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 the ScanSource's earnings conference call for the quarter and year ended September 30, 2019. Our call will include prepared remarks from Mike Baur, our Chairman and CEO; and Gerry Lyons, our CFO. John Eldh, our Chief Revenue Officer is also joining us. We will review our operating results for the quarter and then take your questions. We posted a commentary that accompanies our comments and the webcast is posted in the Investor Relations section of our website. Certain statements made on this call, including our expectations for sales, operating performance, earnings, fair value of contingent consideration, operating cash flow, tax rates, interest expense, planned divestitures and results for the second, third and fourth quarters of fiscal year 2020 are forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These results 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 ended June 30, 2019, as filed with the SEC. 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. During our call, we will discuss both GAAP and non-GAAP results and provide reconciliations between these amounts in the CFO commentary 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. We are pleased to deliver net sales of $1 billion for our first quarter, up 3.5% year-over-year. This was the second full quarter of operations with our new One ScanSource sales structure. We are pleased with the progress we are making to drive more growth and value for our sales partners and their customers. We expected slightly higher revenues than we achieved. The shortfall can be attributed to the shift to cloud in our communications business. We forecasted higher premise-based communications business than we delivered. At the same time, we are very pleased to see the accelerated growth of our UCaS business, including sales through our agent and VAR channels which grew 60% year-over-year. Our suppliers including Avaya, RingCentral, 8x8, and Polly have recently announced cloud offerings that will give us additional recurring revenue opportunities for our agents and VARs. We are ideally positioned to take advantage of this UCaS shift due to our excellent lineup of suppliers and large and growing routes to market. Our performance for the first quarter reflects progress in executing our strategic plan, and we've identified six key growth initiatives for the year. First, as we just discussed, we are growing our UCaS and CCaS business through partnerships with cloud providers that want access to our routes to market to accelerate the move to the cloud for end customers. With our communication suppliers, we are developing easy-to-sell UCaS and CCaS offerings for both agents and VARs. Second, our strong market demand for video surveillance is expected to continue during fiscal year 2020, and we see opportunities to gain market share. For the first quarter of our fiscal year, we had a record quarter for physical security, which is a large and growing market for our channel. Our security channel has been asking for Honeywell security products for many years, and we are delighted to add Honeywell commercial security as a new supplier. Third, Brazil represents a high margin, high growth opportunity for ScanSource. As one of the largest solution providers in Brazil, we give our suppliers and customers the greatest scale and reach to grow their business. We expect our Microsoft business to grow faster with the new SaaS capabilities we recently acquired. This quarter, we put sales integration tools in place to sell across all technologies in Brazil as One ScanSource. Our fourth opportunity, we had a record quarter for Intelisys, which continues to be the largest master agent in North America with 14% year-over-year growth across the supplier portfolio of connectivity, cloud and cable. We shared our plans to accelerate growth for Intelisys with our 1,400 participants at this year's channel connect in October. We highlighted $100 million in new investments we've made to help our sales partners accelerate growth, including the intY, RPM and Canpango acquisitions. We've added new channel managers and solution engineers and we've added new sales tools and partner portal enhancements. Fifth for POS portal in fiscal year 2020, we see excellent payments opportunities at margins that reflect a higher mix of services including lifecycle management and hot spares. This includes double-digit margins through successful execution of our contract deployment business. Our sixth area of growth is our SaaS business, which we believe will be a cornerstone of our recurring revenue practice. With the intY CASCADE cloud platform, which we acquired on July 1, we have a highly automated tool that allows configuration, provisioning and billing services. Our SaaS suppliers today are Microsoft, Symantec and Acronis, and we plan to add many more. In December, we plan to go live with the SaaS platform in Brazil for Microsoft. In January, we plan to launch Microsoft for both the agents and the VARs in the United States. Meetings, teams, and calling will help our sales partners more easily sell strategic cloud solutions and build recurring revenue practices. Should I go back? Okay. Sorry about that. Had a little disconnect. Now, I'd like to welcome John Eldh, our Chief Revenue Officer to today's call. John joined the ScanSource team on October 1 and is responsible for driving profitable sales growth across our multiple routes to market and across all geographies. In addition to his experience building and leading field, channel and inside sales teams, John brings a deep understanding of the SaaS business and extensive experience helping companies transform to a subscription-based sales model. John will be instrumental in helping us execute on our business goals and drive operating excellence throughout our business. With that, I'll now turn the call over to Gerry to discuss our financial results in more detail and our outlook for next quarter.

Thanks, Mike. For the quarter, our GAAP net sales, non-GAAP net sales and non-GAAP diluted EPS tracked near the midpoint of our forecast range. GAAP diluted EPS of $0.45 includes a higher than expected expense for the change in fair value of contingent consideration for Intelisys from better than expected actual results. Our non-GAAP operating income and non-GAAP gross profit margin were lower than our forecast, principally from lower than expected results from our business in Brazil. However, we expect our results in Brazil to improve since the completion of our One ScanSource integration plan. In August, we announced plans to divest certain physical products businesses outside of the United States, Canada and Brazil. These businesses had net sales of $156 million for the first quarter of fiscal year 2020 and at September 30, 2019 had working capital of $180 million. During the quarter, we began a process to sell these businesses. Based on the significant interest we have received, we anticipate having an agreement by the end of the third quarter of fiscal year 2020. Consolidated net sales for the first quarter totaled $1.01 billion, up 3.5% year-over-year or up 3.4% on an organic basis. Foreign currency translation had a minimal impact on net sales. We had strength in our worldwide barcode networking and security segment with net sales up 6.5% and organic growth up 8%. This was led by strong growth in North America across key technologies including mobile computing, video surveillance and payments as well as a higher volume of big deals. Net sales for our worldwide communications and services segment declined 3% year-over-year or 6% on an organic basis, primarily from significant headwinds in our premise-based communications business in North America, as Mike indicated earlier. We had a record quarter for Intelisys including our UCaS business growth is 60%. Excluding the planned divestitures, non-GAAP gross profit dollars for the quarter increased 2% year-over-year. Our first quarter fiscal 2020 non-GAAP gross profit margin was 11.6%, down from the year-ago period and from the previous quarter. SG&A expenses increased $4.6 million from the prior year quarter to $83 million for the first quarter of fiscal year 2020. We've made significant investment in operating expenses to support the planned growth for fiscal year 2020. These expenses include the execution of our sales transformation plan called One ScanSource. Our investments also include the digital capabilities we've added with the acquisitions of intY, RPM and Canpango. Our first quarter fiscal year 2020 non-GAAP operating income was $27.5 million or 3.2% of net sales compared to $32.7 million or 4.1% in the prior year quarter. We have an $80 million contingent consideration liability on our September 30, 2019 balance sheet and this reflects the present value of expected future earn-out payments for our Intelisys acquisition. For the first quarter of fiscal year 2020, we recorded an expense for the increase in the fair value of contingent consideration of $2.5 million for Intelisys. For our second quarter fiscal year 2020 forecast, we estimate the change in fair value of contingent consideration to be an expense of approximately $1.8 million. For the first quarter of fiscal year 2020, the effective tax rate was 26% and for fiscal year 2020, we estimate the effective tax rate excluding planned divestitures to range from 25% to 26% excluding any discrete items. Now turning to the balance sheet and to cash flow. We generated strong operating cash flow of $47 million for the quarter, primarily from the timing of accounts payable, and we expect to generate positive operating cash flow during the fiscal year 2020. The lower working capital quarter-over-quarter includes a $25 million working capital reduction from our planned divestitures. The planned divestitures had approximately $180 million in working capital at September 30, 2019. With the completion of the planned divestitures, we would expect a significant cash benefit and anticipate using that cash to pay down debt. At September 30, 2019, we had cash and cash equivalents of $26 million and debt of $370 million. Our net leverage totaled approximately 2.4x trailing 12-month adjusted EBITDA. Our ROIC was 9.6% for the first quarter of fiscal year 2020. And during the past year, we've invested $81 million for our Canpango, RPM and intY acquisitions that have built strategic capabilities for recurring revenue but have not yet contributed to our EBITDA growth. And with the completion of the planned divestitures, we would expect our ROIC to improve as well. Now turning to our forecast, we are providing our second-quarter forecast, excluding the planned divestitures and in our CFO commentary, we've included reconciliations to show our non-GAAP operating results excluding the planned divestitures for the last five quarters. For the second quarter fiscal year 2020, we expect GAAP net sales to range from $1.03 billion to $1.09 billion and non-GAAP net sales excluding the planned divestitures to range from $880 million to $940 million. The midpoint of our non-GAAP sales forecast range reflects organic sales growth of approximately 4%. We expect GAAP diluted earnings per share to range from $0.54 per share to $0.59 per share and the non-GAAP diluted earnings per share to range from $0.80 per share to $0.85 per share. The GAAP EPS does not include any non-cash charges from any planned divestitures, and those cannot be reasonably estimated at this time. For the quarter, we expect gross profit margin closer to 11% and a non-GAAP operating income margin close to 3.5% for the ongoing businesses. We are assuming approximately $3.8 million for interest expense in the second quarter of fiscal year 2020, and we estimate the tax rate to be in the range of 25% to 26% for fiscal year 2020 excluding any discrete items. As we look to the second half of our fiscal year 2020, we are executing plans to drive annual sales growth between 4% and 6%. We also expect our non-GAAP operating margin to reach our 3.5% target for the remainder of fiscal year 2020 excluding the planned divestitures. And with that, I'd like to turn the call back over to Mike for closing comments.

Thanks, Gerry. Before we close, I want to take this opportunity to welcome Dede Ramoneda, EVP and Chief Information Officer of First Citizens Bank & Trust to our Board of Directors. We are delighted to have Dede on our Board to share her expertise in information technology and believe her experience leading an organization that relies on delivering a secure digital customer experience will lend insight to ScanSource. Throughout fiscal year 2020, we are executing our strategic plan to sell devices, software as a service, services and recurring revenue. Our routes to market are a competitive advantage in the marketplace. By offering digital and physical solutions with value-added services, we believe we will be at the center of the solution delivery channel. We will now open it up for questions.

Thank you. Our first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks, and good afternoon. I just wanted to start, Mike, maybe it would be helpful to kind of bridge near-term trends that we're seeing versus the longer-term vision. So, in terms of near term, I think x divestitures in this quarter, sales growth was up mid-single digits, but non-GAAP operating income was down to almost 20%, and next quarter based on guidance, sales are going to be up low single digits. But again, x divestitures, operating profit dollars down double digits. I know there's more than what these numbers are just telling us. So, hoping you can bridge the gap on the core business in terms of why we're seeing shrinking profit dollars with revenue. And I'd imagine part of the explanation is at least due in part to these investments which will happen before we see the ultimate impact of those. So, help us see the other side of that on which financial metrics are focused on so that we can follow along as the plan unfolds.

Sure, Adam. Number one, we've said for a long time and we've restated at the end of the day that operating income of 3.5% is our goal and that we can get back to that for the balance of 2020. And we think that's a very good number based on the investments we've made. So, we're having to achieve significant profitability at the gross margin line to do that. We recognize that we've added significant SG&A when we made these acquisitions, and the acquisitions that we've made in the last year, whether it's the intY CASCADE, RPM, Canpango, these acquisitions are still to deliver the operating leverage that we all want. And so, we believe in our core legacy business, we just look back at that for a minute. The goal there is to ensure that we're still having a very profitable business in those businesses that we are staying in. That's the reason that we decided to stay in North America and our device business and in Brazil. We believe operating margins there can be very good for a long time and we believe we have the scale in those two markets to achieve that. So yes, we're not finished with our ability to get leverage on our SG&A by any stretch. And so, we think 3.5% for the rest of this year is a really good target.

Okay. That's helpful. And maybe just building on that, I think Gerry had mentioned in the prepared remarks that gross margin was going to be down near 11% in Q2. As we think about the back half, this 3.5% operating margin, is that going to also kind of come with a higher level of gross margin? Just what's the bridge to get kind of from current operating margins trends to the 3.5%, is it more volume? Is it higher gross margin, what, just break it apart for us. Thanks.

Sure, Adam. This is Gerry. I think you're spot on, right? We are expecting our gross margins to continue to expand at that percentage. So that's part of where we have confidence in that 3.5%.

Okay. And maybe just a question on cash flow, Gerry. I think you talked about expecting positive operating cash flow for the year. And I think you also quantified the impact from divestitures to cash flow. Could you remind me of that number in that positive operating cash flow comment? Is that x divestitures and we should add the benefit on top of that?

Yes. So, Adam, we have $47 million in positive cash flow in the quarter. We had our working capital decrease from the divestitures by about $25 million. And if you think about us trying to sell these businesses, we're trying to get the investments there down just from the standpoint of that's going to make it more attractive to the potential buyers. We are expecting, back to your comment about the full year, operating cash flow to be positive for the full year, and those numbers on the cash flow currently include the divestitures in there.

Okay. To wrap things up, could you discuss your decision to use the proceeds to pay down debt? What alternatives did you consider, and why do you believe paying down debt is the best use of capital?

Well, I think at this point in time, we just feel like we're at close to where we think our top of our targeted ranges. So, we said we want to be somewhere between 1.5x to 2.5x leverage. Paying down debt at this point seems to make more sense. We've talked earlier on earlier calls about our acquisition strategies. We don't really see anything out there that we need to be inquisitive about. So, I think that really paying down debt is the best for our investors.

To clarify, since the stock is trading below book value, are there reasons why share repurchases wouldn't be advisable? Many distributors operate with about 2.5 times leverage, and ratings agencies usually limit you at 3 times. Trends seem to be improving in the latter half of the year, with expanding margins and positive momentum. So what are the considerations regarding share repurchases?

Hey, Adam. It's Mike. One comment is, when we met with investors over the last three years, we had quite a bit of discussion around this topic and we found that more investors were not in favor of share repurchases. They really wanted to ensure we had our balance sheet in pristine shape, so that if something does come along, we're prepared to take advantage of that. And I think that's been our history. Our Board considers this quite frequently and at this point, listening to our key shareholders, we believe this is the direction they want us to go. And it doesn't mean we won't listen to them again. We're going to be visiting with many of them over the next few months and we'll certainly take a poll.

Okay. Thanks, Mike.

Thank you. And our next question comes from Keith Housum with Northcoast Research. Your line is open.

Good afternoon, guys. Mike can you provide a little bit of color on the communication segment? If I look at last year, you guys were able to have some pretty good growth and I heard your comment suggesting that the move to UCaS is bigger than you expected this quarter. Was there anything unique that perhaps accelerated this quarter that we're seeing an acceleration of this trend because the trend we've been seeing for the past several quarters, correct?

Yes. So, Keith, I think what we're seeing is, this is not just us. This is the market has absolutely gotten much more excited about this idea of moving more. And this is an end customer driven desire to move towards the cloud in UC, specifically in a more concerted effort. So, we've got a lot of feedback from our channel partners. We've got feedback obviously from some of our suppliers. When you see the data that's out there, customers are all wanting to at least try to get some of their UC into the cloud. Doesn't mean everybody's going to move their premise equipment quickly. But the numbers we're looking at show there are around 315 million legacy seats out there that are up for grabs. So, I think that size of that market that's been fairly stable has attracted the attention, for sure, the key suppliers that we have in our portfolio. They are driving more incentives for the channel to do this. So, I think what you're seeing is the suppliers that we've referenced on our call today, they have programs to drive this even faster because for many of them moving to the cloud gives them an opportunity to win new market share. So, I think it's an exciting time to be in, and we're glad to be playing a key role in that.

Is there any type of rule of thumb that you might be able to offer us in terms of as a seed or as a project moves to the cloud? How has that impacted both revenue and profitability? Does revenue go down, but profitability increases or how can we think about that going forward?

Well, we don't have any specific numbers to share with you today. We're still trying to decide how much of that we want to share because we're in this unusual position of being the only distributor that owns a master agent business also. We want to keep some of that confidential. But in general, for us and for our suppliers, moving to a recurring revenue model is a long-term, much more profitable business. We have incentives just like all of our suppliers do, and our VARs and our agents to establish a recurring revenue business because we all believe that by doing that we also ensure better customer satisfaction, better customer experience. If you look at what the customers want, the end customers, that's what's driving our interest in this space. That's why we want to offer options to stay in premise. If a customer wants to, as long as they want to and offer the option to move to cloud. So, it's longer term, Keith; I think it's more profitable for everyone in the channel.

Got you. Okay. Turning gears over to Brazil, can you provide a little more color on the pain points you had in Brazil this quarter and how we should think about it going forward?

Sure. You mentioned this One ScanSource strategy and this is a follow-on from putting network one or acquisition down there that frankly, we're just now integrating this year with our former CDC business, if you recall our barcode business. So, we decided earlier this year to really get leverage on that SG&A trying to share some of the routes to market with some of the new technologies because many of the network one technologies should be sold to the barcode channel and we weren't. We had to go down a process of integrating the tools, systems, and training for our teams to allow that to happen. That's what happened last quarter. To be honest, we had some disruption doing that reassigning some accounts similar to what we did in the U.S. and now we've got two quarters behind us in the U.S., Brazil just had their first quarter. We think it's behind us and we're moving forward. That business has always been very profitable for us in Brazil. It's like once you get in there with a strong value proposition, it's hard for someone to displace you. We're bullish on our business in Brazil, especially in the long-term. Our suppliers like Microsoft are delighted to have us down there.

Great. Thank you.

Thank you. Our next question comes from Chris McGinnis with Sidoti & Company. Your line is open.

Good afternoon. Thanks for taking the questions. I just wanted to follow up, Mike, on one of the six keys that you talked about on the security side and the expansion with Honeywell. Can you just talk about maybe how big of an opportunity that is and how long is that runway to spend when you're big ones for a while?

Yes. Thanks Chris. We would like to, not to talk about the size of the business at this point. But we mentioned it because it is a big opportunity; basically, a security channel partner had only one place to buy Honeywell security products up until recently. With the spinout of this Honeywell commercial security from big Honeywell, they want to grow. Honeywell security products have been wanting to for years. We've been talking to these guys for three years, I believe. Our channel is clamoring for the products. They have great products. They were under distributed frankly. I believe for us it's a little bit of a market share grab. We're going to go hard at it and we're going to take some market share and it will be significant or we wouldn't have mentioned it today. And John, why don't you tell him about your early days?

I am here. I'm in the room. Anyway, thanks for the question and nice to meet you. It's been a fantastic first six weeks onboard here at ScanSource and I would offer that I think the opportunity for us is even bigger over time than I had initially anticipated. This is an incredible opportunity where we are able to leverage our heritage in the hardware business while at the same time expanding to large and growing markets, differentiating routes to market. Now, not only do we have the opportunities with the VARs, but also with the agent channels and in our payments business, the ISVs and ISOs. We're really creating an ecosystem of size and scale and planning in large markets. Over time, the addition of moving into the SaaS platforms that we've just announced through intY provides excellent opportunities across routes to market and puts us and our partners, our customers in a much stronger position moving to recurring revenue. Those are the opportunities that I'm seeing.

Great. Thanks for that. And then just one last question, Gerry, so I understand, is it exiting the 2020 at 3.5 or should we be about in the back half of the year? I just want to make sure that the progression of that. Thank you.

Yes. Sure, Chris. We're expecting really to be at 3.5% for every quarter from this point forward, that's what we're expecting to have happen.

All right. Thank you very much and good luck for Q2.

Thanks, Chris.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Mike Baur for any closing remarks.

Great. Thank you for joining us today. We expect to hold our next conference call to discuss December 31 quarterly results on Tuesday, February 4, 2020.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.