ScanSource, Inc. (SCSC) Q4 2026 Earnings Report, Transcript and Summary

Welcome to the ScanSource Quarterly Earnings Conference Call. All lines have been placed in a listen-only mode. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mary Gentry, senior vice president, finance, and treasurer. Please go ahead.

Good morning, and thank you for joining us. Our call will include prepared remarks from Michael L. Baur, our Chair and CEO and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and 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 our Form 10-Ks for the year ended 06/30/2026. 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 will discuss both GAAP and non-GAAP results We have provided reconciliations on our website and in the press release included in our Form 8-K filed earlier today. I will now turn the call over to Mike.

Thanks, Mary. Good morning, everyone. I appreciate you joining us today. We finished our fiscal year with a strong fourth quarter and I am pleased with the progress our team made throughout the year. Our results reflect disciplined execution, improving demand, across the business and momentum toward our 3-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 have 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 are at the beginning of a stronger growth trajectory. We are 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. And second, MicroAge brings additional services offerings to enable ScanSource channel partners to partner and cosell 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 advisers 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 we and require specialized expertise to deliver value to the end user. that is the driving force behind our converged communication business unit we started last quarter. Our first of in the on prem to cloud for many years. In a market where everything is connected. that is 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 advisers attach more edge devices, and build on these successes to accelerate growth. We are proud to have 3 long standing brands in 1 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 3 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 will now turn the call over to Steve to take you through our financial results and outlook for fiscal year 27.

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 per 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 3-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 will 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 profit 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 and advisory segment, Q4 net sales and gross profits grew 78% year over year, respectively. 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' FY 2026 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, a 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 06/30/2026, we had approximately a $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 3-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 1x to 2x 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% to 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 a $165 million, reflecting an expected 4.6% to 4.65% adjusted EBITDA margin. For free cash flow, we expect to generate at least $85 million in free cash flow. We expect the FY 2027 effective income tax rate to range from 27.5% to 28.5%. We plan to update our annual outlook to include the MicroAge acquisition during our FY 2027 Q1 earnings call.

We will now open up for questions. To ask a question, please press 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from Gregory John Burns with Sidoti. Your line is open.

Morning. Can we just talk a little bit about the outperformance for the fourth quarter and the full year relative to your guide. What came in stronger than you were expecting? And it does not seem like it. But are you seeing I think last quarter, was a little caution around macro risks and maybe supply shortages around memory, but it does not seem like that is impacting your business. what is the risk of that going forward as we head into fiscal 27?

Gregory, good morning. This is Steve. So I would say what we saw this year when we think about the full year was really what we thought was going to happen coming into the year. We believe we were going to have a stronger second half growth performance. As we saw the second half unfold, what we saw was actually a very strong demand environment and the return of those large deals that we continue to talk about being in our pipe as the fourth quarter unfolded. So we were very pleased. Like many other technologies, that we saw this strong demand. When we think about the macro environment, of course, we are always cautious about going on in the macro environment because it is out of our control. And we believe that in our guide, that we are not gonna ex we are not expecting to see any kind of supply disruption and we still believe we are gonna see continued strong demand.

Okay. Could you could you just maybe give us a little insight into product segment categories, where you were seeing particular strength? Or whether or not it sounds like it was across the board, but is there any particular areas of strength that are worth highlighting?

No. I Gregory, again, it is Steve. I think it was across the board. You know, we saw all year long that physical security has been a been a great performer for us. As we saw the second half, it is been very broad based.

Okay. Okay. And then just flipping over to MicroAge, could you give us a little better understanding of their revenue mix? Is how much is it you know, product versus maybe services?

Hey, Gregory. it is Mike. Yeah. I think we are going to wait to talk more about the details of MicroAge after Q1. Once we get it closed, there will be some revenue in the quarter. So standby for that. But just in general, what we were looking for frankly, for the last year was a company that had a services strategy that we could not only buy into from their perspective, meaning selling their services business growing into their customer base, but also a services business that we could scale and have some of those services work with our existing channel partners. We found MicroAge as a company that had a services business, but also comes out of a traditional reseller business for 50 years. And so this company, for sure, comes out of the legacy hardware model moved into services and now have been very successful at the blend of selling hardware and providing services, whether they are some managed services, professional services, So we really like the composition. And we will talk more about that after our Q1 call.

Okay. And then just lastly, what is is there any risk of channel conflict here for you?

We think the risk is very low. But we are also as we said when we acquired Resourcive a couple years ago, if any of our partners feel like there is some channel conflict with their customers, we are going to do our best to make sure we prefer our existing channel partner. If they are already in account and MicroAge shows up, But here's what the research really is showing across the IT landscape. Is and this is from third party research experts that most end users today at mid market and enterprise companies are working with 6 or more partners all the time. So we believe that MicroAge has a motion into their community. By the way, they are they are really only selling to about 2.5 thousand or so end users which is a very small number. But where MicroAge's lane is, it is very clear. We might today have someone else in there selling products For example, we could have a securities VAR in there selling security and not even know MicroAge is there. And we might have an agent in their selling connectivity And today, all 3 could be in the same account and not even know each other's there because the end users today again, from what the research shows, the IT end user today is comfortable working with a small set of partners as a team, not having 1 partner do it all. And so we really believe that just offers more opportunity for our channel partners today to actually go to market alongside MicroAge and vice versa. And that is really the model that we are talking about, and we will do everything we can to make sure no 1 feels like they have gotten disenfranchised And we think our long standing relationships with our partners have given us permission to be able to do this.

Alright. Great. Thank you.

Our next question comes from Keith Michael Housum with Northcoast Research. Your line is open.

Good morning, guys, and congratulations on a great quarter. Great to see the leverage come for the model coming through. Hey, Steve, as we look at the guidance and we kind of think about the tougher comps that you are going to have in the second half of the year, is it fair to say that you expect a stronger, I guess, percentage growth in the first half of the year compared to second half of the year?

Yeah, Keith. Good morning. Yeah. Thanks for the question. Yeah. I believe that is the way if you look at a percentage year over year growth that it is gonna lay out. I think our first half has easier comps to second half. Especially with this fourth quarter, it is going to be a tougher comp. But that is all captured in our 6% to 10% expectations.

Yep. And based on your guidance, I am assuming the pipeline coming out of the quarter and conversations you have at quarter end was just as strong as the prior quarter, if not even better.

Yeah. I would say that our account management teams were very busy going through the end of June.

Great. Great. And then, you know, you guys had a press release with the Hewlett Packard Enterprise adding Juniper to your line card for networking. Can you perhaps talk about your expectations for when that might start to kick in and benefit you guys and how you are thinking the addition of 1 vendor. I know 1 vendor does always make the numbers, but, you know, Juniper, you guys used to carry, and Aruba, of course, you were there first, so it is important to you guys. Maybe help us understand how you are thinking about that benefit.

Thank you. it is Mike. I will comment on that. I would say right now, 1 of the challenges that we have already faced is Juniper has some supply chain constraints. They have had such a big year that by adding us, our partner opportunities are going to be a little slower to be fulfilled. And so they have got some--they just got some incredible pipelines of deals and opportunities. And so I think it will be slower than we would have wanted it to be, and what we thought even a quarter ago. So it is going to develop throughout I would say, slowly through the first half of our year. And then by the time we get to the second half, we should be in full swing. With Juniper from not only being able to sell, but also to deliver. So there is going to be a little bit of a backlog from us being able to get product to sell until we get to the second half.

You think the second half of the year, there can be a noticeable contributor to growth?

I think let us talk about that as the year unfolds. Because, again, some of these constraints are not anything we have control over.

Right. Right. I appreciate it. Hey. You know, your quarter was so strong this quarter. Did you guys have any new customer wins to help to drive that, or was it just broad demand across the board?

Well, I would say this is, as everybody on the call knows, we made some changes in our leadership and sales structure, And we have got a different mindset right now about winning instead of defending. And I think that is a reflection on the emphasis we have put on. We need to take market share and not just defend market share. And I think that is spirit is something that is coming through And all across the business, especially under Mark Morgan's leadership, there is a sense of people are excited and our partners are because, again, we probably had a little bit of complacency about being able to grow our market share. So that is a new trend that we expect to continue through 2027.

Great. Appreciate it. And then Mike, can you talk about the Intelisys turnaround? I know it is been a work in progress now for several quarters, but if you could talk about the progress of that. And then what Intelisys bookings were for the quarter?

Yeah. You know what we have done, again, under Ken's leadership is we have gotten our teams more focused on how do we win instead of just defend. And when you are the largest TSD as Intelisys has been, in its history, it is easier for competitors just to pick off partners with better commission splits, better margins, if you will, for them. So what we have done is focused more on some of the technologies that are growing faster than others put more resources behind it, And some of that, I think, is evident in our results for the year where we when you look at that segment, we have some investments that are showing up in the additional SG&A spend because we are adding some capabilities with resources. And some of the results we talked about earlier on the call, like in cloud compute and connectivity, and even CX. We had very strong results that we have not had in a while. And, frankly, the connectivity is 1 that I--we were talking to Ken about it some more, and some of that is coming from some of the new data center connections back to enterprises and they need more bandwidth and more connectivity, And so that is improving our opportunity in that space. So I think the whole space, Keith, is seeing a growth surge and acceleration. And, of course, as you know, we do not see all that right away. But the early days are very positive.

So how are bookings in this quarter for those guys? Well, as you know, we are not reporting on bookings these days. Alright. Alright. I guess final question for you. Brazil seemed to have another tough quarter, which, I guess, was a surprise to us. Anything happening in that business structurally that we should be thinking about?

Well, I think the main thing is we have got such great operators there that no matter how the marketplace treats us from a market demand for our products and technologies, always managing to a profitability, and this is a business that is been consistently profitable nicely profitable since we got into Brazil. And so, unfortunately, it means we have to take some actions We had to make some structural changes with headcount. And so that team understands that in their environment, they have to be responsive so that we do not lose leverage on the revenue that does come in, Keith. So, again, disappointed at the top line. Pleased with the profitability.

Great. Thanks, guys. Good luck.

Thank you. Thank you.

Our next question comes from Guy Drummond Hardwick with Barclays. Your line is open.

Hi, good morning. Congrats on the excellent results.

Appreciate it. Thanks, Guy.

Steve, I think I heard you say when you gave the guidance for 2027, it is organic 6 to 10. So maybe if you could bear in mind the previous comments about first half versus second half. it is a question of what visibility do you have on that 6 to 10 To what extent are you factoring in large deals or new business prospects? Or the impacts of some of the changes that you said to kind of reenergize the business?

Yes, Guy, thanks for the question. So when we think about that 6% to 10 that is our business, our organic business. And we want to be really clear in our guidance that it did not include the acquisition the benefits of the acquisition. We will update that when we do our Q1 results. But what we are seeing is that is the way this business should operate as large deals continue to roll out, the technologies that we are in. 1 of the things that I go back to for this year even is in our specialty technology segment, you look at the hardware versus the recurring revenues, and you see the 6 to 10%. So that is a that is a mixed statement. And so things we believe things will operate more normally, for FY 2027.

And just maybe in Q4, I mean, is it possible to give a kind of a split between, you know, price and volume, particularly in STS? How much of a tailwind to revenues or billings was inflation in the in the period on a on a year on year basis.

Yes. Let me double click on that. it is a great question. We definitely benefited year over year from broad based price increases. Across our technologies. Like most of our most other distributors and those in the technology did. Remember that 80% plus of our sales are under special pricing agreements controlled by the supplier. So isolating the difference with, with custom configuration, the mix, isolating that price difference is really difficult for us. What I would say, though, is the majority is demand driven.

Okay. Thank you.

Thank you.

Our next question comes from Adam Tyler Tindle with Raymond James. Your line is open.

Congrats on a strong Q4 finish. Mike, I want to start on MicroAge Just given the sheer magnitude of this, I think it is, more than 20% of your market cap. So a big bet on this acquisition. And I wonder if we just take a step back and have kind of walk investors through the decision on capital allocation here. I think you mentioned your core business is returning to growth, obviously, returns in the core business are very strong. Your stock's trading at 6x or 7x EBITDA right now. So doing this acquisition versus perhaps, more share repurchase, you know, why this was, you know, sort of the decision that you made?

Well, there is probably 2 different ways I would go at this. 1 is we have been planning this for a long time. When I go back to literally 2016 when we bought Intelisys, we have been talking about how the business the IT business is going to change in the channel over 10 years. And the idea for why we believe an acquisition of a company like this is important to the future growth of our business because our channel partners need access to more services and capabilities, not just selling hardware. We have we, we predicted this. We forecast. We have slides back in 2016 where we were trying to locate managed services capabilities to add over time. And as we went through those 10 years, at different times, we made a big bet. We made a big bet back then, if you recall, That, at the time, was the largest transaction we would ever done. Of course, it was an earn out, so that made it a little more palatable from a cash perspective. But that was a bet on adjacencies. And, again, what we believe this is not only adjacent, but it also is gonna help not only micro age grow. This is a growth company. This is a company that we believe if we do nothing to it, from a, synergy with our existing channel partners, where our channel partners can bring them in on their own. This company is growing fantastically and very profitable. Because they are in the sweet spots of technology growth and they have long standing relationships. The average tenure of their employees is way up there compared to other companies we have seen. So if the core business that they are in is going to grow and give strong returns, why would we not want to invest in that with our balance sheet? So this became almost an easy decision from is this a as good or better return than share repurchases? Absolutely, it is. And it fits our long term plan. that is why we did it.

Okay. And any kind of color you can give on that? If I was to back into, you know, this versus share repurchase, this acquisition should bring $30 million so of EBITDA. Is that a reasonable ballpark? I know we are gonna get more details, but just, you know, so we can sort of think about, you know, what could be coming after a close.

Yeah. Adam, I would say, you know, we are we are still not closed. And so right now, probably not appropriate for us to project on what that might look like. Stay tuned to Q1. We will give you we will give you a lot of color because we will update our annual guidance to include it.

Okay. And then Mike, you know, as I kinda think about, you know, MicroAge under ScanSource care, if and when that does, happen, I would be curious your view on both the vendor and customer reaction to this. On 1 hand, you know, the vendors sometimes you know, when a bigger entity acquires they may be excited about this and potentially consolidate more share to, to the company. So I, you know, I imagine obviously, conversations may have been limited given it was just announced. Just as you kind of did your diligence, how you think vendors might react, especially given some of them are new? To ScanSource and then customers. You know, as mentioned earlier, that there is, you know, potential for channel conflict here, which is obvious. But, you know, there is also potential for synergy and your existing, partners. So how you are thinking about the reaction from vendors and customers is the part of the question. Thanks.

Sure. And I will go back just a little bit to when we met the management team not that long ago. And the first question they had for us is we went in to ask them questions with, Mike, what is your thesis for this? And, again, this is a management team that is been at MicroAge a long time. Some of them 30 years. And when we talked about 1 of the things that ScanSource channel partners need both our solution providers and our trusted advisers under Intelisys, they are always asking us how can we grow and what can you do, ScanSource, to help us grow. And 1 of the things we keep seeing is they are not most of our partners and we have a subset that are very large and have a lot of capability to add skills. But for example, if you are trying to sell cybersecurity today as a solution provider or an agent, trusted adviser, they do not have the resources to follow a sale of security, cyber products with implementation, deployment, and then follow on support None of our partners except the very largest have their own NOC or SOC. And so this is something we have been trying to figure out. How can we provide that service from ScanSource on a wholesale model, if you will, to our channel And by buying a company that is already doing that for their own customers and then us adding scale to that because we can now MicroAge can now add people they were not able to do under a private equity ownership. They with they can add more scale and provide services that, frankly, none of our competitors can offer our channel. So we believe that this is gonna allow our partners and by the way, so I had a call in anticipation, of course, of the announcement with 4 of our long time Barcode Mobility partners, not to tell them the name, but to tell them the idea. And, they were enthusiastic. Because they trust that we are not gonna bring a partner in that will compete with them. Whereas today, if they wanna go to a partner to say, help us with cybersecurity or help us with data center, If they do not know them really well, they do not know if that entity might not compete with them, but they trust that we will manage the competition and they trust us to it. So we had this call Mark Morgan and I did a couple of days ago with 4 partners and said, if we do this, what will your reaction be? And they were enthusiastic. And I did talk to a couple of vendors and told them what we are doing. And they were thrilled because, frankly, we have got a lot more financial ability to expand the MicroAge business than they could without us. So the vendors are delighted. These because MicroAge is doing a fantastic job with those key vendors. And they see giving them access to ScanSource balance sheet is nothing but positive. that is helpful. Thank you. You bet.

Thank you. I am showing no further questions at this time. I would now like turn it back to Steve Jones for closing remarks.

Thank you for joining us today. We expect to hold our next conference call to discuss our September 30, quarterly results on Thursday, November 5, at approximately 10:30 AM.

This concludes today's conference call. Thank you for participating. You may now disconnect.