Scansource Inc (SCSC) 2014 Q2 法說會逐字稿

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, Treasurer and Director of Investor Relations. Ma'am, you may begin.

Thank you and welcome to ScanSource's earnings conference call for the quarter ended December 31, 2013. With me today are Charlie Mathis, our CFO, and Mike Baur, our CEO. We will review operating results for the quarter and then take your questions. A slide presentation that accompanies our comments and webcast is posted in the investor relations section of our website.

Certain statements made on this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include but are not limited to those factors identified in the release and in ScanSource's SEC filings. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. ScanSource undertakes no duty to update any forward-looking statements to actual results or changes in expectations.

We will be discussing both GAAP and non-GAAP results during our call and have provided reconciliations between these amounts in our press release, which can be found on our website and has also been filed with our Form 8-K.

Mike Baur will now begin our discussion with an overview of the quarterly results.

Thanks, Mary, and thank you for joining us today.

Let's start with slide 3. For a second quarter 2014, we reported net sales of $741 million, at the lower end of our expected range, and diluted EPS of $0.64 per share at the upper end of our expected range. For the quarter, we had strong operating performance, including higher margins and a 15.9% return on invested capital.

In looking at our sales for the quarter, I'd like to share a few summary points. For Worldwide Communications and Services, both of our communications business units in North America, the ScanSource communications and catalyst units, had solid year-over-year sales growth and our worldwide gross profit margin improved from last year.

In worldwide bar coded security, our sales declined year over year. However, each of our POS and bar code units had sequential quarterly sales growth primarily due to better performance in our bar code products.

In Brazil, we had a record sales quarter for the second quarter in a row. As we move into the second half of our fiscal year, we are planning to return to year-over-year growth for all of our business units at value-added margins and we have a strong value sheet that positions us for growth. During the quarter we continue to invest in expanding our sales force with the addition of new sales teams members in many business units.

Now for an update on our ERP project. We have been evaluating a new ERP platform over the last several months to replace our existing enterprise hardware and software IT system. After careful evaluation and taking into account our prior experiences, we focused on how to achieve certainty with our go live. Given that, we entered into agreement with SAP for both the software and implementation consulting services for a new ERP system.

We have also assembled a team of experienced ScanSource employees to work on our project with a focus on business processes, training, and change management. With SAP, we have selected a partner with a proven solution for wholesale distribution companies similar to ScanSource, plus SAP services team has assigned an experienced implementation team to deliver a successful ERP system for ScanSource. We are very pleased with the commitment from the senior executives at SAP for successful results.

With that, I'll turn the call over to Charlie to discuss our second quarter financial results in more details.

Thanks, Mike.

I'll begin with slides number 4 through 7 of the investor presentation, second quarter FY'14 results. Net sales of $741 million decreased 0.9% from the prior year. The net impact of the currency exchange fluctuations on the year-over-year change was minor with higher sales from the strengthening of the Euro offsetting lower sales and the weakening of the Brazilian Rio.

Worldwide Barcode and Security sales was $476 million, decreased 3% year over year primarily from slower big deal activity. Worldwide Communication Service sales of $264 million, increased 2% year over year. Our North American communications and catalyst business units growth was the result of growing key vendor lines and securing larger big deal projects.

The consolidated gross profit margin for the second quarter 2014 was 10.4%, compared to 9.9% in the prior year quarter. The Worldwide Barcode and Security gross margin for the quarter remained at 9%, unchanged from the year-ago quarter. The Worldwide Communication Services gross margin was 13.1% up from 11.6% in the prior year, principally from an increase in service fee revenues and better attainment of vendor programs.

This increase in gross margin for the communications segment was the driver in an overall consolidated gross margin increase. Overall, this quarter we received some end of the year vendor incentives and unusually high service fee income that has not expected in the March quarter.

SG&A expenses totally $49.3 million, or 6.7% of net sales, relatively unchanged from the year-ago quarter. SG&A for the second quarter 2014 included a severance payment as previously disclosed in an 8-K filed in November. Also, as you may recall, our second quarter 2013 included a $2.1 million charge for Belgian tax compliance and personnel replacement costs in our European entities.

As Mike previously mentioned, we recently signed contracts with SAP to provide the software platform, as well as SAP services to implement the new enterprise software. The project kicked off in January. Although we did not expect significant operating expenses in the current quarter related to our new ERP project, we'll discuss the overall project cost and timing of the roll out in greater detail as we finalize the blueprint stage in the next few months.

In second quarter 2014, the fair value measurement earn out for the CDC Brazil acquisition was a charge of $499,000 as expected, in line with a year-ago quarter. Second quarter 2014 operating income was $27.5 million with an operating margin of 3.71%. The operating margin increased from 3.27% from second quarter 2013 or 3.55% excluding the $2.1 million for the Belgian tax compliance and personnel replacement cost.

Our effective tax rate was 32.4%, in line with our expected range of 34% to 34.5% for the remaining quarters of FY'14. Second quarter 2014 net income was $18.3 million or $0.64 per diluted share. Diluted EPS total $0.59 for the second quarter 2013 or $0.64 per share excluding the Belgian tax compliance and personnel replacement cost. Return on investment capital totaled 15.9% for the quarter compared to 15.2% for the year-ago quarter.

Now, let me discuss the balance sheet, which you'll find on slide 8 of the presentation. Cash and cash equivalents totaled $157.1 million December 31, 2013, compared to $148.2 million at June 30, 2013, but down from the $193.8 million in the prior quarter, which I discussed last quarter. For the traveling 12-month period, we have generated $140 million in cash from operating activities. I will discuss how we intend to use the cash a little later.

Our day sales outstanding, DSO, was 53 days in December 31, 2013, compared to 55 in the sequential quarter and 54 days in the prior-year quarter. The increase in the allowance for doubtful accounts contributed to lower day sales outstanding.

We continue to execute well and remain disciplined in managing appropriate inventory levels. Although inventory has increased approximately $65 million since our fiscal year end due to increased demand, inventory turned 5.9 times during the quarter compared to 5.6 times for the prior year. We have 11.3 paid for inventory days at the end of December 2013 compared to 2.2 paid for inventory days at the end of September 2013 and 17.8 days at the end of December 2012.

We had $5.4 million of debt as of December 31, 2013 compared to $27.8 million at December 31, 2012. During the past year, we have borrowed very little under our credit facility. Nevertheless, in the quarter we extended $300 million facility for an additional two years with essentially the same terms as the previous facility. We have significant resources and capital to grow the Company in the future while maintaining a high ROIC. Our top priorities on allocating capital are consistent with how the Company has created shareholder value in the past.

First, we look to invest in the organic business to ensure growth. This means decisions on a range of opportunities such as investing in inventory, on existing and/or new vendor lines, extending credit terms to new or existing customers, opening new markets, as well as investing and maintaining our own infrastructure for the future. Second, we look to make acquisitions, acquisitions that meet our strategic and financial goal. The Company has made over 20 acquisitions since its inception, adding a strategic geographic area, a strategic vendor, and our customers, or a new technology, and has done so at a reasonable multiple valuations. We continue to focus on these top two priorities.

Turning now to our next quarter, and a quarter in which we expect to see year-over-year revenue growth, we expect net sales for the quarter ended March 31, 2014, to range from $700 million to $720 million and earnings per share to range from $0.53 to $0.55 per diluted share.

With that, I'll turn the call back over to Mike.

Thanks, Charlie.

Let me start with our Worldwide Barcode and Security summarized on slide 9. It represents 64% of overall sales this quarter. Worldwide Barcode and Security sales are $476 million, increased 6% subsequently and decreased 3% year over year. We have sequential quarter growth for each of our POS and barcode units across all geographies, including a record sales quarter in Brazil. This quarter-over-quarter increase reflects better performance with our lead vendors.

Similar to the last few quarters, slowness and big deals continue with larger products being broken up into a small pieces. Though sales were down year over year, our POS and barcode team in North America had solid sequential quarter growth led by mobile commuting and scanning. Big deals were down from last quarter and last year, including fewer big point of sale deals. We continue to have good growth with our small and mid sized vendors and payment processing sales were up significantly.

In Europe, our POS and bar code business unit exceeded its sales plan with strong growth in our scanner business and better achievement of vendor rebates. We had good growth in certain regions including eastern Europe, Germany, France and Belgium. We recently expanded our US relationship with Code, a new vendor for us of barcode readers to include our Europe geography. We are very pleased to report that our team in Brazil had a record quarter for the second quarter in a row where sales grew across all product categories, point of sale, barcode, AIDC, and communications.

Even with currency fluctuations as a growth head wind, net sales in Brazil agree 15% year over year. Our team in Brazil executed well, growing faster than the market, keeping margins at planned levels, and accelerating inventory terms. In the past year, our team won two sales growth awards from HP networking in Brazil.

We named Yvette Mckenzie, who joined ScanSource in 2000, president of ScanSource Latin America and Mexico. Since May, Yvette has been leading our Latin America and Mexico business units, helping our teams execute best practices, building vendor and re-sell our partner relationships to grow our business, and adding new team members. Economic struggles in countries like Venezuela and Argentina continue to impact our business there. However, we had good growth in Chile, Ecuador, and Guatemala. Our Latin America and Mexico business is very project driven, and we are working there to grow our run rate business.

This quarter we're launching Motion Computing and Posex as new vendors in Latin America and Mexico. Our security sales in the US and Canada declined from weak sales in our networking infrastructure and card printers, offsetting good year-over-year growth in video surveillance and access control. Big deal volume went down, which contributed to a 4% year over year sales decline for the security business unit. We had record quarters with four of our top six vendors and higher margins from the sales mix and better achievement of vender programs. This quarter we're adding Cisco's Meraki products to our wireless infrastructure offerings and Access' access control products.

Now, turning to Worldwide Communications and Services on slide 10, which is 36% of overall sales this quarter, Worldwide Communications and Services net sales of $264 million decreased 6% sequentially and increased, though, 2% year over year. Both of our business units in North America had solid year-over-year growth and higher big deals. This increase was partially offset by lower sales in Europe communications. ScanSource Communications in North America had year-over-year sales growth including record quarters with Polycom and AudioCodes. We continue to have good growth with our voice-over IP telephone resellers in the service provider customer assignments.

ScanSource catalyst, a significant increase, a year-over-year sales growth. In addition, we had good growth with our mid market voice and another quarter of double digit growth from our wireless venders here. We're building up the value added support model to grow our Cisco collaboration business. In October, we held our catalyst partner conference branded fuel with great business building opportunities for our reseller and vendor partners.

ScanSource communications in Europe declined in both of our biggest countries, UK and Germany. In the UK, timing of business had an impact on sales results. During the quarter we lost AudioCodes as a new vender in our UK market. In Germany, sales declined largely from competitive pressures and some changes to our sales team. We saw business start to pick up in France with quarter-over-quarter growth.

ScanSource Services Group provides education and training, network assessments, customer configurations, marketing in our SUMO partnership community principally in North America. We had a record operating income quarter for our marketing service offer with increases in both the number of projects and our billable hours. We continue to have good demand for our configuration services with the exceptionally high quality metrics and training classes as an authorized training partner for Avaya, Polycom, and ShoreTel.

At this time, we'll be glad to answer your questions.

(Operator Instructions)

The first question comes from Chris Quilty of Raymond James, your line is open.

Thanks, gentlemen. Just wanted to follow up just to make sure I caught it. You were saying for the fiscal third quarter or for all of calendar 2014 you expect revenues to be up by product line and business segment?

What we're saying -- Chris, this is Mike -- what we're saying is that we expect for the calendar year, so we're saying that we expect growth in our business units to occur this year. So, we're obviously only giving guidance for one quarter, but we believe based on the investments we've made in 2013 and some of the indicators we're getting from either vendors or customers that we think the calendar year and certainly the last half of this fiscal year will show growth for our Company year over year in all of our business units.

That's great. And is there a particular business unit that you, if you were to rank order, where you feel best about?

For us, it's a always a challenge because when we look at the businesses, we're trying to manage the portfolio and sometimes we'll miss base on a quarterly basis how much they can grow based on some of these big deals. I would say that's probably the gating factor in some of what we're saying is we saw big deals come back this time in our communication business but not in our barcode POS business, which historically we saw some significant point of sale deals in the December quarter in North America.

And because of the change in one of our vendors this year that didn't happen, so we may see more barcode and POS big deals now move into the March quarter than the December quarter. So we're not really going to prioritize them for you, but we feel good about each one of these business units and their opportunities.

Got you. And are there any underlying technology or market changes in either Communications Barcode or Security that are worth highlighting as growth drivers, and I'm just thinking off the top of my head something like Target getting burned with their POS terminals. And there are some articles in the Journal about maybe we should all move back to smart card readers to try to mitigate some of the theft. Either that or some other end market specific drivers?

Well, that particular comment around the data breaches and the retailers for sure is a topic of discussion in the point of sale industry. And one of the things that we've highlighted for the last year or so is that we've continued to add some venders in the payment processing terminal arena.

We have good relationships with key venders now. We've added this capability in our distribution center where we can configure payment processing terminals. That means doing what's called a key injection process for our customers.

So, we've added the capability and the right vendors, and so if that market starts to accelerate, which if you read the trade press and listen to the stories, one of the drivers that could help solve some of the data breaches is to adopt -- the US to adopt the chip and pan technology that Europe uses. And that chip and pan or E and V technology is something that has been predicted to the happen in the US and if it happens, it will require, based on everything we've seen, a replacement of the existing payment processing terminals and readers out on the market as you're saying. So we do see that as a potential driver.

We just don't know, like any of these technologies, how fast they'll be adopted, because that's going to be a significant cost for someone to bear, whether that's the retailer, or it's the banks, not sure, right? But that is a potential driving force in our technologies. Having said all of that, that's not why we're feeling good about growth for this year. That would be more up side to what we're thinking.

Got you. Charlie, some of the foreign exchange fluctuations that have happened in the past week, do you expect that to impact revenues in any way?

Well, we didn't see a lot of that in the third quarter because we had it going both ways. Euro was strengthened, the Brazilian Real was weakening, they pretty much offset each other. So, we don't really anticipate a big impact to that.

Got you. And did you mention at some point in the script that you increased the allowance for doubtful accounts? And can you just talk about whether you're seeing a deteriorating or improving situation with receivables?

Yes, I did mention that and the allowance reserve did go up. There was some customer specific issues in there that we felt we needed to reserve for. So, I think that was the primary thing that was driving it, other than an overall deterioration in the portfolio.

Got you. And can you elaborate a little bit more specifically. I mean, the performance in Brazil is pretty outstanding, given the economic backdrop there. Is there something specific driving the business, either just the edition of vendors, is it taking market share or some other driver?

Yes, I think what we -- this is Mike, Chris. I think what we saw is better execution by the ScanSource team in an improving market, so our team told us that the overall demand for our products has improved in the last few quarters and we're executing better against that.

One of our largest venders down there is a company called Bematech. They are a Brazilian printer company that sells other point of sale equipment, as well, and we've seen better performance in our Bematech portfolio down there. I would say they're more representative, if you will, of the overall market.

We believe that business is getting better, has been good for ScanSource Brazil, and I think there is some cases where we're taking market share. We've got a very early stage business in our Brazil communications business. We referenced HP networking as one of our couple of vendors.

We don't have a real significant vendor yet in that marketplace. We don't have the Avayas or Polycoms in that marketplace. We would certainly hope that our communication business would start to develop over the next year. We did see some nice growth in those networking products in Brazil that we had not. That was kind of an up side, as well, for us in the quarter.

Got you. And final question on the M&A. I think you mentioned geography and one other priority, was it product line?

Well, historically, the Company has made acquisitions to expand strategically in geographic areas and vendor product lines, and new technologies, and that's continually where we're focused on.

Okay. And I mean historically you've said that when you look at the Asia Pacific reason where you don't have a presence, it's simply too bulkanized. And so I'm assuming your M&A efforts would be more focused on beefing up some of your existing markets. Is that a fair assumption?

I would say, Chris, that we're probably not looking at Asia Pacific, I think that's fair. But, as Charlie said, we would be looking at our existing market plus new technologies.

Got you. And is that primarily on the barcode security or communications?

Could be something new, something that's separate from both of them.

So a new leg to the story.

Correct. Yes. That's right.

Very good. It's been, what, a decade, well, that's not true.

Yes, that's right. 2004 when we started security, yes. You're right on.

It was a decade. All right. Very good. Interested to see what you have in the pipeline.

Yes, stay tuned. More to come on that.

Great. Thank you.

Thanks, Chris.

The next question comes from [Dominic Rachela] for [Keith Housen of Northcoast Research]. Your line is open.

Thank you for taking my call. Just a few questions for you guys in the quarter. Did you guys see any type of competitive benefit from Wescon's troubles with their ERP?

This is Mike. We didn't hear that from any of our team members. We certainly sympathize with anyone that has ERP challenges, because we've certainly had ours, unless you're trying to go live. I would say no one on our team said, hey, we were able to steal from business or take some market share because of challenges with that.

It's generally, especially in the communications business where we've got larger customers, they really -- they make some really long-term decisions when they choose distribution partners, so I think that one is less transactional oriented, frankly, than some of our other businesses, and so I would say no, we didn't see that at the quarter.

Okay. Fair enough. Thank you. For Avaya's new channel programs, what are your guys' initial thoughts? Positive, negative for you guys? I know you mentioned a little bit earlier in the script.

Well, in general for us we're really reflecting on just the normal development of vendor programs as they go. We try to shy away from talking about any specific vendors if we can, and so I don't think I said a biased program. I was talking about our vendor programs and that really encompasses lots of them. But, in general, if we have problems with programs where we believe we're providing value-added services and not being compensated, we'll call that out. If we didn't, we feel good about our vendor programs right now.

They seem to be, and maybe that's the point, is we seem to see improvement I would say more broadly with our programs. Having said that, as you heard from Charlie, still had some unexpected gains from a margin perspective in the quarter because we got some program benefits that we don't believe we can forecast will happen again in March.

Okay. All right. Thank you very much. And then for the -- kind of keeping with your outlook on the vendor programs, any type of gut feeling right now on if any changes from Motorola or Zebra or any other large vendors coming down the pipe, do you have any foresight on that?

Well, it's kind of early days because these guys are all calendar year-oriented programs, so I would say it's too early to call anything for the year. I would say the way we exited the calendar year with our key vendors, we feel better about that whole situation than we did a year ago, but it's still, we have got to sit down and work with them.

March being the first quarter for all these vendors and it's our fiscal third, it's always the quarter where they're trying to figure out what do they really want from their teams and expect from the channel, and then they have got to figure out what they can expect from the ScanSource team. Still too early to call for the year, but we'll certainly be able to report a lot more on the vendor programs to you in April when we report our next quarter results.

Okay. Great. More on Avaya, is it safe to assume that's less than 29% of your business now, the relationship with Avaya?

Well, we haven't reported a percentage. I mean, we talk about them being a significant vendor and we talk about them a lot. We don't have a specific number that we're out there with. So, we view that as proprietary information.

Okay. Fair enough. Okay. Well, I think that takes care of all my questions. Thank you very much.

Great, thanks, take care.

You too.

(Operator Instructions)

One moment, please. We are showing no further questions at this time.

Great. Thank you so much for joining us today. Our next conference call to discuss our March 31 quarterly earnings is expected to be on May 1, 2014. Thank you very much.

That concludes today's conference, thank you for participating. You may disconnect at this time.