Mary Gentry - Vice President, Treasurer and Investor Relations Mike Baur - Chief Executive Officer Gerry Lyons - Chief Financial Officer.

Adam Tindle - Raymond James Chris McGinnis - Sidoti & Company Michael Leshock - Northcoast Research.

Welcome to the ScanSource Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’ 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 and fiscal year ended June 30, 2017. With me today are Mike Baur, our CEO; and Gerry Lyons, our CFO. We will review our operating results for the quarter and full year and then take your questions.

A slide presentation that accompanies our comments and webcast is posted in the Investor Relations section of our webcast – excuse me - of our website. Certain statements made on this call, including our expectations for the first quarter and fiscal year 2018 will be forward-looking statements.

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 earnings release that we put out today and in ScanSource's Form 10-K for the year as filed with the SEC today.

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 disclaims any duty to update any forward-looking statements to reflect actual results or changes in expectations, except as required by law.

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 our press release. These reconciliations can also be found on our website and have been filed with our Form 8-K. Mike Baur will now begin our discussion with an overview of our results..

Thanks, Mary, and thank you for joining us today. Our fourth quarter results were in line with our expectations, and we delivered a strong finish to our fiscal year. For the fourth quarter, net sales increased 5% to $917 million, GAAP diluted EPS increased to $0.74 and non-GAAP diluted EPS increased to $0.68, all at or above our forecast range.

We returned to organic net sales growth with 3% organic growth for the fourth quarter. This reflects execution of our 2017 growth initiatives and healthy market demand for many of our technologies. In addition, we had a terrific quarter for our Worldwide Barcode Networking and Security segment in North America.

We expect to continue to grow organically in fiscal year 2018 and have identified five key opportunities for growth.

First, growth in mobile computing across geographies, impart from operating system migration, and the opportunity to get our share of the growth plus some; Second, continued growth in our Physical Security business as a result of growth in video surveillance; Third, the expected consolidation of bar vendors Mitel and ShoreTel brings an opportunity to recruit and support bars.

Fourth the Intelisys telecommunications and cloud services business grew more than 20% for the fiscal year and we expect this strong growth to continue as suppliers shift more business to the channel. And fifth, our Network1 business in Brazil added strong new vendors that had significantly increased our total addressable market.

For the quarter and the full year, stronger top-line and bottom-line results for our North America business were partially offset by weaker results for our International business.

For fiscal year 2017, net sales for our International business declined 6% in constant currency, and the non-GAAP operating margin for our International business declined considerably.

During fiscal year 2018, we intend to drive profitability improvements for our International business by emphasizing the opportunities where we can grow value-added margins.

On the capital allocation front, we completed three strategic acquisitions during the past year, starting with our acquisition of Intelisys which we closed last August, a year ago, then we acquired Kingcom’s Channel business in April.

These acquisitions fit with our strategic financial objective, require high margin, high growth recurring revenue companies, and Intelisys strengthened our financial results this past fiscal year. On July 31, we closed on our acquisition of POS Portal, which brings industry-leading services and capabilities in the U.S.

payments industry, particularly in the SMB segment. POS Portal delivers services and secure payments terminals to meet customer needs and deliver value-added margins. We are excited to combine POS Portal and ScanSource’s existing payments business.

POS Portal offers hardware-as-a-service under its portal advantage program that provides customers with hardware support and next day replacement of tablets and terminals.

We are very pleased to welcome Buzz Stryker, Founder and CEO; Scott Agatep, Chief Operating Officer; and the rest of the talented and experienced POS Portal team to ScanSource, and we look forward to leading the channel in the U.S. payments industry together.

Last week, we announced promotion of Gerry as our Chief Financial Officer after serving as Interim CFO since November of last year. Over the past ten years, Gerry has been instrumental in leading our financial operations worldwide, and we are delighted to have Gerry take on the CFO role for ScanSource.

Gerry’s proven leadership and deep knowledge of the company will serve ScanSource well. With that, I’ll turn the call over to Gerry to discuss our financial results in more detail and our outlook for next quarter. .

Thanks, Mike. We had a strong finish to our fiscal year 2017, and set the stage for improved profitability as we head into our new fiscal year. Our fiscal year 2017 results reflect the financial progress from our Intelisys acquisition and stronger operating cash flow.

Slide 5 shows the summary of our financial results for the fourth quarter, including increases in GAAP diluted EPS to $0.74 per share and non-GAAP diluted EPS to $0.68 per share. Fourth quarter EPS – diluted EPS includes a $0.21 benefit from a tax settlement in Brazil, which we consider to be a one-time benefit and identified as a non-GAAP item.

This settlement was a recapture of five years of tax credit. Consolidated net sales for the fourth quarter increased 5% to $917 million. The dollar impact on sales due to foreign currency translation was a positive $2 million.

Our Worldwide Barcode Networking and Security segment increased 7%, while our Worldwide Communications and Services segment increased 1%. Worldwide Communications and Services segment net sales included $9 million from the Intelisys acquisition.

Our fourth quarter 2017 gross profit margin was 11%, up from the prior year from the addition of Intelisys and favorable timing of vendor program recognition for both segments. Our prior year gross margin was unusually low, particularly in the Worldwide Communications and Services segment in large part from Network1 integration issues.

On Slides 6 and 7, you can see our current quarter, sequential quarter, and prior year quarter margins by segments. SG&A expenses, excluding depreciation expense, intangible amortization expense, and acquisition costs increased $8.7 million from the prior year quarter to $71 million for the fourth quarter 2017.

This increase reflects the addition of Intelisys which was not in the prior year quarter and to a lesser extent higher employee costs. Our fourth quarter 2017, non-GAAP operating income was $27.8 million or 3% of net sales compared to $18.9 million or 2.1% in the prior year quarter.

We have $114 million contingent consideration on our June 30, 2017 balance sheet reflecting the present value of expected future earn out payments for our acquisitions of Intelisys in September 2016 and Network1 in January 2015.

For the fourth quarter 2017, we recorded a loss for the increase in the fair value of contingent consideration of $1.3 million, which was lower than the expected due to a $4.4 million gain for Network1 from reduced projections and lower than expected current year results.

For our first quarter 2018 forecast, we estimate the change in fair value of contingent consideration to be a loss of approximately $4 million principally related to Intelisys. Our effective tax rate was 19% for the fourth quarter of 2017 including the benefit from the large tax settlement in Brazil that we identified as a non-GAAP item.

Excluding the tax settlement in Brazil, our effective rate was 38% for the fourth quarter 2017 and 35.7% for the fiscal year 2017. For our fiscal year 2018 forecast, we are using a 35.5% effective tax rate.

Turning to the full year results on Slide 8, 9 and 10, our fiscal year 2017 net sales of $3.6 billion represent a 1% increase from the prior year or down 2% in constant currency excluding acquisitions.

The gross margin for the full year fiscal 2017 was 10.8%, up from 10% in the previous fiscal year, principally from adding Intelisys and its high margin recurring revenue business. Excluding Intelisys, the gross margins for the fiscal year 2017 was 10%. So there was no change in the year-over-year organic business gross margins.

Non-GAAP operating income increased 1% to $110 million for the full fiscal year 2017. Full year net income was $69 million or $2.71 per diluted share and non-GAAP net income was $70 million or $2.75 per diluted share. Now turning to the balance sheet and the capital allocation plans.

Our working capital, balance sheet and cash flow measures are all referenced on Slide 11 and 12 in our presentation. One of the highlights from Slide 12 is the $95 million of operating cash flow generated over the last 12 months, which is significantly higher than the prior year period.

This reflects some working capital efficiency increases and the additional cash flow from our Intelisys acquisition. We had inventory turns of 6.2 times and decreased our inventory level by 5% year-over-year.

DSO excluding Intelisys came in at 61 days still higher than our desired range and reflects the aging of the receivables portfolio primarily in North America. In addition, we experienced slower collections for our Communications business in Latin America including Brazil.

And I want to note that our reseller financial services team worldwide has not changed our underwriting standards to take on more risk. Our balance sheet remains very strong and continues to provide us with the ability to execute our capital allocation plan, which includes in order, organic growth, strategic acquisitions, and share repurchases.

At June 30, 2017, we had cash and cash equivalents of $56 million and debt of $97 million or net debt of $41 million. Our leverage totaled approximately 0.34 times trailing 12 months adjusted EBITDA and our ROIC was 13.2% for the fourth quarter 2017.

On July 31, 2017, we closed on our acquisition of POS Portal and funded the initial cash purchase price of approximately $145 million with increased borrowings under our revolving credit facility.

Following the close of POS Portal acquisition, we estimated our leverage ratio on a net basis at approximately 1.9 times, which is in keeping with our target of at least one times leverage. On Augusts 8, 2017, we amended our revolving credit facility to increase committed borrowings from $300 million to $400 million.

We now have a $400 million committed facility, committed credit facility as it matures on April 3, 2022 to fund outstanding borrowings and to provide additional liquidity for investments. During the quarter, we had no share repurchases and ended the quarter with approximately $100 million remaining on our share repurchase authorization.

Now turning to our forecast on Slide 13, we expect net sales for the first quarter fiscal 2018 to range from $940 million to $1 billion. GAAP diluted earnings per share to range from $0.49 per share to $0.55 per share and non-GAAP diluted earnings per share to range from $0.74 per share to $0.80 per share.

Our forecast reflects low single-digit organic growth and an 11% gross profit margin. The foreign exchange rates used in our forecast are summarized on our presentation slides.

The forecast includes projections for POS Portal since the July 31, 2017 acquisition date including approximately $15 million in net sales and higher interest expense from increased borrowings. I’d now like to turn the call back over to Mike..

Thanks, Jerry. We have two reporting segments and I’ll start with Worldwide Barcode Networking and Security, which represents 68% of overall sales. Net sales of $619 million increased 7% from the prior year or 6% on an organic basis. This was the second consecutive quarter of organic growth for the segment driven by our North America business.

Our North America business grew 10% year-over-year, while our international sales were down 6%. In North America, our strong results were led by healthy market demand from mobile computing, retail, networking and video surveillance solutions.

It was a great quarter across key customer segments, big deals, runrate business and our federal government business. Our retail business reflected increased spending for self-checkout and point-of-sale solutions that enhanced the customer experience.

In May, we were named NCR distributor of the year for North America and Latin America and our networking business made a strong come back with better execution following vendor consolidation, as well as more e-rate spending opportunities. In Europe, we faced increased competition due to vendor consolidation that increased the number of distributors.

Net sales declined 6% year-over-year in local currency and we had good growth in printing and also launched six new vendors. In Brazil, we had a great quarter for mobile computing, including strong big deals and we took market share there. However, we had another quarter of declines for our fiscal printing business.

Competitive pressure continued including aggressive financing terms offered by competitors. In Mexico, we had strong quarterly growth from significant big deals and good sales momentum. Now to our second segment, Worldwide Communications and Services, which represents 32% of our overall sales.

Net sales of $298 million increased 1% from a year ago or down 3% on an organic basis.

As we look at our traditional telecom business with market uncertainty, surrounding Avaya’s bankruptcy not surprisingly net sales declined, particularly, for our large enterprise business customers as they report to us that end-users are delaying the upgrading and expansion decisions.

However, as challenging as this is for our customers, we continue to support the Avaya channel partners and we are managing our resources as the business demands.

In our Unified Communications practice in North America, we have a great line card of suppliers of both premise and cloud-based solutions including unified communications as a service offerings. Our strategy is to offer our customers multiple ways to go to market including on-premise, hybrid and cloud.

We see steady demand for new UC solutions and we see a value-added role for ScanSource to play as the market shifts from premise to cloud solutions. We believe we have the best UCAAS portfolio to offer customers when you include both the ScanSource and the Intelisys offerings.

During the quarter, we successfully onboarded the Shore Tel direct partners to ScanSource for their premises business and we will be providing additional Shore Tel dedicated resources and services. Turning to Intelisys. This team delivered excellent results for the year in line with the forecast.

For the year-to-date period since acquisition net sales increased 22% year-over-year. Growth with our top telecommunication suppliers continues to accelerate with strong new billings. By leveraging ScanSource financial services, Intelisys launched a hardware purchasing power program to support agents interested in selling hardware.

Intelisys also launched a new cloud services university platform and saw outstanding growth from its cloud suppliers.

In Europe, communications, we had a new supplier including a new relationship with Extreme following its acquisition of Avaya’s networking business and new video communication vendors both premises and video as a service cloud offerings.

In addition, better execution on cross-selling across our line card present opportunities to grow revenues and gain scale as a combined team. Our strategic plan for Europe includes providing our customers more solutions, which include new vendors and services, so they can grow their sales to their customers and end-markets.

Net sales increased 5% year-over-year in Latin America led by Brazil with excellent growth across all customer segments including a record quarter for SMB. New vendors in Brazil have significantly increased the total addressable market and present opportunities for continued growth.

In addition, our Brazil team has entered into a new cloud solution provider agreement with Microsoft. We had another quarter of outstanding growth with our cyber security vendors in Brazil. So let me close with a few thoughts on what we expect for fiscal year 2018.

Our financial goals are to drive strong cash flow from operations, deliver double-digit adjusted EBITDA growth including POS Portal, expand non-GAAP operating margins and increase ROIC from the prior year. In addition, we will continue to execute our strategic plan to grow our business organically and through acquisitions.

We will now open it up for questions..

[Operator Instructions] Our first question comes from the line of Adam Tindle with Raymond James. .

Okay, thank you and good evening and congratulations to Gerry. Just wanted to start Mike, a high level on the competitive landscape. Obviously, we’ve got a major transaction expecting to close soon with SYNNEX acquiring Westcon.

How are you thinking about the impact to ScanSource as a result of this and perhaps the competitive landscape more broadly hoping that maybe you can tie this into ScanSource’s strategic direction with the POS Portal acquisition? Thanks..

Yes, thanks, Adam. Appreciate that, and when we look at competition, we have always had certainly a healthy regard when we have competitors who – their goal would be to achieve value-added margins in all the businesses we’ve been in, historically that’s where we choose to play as businesses where they have value-added margins.

And we believe that with Westcon’s announcement that that will still be the same. However, we certainly have had conversations with our vendors that we would share with Westcon to ensure that we are only investing in those businesses where we can achieve – continue to achieve value-added margins in a competitive landscape.

We have always viewed that our challenge and our opportunity is to make sure we can grow our vendors’ businesses by providing these value-added services. So, we don’t expect to see a significant change in the marketplace.

We do expect with new management there might be some different strategies deployed, but today, we feel very confident about market share with those key suppliers and most importantly with our customers.

Really the core relationship we have with the ScanSource customers is very strong and that we have made sure that we understand what their needs are going into the future. .

Okay, and maybe just a follow-up for Gerry or Mike. So the adjusted EBITDA, double-digit growth in fiscal 2018, it doesn’t sound like that was an organic statement. I think you said that includes POS Portal, but I think that acquisition alone would get you to double-digits with no growth in the core.

So, just hoping for some more commentary on how we can think about the core ex-POS Portal in terms of expected growth. .

Adam, this is Gerry. We do expect the organic businesses to grow. So in the quarter that we just forecasted, we’ve got -- excluding POS Portal, we are expecting like, 3.5% growth quarter-over-quarter, so from June to September. .

Okay. And maybe Gerry, I know that that bad debt expense has kind of weighed on operating profit dollars in fiscal 2017.

Is that something that you can maybe ballpark the amount for us and has it been fully resolved to the extent that heading into next year that should be a tailwind and that does not repeat?.

Adam, I think the dilemma with bad debt is, you’ve got lots of customers across lots of different geographies and things change and they move. We believe at this point in time that we have everybody adequately reserved for, every possibility. But as you know, those things change.

We are not anticipating that there will be any bad news and in fact, typically we come out of these things fairly well. As Mike just alluded to, we have very strong customer relationships and so even when things go poorly from a collections perspective, we normally are able to work out of most of those. .

Okay. And I guess last one maybe tying into this. Mike, you alluded to the international business and expecting some profitability improvements. So just hoping maybe you could dig a level deeper in terms of the mechanics behind that what you are looking for from your international team heading forward? Thank you. .

Sure, Adam. I think, for us, we’ve got a little bit of tale of two cities.

We’ve got Europe that has a little different challenge than Latin America and without giving too much information to our competition, I would say that the statement we had about we are going to emphasize where we can get value-added margins is a statement to, let’s do the things we are very good at and sometimes that means, quit doing things that don’t deliver the results and the returns we need, and we believe that with some of the change in our vendor community that’s been, as you know consolidation of some of the vendors that has led to more distributors in Europe for example than we had before.

And so we are having to sort our way through this plethora of new competitors, and we expect the vendors to respond and so again playing to our strength is what we have always done and that is sitting down with those key vendors that we depend on for growth and good margins and letting them understand where we are challenged and we have to choose which vendors and which markets we are going to put resources in.

I think every vendor knows that.

So that’s really our message is, in Europe, we’ve got to focus on where we can achieve the value-added margins, and in Latin America we really have a new business if you will in our Network1 business outside of Brazil, and that’s still a business that we are refining and so we’ve got some - really some opportunities to execute better there.

As we have organized outside of, frankly Miami and the Mexico, Colombia, Peru and Chile, we’ve got some opportunities there with our key vendors to grow that business significantly. So it’s again focusing on the better opportunities and not getting distracted by everything.

I think that’s the challenge when you are in some of these international markets is, every new country looks like it’s a home run and they all take dedicated resources and they take a lot of focus. And our teams recognize that they have to take care of our customers first and if we do that, we are going to achieve the profitability that we expect. .

Okay, thanks and best of luck..

Thank you. .

Thank you. And our next question comes from the line of Chris McGinnis with Sidoti & Company. .

Afternoon. Thanks for taking my questions and congratulations Gerry..

Thank you..

So maybe just to touch on Brazil, you just talked about the strength within that market and I was just wondering, is that based on just, I guess, for a few quarters we saw some difficulties obviously from the region, but is that a lack of – I guess, some competitors going out of the business.

Can you just maybe talk a little bit about what’s driving that success recently?.

Chris, did you say Brazil? I didn’t quite get the first..

Yes, Brazil. Yes, yes, sorry..

No problem. So, Brazil, we continued to have as you know, everyone has macroeconomic issue with Brazil. So set that aside. We are talking about in a couple of cases, we’ve got this fiscal printer business that was very profitable and successful for ScanSource, POS and barcode CDC for years and years.

It has been on a decline for the last, probably six quarters, seven quarters and so that has just continued to deteriorate for us and that was a very good business that has been replaced by a less attractive alternative for us. It’s a market that we still plan to play in.

So revenue replaced some revenue and profits in our POS and Barcode business and it’s taken our team a while to replace that. So that’s really the story there is very specific to that fiscal printer business outside of the barcode and by the way, meanwhile, they saw as we mentioned, excellent growth in our mobile computing.

So they’ve got good things happening in POS and Barcode, but that fiscal printer business was substantial.

Outside of that, then we’ve got in the Network1 business in Brazil, our only issue there frankly have been that we’ve been historically project-driven and for us, that means there is some lumpiness in the business and we’ve added some new vendors that obviously take a little while to ramp up.

But we believe the strategy there is right on that and that the margins that we can attain in Brazil are excellent both in Network1 and in CDC. So that’s why we have confidence there that there is no big issue that we have to resolve. We just have to work with our customers and make sure we are covering the marketplace..

Okay. And then I guess, just to touch on, you mentioned retail being pretty strong in North America, can you just talk about, I guess the outlook for retail being impacted by the transition to the e-commerce.

Just how you think about that for the next year and the impact on your business and is there any risk at all as they figure out how to manage the – I guess, the new environment?.

Well, I think there is maybe two opportunities for us that we talked about.

One is payments with POS Portal is we believe that is significant upside as this EMV shift continues to happen and even with the growth of e-commerce which is still maybe 10%, 12% of retail business, the vast majority business still has to be handled with traditional methods of accepting payments.

So payments, we believe is a long tale to it and will be very profitable for us. Secondly, we referenced in the call the self checkout growth and that’s an offset to the minimum wage increases around the country. It’s a – definitely a hospitality and a food opportunity.

It’s a more and more we are seeing that our customers are choosing to add those technologies and I would say, five years ago, they were still very early, very nascent, very custom and they were difficult to sell through the channel. They were primarily sold direct.

So there is this emerging opportunity for growth in all kinds of self checkout, whether you are thinking of what, McDonald’s has announced that they are rolling out, whether you look hospitality companies like Panera, all of those are opportunities for our channel to still play a role even when they are not replacing the point of sale cash registers or even if someone using their smartphone to place an order they still have to have technology within the store to handle that and our customers are making that switch.

.

Great. Thanks for taking my questions, Mike. Appreciate that.

You bet..

Thank you and our next question comes from the line of Michael Leshock with Northcoast Research. Please go ahead. .

Great. Thanks for taking my question guys.

Just, off the top of my head, I wouldn’t assume so, but just wondering if you are seeing any exposure to the storms that are occurring down in Texas right now, whether that be either sales or in product shipping?.

We have not. We certainly are mindful of what’s going on down there and certainly we’ve got a lot of people that are talking to our customers down there making sure that if there is we can do to help, we are prepared to offer, but no, not at this point, no impact. .

Okay. And then I know you touched a little bit on Europe a bit earlier.

But I know the competition specifically Westcon has been having some issues in the region and I am just wondering if that was a benefit? Are you’re able to capitalize on any of that weakness in the region?.

Well, the challenge for Westcon compared to ScanSource in Europe has been historically – we have been in different regions and they – Westcon has had a head start on ScanSource over there with some of their other vendors. So they have a larger line card of vendors than ScanSource has. So ScanSource has always been very focused on a few key vendors.

The acquisition we made three years ago of Imago was very focused on video – video conferencing solutions and before that, we were very focused on only a few key vendors who were selling SMB premise-based communication hardware.

So, the point would be the line card we compete on is fairly narrow and so, where we can have opportunities within those key product lines that I just described. So, we would like to think that in the markets we compete within, we compete very favorably. .

Okay, great. That makes sense.

And then, just last question, have you seen any impact at all from component shortages in the industry, specifically with memory or solid state drives at all?.

No we haven’t. We’ve got a very close relationship with the product teams, all of our key suppliers and at this time, I have not been made aware there is any supply shortages.

We generally, in our industry have kept a larger supply of inventory of finished goods as evidenced by our inventory turns around six and so at this point, if there are going to be component shortages, they are not affecting us. .

Okay, great. Thanks. .

You bet..

Thank you. And that concludes our question and answer session for today. I would like to turn the floor back over to Mike for any closing comments..

Thank you for joining us today. We appreciate it. We expect to hold our next conference call to discuss September 30th quarterly results on Monday, November 6, 2017..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day..