ScanSource (SCSC) Q1 2027 Earnings Call Transcript

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DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Senior Vice President, Finance and Treasurer - Mary Gentry
• Chair and CEO - Michael L. Baur
• Chief Financial Officer - Stephen T. Jones

TAKEAWAYS

• Net Sales -- $962.3 million, growing 30.1% year over year driven by strong demand in North America.
• Specialty Technology Solutions Revenue -- $917.3 million, a 28.2% increase year over year reflecting broad-based hardware sales growth across multiple technology segments.
• Intelisys & Solution Services Revenue -- $45.0 million, representing an 85.9% year-over-year increase primarily due to the MicroAge acquisition.
• Non-GAAP Diluted EPS -- $0.86, compared to $1.06 in the prior-year quarter.
• Adjusted EBITDA -- $31.3 million, a decrease of 18.9% year over year with margins compressing by 197 basis points.
• Gross Profit Margin -- 12.2%, down from 14.5% due to a higher mix of lower-margin large hardware deals.
• Recurring Revenue -- $42.4 million, representing 15.7% year-over-year growth and accounting for 32.8% of total gross profit.
• Free Cash Flow -- Negative $44.1 million, reflecting higher working capital requirements to support revenue growth.
• Net Debt Leverage Ratio -- Approximately 2 times trailing 12-month adjusted EBITDA.
• Brazil Net Sales -- $48.3 million, declining 20.5% on a constant currency basis.
• Bad Debt Expense -- Increased by $4.5 million, primarily related to credit issues with telecommunications customer Oi SA in Brazil.
• MicroAge Acquisition Cash -- $217.8 million net cash paid for the purchase, which closed on Sept. 1, 2026.
• MicroAge Client Base -- Approximately 2,400 clients served across a diversified U.S. base.
• Fiscal Year 2027 Net Sales Guidance -- $3.8 billion to $4.0 billion, raised to include the contributions of MicroAge.
• Fiscal Year 2027 Adjusted EBITDA Guidance -- $175 million to $185 million, an increase from previous expectations of $158 million to $165 million.
• Full-Year Free Cash Flow Guidance -- Reaffirmed at a minimum of $85 million.
• Interest Expense Guidance -- $18 million to $20 million for the full fiscal year.
• Effective Tax Rate Guidance -- 27.5% to 28.5% for the 2027 fiscal year.
• Intelisys Annualized Net Billings -- Approximately $2.9 billion, representing a 3.8% increase in quarterly net billings.
• Share Repurchases -- $4.8 million in the first quarter, with $116 million remaining under the current authorization.
• Non-GAAP SG&A Expense -- $92.1 million, representing 9.6% of net sales compared to 10.1% in the prior year.
• Adjusted ROIC -- 10.7% for the quarter, down from 14.6% in the previous year.

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RISKS

• Jones stated, "The difference in growth rate between revenue and gross profit is mainly due to mix," referring to the margin compression caused by an increase in large hardware deals.
• Jones noted that first-quarter operating results were impacted by higher bad debt expense "primarily related to customer specific credit issues in Brazil," specifically citing the judicial proceedings of Oi SA.

SUMMARY

ScanSource, Inc. (NASDAQ:SCSC) reported a 30.1% increase in net sales for the first quarter, alongside margin pressure resulting from the sales mix. Management stated that broad-based hardware demand in North America led to the revenue growth, while profitability was impacted by a shift toward larger, lower-margin contracts and specific bad debt reserves in Brazil. The company completed the acquisition of MicroAge during the quarter to expand its footprint in cloud, cybersecurity, and artificial intelligence solutions. CFO Jones attributed the margin dynamics to timing and specific reserves, expressing confidence in the underlying earning power of the business.

• The company launched a pilot program this quarter to co-sell MicroAge managed services and AI solutions through its existing specialty channel partners.
• Management identified a market share opportunity following the acquisition of a major competitor in the barcode and point-of-sale distribution space.
• CEO Baur stated, "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."
• The company expects to begin generating revenue from its Juniper Networks partnership in the second half of the fiscal year following previous supply-chain delays.
• Jones indicated that approximately 110 to 120 basis points of margin compression in the quarter was specifically linked to the timing of large hardware deals that were booked and shipped in the period.

INDUSTRY GLOSSARY

• Intelisys: A ScanSource business segment that acts as a technology services distributor for cloud and connectivity solutions.
• Specialty Technology Solutions (STS): The business segment focusing on enterprise mobility, barcode, point-of-sale, and physical security products.
• Net Billings: The total value of recurring service contracts billed to customers through the Intelisys platform.
• Oi SA: A Brazilian telecommunications company for which ScanSource recorded a specific bad debt reserve.
• ROIC: Return on Invested Capital, a financial ratio used to measure the efficiency of a company at allocating the capital under its control to profitable investments.

Full Conference Call Transcript

Operator: Welcome to the ScanSource quarterly Earnings Conference Call. All lines have been placed in a listen-only mode until 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: Good morning, and thank you for joining us. Our call will include prepared remarks from Michael L. Baur, our chair and CEO and Steve Jones, our Chief Financial Officer. We will 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 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, and our Form 10-Ks for the year ended June 30, 2026 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 will discuss both GAAP and non GAAP results. We provided reconciliations on our website and in the press release included in our Form 8-K filed earlier today. I will now turn the call over to Mike.

Michael L. Baur: 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 FY 2027 net sales and adjusted EBITDA ranges which now include MicroAge. We remain confident in our strategy, and we are making progress on our 3-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 learned, 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 will now turn the call over to Steve to take you through our financial results and outlook for fiscal year 27.

Stephen T. Jones: 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 carrying 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 are raising our full year outlook including the contribution of MicroAge. Net sales grew 30% year over year with reported net profit growing 9% year over year. Non GAAP SG&A expense in the quarter including acquisition 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 will 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, net sales 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 of 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 the 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 2x trailing 12 month adjusted EBITDA. ScanSource repurchases totaled $5 million for the quarter. As of September 30, 2026, we had approximately a $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 3-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 2x adjusted EBITDA, and be disciplined in the capital deployment, 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 fee. 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 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 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 FY 2027, 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 will now open it up for questions.

Operator: As a reminder, to ask a question, please press *1 on your telephone and wait for your name to be announced. Our first question will be coming from the line of Greg Burns of Sidoti. Greg, your line is open.

Greg Burns: 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 you have?

Stephen T. Jones: Greg, good morning. This is Steve. As far as the technology growth for Q1, we continue to see strong security growth as we have seen over the last year or so. We also saw Cisco grow year over year networking barcode mobility. And this time, for the quarter, we also saw growth in our communications hardware group. So I would say when we say broad based this quarter, we really mean broad based, in North America. When you ask about the mix of business and how much of our business do we think going forward is our large deals. This was a unique quarter for us.

We have 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 are gonna modulate back to a better mix of large and run rate deals as we look at the full year. Okay. And the bad debt in Brazil do you have any other risks around that going forward, or is that do you see that as like more of a 1 off for the first quarter?

Yeah, let me add a little color to that. So in Brazil, we took a significant reserve for a company called Oi SA, which was a Brazil telecommunication 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, of our exposure to this customer is now reserved. And we will 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. Okay. Thank you. Thank you.

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

Keith Housum: Thank you. Good morning, guys. Hey, so 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, like, history, you know, even going back to a year, year and a half ago, you know, substantially less. You 200 million less revenue, and you still did just about the same in gross profit. So I am just really kind of confused on the mix here and if SMB suffered because of that.

Stephen T. Jones: 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 hard. To these large deals. That were both carry forward from last year and booked in this quarter. Okay. Yeah. it is still just. It feels like that-- well, you still get SMB, since they have done well then. They were nowhere near as well compared to the large deals.

Well, we certainly would not have had as much top line growth. And we would modulate back towards our normal margin our margin profile. Okay. 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 MicroAge acquisition? 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 did not expect a 30% year over year growth in Q1, so that is that is definitely helping push that top line up for the full year. Okay. So if I said MicroAge will contribute about 20 million in EBITDA for the year, is that in the right ballpark? I would say that is close. I. What I would say is we have bigger expectations for MicroAge. Remember, we are only talking about 10 months. Of this. And we are we are early days in what we can do to accelerate growth in our core business. with what Mike talked about in these tests that we are doing. Gotcha.

Gotcha.

Keith Housum: And then during the quarter, obviously, your largest. Your legacy is probably your most significant competitor in the AIDC space and POS space. I am referring to BlueStar here. Was bought by TD SYNNEX. Any thoughts on how that might change the competitive dynamics going forward for you guys?

Michael L. Baur: Good morning, Keith. it is Mike. We have seen over the years consolidation happen in distribution. And typically, early on, there is a lot of disruption. disruption, some turmoil. We believe there will be some market share gains. Over the years, whenever 1 of the broadline lower value distributors got into any part of our business, Typically, over time, it appeared that those companies still maintain similar value proposition. So that will be what we are looking for is there anything that is gonna 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 that if they are going to operate differently meaning BlueStar would be operating differently going forward, we would wanna be very aware of is that in the supplier's best interest. So for us, we do believe there is a market share opportunity here. Thank you.

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

Michael L. Baur: Keith, in our MicroAge business, for sure. We definitely as we did our due diligence, we looked at that very carefully. We are wanting to understand how they were performing, so well, frankly, in the market. With their data center products and services. And that is 1 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 mobility partners, security partners, communication partners, many of them are looking to add some AI capabilities and more products. And so we believe that is the idea behind our MicroAge pilots.

We wanna 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 have talked to them about would you like us to co sell with you with our expertise from MicroAge? They have said yes. So we are testing that this quarter. Okay. Appreciate it. I will 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: Hi. This is Logan on for Adam Tindle. Thanks for taking our question. Guess first, I think last quarter you mentioned supply constraints were limiting Juniper's contribution in 1H 27. 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 second half. So have you seen that come into fruition, or have expectations changed around that?

Michael L. Baur: Yeah. I think the Juniper. This is Mike, Logan. Thanks. The Juniper plans are still similar in that we are still working with them to try to establish a pipeline, but yes, there is some delays from where we originally thought, let's say, 9 months ago. But what we said last quarter is true that we expect that we will start seeing Juniper revenue in the second half.

Stephen T. Jones: And this is Steve. I will just talk about our expectations on supply chain constraints and how we are thinking about that in our outlook. We still believe that is manageable. And we would not expect a significant impact that would that would put pressure or anything on our current outlook.

Logan Katzman: Awesome. I appreciate that. 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 T. Jones: 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 is really difficult to isolate how much is pricing because if 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 kinda hard to isolate. We know it was a fair amount of our 30% growth And what was your second question?

Logan Katzman: Yeah. My second question was, do you guys see any, pull-in demand, push out, in any of those dynamics in the quarter?

Stephen T. Jones: From what we see and what we believe, it is not a 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: Understood. Thank you. And I guess last 1 from me. I think organic Intelisys 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. Was just kind of curious, like expectations around timing on when you guys think those, investments will come to fruition. And how you are thinking about the trajectory of that business?

Stephen T. Jones: 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 is a small deal, that can be 6 to 9 months. If it is a larger deal, that can be 12 to 18 months. And so, it is an invest ahead business.

We have talked about this for a long time that this is an invest business. We are seeing momentum in orders. And so we are seeing the fruits of that. Those investments as we go along. We definitely wanna accelerate that growth because as Mike talked about in his prepared remarks, we think that is key to growing that business is getting that getting those new order growth and more of that market share. Thank you.

Logan Katzman: Thank you guys for taking our questions.

Operator: As a reminder, to ask a question, please press *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 T. Jones: Thank you for joining us today. We expect to hold our next conference call to discuss our December 31 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.

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