Mike Baur - Chief Executive Officer Charlie Mathis - Chief Financial Officer Mary Gentry - Director of Investor Relations.

Chris McGinnis - Sidoti & Company Keith Housum - Northcoast Research.

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, Vice President, Treasurer and Investor Relations.

Ma'am, you may begin..

Thank you, and welcome to ScanSource's earnings conference call for the quarter ended September 30, 2014. With me today are Mike Baur, our CEO, and Charlie Mathis, our CFO. We will review operating results for the quarter and year 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 slide presentation and in the press release. These reconciliations can be found on our website and have also filed on Form 8-K. Mike Baur will now begin our discussion with an overview of the results..

Thanks, Mary, and thank you for joining us today. Let’s start with the highlights for first quarter on Slide 3 of our presentation. We had another strong quarter of sales and EPS above our expected range. Our teams achieved record net sales for the quarter.

Sales growth accelerated to 8% year-over-year, with growth in worldwide barcode and security and our worldwide communications and services segment. We are making strategic investments in our business, including acquisitions in attractive growth markets with higher operating margins.

Since we talked with you last quarter, we successfully completed our acquisition of Imago Group Plc, Europe’s leading value-added video and voice communication distributor. We welcome Ian Vickerage and his team to ScanSource and look forward to continuing his focus on driving growth of video and voice communication solutions in Europe.

We expect the addition of Imago’s customers and vendors to be almost entirely incremental to the existing ScanSource Europe voice and data business. This acquisition will allow ScanSource to complete the build out of our communication strategy across the major countries in Europe with our key vendors Polycom, Avaya and Shoretel.

With the acquisition, we added approximately 120 employees in five locations across Europe. And Imago’s net sales for the 12 months ended July 31, 2014 totaled approximately $80 million. In August, we announced an agreement to acquire Network1, Brazil’s leading value-added distributor.

Network1 currently has over 60 vendors, 8,000 customers and 365 employees. Network1 would be the largest company that ScanSource has acquired to date. Network1’s estimated sales for calendar year2014 are estimated to be $340 million.

We are excited about this opportunity to expand our existing, successful value-added distribution business in Brazil with the addition of incremental technology solutions, vendors and customers.

For both ScanSource and Network1, business is continuing as usual as we are in the process of negotiating a definitive agreement with a closing plan by the end of the calendar year. Our strategic investments in our business include adding skill and industry experience talent to build and grow our higher margin opportunities.

Over the past year, we’ve added headcount in these areas such as our international markets, 3D printing, security and POS payment terminals. These investments take time and are expected to generate strong returns in the future.

ScanSource is positioned for growth as we are investing not only in acquisitions and talent, but also our worldwide infrastructure. This will include all of the areas that add value to our business, including our customer and vendor facing systems.

This will enable us to improve the experience for our customers and vendors as we continue to grow and gain efficiencies at the same time. The Additional investment in our IT systems will provide our management team better decision making information as the business continues to grow globally.

Of course the key to making these investments is a strong balance sheet and strong operating performance as we demonstrated this quarter. With that, I will turn the call over to Charlie to discuss our financial results in more detail and our outlook for second quarter fiscal year 2015..

Thanks Mike. The financial information I will be discussing can be found on Slides 4 through 9 of our presentation. As Mike mentioned, we are pleased to have completed our acquisition of Imago on September 19 and our first quarter results include Imago for seven business days, which had minimal impact on our first quarter results.

With the acquisition of Imago, as well as the planned acquisition of Net work1 this quarter, we are discussing our operating results and will be discussing in future quarters our operating results in terms of GAAP and non-GAAP measures.

The non-GAAP measures exclude acquisition costs, the amortization of intangible assets and the change in fair value of contingent considerations. We believe that these non-GAAP measures provide better comparisons of our operations and will be helpful in understanding both our current performance and forecasts for future periods.

Net sales for the first quarter totaled $792 million, a record sales quarter and an 8.2 % increase over the prior year quarter. Our worldwide barcode and security segment had another record sales quarter with 11.2 % year-over-year growth and our worldwide communications and services sales grew 3.4%.

Our international sales were especially strong, growing 12.9%, driven by our POS and barcode business in Europe and Latin America, including Brazil. This quarter, foreign currency translation had a minimal impact on sales.

Turning to profitability; our first quarter 2015 gross profit margin of 9.8% reflects the mix of business and higher volume big deals. The gross profit margin for the quarter -- for the prior year quarter was 10.5 % higher than we expected to maintain going forward and as indicated in last year’s call.

The first quarter 2014 margin for our communications and services segment included a benefit from the timing of vendor program recognition. The worldwide barcode and security gross margin decreased to 8.6% from 9% for the year ago quarter, largely due to product and customer mix and a higher volume of big deals.

For worldwide communications and services, the gross margin come in at 11.9% for the quarter, down from 12.7 % for the year ago quarter, primarily due to the mix of business and last year’s timing of vendor program recognition that did not recur.

SG&A expenses, excluding $1.3 million in acquisition costs, amortization of intangible assets and the change in fair value of contingent considerations, were 5.8% of net sales for first quarter 2015 and 6.4 % for the first quarter of 2014.

First quarter 2015 SG&A expenses included a $2 million credit for bad debt expense, which lowered SG&A expenses this quarter. This credit for bad debt expense is due to excellent collections and improved aging for our worldwide communications and services segment.

We acknowledge the hard work and dedication of our reseller financial services efforts over time to make these improvements happen for the quarter. Since our last two acquisitions included earn out payment as part of the purchase price, each quarter we re-measure the fair value of our future earn outs related to accusations.

The fair value adjustments forecasted to be a loss each quarter, reflect the time value of the cash flow payments to be paid to the sellers of the acquired company. In addition, these expected fair value adjustments can fluctuate based in changes and assumed discount rate, actual forecast, operating results, foreign exchange rates and other factors.

In first quarter 2015, we recorded a fair value adjustment loss of 513,000 hours compared to a loss of 738,000 in the prior year quarter. We have one annual earn out remaining for CDC Brazil and two annual earn out payments for Imago. We would expect a fair value adjustment of approximately $350,000 for second quarter 2015.

Given the size of the acquisitions and potential variability of fair value adjustments on operating results, our non-GAAP results, including ROIC, exclude the change in fair value of contingent consideration.

On Slide 4, you will see first quarter 2015 non-GAAP operating income of $31.8 million, with a non-GAAP operating margin of 4%, slightly down from 4.1% for the first quarter 2014.

Our first quarter 2015 GAAP operating income was $29 million, with an operating margin of 3.7% compared to $28.2 million in the first quarter 2014 with an operating margin of 3.9%.

For the worldwide barcode and security segment on Slide 6, the non-GAAP operating margin was 2.7% for the first quarter 2015, down from 2.9% from the year ago quarter, principally from a lower gross profit margin.

For the worldwide communications and services segment on Slide 7, the non-GAAP operating margin increased to 6.3% for the first quarter of 2015 from 5.9% from the year ago quarter. The credit for bad debt expense previously discussed more than offset the lower gross profit margin.

Our effective tax rate was 34.3% for the first quarter 2015 and 31.7% for the first quarter 2014. Our effective tax rate for the first quarter 2014 included a favorable timing adjustment related to state income taxes which was recorded as a discreet item. We expect the effective tax rate for fiscal years 2015 to range between 34% and 34.5%.

Excluding the items previously discussed, first quarter 2015 non-GAAP adjusted net income was $21.6 million or $0.75 per diluted share compared to $20.5 million or $0.76 per diluted share for the first quarter of 2014. On a GAAP basis, net income for the first quarter 2015 totaled $19.2 million or $0.67 per diluted share.

Our return on invested capital, which excludes the change in fair value of contingent consideration and other non-GAAP adjustments, totaled 16.2% for the quarter compared to 17.4% and 14% in the prior years and sequential quarters respectively.

Now shifting to the balance sheet and some key metrics, cash and cash equivalents at September 30 2014 were $139.9 million, down $55 million from the end of June. At September 30, 2014 we had $5.4 million of debt, the same as a year ago for an industrial development revenue bond for a distribution facility in Mississippi.

Again this quartet we had no borrowings from our $300 million credit facility. Combining our cash and our credit facility, we have approximately $440 million available to fund future growth. Day sales outstanding at September 30, 2014, excluding the impact of the Imago ScanSource, remained at 55 days, in line with our prior quarters.

Inventory levels, inventory turns and paid for inventory days as depicted on Slide 8 of our presentation, are within our normal ranges and consistent with our current operating environment. During that first quarter fiscal year 2015, capital expenditures totaled $7.3 million, primarily for our ERP project.

For fiscal year 2015, we expect total capital expenditures to be $17 million to $22 million primarily for our ERP project. We plan to go live in Europe, our first go-live date during the first half of fiscal year 2015 -- I’m sorry, during the second half of fiscal year 2015. We remain on schedule and on budget for this project.

As I mentioned last quarter, in addition to the capital expenditures and the level of operating expenses we have been incurring over the last nine months, we expect additional SAP related ERP expenses in the second half of fiscal year 2015 of $5 million to $6 million.

These expenses are for SAP implementation cost and training after the first go-live and can no longer be capitalized for the project. Again, these costs will not be ongoing expenses for the company. ERP related expenses in the first quarter 2015 were not significant.

We believe we have significant resources and capital to grow the company in the future while maintaining our high margins and high ROIC. Our capital allocation priorities include investing in organic growth for our businesses around the world and acquisitions that meet our strategic and financial goals.

Our planned acquisition of Network1, which we expect to close by the end of calendar year 2014, is structured with an initial purchase price plus earn out payments over the next four years. We expect to fund this acquisition form our cash on hand.

We will continue to pursue strategic opportunities to invest and grow our businesses, including additional acquisitions. In August, our Board of Directors authorized a three year, $220 million share repurchase program. We made no purchases during the quarter.

Turning now to our next fiscal quarter, we expect net sales for the quarter ended December 31, 2014 to range from $780 million to $800 million and non-GAAP diluted earnings per share to range from $0.64 to $0.66 per share.

The non-GAAP diluted earnings per share exclude acquisition costs, amortization of intangibles and changes in fair value of contingent consideration. With that I’ll turn the call back over to Mike..

Thanks Charlie. Let me start with our worldwide barcode and security segment summarized on Slide 10, which represented 63% of our overall sales for the quarter. Worldwide barcode and security sales of $501 million increased 11% year-over-year and 2% sequentially.

We have a record sales quarter and double digit growth for the segment for the second quarter in a row. We also had strong growth from our international POS and barcode business units, with double digit growth from Brazil and Europe and Mexico. Similar to fourth quarter 2014, it was a strong big deal quarter.

As announced earlier, our largest barcode vendor worldwide Motorola Solutions, was acquired by another of our large vendors, Zebra Technologies. As we already have been doing significant business with both firms since the early days of the company’s founding, we anticipate no surprises or negative changes to our relationships.

Our POS and barcode unit in North America had a record sales quarter, driven by big deals in retail system sales and market share growth in our run rate barcode mobility scanning and printing businesses. The Point of Sale payments terminal hardware business had another quarter of strong double digit quarter growth.

We are seeing demand for EMV and NSC capable terminals increase as retailers move to adopt the more secure chip and pin technology in advance of the mandate from the credit cards issuers in October 2015.

The retail reseller channel that we serve is becoming more and more involved in recommending selling and implementing these payment systems to the retail and hospitality end users as opposed to the traditional ISO channel that served retailers.

The complexity of the new solutions and the integration between hardware and software require much more value-added support than in the past. We will continue to invest in this payment processing business to increase our value added services.

Our POS and barcode team in Europe had double digits sales growth from both big deals and our run rate business. Sales across all product categories, mobile computers, scanners, printers, POS and wireless, increased. By region, the United Kingdom had outstanding performance. It was a record quarter and Southern European started growing again as well.

In Brazil, our team had a record sales quarter and Brazil was our fastest growing business unit. Brazil’s growth reflects strong run rate business and double digit growth from both Point of Sale and AIDC products. Each of Brazil’s top 10 vendors grew year over year. New fiscal printer legislation has accelerated Our Point of Sale printer market grow.

Turning to our security business in the U.S and Canada, this unit had 6% year over year sales growth led by double digit year-over-year growth for our wireless networking. Our product category strength in networking and access control products offset lower video surveillance camera sales where market growth had slowed in some areas.

We are getting positive feedback on our ScanSource security on-demand and online education and information portal and our Success Made Easy campaign. Now, just a few comments on 3D printing, our newest technology business unit that we launched six months ago.

Recruitment events for new resellers to join the 3D systems channel continue to be a focus for our team.

We are adding new customers from our existing barcode and point of sale customers looking for new market opportunities and we are adding customers from the traditional computer aided design reseller community who already know the target end customers.

Our 3D printing team hit their sales forecast for the quarter, but it still early days for the development of the 3D printing channel. Now Worldwide Communications and Services on Slide 11, which was 37% of overall sales this quarter.

Worldwide Communications and Services net sales of $291 million increased 3% from a year ago and increased 9% sequentially. It was also a good sales quarter for the resale of vendor service contracts, which have become recurring revenue for ScanSource and our channel partners.

ScanSource Communications in North America had another record sales quarter, led by outstanding sales results with Polycom and Shoretel. Our voice product sales continued to do very well and we recently added a new vendor barcode, a display hardware manufacturer, including video walls as a new vendor in North America.

In our channels, the service provider customers had a very good growth quarter. ScanSource catalyst hit its sales forecast for the quarter driven by higher enterprise sales and a record sales quarter with Cisco. In Cisco, we are building momentum in collaboration sales and we’ve added new video partners.

We are seeing good year-over-year growth also with Aruba Instant, including success with mid-market recruitment. In Europe, we completed the acquisition of Imago late in the quarter.

Imago was recognizing by Polycom as its distributor of the year in Europe and we expect to spend time early in this quarter planning ways to leverage our two European communication teams. ScanSource services group had a record quarter for hardware configurations services both in number of units and the number of customers.

We continued to expand configuration services in support of our business unit sales efforts, particularly for IP, phone provisioning and key injections for the Point of Sale payment terminal business. We also had a team certified and ready to implement the Cisco config-to-order program.

Our team had a good quarter for professional service offerings which support our customers in Wi-Fi services, network assessments and voice and video implementations. We recently added a new Avaya training class for the IP office contact center solution and are working on wireless certification classes.

So, we had a strong start to our fiscal year 2015. We exceeded our expectations for sales and profitability. We are especially pleased to achieve a record sales quarter 8% sales year-over-year growth and sales growth for both of our segments. In addition, the completion of our acquisition of Imago added a strong finish to the quarter.

We expect to update you at the closing of the Network1 acquisition which is currently estimated by the end of December. With that, we will turn it over for questions. .

(Operator Instructions). And our first question comes from the line of Chris McGinnis of Sidoti & Company. Your line is now open..

Good afternoon and thanks for taking my questions and nice quarter. I guess just to maybe just dig in a little bit deeper on the growth in North America, I guess some companies related to retail capital spending had I guess a little bit of a more difficult time.

Is it more about market share gains for you that’s driving this or is it I guess just more deal growth that you are just positioned towards?.

Chris, it’s Mike. I’ll start here. I think the number one thing for us was just we characterized as a big deal quarter and that came out of our barcode and POS business specifically where we had very good growth on the retail side and our barcode business. Good growth there. We certainly had – we were coming off of a strong June quarter as well.

And so we were pleasantly surprised and I think part of it goes back to two quarters ago when we talked about we had lost some market share in the March quarter. And it was one of our goals was to make sure that we could gain back market share where we met appropriate financial returns. And I believe we’ve done that.

We had a good execution on the part of our North America sales team taking share. .

Great.

And the strength in international markets, is that similar in terms of more market share gains that obviously -- than what’s happening in the underlying demands?.

Yeah. I think Europe itself was similar to North America in that we executed well. Our vendors are doing a good job with us. I believe the difference in those markets in Brazil would be Brazil. There’s some legislation that’s helping us grow our fiscal printer business.

And that the new requirements for retailers to add fiscal printer technology, is underlying the continued strong growth in Brazil. In addition to the same scenario we are finding in Europe, in North America of we have the right vendor partners who themselves are gaining shares. We are gaining share within their distribution businesses.

Overall it was just a really good execution quarter. And in some in cases where we were able to take some additional share, we felt like it was strategic for us because many of our vendors have programs that will reward growth and we wanted to make sure that we didn’t lose that on that opportunity, which we had frankly three quarters ago. .

And just two quick questions on, I guess just the quarter itself, you talked about a benefit from bad debt expense. I don’t think that that would carry forward obviously.

Is that a onetime benefit for you?.

Chris, this is Charlie. That’s correct. There was a $2.5 million credit in the quarter that will not -- we wouldn’t expect that to carry forward in the next quarter. .

That wasn’t backed out of the non-GAAP number, is that correct?.

That’s correct. That was not backed out. .

All right.

And I guess just going forward when you give Q3 guidance for the back half of the year, will you back out the extra expense for the ERP implementation?.

We are certainly highlighting the fact that we are going to have these expenses too. You should be aware that we plan on having $5 million to $6 million expenses.

The non-GAAP numbers that we disclose for the quarter related to three primary areas and that was amortization of the intangibles, the change in fair value contingent considerations and the acquisition cost. Those we spelled out. So yeah, I would not expect to exclude those -- the non-GAAP number.

However, I do want to highlight for you that we have those expenses of which we don’t believe will be recurring in our business going forward. .

(Operator Instructions). And our next question comes from the line of Keith Housum of Northcoast Research, your line is now open. .

Good afternoon guys. Thanks for taking my call and good quarter. Charlie, the receivables were up $36 million compared to yearend. I think it might be a record of roughly $500 million from what I remember of that.

What’s driving that receivables and is that perhaps just because sales are way towards the back end of the quarter?.

Yes, absolutely. The receivables is up because of the strong sales which normally occur at the back end of the quarter. Yes. Our DSO numbers were consistent in that 55 days range. So there’s no change there..

Okay.

Does that lead us to believe that the sales I guess the quarter end were strong and that carries over to the beginning of this quarter, correct?.

Let me also add one other thing on that Keith, is that we also have Imago, the acquisitions for the receivables in that number as well. That was one of the other reasons why the receivables numbers were up because of the acquisition of Imago. .

Got it. Okay, thanks. In the unified communications business, it looks like gross profit was down about $1 million compared to prior year. But the operating margin was up like $1.5 million.

Is there anything going on in that business that perhaps stands out to you?.

I’ll start first. Charlie, you can jump in. I think Keith it’s mixed and that was the indication we gave in the call that we had a different mix.

So when you look at our communication business as it’s changed over the last few years, we’ve got other vendors now that are becoming stronger in that communications mix and so that’s what changing the margin from a gross margin. .

I’m assuming – but it’s a higher operating margin, you’ve got less expenses going into it. .

Keith, one of the things on the operating margin is the fact we had $2.1 million bad debt credit in that segment. .

That’s what it is, okay. Got it. That makes sense. Okay, thanks. Your international sales have obviously been strong.

Is that probably a function of the management restructuring you did last year as well? Is that helping the vendors to play better with you guys or what are your thoughts there?.

I think overall it’s execution. I think our teams are executing better. We’ve got more people involved in the international business that was the design. And there’s certainly some benefit of the vendors recognize us now as more of a global player from their view rather than just a regional player.

But I would say it’s more the execution of the teams and I think that’s why this this quarter we executed excellent in all those regions. We have more management worried about how we are doing in these markets and I think we are seeing the results of that today. .

Okay.

As I look at your guidance for the second quarter, do I think about roughly $0.61 on a GAAP basis? Is that a good way to back into it?.

I think we gave you the non-GAAP number there which again excludes the amortization of the intangibles, the fair value change and contingent considerations and the acquisition cost related to that. I think going forward we are going to give non-GAAP guidance. And so I don’t have the GAAP guidance number for you right now. .

Got it. And I guess the last question for you, I guess we are hearing more and more about congestion on the West Coast and the ports with inventory coming in from Asia.

Is that a potential impact on the vendors you guys serve?.

We are certainly aware of those issues. It’s been going on for quite a while and I think our teams have not highlighted them as a concern they have to date.

We of course have always had strong inventory positions and I would say with the level of inventory we had today we are in good position to satisfy our customers, even if there’s some temporary shortages. .

Thank you and I’m showing no further questions at this time. I would like to turn the call back over to Mr. Mike Baur for any further remarks. .

Thanks everybody for joining us today. We expect to hold our next conference call to discuss December 31 quarterly earnings results on January 29, 2015. .

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone..