip acquisition. Adjusted EBITDA grew 20% year over year. Q3 end user billings for Intelisys increased 7% year over year to ~$2.86 billion, with double-digit growth in CX (UCaaS, CCaaS, AI-enabled CX solutions).

Guidance

• FY 2025 Outlook: Updated net sales to approximately $3 billion, adjusted EBITDA range $140 million to $145 million, and free cash flow of at least $70 million.
• Q4 Expectations: Sequential growth expected, with lap of netted down revenue headwind from prior year Q4.
• Share Repurchase: New share repurchase authorization of $200 million, in addition to remaining authorization.
• Acquisitions: Prioritizing acquisitions as capital allocation priority, with active pipeline of margin-accretive, working capital light opportunities.

Risks

• Tariff Policies: Fluid tariff policies, but passing through price increases with minimal margin impact.
• Macro Uncertainties: Brazil facing macroeconomic issues, FX impact, and netted down revenue headwinds.
• Large Deals Impact: Large deals have lower margin profile, which could pressure gross profit margins if percentage increases.

Question and Answer

• Q: Implied guidance for Q4 and sequential growth A: Steve Jones discussed lap of netted down revenue headwind from prior year Q4, expecting Q4 growth to support $3 billion guidance.
• Q: Share repurchase authorization and capital allocation A: Mike Baur and Steve Jones explained prioritization of acquisitions while maintaining share repurchases, with focus on leverage target.
• Q: Demand trends in Brazil A: Steve Jones discussed FX impact, netting down revenue, and focus on profitability and working capital in Brazil.
• Q: Channel Exchange and Intelisys initiatives A: Mike Baur discussed channel exchange facilitating new suppliers, and growth in CX and AI-related initiatives.
• Q: AI master class monetization A: Mike Baur mentioned immediate deals closed with suppliers from the master class.
• Q: Competitive environment for acquisitions A: Mike Baur discussed experience with acquisitions, disciplined valuation, and vast target market.
• Q: Large deals impact on margins A: Steve Jones noted large deals have lower margin profile, but offset by recurring revenues from acquisitions.
• Q: Free cash flow guidance A: Steve Jones explained late quarter sales impact on free cash flow, but comfortable with at least $70 million guidance.