Scansource Inc 2026 Q4 Earnings Call

Please go ahead. Good morning, and thank you for joining us.

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

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

Thanks, Mary, and good morning, everyone. I appreciate you joining us today. We finished our fiscal year with a strong fourth quarter, and I'm pleased with the progress our team made throughout the year. Our results reflect disciplined execution, improving demand across the business, and momentum toward our three-year strategic goals. Sales were up 17% year-over-year in the fourth quarter and 6% for the full year. This growth reflects outstanding performance by our account management teams, including sales, engineering, financial services, and operations, and the deep relationships that we've maintained over decades with our partners. We were able to respond successfully to the increased demand for our technologies from our channel partners. For the second half of our year, we saw renewed growth for key technologies, including physical security, mobility, networking, CX, cloud compute, and connectivity.

Our business has returned to growth, and we believe we're at the beginning of a stronger growth trajectory. We're excited about today's announcement that we signed a definitive agreement to acquire MicroAge, and I want to start with why we believe this is such a strong fit for ScanSource. The acquisition expands ScanSource's TAM, adds new services capabilities, and provides greater visibility into end-user needs. First, MicroAge's technologies. Many of them are new to ScanSource. Expand our TAM in high-growth technologies like cloud, cybersecurity, data center, and AI. Second, MicroAge brings additional services offerings to enable ScanSource channel partners to partner and co-sell new technologies, capabilities including cloud migration and management, cybersecurity services, next-generation AI data center implementation, and AI solutions development. We see great opportunities ahead to help our trusted advisors and our solution providers take advantage of these new services that will become available from MicroAge.

We built ScanSource over the years by identifying technologies that are transitioning to the channel and require specialized expertise to deliver value to the end user. That's the driving force behind our converged communication business unit we started last quarter. As we all know, the communications market has been moving from on-prem to cloud for many years in a market where everything is connected. That's where our converged communications team comes in, helping our partners capture the full stack of opportunities. The idea is simple. Help solution providers sell more cloud recurring revenue, help Intelisys trusted advisors attach more edge devices, and build on these successes to accelerate growth. We are proud to have three longstanding brands in one channel company. ScanSource has been serving the channel for 34 years, Intelisys also for 34 years, and MicroAge is celebrating its 50th anniversary this year.

All three companies have built decades-long relationships with channel partners and end users across most industries. ScanSource's differentiation is building specialized expertise while developing deep relationships with channel partners and end users founded on trust. I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2027.

Thanks, Mike. Our Q4 results reflect strong demand and profitable growth across our technologies and reporting segments. Net sales and gross profits saw strong mid-teen year-over-year growth, while our non-GAAP EPS grew 43% to $1.46 a share, a record for the company. Our full-year results reflect strengthening second-half demand and the return of large deals. Our FY 2026 full-year results align well with our three-year goals, with net sales for products growing 5.9% year over year, while recurring revenues increased 10.6% year over year. Consolidated gross profits increased 7% year over year, the higher end of our range. With the gross profit contribution from recurring revenues increasing to 34% of the consolidated results. We grew our business and delivered annual free cash flow of $114 million, with cash conversion of non-GAAP net income of 124%. Turning to our segments, I'll start with Specialty Technology Solutions.

Net sales for the quarter increased 18% year-over-year, led by broad-based North America hardware sales growth across our technologies. Gross profits increased 16% year-over-year to $94 million. Adjusted EBITDA increased 28% year-over-year to $36.7 million, with an adjusted EBITDA margin of 3.96%. For the full year, segment revenues increased 6% to $3.12 billion, while gross profits increased 8.4% to $338 million, with approximately 15% of segment gross profits coming from recurring revenues. In our Intelisys & Advisory segment, Q4 net sales and gross profits grew 7% and 8% year-over-year respectively. Adjusted EBITDA for the segment was $9.4 million, with an adjusted EBITDA margin of 36.4%. For the full year, segment revenues grew 3.1% to $101 million. Intelisys FY26 net billings increased to approximately $2.88 billion.

Going a bit deeper on our balance sheet and cash flow, we ended Q4 with $88 million in cash and a net debt leverage ratio of approximately zero on a trailing 12-month adjusted EBITDA basis. For the full year, we generated $114 million in free cash flow, 124% conversion of our non-GAAP net income. Share repurchases totaled $27 million for the quarter, taking our full-year share repurchases to $98 million. As of June 30th, 2026, we had approximately $121 million remaining under our share repurchase authorization. Adjusted ROIC was 18.2% for the quarter and 14.7% for the full year, reflecting our disciplined approach to both working capital and capital allocation priorities. As Mike discussed, we signed a definitive agreement to acquire MicroAge, which is expected to close by the end of Q1.

The planned acquisition is an exciting opportunity to advance our three-year goals and aligns with our capital allocation priorities, expanding our total addressable market, our technology stack, our capabilities, and our channel reach with accretive margins and positive free cash generation. Our capital allocation priorities remain the same: maintain a strong balance sheet with leverage of one to two times adjusted EBITDA and be disciplined in capital deployment, including strategic acquisitions and share repurchases. We are providing an annual outlook excluding the benefit from the planned acquisition of MicroAge. On an organic basis, we expect revenues to increase between 6% and 10%, believing we will see continued strong demand across our technologies and with normal lead times. We expect adjusted EBITDA to be between $158 million and $165 million, reflecting an expected 4.6% to 4.65% adjusted EBITDA margin.

Free cash flow, we expect to generate at least $85 million in free cash flow. We expect the FY27 effective income tax rate to range from 27.5% to 28.5%. We plan to update our annual outlook including, the MicroAge acquisition during our FY27 Q1 earnings call. We will now open up for questions.