ScanSource Q1 2027 Earnings Call Transcript

ScanSource (NASDAQ:SCSC) reported first-quarter financial results on Thursday. The transcript from the company’s first-quarter earnings call has been provided below.

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View the webcast at https://edge.media-server.com/mmc/p/wfkae75u/

Summary

ScanSource reported strong demand this quarter, with net sales growing 30% year over year. Profitability was impacted by a higher mix of large hardware deals with lower margins and bad debt reserves in Brazil.

The company is raising its FY27 net sales and adjusted EBITDA ranges, reflecting confidence in strategic initiatives, including the recent acquisition of MicroAge, which expands their reach in high-growth technologies.

Strategic focus includes accelerating new order growth in the Intelisys business and leveraging the new converged business unit to enhance channel partner sales in communications hardware and cloud services.

MicroAge’s acquisition supports strategic goals by extending capabilities in cloud, cybersecurity, data center, and AI, with plans to co-sell its solutions with ScanSource’s channel partners.

The company expects to generate positive free cash flow for the fiscal year and has updated its annual outlook, projecting net sales between $3.8 billion and $4.0 billion, and adjusted EBITDA between $175 million and $185 million.

Management cited confidence in the business’s underlying strength, despite Q1 profitability challenges, due to robust demand and strategic acquisitions.

Full Transcript

OPERATOR

Welcome to the ScanSource quarterly earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mary Gentry, Senior Vice President, Finance and Treasurer. Please go ahead.

Mary Gentry (Senior Vice President, Finance and Treasurer)

Good morning and thank you for joining us. Our call will include prepared remarks from Mike Baur, our Chair and CEO, and Steve Jones, our Chief Financial Officer. We’ll review our operating results for the quarter and then open the line for your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our website. As you know, certain statements in our press release, infographic and on this call are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and uncertainties include the factors identified in our earnings release, in our Form 10-K for the year ended June 30, 2026, and in our subsequent report on Form 10-Q. Forward-looking statements represent our views only as of today and ScanSource disclaims any duty to update these statements except as required by law.

During our call we’ll discuss both GAAP and non-GAAP results. We’ve provided reconciliations on our website and in the press release included in our Form 8-K filed earlier today. I’ll now turn the call over to Mike.

Michael Baur (Chief Executive Officer)

Thanks, Mary, and good morning, everyone. We appreciate you joining us today. Demand was strong this quarter, led by large deals and market share gains. Our team delivered broad-based growth in North America and both segments grew net sales and gross profit, while profitability was impacted by a higher mix of lower-margin large hardware deals as well as customer-specific bad debt reserves in Brazil. We view these factors as largely confined to Q1 and not reflective of the underlying profitability of our business.

We are raising our FY27 net sales and adjusted EBITDA ranges, which now include MicroAge. We remain confident in our strategy and we are making progress on our three-year strategic goals for our Intelisys business. Accelerating new order growth is the key to taking market share. We are reallocating Intelisys investments toward the activities that drive new orders, including a targeted effort to recruit and onboard new partners this fiscal year. And our new converged business unit is helping channel partners sell more communications hardware and more cloud recurring revenue.

In September we closed the MicroAge acquisition, extending our reach in high-growth technologies like cloud, cybersecurity, data center and AI. MicroAge brings solution provider relationships with top suppliers, including CrowdStrike, Dell, HPE, Microsoft, NetApp, Sophos and VMware. Our near-term priority is to bring MicroAge managed services and AI solutions to market by co-selling with ScanSource specialty channel partners. This quarter we are launching a pilot to test the go-to-market model.

Based on what we learn, we intend to finalize a services catalog of offerings that are repeatable and scalable. Looking ahead, we are confident in our direction. Our team is executing our strategy with our initiatives to accelerate growth and gain market share. We believe we are well-positioned for the remainder of the fiscal year. I’ll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2027.

Stephen Jones (Chief Financial Officer)

Thanks, Mike. Our first quarter results reflect strong, broad-based demand in North America. While that demand drove significant revenue growth, profitability was impacted by a mix of large hardware deals that carry lower margins, along with customer-specific bad debt reserves in Brazil. Despite these factors in our Q1 results, we are confident in our organic business and we’re raising our full-year outlook, including the contribution of MicroAge.

Net sales grew 30% year over year with reported net profits growing 9% year over year. Non-GAAP SG&A expense in the quarter, including acquisition-related expense, totaled $92 million, or 9.6% of net sales, compared to our prior year at $75 million, or 10.1% of net sales. Non-GAAP net income was $17.7 million and non-GAAP EPS was $0.86 per share. Free cash flow was a use of $44 million in Q1, primarily reflecting the higher working capital balances associated with strong revenue growth.

We expect positive free cash flow generation for our full fiscal year. We continue to believe the margin dynamics experienced in the first quarter were primarily driven by sales mix and specific bad debt reserves and do not reflect a change in the underlying earnings power of our business. Turning to our segments, I’ll start with Specialty Technology Solutions. Net sales for the quarter increased 28% year over year, led by North America hardware sales growth across most of our technologies. Gross profits increased 3% year over year to $87 million. The difference in growth rate between revenue and gross profit is mainly due to mix. This quarter we saw a significant increase in large hardware deals, which come at a lower gross profit margin.

Included in this segment is our operations in Brazil, which represents about 5% of this quarter’s segment. Net sales in Brazil declined more than 20% on a constant currency basis, and for the quarter we had higher bad debt expense, primarily related to customer-specific credit issues in Brazil. STS segment adjusted EBITDA for the quarter was $20 million, and our adjusted EBITDA margin was 2.18% in Q1. Recurring revenue in the segment grew 16.8% year over year, and gross profits from recurring revenues represent 14.3% of segment gross profits, an increase of 88 basis points from last year.

Our Intelisys and Solutions Services segment was renamed to now include our acquisition of MicroAge that we closed on September 1st. MicroAge contributes hardware, software and services revenue to the segment. Quarterly net billings for Intelisys increased 3.8% year over year over the prior year’s quarter to bring annualized net billings to approximately $2.9 billion. Q1 reported net sales increased 86% year over year, or 3.2% on an organic basis.

Reported gross profits increased 29% year over year to $30 million. Adjusted EBITDA for this segment was $11.3 million with an adjusted EBITDA margin of 25.1%. Going a bit deeper on our balance sheet and cash flow, we ended Q1 with $46 million in cash and a net debt leverage ratio of approximately 2 times trailing 12 months adjusted EBITDA. Share repurchases totaled $5 million for the quarter. As of September 30, 2026, we had approximately $116 million remaining under our share repurchase authorization. Adjusted ROIC for the quarter was 10.7%. Our leverage ratio and our continued share repurchases reflect our disciplined approach to both working capital and capital allocation priorities.

Our acquisition of MicroAge is an exciting opportunity to accelerate our three-year goals. It expands our total addressable market, technology stack capabilities and channel reach with accretive margins and positive free cash flow generation. It also aligns with our capital allocation priorities. Our capital allocation priorities remain the same: maintain a strong balance sheet with leverage of 1 to 2 times adjusted EBITDA and be disciplined in the capital deployment, including strategic acquisition and share repurchases.

In the near term, we will focus on reducing our leverage and plan to continue share repurchases. Our outlook for free cash flow reflects our belief that we will generate positive free cash flow in our fiscal year and be able to do both debt reduction and repurchases while also supporting continued strong demand. Our working capital metrics reflect the operational improvements from our cash culture focus. Faster inventory turns are helping offset higher accounts receivable balances as we respond to robust demand from our customers and their end users.

While first quarter profitability was impacted by mix and customer-specific reserve adjustments, the strength of demand and contributions from MicroAge support our confidence in the remainder of the year. As a result, we are updating our annual outlook, including the contributions of MicroAge. We believe that reported net sales will range from $3.8 billion to $4.0 billion. We expect adjusted EBITDA between $175 million and $185 million. And for free cash flow, we are reaffirming our expectations that we will generate at least $85 million in free cash flow.

To help with analyst models for FY27, we expect interest expense to range from $18 million to $20 million and our effective tax rate to range from 27.5% to 28.5%. We’ll now open it up for questions.

OPERATOR

Thank you. As a reminder, to ask a question, please press star-1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1 again. Please stand by while we compile our Q&A roster. Our first question will be coming from the line of Greg Burns of Sidoti. Greg, your line is open.

Greg Burns (Analyst)

Morning. Can you maybe give us a little bit more color on the strong hardware demand you saw this quarter? Which technology segments were showing the most growth, and the mix you saw with the large enterprise deals this quarter? Do you expect that to continue for the rest of the year, given the pipeline that you have?

Stephen Jones (Chief Financial Officer)

Greg, good morning, this is Steve. As far as the technologies growth for Q1, we continue to see strong security growth, as we’ve seen over the last year or so. We also saw Cisco grow year over year, networking, barcode and mobility. And this time for the quarter, we also saw growth in our communications hardware groups. So I would say when we say broad-based this quarter, we really mean broad-based, especially in North America. When you ask about the mix of business and how much of our business do we think going forward are large deals, this was a unique quarter for us. We’ve been talking about large deals that had been pushed or also split up for a while now. And in Q1 what we saw was a lot of those deals delivered, and we also saw deals get booked and shipped in the quarter. So we think a lot of this is timing. We think we’re going to modulate back to a better mix of large and run-rate deals as we look at the full year.

Greg Burns (Analyst)

Okay. And the bad debt in Brazil, do you have any other risk around that going forward, or do you see that as more of a one-off for the first quarter?

Stephen Jones (Chief Financial Officer)

Yeah, let me add a little color to that. So in Brazil we took a significant reserve for a company called Oi S.A., which was a Brazil telecommunications giant, once the largest fixed-line operator in South America and a longtime customer of our Brazil business. With our Q1 expense reserves that we took, basically all of our exposure to this customer is now reserved and we’ll work through the final judicial proceedings like many other creditors for this particular customer that was declared on August 25.

As far as other exposures, this was the largest concentration of any customer we had in Brazil.

Greg Burns (Analyst)

Okay, great, thank you.

OPERATOR

And our next question will be coming from the line of Keith Howsom of Northcoast Research. Your line is open, Keith.

Keith Howsom (Analyst)

Thank you. Good morning, guys. A little confused on the performance in the quarter. Understanding that the mix was weighted towards some large deals. But were the large deals done at the expense of some of the small deals? Because if I look at history, even going back to a year, year and a half ago, substantially less, really less revenue, and you still did just about the same in gross profit. So I’m just really kind of confused on the mix here and if SMB suffered because of that.

Stephen Jones (Chief Financial Officer)

Well, Keith, hi, this is Steve again. Thanks for the question. I would say that it was just an unusual timing for the quarter. Again, I think when I try to peel back the impact in the quarter, I would say that probably 110 to 120 basis points of our margin decline or compression in the quarter was really related to these large deals that were both carry-forward from last year and booked in this quarter.

Keith Howsom (Analyst)

Okay. Yeah, it still just feels like SMBs must not have done well then, or near as well compared to the large deals.

Stephen Jones (Chief Financial Officer)

Well, we certainly wouldn’t have had as much top-line growth, and we would modulate back towards our normal margin profile.

Keith Howsom (Analyst)

Okay. In terms of your full-year outlook, is the increase in both the revenue and adjusted EBITDA, is that all attributable to, or majority of it attributable to, the MicroAge acquisition?

Stephen Jones (Chief Financial Officer)

From a guide, what I would say, Keith, is that we have confidence in our Q2 through Q4 original guidance that we gave. We believe that the Q1 profit pressures related to the mix and the SG&A are pretty well contained in the quarter. The balance of it would be related to the positive contributions from MicroAge. I would say on the top line, we were surprised—we didn’t expect a 30% year-over-year growth in Q1. So that’s definitely helping push that top line up for the full year.

Keith Howsom (Analyst)

Okay, so if I said MicroAge will contribute about $20 million in EBITDA for the year, is that in the right ballpark?

Stephen Jones (Chief Financial Officer)

I would say that that’s close. What I would say is we have bigger expectations for MicroAge. Remember, we’re only talking about 10 months of this, and we’re early days in what we can do to accelerate growth in our core business with what Mike talked about in these tests that we’re doing.

Keith Howsom (Analyst)

Gotcha, gotcha. And then during the quarter, obviously your largest—who I see as probably your most significant competitor in the AIDC space and POS space—of course I’m referring to BlueStar here—it was bought by TD SYNNEX. Any thoughts on how that might change the competitive dynamics going forward for you guys?

Michael Baur (Chief Executive Officer)

Good morning, Keith. We’ve seen over the years consolidation happen in distribution, and typically early on there’s a lot of disruption, some turmoil. We believe there’ll be some market share gains. Over the years, whenever one of the broad-lines, lower-value distributors got into any part of our business, typically over time it appeared that those companies still maintain similar value propositions. So that’ll be what we’re looking for. Is there anything that’s going to be expected differently from us by the suppliers based on this acquisition?

Typically we watch that really close. We make sure the key suppliers know well if they’re going to operate differently. Meaning, if BlueStar was to be operating differently going forward, we would want to be very aware of is that in the supplier’s best interest. So for us, we do believe there’s a market share opportunity here.

Keith Howsom (Analyst)

Great. Great. I guess, last question for me. I know it’s sometimes tough to tell who your end customers are, but obviously networking is an area you’ve had a lot of success lately, and networking is important to the AI infrastructure play out there now. Any way to tell if some of your business here is being driven by the AI infrastructure that’s going into place?

Michael Baur (Chief Executive Officer)

Keith, in our MicroAge business for sure, we definitely—as we did our due diligence—we looked at that very carefully. We were wanting to understand how they were performing so well, frankly, in the market with their data center products and services. And that is one reason that they became a very attractive acquisition for us, because it expands our TAM in our core business. What we think is many of our traditional partners, whether they were barcode mobility partners, security partners, communication partners, many of them are looking to add some AI capabilities and more products.

And so we believe that’s the idea behind our MicroAge pilots. We want to co-sell with our channel partners to get them into the AI side of the business that many of them are not prepared for, including some of our larger mobility partners. We’ve talked to them about, would you like us to co-sell with you with our expertise from MicroAge, and they’ve said yes. So we’re testing that this quarter.

Keith Howsom (Analyst)

Okay, appreciate it. I’ll turn it back over. Thanks.

OPERATOR

And our next question will be coming from the line of Logan Katzman of Raymond James. Your line is open.

Logan Katzman (Analyst)

Hi, this is Logan on for Adam. Thanks for taking our question. I guess first, I think last quarter you mentioned supply constraints were limiting some of Juniper’s contribution in 1H27. I guess first, did you see that come into fruition? And then I think you said the expectation was that to become fully operational in fiscal 2H. So have you seen that come into fruition, or have expectations changed around that?

Michael Baur (Chief Executive Officer)

Yeah, I think the Juniper plans are still similar, in that we’re still working with them to try to establish a pipeline. But yes, there’s some delays from where we originally thought, let’s say nine months ago. But what we said last quarter is true, that we expect that we’ll start seeing Juniper revenue in the second half.

Stephen Jones (Chief Financial Officer)

And this is Steve. I’ll just talk about our expectations on supply chain constraints and how we’re thinking about that in our outlook. We still believe that that’s manageable, and we wouldn’t expect a significant impact that would put pressure or anything on our current outlook.

Logan Katzman (Analyst)

Awesome. I appreciate that. And then, I mean, growth here was really, really strong. Obviously, I think organic revenue accelerated 27% year over year. How much of this was pricing versus units? And then did you guys see any pull-forward in demand? And I guess on the pricing, how sustainable—if you saw that—how sustainable is that?

Stephen Jones (Chief Financial Officer)

Well, Logan, this is Steve again. So let me talk about the pricing impacts on our growth rate. So we know it had an impact, and a fair amount for us. It’s really difficult to isolate how much is pricing because more than 80% of our deals are going out on a special pricing arrangement, and so how much of the street price actually gets through is kind of hard to isolate, but we know it was a fair amount of our 30% growth. And what was your second question?

Logan Katzman (Analyst)

Yeah, my second question was did you guys see any, like, pull-in demand, push-out—any of those dynamics in the quarter?

Stephen Jones (Chief Financial Officer)

From what we see and what we believe, it’s not apparent that we saw any pull-in or push-out. I would say, given the results that we had, we feel like everything that was needed was booked and shipped in the quarter from our customers.

Logan Katzman (Analyst)

Understood, thank you. And I guess last one from me, I think organic Intelisys and Solutions Services revenue grew about 3% year over year. I know you guys have been making a lot of investments into this business over the last few quarters to accelerate growth. I was just kind of curious—expectations around timing on when you guys think those investments will come to fruition, and how you’re thinking about the trajectory of that business.

Stephen Jones (Chief Financial Officer)

Well, this is Steve again, let me maybe talk about how that business operates. So it is a fairly long cycle from when we make an investment to when the revenues come in for us. So if you think about what happens, we make the investment, we recruit new partners, we look at new orders, those orders get placed, then the rollouts have to happen and the commission streams have to happen. If it’s a small deal, that can be six to nine months. If it’s a larger deal, that can be 12 to 18 months.

And so it is an invest-ahead business. We talked about this for a long time—that this is an invest-ahead business. We’re seeing momentum in orders and so we’re seeing the fruits of those investments as we go along. We definitely want to accelerate that growth because, as Mike talked about in his prepared remarks, we think that is key to growing that business—getting those new order growth and more of that market share.

Logan Katzman (Analyst)

Great. Thank you guys for taking our questions.

OPERATOR

As a reminder, to ask a question, please press star-1-1 on your telephone and wait for your name to be announced. And I am showing no further questions. I would now like to turn the call back to Steve Jones for closing remarks.

Stephen Jones (Chief Financial Officer)

Thank you for joining us today. We expect to hold our next conference call to discuss our December 31st quarterly results on Thursday, February 4th at approximately 10:30 a.m. Eastern Time.

OPERATOR

And this concludes today’s conference call. Thank you for participating. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.