ScanSource, Inc. Stock

Thank you. 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, Senior Vice President, Finance, and Treasurer. Please go ahead.

Good morning, and thank you for joining us. Our call will include prepared remarks from Mike Bauer, 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 webcasts in the Investor 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 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. return 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, my courageous technologies. Many of them are new to ScanSource. Expand our TAM in high growth technologies like cloud, cyber security, data center, and AI. And 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 MicroRage. 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 Converge 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 Converge 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 Intellisys trusted advisors attach more edge devices, and build on these successes to accelerate growth. We are proud to have three long-standing brands in one channel company. ScanSource has been serving the channel for 34 years, Intellisys 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.

GanttSource'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 FY26 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 Intellisys and 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.

Intellisys 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 total $27 million for the quarter, taking our full-year share repurchases to $98 million. As of June 30, 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.

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 a creative 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 Micro-H. On an organic basis, we expect revenues to increase between 6 and 10 percent, 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 microwage acquisition during our FY27 Q1 earnings call.

We'll now open up for questions. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. standby while we compile the Q&A roster. Our first question comes from Greg 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 what's the impact? And it doesn't seem like it, but are you seeing, I think last quarter there was a little caution around macro risks and maybe supply shortages around memory, but it doesn't seem like that's impacting your business. What's the risk of that? going forward as we head into fiscal 27. Greg, 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 believed 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 organizations, technologies that we saw this strong demand. When we think about the macro environment, of course, we're always cautious about what's going on in the macro environment because it's out of our control. And we believe that in our guide that we're not expecting to see – any kind of supply disruption, and we still believe we're going to see continued strong demand.

Okay, could you just maybe give us a little insight into product segment categories, you know, 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 worth highlighting.

No, Greg, again, it's Steve. I think it was across the board. You know, we saw all year long that physical security has been a great performer for us. But as we saw the second half, it's 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? How much is it product versus maybe services?.

Hey Greg, it's Mike. Yes I think we're going to wait to talk more about the details of micro-age after Q1 once we get it closed. There'll be some revenue in the quarter, so stand by 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 business, customer base, but also a services business that we could scale and have some of those services work with our existing channel partners. We've 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're some managed services, professional services, So we really like the composition, and we'll talk more about that after our Q1 call.

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

We think the risk is very low, but we're also, as we said when we acquired Resourcib a couple years ago, if any of our partners feel like there's some channel conflict with their customers, we're going to do our best to make sure we prefer our existing channel partner if they're already in an 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 six or more partners all the time. So we believe that MicroAge has a motion into their community. By the way, they're really only selling to about 2,500 or so end users, which is a very small number. But where MicroAge's lane is, it's very clear. We might today have someone else in there selling products. For example, we could have... have a security bar in their selling security and not even know MicroAge is there.

And we might have an agent in their selling connectivity. And today, all three 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 one 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's really the model that we're talking about. And we'll do everything we can to make sure no one feels like they've gotten disenfranchised. And we think our longstanding relationships with our partners have given us permission to be able to do this.

All right, great. Thank you. You bet. Thank you. Our next question comes from Keith Halsom with North Coast Research. Your line is open.

Good morning, guys, and congratulations on a great quarter. Great to see the leverage from the model coming through. Hey, Steve, as we look at the guidance and we kind of think about the tougher comps that you're 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 the second half of the year?.

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

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

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

Great, great. And then you guys had a press release with 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're thinking the addition of one vendor? I know one vendor doesn't always make the numbers, but Juniper you guys used to carry and Aru of course, you were there first, so it's important to you guys. Maybe help us understand how you're thinking about that benefit.

Thank you, Mike. I'll comment on that. I would say right now one of the challenges that we've already faced is Juniper has some supply chain constraints. They've had such a big year already that by adding us, our partner opportunities are going to be a little slower to be fulfilled. And so they've 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's 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's 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.

Do 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 the things.

Some of these constraints are not anything we have control over. Right, right. 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 true just broad demand across the board?.

Well, I would say this. As everybody on the call knows, we made some changes in our leadership and sales structure, and we've got a different mindset right now about winning instead of defending. And I think that's 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 spirit is something that is coming through and all across the business, especially under Mark Morgan's leadership, there's 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's a new trend that we expect to continue through 2027.

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

Yes, you know what we've done, again, under Ken's leadership, is we've gotten our teams more focused on how do we win instead of just defend. And when you're the largest TSD, as Centellas has been in its history, it's It's easier for competitors just to pick off partners with better commission splits, better margins, if you will, for them. So what we've done is focus 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 SDNA spend because we're 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 haven't had in a while. And frankly, the connectivity is one that we were talking to Ken about it some more, and some of that's coming from some of the new data center connections back to enterprises, and they need more bandwidth and more connectivity, and so that's improved. 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 don't 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're not reporting on bookings. these days. Alright. 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? No.

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, we're always managing to a profitability. And this is a business that's 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 don't lose leverage on the revenue that does come in key. 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 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's organic 6 to 10. So maybe if you comments about first half versus second half. It's a question of what visibility do you have on that 6 to 10? To what extent are you factoring in large deals.

new business prospects or the impact of some of the changes that you said to kind of re-energize the business? Yes Guy, thanks for the question. So when we think about that six to ten, that's 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'll update that when we do our Q1 results. But what we're seeing is that's the way this business should operate as large deals continue to roll out, the technologies that we're in. One 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's a mixed statement. And so we believe things will operate more normally.

for FY27. And just maybe in Q4, is it possible to give a kind of a split between, you know, price and volume in STS, how much of a tail went to revenues or billings was.

was inflation in the period on a year-on-year basis? Yes, let me double click on that. Great question. So we definitely benefited year over year from broad-based price increases across our technologies, like 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 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. As a reminder, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question. Our next question comes from Adam Tindall with Raymond James. Your line is open.

Okay, thanks. Good afternoon and congrats on a strong Q4 finish. Mike, I want to start on micro-age. Just given the sheer magnitude of this, I think it's like more than 20% of your market cap. a big bet on this acquisition. And I wonder if we just take a step back and have, you know, kind of walk investors through the decision on capital allocation here. you mentioned your core business is returning to growth obviously returns in the core business are very strong your stock trading at six or seven times 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's probably two different ways I'd go at this. One is we've been planning this for a long time. When I go back to looking at the literally 2016 when we bought Intellisys. We've been talking about how the business, the IT business is going to change in the channel over 10 years and the 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 predicted this. We forecast. We have slides back to 2016 where we 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 big bets. We made a big bet back then, if you recall.

That at the time was the largest transaction we'd 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 going to help not only micro-age growth. 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're 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've seen.

So if the core business that they're 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 as good or better return than share repurchases? Absolutely it is. And it fits our long-term plan.

That's 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 or so of EBITDA. Is that a reasonable ballpark? I know we're going to get more details, but just, you know, so we can sort of think about, you know, what kind of.

could be coming after a close? Yes, Adam, I would say we're 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'll give you a lot of color, because we'll update our annual guidance to include it.

Okay. And then, Mike, you know, as I kind of think about, you know, microwage under scan sources care, if and when that does happen. I'd be curious your view on both the vendor and customer reaction to this. On one hand, the vendors sometimes, when a bigger entity acquires, they may be excited about this and potentially consolidate more share to the company. So I imagine, obviously, conversations may have been limited given it was just announced. But 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, it was mentioned earlier that there's, you know, potential for channel conflict here, which is obvious. But there's also potential for synergy and empowering your existing partners.

So how you're thinking about the reaction from vendors and customers is part of the question. Thanks.

Sure. And I'll go back just a little bit, too. When we met the management team, not that long ago and the first question they had for us as we went in to ask them question was Mike what's your thesis for this And again, this is a management team that's been at MicroAge a long time, some of them 30 years. And when we talked about one of the things that scan source channel partners need, both our solution providers and our trusted advisors under Telesys, they're always asking us, how can we grow and what can you do? you do, ScanSource, to help us grow. And one of the things we keep seeing is they're 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're trying to sell cybersecurity today as a solution provider or an agent, trusted advisor, they don't have the have the resources to follow a sale of security, cybersecurity 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've 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's already doing that for their own customers, and then us adding scale to that, because we can now, MicroEdge can now add people they weren't able to do under a private equity ownership. They can add add more scale and provide services that, frankly, none of our competitors can offer our channel. So we believe that this is going to allow our partners and, by the way, so I had a call in anticipation, of course, of the announcement with four of our longtime barcode mobility partners, not to tell them the name, but to tell them the idea. And they were enthusiastic because they trust that we're not going to bring a partner in that will compete with them, whereas today, if they want to go to a partner to say, help us with cybersecurity or help us with data center, if they don't know them really well, they don't know if that entity might not compete with them, but they trust that we will manage the competition and they trust us to do it. So we had this call, Mark Morgan and I did a couple of days ago with four 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're doing and they were thrilled because frankly we've got a lot more financial ability to expand the MicroAge business than they could without it. So the vendors are delighted 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's helpful. Thank you. You bet. Thank you. I'm showing no further questions at this time. I would now like to 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 30th quarterly results on Thursday, November 5th at approximately 10.30 a.m.

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

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn in 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 Mike Baur, our Chair and CEO; and Steve Jones, our Chief Financial Officer. We'll review our operating results for the quarter 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 could cause actual results to differ materially from expectations.

These risks and uncertainties include the factors identified in our earnings release and our Form 10-K for the year ended June 30, 2025, and in our subsequent reports on Form 10-Q. 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 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 thanks to everyone for joining us today. Our team delivered strong third quarter results with adjusted EBITDA, EPS, free cash flow, and ROIC all increasing versus the prior year. I'm pleased to see improved hardware demand drove 9% growth in net sales with growth across most technologies, but especially networking and security. We believe end users have more choices than ever, and solutions are getting more complex. But what they're really looking for are business outcomes, complete solutions, not point products. Research shows us that end users prefer to buy from trusted partners who can deliver across the full technology stack.

That's why we're taking the next step to help our partners grow their business by launching a new Converged Communications business unit to deliver a unified, 1 ScanSource partner experience. This new business unit will include the business development and sales resources, pre-sales engineering, marketing and supplier management functions, bringing together the ScanSource specialty communications team and the Intelisys CX cloud-based solutions team into one combined business unit. This team will support specialty communication VARs and Intelisys CX partners, helping VARs sell more cloud recurring revenue products and solutions and helping Intelisys partners attach more hardware. Importantly, each partner will have dedicated sales resources to sell across our 1 ScanSource portfolio. The Converged Communications business unit will be led by Katherine White, who brings 5 years of ScanSource experience across both our specialty business and Intelisys.

Looking ahead, we're focused on helping our channel partners grow by delivering innovative Converged solutions, including, of course, new opportunities in AI. Our partners are finding excellent opportunities for AI adoption in the CX solutions area. And let me share 2 examples of recent AI channel wins. First, with AI as automation, a financial institution adopted an AI-powered platform with AI agents to handle routine inquiries that freed up approximately 4 to 5 hours per live agent each week, so they could focus on more complex customer needs. Second, with AI as augmentation, AI helps drive revenue expansion, including cross-selling.

In this deployment, AI supports inside sales agents during live interactions by providing real-time recommendations. We believe both examples highlight how ScanSource helps our partners bring Converged AI-enabled CX solutions to market. Overall, our strong results this quarter reinforce our confidence in our business model as we look to the future. I'll now turn the call over to Steve to take you through our financial results and our outlook for fiscal year 2026.

Thanks, Mike. We're pleased with our Q3 results with consolidated net sales and non-GAAP EPS growing 9% year-over-year. We also delivered strong free cash flow in the quarter and feel very well-positioned to deliver our fiscal year 2026 outlook. Turning to our segments. I'll start with Specialty Technology Solutions. Net sales increased 9% year-over-year, led by North America hardware sales growth across most of our technologies. Gross profit increased 10% year-over-year to $81 million. Approximately 15% of segment gross profit is coming from recurring revenue, led by managed connectivity growth from our Advantix and DataXoom acquisitions.

Segment adjusted EBITDA grew 6% year-over-year to $24.7 million with an adjusted EBITDA margin of 3.3%. In our Intelisys & Advisory segment, net sales declined 1% year-over-year. Intelisys annualized net billings increased to approximately $2.88 billion. Quarter-over-quarter, both segment, net sales and gross profits, increased 4%. Adjusted EBITDA for the segment was $11 million, a sequential quarter growth of 6% with segment adjusted EBITDA margin of 42%. Going a bit deeper on balance sheet and cash flow.

We ended Q3 with $120 million in cash and a net debt leverage ratio of approximately 0 on a trailing 12-month adjusted EBITDA basis. For the quarter, we generated $69 million in free cash flow, bringing our year-to-date free cash flow to $119 million. Share repurchases totaled $33 million in the quarter, and we had $146 million remaining as of March 31, 2026, under our share repurchase authorization. Adjusted ROIC was 14.3% for the quarter and 13.6% year-to-date.

We continue to have a strong balance sheet, and we're well-positioned to execute our strategic priorities and achieve our 3-year goals. Our 3-year goals focus on growing the company's gross profit contributions from recurring revenue, expanding our profitability, delivering strong free cash flow, and maintaining disciplined capital deployment. You can find our goals in the infographic and our investor presentation in the Investor Relations section of our website.

We continue to explore acquisition opportunities that could expand our technology stack, our capabilities, and accelerate our recurring revenue growth. Our capital allocation priorities also include continued share repurchases. We are confident in our business model, and our Q3 results support our expectations for our annual outlook. We are maintaining our full year projections for both revenue and adjusted EBITDA. And for FY '26 free cash flow, we are raising our expectations to at least $90 million. We'll now open it up for questions.

[Operator Instructions] Our first question comes from the line of Keith Housum of Northcoast Research.

Steve, in terms of the revenue guide for the full year, based on the strong quarter you have, if my math is right, that would suggest on the top side, revenue growth of only 2% in the quarter and on the downside would be a decline of 10%. Was that intentional in terms of what you're thinking about for the second quarter or the next quarter?

Well, Keith, I'll tell you -- thanks for the question, by the way. When we look at our full year outlook that we gave last quarter, we said that we would need some large deals coming in and we had growth projected for the second half. Q3 delivered on that, and we're confident that we can deliver our full year guidance, but we don't want to get over our skis as we look at Q4.

Okay. Is there a sense that business was pulled forward from fourth quarter into third quarter based on the world, that's some chaos, when it comes to memory pricing right now?

What I would say on that, Keith, is it's always -- the visibility is always hard on pull forwards and that kind of detail. But we didn't -- we don't believe that we saw material pull forwards in our Q3 results.

Okay. Appreciate it. You guys called out resources sales being down in the quarter. I would assume those would sequentially grow every quarter. Was there anything unique that happened in the quarter that would cause that to be down?

Well, on resource, remember, that's our end customer-facing business. And what you'll see in that is there's recurring revenue and there's services revenue in that business. And so some of those services revenues can be up and down quarter-over-quarter.

Okay. Got you. How were Intelisys orders for the quarter? I know you guys mentioned billings were $2.88 billion. What happened to orders due?

Keith, it's Mike. One of the things that we're focused on is how do we accelerate new order growth. And that's one reason we, really, are focusing on establishing this new group, this new team. We believe that we need to put additional focus on new orders, especially through the VAR community. So this Converged Communications team is going to have as a primary goal to how do we get more partners selling Intelisys and getting the new order growth to accelerate. We would like to see that grow faster.

So do I assume then that order growth didn't grow for the quarter year-over-year?

No, we didn't say that. Our belief is that we are doing everything we've said we're going to do, but we want to go faster. And we don't believe it's growing at the rate we would like to see.

Got you. I guess last question for me, and I'll turn it back over. But in terms of the STS segment, revenue was almost identical to the third quarter, but yet gross profits were about -- gross margins were 50 basis points higher. I know last quarter, you guys called out freight costs due to more small and medium-sized businesses. Anything else that drove the improved gross profits for the quarter?

Keith, this is Steve. I would say it's more mix in that benefit. We've seen the freight costs normalize for us. We thought that, that was going to be more of a one-time impact in the quarter. So I would say it's more of a mixed story in terms of the improved margins.

Our next question comes from the line of Gregory Burns of Sidoti.

Just a follow-up on the investments you're making in the Intelisys side of the business to drive faster growth. I know you announced this new Converge business unit, but you've done a number of things over the last 12 to 18 months to kind of stimulate that growth. Are you finding like the impact of those investments and changes that you previously made are not what you expect them to be? Or has there been like increased competitive response? Like why haven't you been able to get the growth on Intelisys where you think it should be?

Greg, it's Mike. I think from my perspective, we've been very clear that we need to see acceleration of our new orders growth. We've been able to talk consistently over time about end-user billings being also the indicator of how is our revenue going to come in. New order growth, if you remember, has a lag between a new order and revenue for us. So we clearly have to not only continue doing what we were doing for new orders, but everything that I'm talking about today that's new, we won't see the results of that for anywhere from 6 to 18 months. And so, really, what I'm saying today is we're going to do more so that we can, a year from now, see even more of those results. This is the -- I would say the challenge with our Intelisys business is what we're seeing in new order growth now were actions we took a year ago, and we're saying we'd like to see better results, and we want to accelerate that. And we believe now is the time.

And one more point, Greg, is we felt like we needed to get to this point in the year, the fiscal year, to make some of those decisions. When we said back in August that our strategy and our outlook for the year was X, we said we got to have a strong second half, and some of our decisions would not be made for more investments until we got through the first half, where we're there, and we saw what happened in Q3. And so we have the confidence that we should do that now. So that's why now it's a timing question for us.

[Operator Instructions] Our next question comes from the line of Logan Katzman of Raymond James.

This is Logan on for Adam. Maybe back to the -- to one of the first questions that was asked earlier. When we're looking at -- into 2027 since we have to start to model that, I guess, first, any guidelines or parameters you guys want to maybe give us as we look into modeling that? And then secondly, maybe what do customer conversations look like in that -- around the first half of 2027? I know it's a little early, but kind of back to the pull-in question, just curious if you're seeing a big drop off here, potentially, in demand as we move into that first half '27, 2H calendar '26. So just wanted to see what you guys were hearing on that front.

Yes, Logan, thanks for the question. I would just first start out by saying we haven't given '27 guidance yet. We typically would do that when we deliver our fourth quarter results. So we're a little bit early in talking about FY '27 for us. But we're happy with where Q3 came in. We're confident in our Q4 forecast that builds to our full year guidance that we've given, the guidance range. There are some things in our business right now that have a lot of momentum. Mike talked about security and networking having a lot of momentum from a sales perspective. And what we saw this quarter that we haven't seen in previous quarters is most of our technologies show growth, which that's a great sign for us as we think about going into 2027, is to have that momentum.

I would now like to turn the conference back to Steve Jones for closing remarks. Sir?

Yes. Thank you for joining us today. We expect to hold our next conference call to discuss our June 30 quarterly and full fiscal year results on Thursday, August 20, at approximately 10:30 a.m.

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

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions] 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 Mike Baur, our Chair and CEO; and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and then take 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 statements and subject to risks and uncertainties that could 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, 2025, and in our subsequent reports on Form 10-Q. 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 and have provided reconciliations on our website and in our Form 8-K filed earlier today.

I'll now turn the call over to Mike.

Thanks, Mary, and thanks, everyone, for joining us today. In the second quarter, we generated strong free cash flow and delivered net sales and gross profit growth in both segments. However, our profitability was negatively impacted due to some unexpected expenses contained in the quarter. This resulted in declines in both gross profit and EBITDA margins compared to our very strong first quarter.

In Q2, we had organic net sales growth for both segments though slower than expected for our Specialty Technology Solutions segment.

Today, we're excited to announce the launching of a new converged communication sales team at ScanSource. This communications team unifies the ScanSource communications products and the Intelisys products and services to fully embrace the accelerating convergence of hardware, cloud and customer experience technologies. We believe end users are embracing cloud-based UCaaS and CX platforms, and this is a growth opportunity for our channel partners.

We're bringing together the expertise of our people to form one unified sales team, a team with deep knowledge of communications products and Intelisys' cloud-based CX solutions. By giving this one team responsibility for both the hardware and recurring cloud business for these partners, we are strengthening partner alignment, expanding our share of wallet and positioning ScanSource at the center of this converging ecosystem.

In our Intelisys & Advisory segment, our investment strategy is driving growth and momentum in new orders. We make these investments ahead of the revenue, understanding that it typically takes about a year for new orders to convert into billings. As a result, we're seeing our new orders increase at a faster rate than our current revenue from billings.

New investments for Intelisys include building out our new converged communication sales team, which is designed to further accelerate growth and capture new end user solution opportunities.

As we move ahead, our strategy centers on helping our channel partners deliver innovative converged solutions driving both organic net sales and free cash flow through solid execution of our strategic plan. Our team is focused on profitable growth, executing our strategy, and making progress toward our 3-year strategic goals.

I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2026.

Thanks, Mike. Q2 net sales grew 3% year-over-year in both segments and gross profits increased 1% year-over-year. Profits for the quarter were negatively impacted by some higher period expenses in our Specialty Technology Solutions segment impacting both COGS and SG&A. We delivered strong free cash flow in the quarter and closed on a new 5-year credit facility that will support our strategic objectives and capital priorities.

Turning to our segments. I'll start with our Specialty Technology Solutions segment. Net sales increased 3% year-over-year and 4% quarter-over-quarter. Gross profits increased 1% year-over-year. Higher period expense, including freight cost and mix impacted gross profit margins by approximately 30 basis points. Excluding these costs, gross profit growth would have been in line with the revenue growth for the segment.

The percent of gross profits from recurring revenues grew to approximately 18% for the segment and includes positive contributions from the acquisition of Advantix and Data Zoom. The Specialty Technology Solutions segment adjusted EBITDA margin was 2.8%. For the quarter, the impact on segment adjusted EBITDA margin from higher period expenses is approximately 60 basis points.

In our Intelisys & Advisory segment, net sales increased 3% year-over-year, in line with our expectations. Annual net billings increased to approximately $2.85 billion, gross profit increased 3% year-over-year, while adjusted EBITDA margin for the segment was 41%.

Going a bit deeper on our balance sheet and cash flows. We ended Q2 with approximately $83 million in cash and a net debt leverage ratio of approximately 0 on a trailing 12-month adjusted EBITDA basis. Adjusted ROIC was 11.9% for the quarter and 13.3% for the first half of FY '26.

Share repurchases for the quarter totaled $18 million, and we have $179 million remaining under our share repurchase authorization.

We continue to have a strong balance sheet and are well positioned to execute our strategic priorities and achieve our 3-year goals. Our 3-year goals focused on growing the company's gross profit contributions from recurring streams, expanding our profitability, delivering strong free cash flow and disciplined capital deployment. You can find our goals in the infographic and our investor presentation in the Investors section of our website.

We are pleased with the contribution from our acquisitions, including the most recent acquisition of Data Zoom and what they bring to our channel capabilities and our strategic plan. We continue to explore acquisition opportunities that could expand our technology stack, our capabilities and help us drive additional value across our partner ecosystem. Our capital allocation priorities also include continued share repurchases. We are confident in our business model and are optimistic for growth in the second half of our fiscal year.

For the first half of our fiscal year, our gross profit margin was close to 14%, and our adjusted EBITDA margin was over 4.6%. We are updating our full year projections based on our first half performance. We now believe that full year revenue will be in the range of $3 billion to $3.1 billion, and adjusted EBITDA will be in the range of between $140 million and $150 million.

For annual free cash flow, we maintain our expectations of at least $80 million. Our expectations include an increase in the second half of large deals as well as investment in our Intelisys & Advisory segment to drive new order growth.

We'll now open it up for questions.

[Operator Instructions] Our first question or comment comes from the line of Greg Burns from Sidoti.

Can you just give us a little bit more color maybe on the period costs that you highlighted and whether or not you expect that to continue into the second half of the year? Or are they just going to remain kind of localized into this quarter?

Greg, this is Steve. I'll take that question. Yes, in our 10-Q, we outlined some of the costs, both in our COGS and in our SG&A. In the COGS piece of it, it's really around mix and freight expense in the quarter that pushed our margins down. We also called out some bad debt expense driven by a customer specific reserve that we took. And we closely manage our receivables, and we have a very healthy receivables portfolio. So when we look at that, we do think that's more period related.

Okay. And I guess you mentioned also a little bit slower than expected growth in the Technology segment. Could you just maybe give us a little bit more color on where specifically the lower growth was coming from or maybe some detail around product categories that might be helpful for us to better understand the dynamics?

Greg, it's Mike. I think what I would say about that is the large deals are really part of the story here, and maybe that's where I'll talk about it. We saw large deals get broken up into smaller pieces. And so as they're rolling out, they're not happening normally. And we saw this even last quarter. And so I believe that's the real story here is that we've got a slowdown in large deals that are being invoiced in the quarter.

And we see that -- by the way, we see that as part of the challenge for the hardware business as we look out and implicit in our adjusted guidance is that we do need the large deals to resume, and we believe that, that will happen.

Okay. Is there any specific reason why you have more confidence in that? Are you seeing anything specifically or anything you're hearing from your customers?

Well, it is based on information. We just had, last week, our sales kickoff for our internal specialty sales teams. And so we spend a lot of time talking to our sales teams about what they're hearing from partners, from suppliers. So yes, based on surveys of our partner community and what they believe as they look at their calendar year and many of these partners, as we all know, they don't have large loan pipelines. And so they generally have very good shorter-term information. And we believe that the information we're getting suggests that the large deals will continue to happen. But again, they may be broken up over the quarter. And so this is really more of a -- for the year, we feel good about it. Q2, we had expected more than we actually booked.

Our next question or comment comes from the line of Keith Housum from Northcoast Research.

Can you guys hear me okay?

Keith, we got.

Okay. Great. I appreciate it. Mike, I understand the memory issue that's affecting World. On the price side may not impact you guys so much because you guys pretty much pass through the prices. But what are you hearing from the customers in terms of are you seeing prices increasing now? And any concerns that you have that perhaps should be some sort of a supply shortage at some point through not only the second half of your fiscal year, but throughout all of 2026?

Yes. Keith, we talked about that, for sure, is the suppliers are indicating that the memory issue will affect them. They don't know what's the near-term impact versus long term. And some of it is a pricing issue, as you know, and some of it potentially could be a shortage issue, right? And since so many technology companies use the same memory sources, I think that will be a challenge for some of our suppliers. So we certainly think that we're going to be in the same position as everyone else in the channel to manage through this. But right now, there's just a lack of visibility as to the near-term impact. So we've adjusted our guidance knowing what we know today about the potential for that to happen. And right now, it's not significant in our guidance, okay?

Okay. Appreciate that. I'm going to ask you look in your crystal ball a little bit here, I talk about the Intelisys business. You guys have been restructuring that business now for a few quarters. Are we thinking the second half of 2026, the calendar year, we should see Intelisys' sales start to accelerate from the current levels?

Well, I would say this, Keith, we probably didn't restructure as much as we added additional sales capabilities is the way I would frame it and what we expected from our sales teams when we brought on Ken Mills, which will be over 1.5 years ago now. So for sure, we believe we had to get more aggressive at acquiring new customers and focusing on new orders and not just at the existing book of business that many of our partners had. And I think part of it too is we went through a couple of years ago in aging of the Intelisys partner community, where we had many of the partners, as you recall, that were selling their books of business, they were selling their agency. And we kind of saw the peak of that, I believe, 1.5 years ago, and I believe that has diminished to some extent.

And so I believe even the partners that have been around a long time are now focused more on new orders. And I believe the new order growth that we referenced that is growing faster then our billings is indicative of what we'll see next year. Already in 2016, we're benefiting from what Ken put in place a year ago. And I think that's why we're starting to see momentum. And I expect it will continue to grow at a faster rate than new orders, yes.

Okay. And in Brazil, actually was down 9% or organic this quarter. Anything new happening there? I know a year or 2 ago, we've asked Broadcom, but I was kind of surprised by how much that declined year-over-year.

Yes, I don't think there's anything specific we can call out. But certainly, we wish that market would recover. It's a market condition that we're in with all the other distributors in Brazil. So from a market perspective, we feel like our management team is managing the -- and pulling the levers that are under their control, whether that's managing expenses or whether that's managing inventories and bringing on new suppliers to replace the supplier that we lost. So I think the management team is operating at a very high level, but it's a challenging market right now for the distribution segment in Brazil.

Yes, that's higher than company average gross profits, correct in Brazil?

Yes. That's right. And I would say, historically, I don't know how much we talked about it, Steve, but it would drop to the bottom line as well. It would be a higher profitability, Steve.

Yes. That's right. Keith, this is Steve. I would say that a lot of their GP flows through. They manage cost very well, and a lot of that does flow through.

So that's certainly not helping your gross profit line either.

That's right.

Correct.

Okay. And then maybe help me understand a little bit more in terms of the launch that you did today in terms of one communications team. Perhaps can you describe how it was operating previously and how you -- how that's going to be different going forward?

Yes. Sure. So we've been trying to figure this out for a while to how do we have a partner, let's say, it's a traditional communications partner, what might be a Mitel partner, Keith or ShoreTel or buy any of our communications heavy partners that were traditionally selling premise-based equipment and maybe not selling cloud yet or maybe they're selling cloud, but the sales team at ScanSource under specialty was only selling on the hardware.

And so the -- if the -- if a Mitel partner wanted to buy some connectivity products or services or solutions, the ScanSource specialty seller would have to pass that on as they lead to someone on the Intelisys team. So now we're going to have one team that can service that partner that will sell the Intelisys' products and the specialty hardware products to the same partner. So we're going to make it much easier for the partner. It's also going to give our communication hardware sellers a lot more to sell to their partners. So I think the partner community will love this idea. We're going to enable them, we're going to make it easier, and we believe this is going to create new solutions from suppliers that will see this as a very attractive way to reach more of the VAR community.

How are we going to see that in the income statement going forward? Are you going to move some of the communications down to the Intelisys' segment?

Keith, this is Steve. We'll wind up with the same reporting in our segments. That's a segment reporting discussion. This is more of a management alignment and a go-to-market discussion.

Yes. Because again, let me finish that part of the description I left out. There'll be Intelisys' employees that will be part of this virtual team, and they will sell hardware now. And so if you've got an Intelisys agent that's working with an Intelisys salesperson that reports into the Intelisys management team, they'll now have the right model so they can sell hardware. Whereas in the past, the Intelisys employee here at ScanSource would flip that lead the hardware over to the hardware guys, and they just wasn't working. That was not the right incentives and opportunities. So that's what's changing.

Our next question or comment comes from the line of Guy Hardwick from Barclays.

Just wondering how much of the lowering of guidance is the absence of large deals versus the potential shortages of product that you mentioned.

Guy, it's Mike. Yes, I think our view right now, I think this is what I was trying to say earlier is our guidance is relative to large deals, not to shortages. So we're not in our guidance indicating that there's going to be a shortage impact on our guidance. That's not what we're suggesting today.

Okay. And just as a follow-up, could you just kind of update us on the kind of competitive environment in the TSD market? I mean it looks like headcount additions of your competitors have already slowed quite sharply and it's pretty much flat or down in the last 6 months. So just wondering how the things improved. Have you noticed any improvements in terms of the market or not yet?

Well, I think the overall TSD space is very competitive and has been, as you know, for a while. We believe that there has been some changes in their approach to how they're going to grow their business organically because we know that from a competitive standpoint, there's been a lot of acquisitive activity from TSDS. And you've not seen that, of course, from Intelisys, from ScanSource. So we believe that has come to a slow down. And now the -- I think the opportunity and the pressure on all the TSDs is to grow organically. And that's why you hear us talking about new order growth. And that's what we believe is the right metric because that will show that we can obviously, in some cases, take market share from the other TSDs and that's reflected in the new order growth, but it also talks about improving the value proposition for the TSD, both in the eyes of the partner who is the seller, but also in the eyes of the suppliers because the suppliers, they need organic growth to happen, not just share shift among the TSD. So we're very focused on organic growth, and we believe that you will see a change in the market share between all the TSDs over the next year as we execute on our strategy.

[Operator Instructions] Our next question or comment comes from the line of Adam Tindle from Raymond James.

Okay. Mike, I just wanted to take a step back. I know we've gone through a lot of detail in this call. But if we take a step back and think we're 2 quarters into the fiscal year now, you're reducing guidance. If you were to rewind to your initial fiscal '26 plan, what would be sort of the biggest variance areas versus your expectations entering this year? I hear you on the large deals. I just want to push back. I mean we would think that would be just kind of more of a timing issue throughout the course of the year. So if you were to kind of set yourself back in the seat when you were entering this year versus now, what are kind of the key areas that maybe have been a little bit disappointing relative to your expectations that caused a reduction in guidance?

Adam. Well, let me go back to something I used to say a lot is that our business is very hard to forecast. Orders come in today, they go out today. This is in the specialty business, which is where the challenge has been. So no news there, that's how that business has always worked. Very difficult to forecast what we're going to do beyond today. We get orders in the day, we ship today, right? We don't work off of a backlog traditionally. We get information on large deals that will happen, but there's no guarantees when they'll actually ship.

So if I go back to -- and to answer your question directly, Adam, if I go back and remember what we were saying back in August, we were saying like the year before, this is going to be a second half loaded year, that we believe -- and given annual guidance is, again, not something that I enjoy doing, but we did because we have for the last few years. And so given annual guidance back in August with the visibility I have today, I would have said, "Well, we probably should have forecasted the first half a little lower, expecting the second half to be bigger." And what we're trying to say now is the second half is going to show growth, and the second -- in this guidance that you'll see, like at the midpoint, that's going to show that we're going to have modest growth year-over-year for the second half. For the year, that's not a great number. But if we can, in the second half show growth, we believe we'll then build momentum going into '27. And that's the way we've always built our business.

Yes. I understand. I think we can fully empathize with the difficulty in forecasting. I think you're telling my boss that I need to raise.

Exactly. Yes. Exactly, exactly.

Steve, I wanted to ask on the magnitude of the cut. I mean I think it makes a lot of sense for investors to kind of take the medicine now and rather than set expectations to climb back for the year, let's just go ahead and reduce. But on the magnitude, I understand you don't guide on a quarterly basis necessarily. But relative to, I think, a lot of our expectations in the quarter, this guidance was reduced by kind of more than that annualized is [indiscernible]. How did you think about the magnitude of the guidance reduction? And I also noticed that you -- I think you maintained free cash flow. So maybe touch on how you're able to do that.

Yes. Adam, yes, a couple of things. When we look at the second half, we look at it a couple of ways, right? We're trying to take the information that we have from our customer base, what they're working on and then we put that against really, if you look back over our years and you look at first half versus second half performance, and I'm thinking about the last 2 years, we've been kind of 49-51, 50-50. And so that's how we get confidence in this -- the second half looks a whole lot like the first half, a little bit of growth that we see coming because, again, we're thinking large deals are going to have to return this to your point before, it's been more of a push out than it is a loss. And so that's what's really guiding our expectations.

On the free cash flow, I think this comes back to the way we've changed our business model and the confidence we have in our business model. And this is what should happen if we're growing in that low single-digits rate. So we have a lot of confidence in our team's ability to deliver that at least $80 million in free cash flow, which has a really good cash yield for us.

Yes. That makes sense. And you know I'm going to ask about capital allocation following that question, of course, Mike. I mean, obviously, one day is not necessarily a trend, but the stock is now hovering below book value. Does this obviously, you're going to maintain free cash flow for the year, as Steve just mentioned. So you have some cash to work with. How are you thinking about priorities around capital allocation? And does this perhaps elevate share repurchase?

I think what we like to do as a management team and our Board level is talk about what are we trying to do on a 3-year basis. And our 3-year goals, we believe, are still intact, and we said that in our call. And we believe if you look at our 3-year goals, we believe we can have growth from a gross profit perspective, which is where we've been saying we've got to focus on gross profit growth. To do that, we have to have some top line help. There's no doubt about it. And we believe that for us, there's a combination of organic and inorganic that needs to happen on the growth side.

At the same time, as we said, I believe we said our share repurchase authorization is still like $179 million. And in the first half of this year, we bought about $40 million in shares, Steve, is that right?

Right.

So we believe that's indicative of our strategy that our strategy hasn't changed this quarter. We hope our investors don't believe our strategy has changed. We hate to deliver news. That's not what we expected. But again, if we think about this is a quarter, this is not the year, and we wanted to be fair, though, to everyone about our expectations for the second half and make sure that we're not over steering, and we believe we're being -- we have -- as you know, we have a strong history of doing our best to give our investors an accurate clear view of what we know today, but our goal is let's keep our 3-year strategic goals in mind, and we believe those are very strong. And again, as we look at the second half, based on our annual guidance that we've adjusted to, that's still a very strong EBITDA margin for the year that will come in consistent with what we're doing from a 3-year goal perspective. And I think that's the important part. Look at the metrics that we'll still deliver. This is a very strong company, excellent balance sheet with strong profitability.

Got it. I'm going to do one more. I think I might be last in the queue. So on Intelisys, I did want to ask, Mike, the dynamic of, I think, billings lagging new orders was something that sounded a little bit newer. I just wanted you to maybe double click and help explain that dynamic. I mean you've been operating Intelisys for many years now. I could have missed it, but I don't recall hearing that dynamic much over the past number of years. So maybe just kind of double-click on what that was and what changed to drive that? And Steve, is there any way to -- and this is probably a difficult one, but to quantify that, the impact that that's having and maybe when that like catches up, how we think about it in the financial statements?

Well, let me -- the reason we started talking about new order growth was -- I'm going to think back now. It's probably 3 years ago, Adam, that we started talking about this margin pressure, if you recall, the margin pressure that was happening at Intelisys and in the TSD community as all the other TSDs started bringing in new ownership, PE investments, and there was a market share land grab, which drove margins down for Intelisys, which drove down our revenue growth, right? And we would start talking, as you know, about our revenues, and we talked about end user billings.

And generally, the end user billings were really at the end of the day, a great metric for, is this market growing because we would have margin pressure that in a year or a quarter would reduce our growth because of just margin compression, but it looked like the TAM was slowing down or the opportunity was going on. That wasn't the case. So we decided a year ago that we needed to start being able to talk about new orders. If we can have a -- and we decided not to give a number because we're in a competitive market against other private companies.

And so we believe new orders growth faster than our revenues is indicative of what will come. And so this delay that happens because if we close an order today, it may not get billed for 6 to 12 months from now, maybe even 15 months. And so it's just focus, Adam, on new orders that you won't see in the quarter that are indicative of future revenues. And that's why this pivot to that is important that we communicated.

Yes, Adam, this is Steve. I'll take the second half of that question. The impossible one to answer, right, is how do we know? Well, we believe, and I think the message to our investors is as we invest, we're looking for the right ROI on those investments. So if you're hearing us continue to invest in Intelisys and in that order growth, we believe that there's a good ROI on that because this all has to hold together with our 3-year goals and the goals that we've laid out and we're committed to. So that's the best way to think about is this -- are we still confident that we're continuing to accelerate the new order growth. If we're still investing in there, our expectation is it's a good ROI, and we continue to do it.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Steve Jones for any closing remarks.

Yes. Thank you, and thank you for joining us today. We expect to hold our next conference call to discuss March 31 quarterly results on Thursday, May 7, 2026, at approximately 10:30 a.m.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]

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 Mike Baur, our Chair and CEO; and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and then take 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 statements and subject to risks and uncertainties that could 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, 2025, and in our subsequent reports on Form 10-Q. 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 and have provided reconciliations on our website and in our Form 8-K filed earlier today.

I'll now turn the call over to Mike.

Thanks, Mary, and thanks, everyone, for joining us today. Technology distribution is being transformed with the convergence of hardware, software and services. As IT, connectivity and cloud computing markets continue to converge, we believe that end users will prefer channel partners who can provide integrated converged solutions. With more choices than ever, end-user purchasing decisions are getting more complex, and that's where solution providers and technology architects add real value. They can help end users make technology decisions that will achieve their expected business outcomes. Because most business outcomes require technology solutions from multiple suppliers, the indirect channel is in the best position to deliver recurring, complex and high-value solutions.

How to win in converging technology markets was the theme at our recent partner events. Partner First in September and Channel Connect earlier this week. Both events highlighted our strategy, helping our partners change and grow as technology markets continue to converge. We are preparing to assist our channel partners in this transformation. We expect to play an expanded role in supporting our partners' transition from traditional VAR to solution provider and from trusted adviser to technology architect. We'll discuss more about how these business models are evolving as the year progresses.

This quarter, in our Intelisys & Advisory segment, we are investing to accelerate new order growth. An example of our investment is the growth of our solutions engineering team who have expertise in advanced technologies, including cloud computing, wireless and IoT. Another way to drive new order growth is to help our partners by providing new and better tools for growth. For example, our product development team launched a new tool called Tech Checks, which combines AI-powered engineering support with conversational sales-friendly discovery questions.

During the quarter, in our Integrated Solutions Group, our Launch Point team has delivered new end-to-end industry solutions called Smart Series, starting with Smart Warehouse and Smart Retail. These solutions consist of products and services from ScanSource's suppliers. One of the new Launch Point suppliers we recently signed is a specialist in the next generation of private 5G that adds a managed services offering to our Smart Connectivity Series.

Also in ISG, in October, we completed the acquisition of DataXoom, a leading provider of B2B mobile data connectivity solutions. This transaction builds upon our August 2024 acquisition of Advantix and expands our ability to scale our relationships across all 3 major U.S. carriers: AT&T, Verizon and T-Mobile. ScanSource's deep relationships with the key suppliers of mobile devices, combined with Advantix' and DataXoom's capabilities to integrate carrier data connectivity into these devices is a great example of a converged solution. Looking ahead, we believe the future of technology distribution lies in helping our channel partners deliver innovative converged solutions. This vision drives our strategic plan.

I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2026.

Thanks, Mike. We're off to a good start to our new fiscal year. For Q1, we delivered strong profits and free cash flow generation, highlighting the strength of our business model. Gross profits grew 6% and non-GAAP EPS grew 26% year-over-year. We delivered 5.2% adjusted EBITDA margins and our cash conversion of non-GAAP net income was 88%. These results are in line with our annual outlook.

Now turning to our segments. I'll start with our Specialty Technology Solutions segment. Net sales declined 5% year-over-year and 9% quarter-over-quarter, including approximately $40 million of large deal pull-ins that benefited our Q4 results. For Q1, many of our larger deals were delayed or broken into smaller orders with a higher mix of run rate orders, favorable technology mix and benefits from supplier price actions, gross profits increased 7% year-over-year and 3% quarter-over-quarter. For the segment, the percent of gross profits from recurring revenues totaled approximately 13%. Adjusted EBITDA margin for the segment increased 61 basis points to 4.2%.

In our Intelisys & Advisory segment, net sales increased 4% year-over-year, in line with our expectations. Annualized net billings increased to approximately $2.78 billion, and we believe we maintained market share. Gross profits increased 2% year-over-year, while adjusted EBITDA for the segment declined slightly due to increased investments in SG&A to drive future billings growth and expand our technical capabilities in advanced technologies.

Now going a bit deeper on our balance sheet and cash flow. We ended Q1 with approximately $125 million in cash and a net debt leverage ratio at approximately 0 on a trailing 12-month adjusted EBITDA basis. Adjusted ROIC for the quarter was 14.6% and share repurchases for the quarter totaled $21 million. We have a strong balance sheet and are well positioned to execute on our strategic priorities and achieve our 3-year goals that you can find in the infographic and our investor presentation in the Investors section of our website.

We believe with the contributions and are very pleased with the contributions from the acquisitions we announced around this time last year, and we're excited about the most recent acquisition of DataXoom and what they bring to our channel capabilities and our strategic plan. We continue to have an active pipeline of acquisition targets for both segments. These targets would expand our capabilities and help us drive additional value across our partner ecosystem while supporting our strategic goals.

We will maintain our discipline in evaluating M&A opportunities and believe there is room for both acquisitions and share repurchases while maintaining a target net debt leverage ratio of 1 to 2x adjusted EBITDA.

In closing, we want to reconfirm our FY '26 full year outlook. We believe the full year net sales growth will range between $3.1 billion and $3.3 billion. Full year adjusted EBITDA will range between $150 million and $160 million, and we will deliver at least $80 million in free cash flow. We still believe that revenue growth will accelerate in the second half of our fiscal year. We'll now open it up for questions.

We'll now open it up for questions.

[Operator Instructions] Our first question comes from the line of Keith Housum of Northcoast Research.

Good to see the performance on the bottom line. But of course, the top line probably is a little bit troubling here as we look over the past year, 1.5 years. I guess, Mike, any thoughts there on -- are you guys losing share, do you think, to competitors in the space? Or are you guys purposely walking away from some business? But any color on the decline in the revenue? I understand the pull forward that you had in the fourth quarter here. But still, if I look over the past year, 1.5 years, the trends have been working against you guys on the top line?

Keith, from our standpoint, we have always said we want profitable growth, right, from the top line. And I think that's a theme here is there's always business out there that a distributor can take to drive the top line. As we think about what we've consistently been, I think, for the last 2 years talking about the measure for our future is our GP growth. And I think if you look at that, the 6% growth, we really are pleased with.

Would we want more top line growth? Absolutely. I think part of that will come as we add some of the new suppliers that we're talking about through the addition of Launch Point and its strategies as well as this idea of convergence, we believe that will attract more suppliers than we traditionally have.

So -- and again, Keith, part of the challenge is we -- to answer part of your question, we don't believe we lost market share. And as I've said many times before, I think all the manufacturers tell all the distributors, they don't lose market share. So I don't put a lot of credibility there. That's just a side comment. But I believe our teams have executed very well with those key suppliers.

Great. And you're right, GP was great, especially in SPS. And I noticed in the earnings recall -- I'm sorry, the earnings report, you guys mentioning suppliers rebates or vendor payments. Are those sustainable or those onetime? Or has there been a shift here that we should look at going for the rest of the year?

Keith, it's Steve. I'll take that one. So our supplier programs have definitely evolved since -- over the last few years. The teams are doing a great job tying our supplier programs more to activities and not inventory. And so we think a lot of that is sustainable. What we did see this quarter is some of the price actions that we -- that the suppliers did last year flow through our inventory turns. So that was a bit of a help to our margins in that segment and on a consolidated basis.

And I know you probably won't get too much into details, but any way you can parse out how much of your GP is more to that onetime price actions?

Well, I'll give you the number, Keith, because I think it's important. I think if I'm thinking of a consolidated basis, I think it was probably 30 basis points to our gross profit margins on a consolidated basis.

Great. I appreciate that color. And then congratulations on the DataXoom acquisition. It sounds like it fits in really well with Advantix. Any more color you can give on that company in terms of -- I think it's 17 employees, but perhaps any revenue or margin profile to kind of think about going forward?

Yes. Keith, when we think about DataXoom and we think about Advantix and what they mean strategically for us, they add capabilities and DataXoom really helps us scale in this space. As far as size, it's really a tuck-in sized acquisition, and we gave the 17 people to kind of help people size what that would look like for us, but it's a tuck-in size acquisition. But they will have higher margins than our typical business in the STS segment. So it will be margin accretive from a percentage.

And maybe I'll add one more comment to that, Keith, that part of the strategy here, as a reminder, is for us to be able to sell more mobile devices by adding the connectivity to the solution set. We believe our mobile device sales will go up as we are more successful communicating this strategy to our channel.

Our next question comes from the line of Gary Hardwick (sic) [ Guy Hardwick ] of Barclays.

It's actually Guy Hardwick. So if 30 basis points of GP margin came from supply rebates implies that 100 basis points came from mix. First of all, is that -- have I got that correct? And maybe it would be a good time for you to give us a refresh on your inventory valuation method. Bear in mind what you said about supplier price increases last year having an impact this year.

Yes. Guy, thanks for joining us today. So yes, I would say you're in the right range in terms of what benefited from mix. And again, when we look at -- and Mike talked a little bit about how we're viewing the business, we also have more netted down revenues in that segment than we've historically had. And that's why we've been talking more about the percentage of recurring revenues at a segment level, because we think that's also an important part of our story as we go forward.

From a mix perspective or how we're thinking about our inventory turns, just think of it as a weighted average first in, first out inventory. So our inventory would be valued in a first in, first out, weighted average basis.

Okay. Just a follow-up. Obviously, on the slide, you have, I think it's Slide 3, the key technologies and growth drivers that's based on FY '25. If you just take those 5 end markets, which were up and which were down in the quarter?

Well, those charts that we add in there, those really help us guide where we were thinking for the full year. So we do use FY '25. We validate whether that's going to be some trends that continue, and we use that to help us in our guidance. As far as what segments were up or down, that really kind of gets into a supplier discussion in some ways. And so we try to steer clear of that.

But just your 2 largest suppliers had revenues up in the quarter year-on-year. So I'm a little bit surprised to see you guys down so much year-on-year.

Yes. And Guy, this is Mike. Let me just add a comment to that, if I can. We came up with these slides to help out because a year ago, we changed segments, and we talked about -- less about where the growth was coming from. And we really believe this will give an indicator of what we believe will happen throughout this year.

Specifically to your comment about suppliers, just as a reminder, their success or not on a quarterly basis isn't always in line, remember, with our channel. All of our suppliers, all of them still sell direct to end users, and that can impact their results that sometimes they delineate their results as how much grew in the channel or not, but not always. And so just -- we have to always remind our investors to -- we're a part of their supplier story, but we're not always aligned with their story. They can have great revenues and the channel as a group does not.

So our measure is typically what we try to lead with, which Steve said was we don't believe we lost any market share. So within the channel that we compete in, we didn't lose market share. So that's how we separate our results and try to help you guys understand, sometimes our results won't mirror the suppliers. And frankly, when we come out sometimes with our results ahead of our suppliers, people try to read that into the suppliers and generally it's wrong. So I wish I could help you more on the specifics of why those 2 suppliers would be different than ours. But just remember that we're -- as a channel, we're only a part of their success.

Our next question comes from the line of Adam Tindle of Raymond James.

Steve, I wanted to start with a question for you on guidance. And leading into this question, I just want to acknowledge, I was glad to see gross profit growth put into the 3-year targets. I think that metric makes a lot more sense. But for now, for this year, we're basing guidance on net sales. So I've got to ask on that. You decided to reaffirm net sales growth for the year, but we're obviously starting with net sales down in Q1. I think you had previously thought maybe low single-digit growth in first half and accelerating in the back half to get to that full year net sales growth that you talked about.

I wonder if you might, first of all, update the cadence as you're thinking about that? And then secondly, just what gives the confidence to reaffirm the net sales portion after what you saw in Q1? Why not maybe consider lowering expectations at this point?

Adam, thanks for the question. When we look internally to our plan, Q1 is fairly close to what we thought. And so that gave us confidence to reconfirm our guidance and our outlook. One of the things that we continue to look at. We talked about netted down revenues, and we are more and more looking at gross profit as a better proxy for the success of our sales teams and our company overall.

And then when we think about whether first half or second half, the other thing I would lead to is we keep seeing these large deals push out or break up. They're not getting canceled. And so that gives us confidence that this is a timing issue, not necessarily a weakness in overall demand.

Okay. I mean maybe just give us a little bit of color on what you're seeing in October or early November and the pipeline for December on those? And any quantification of those large deals? I know those are typically deals that can get done at calendar year-end, so it might make sense for that to happen. But just wondering what you're seeing early on in calendar Q4, the December quarter.

Adam, we typically don't talk about the quarter mid-quarter because a lot of times, what we see is the last month of the quarter is our biggest quarter, and we could make up a lot even in the last 2 weeks. What we've talked about in the past even with our working capital is we would get surprised of how good of sales we have. And so maybe our accounts receivable may have moved up. And so it's dangerous for us to try to predict the quarter midpoint.

And Adam, I'll just chime in, it's Mike. Our enthusiasm for our guidance is reaffirmed as of last week. So what we knew last week about the quarter-to-date is reflected in our reaffirming the annual.

Okay. That's helpful. And maybe just, Mike, one for you. I was glad to see the 3-year target updates, and I know this is a little bit more of what Steve owns, but a conceptual question here, follow me. The 80-plus percent free cash flow on a consistent -- on an annual basis was nice to see. I wonder if you guys discussed with the Board about maybe outlining a structure on how to allocate that free cash flow. Some companies do sort of x percent to acquisitions, x percent to returning cash to shareholders, et cetera. Is that something that you thought about and not to put you on the spot, but if we were to try to set investors' expectations on what the pie chart would look like on that free cash flow in terms of how you're thinking about it, how would you kind of ballpark that for us?

Well, I think what we said last quarter and what we said -- Steve said in his prepared remarks is that we still believe we can do share repurchases and acquisitions without any specific structure of percentile on a chart. But it was a very good discussion with our Board, the last 2 Board meetings, both the fiscal year-end when we gave our guidance for the year and when we had our meeting a week ago discussing again how do we feel about the acquisition pipeline that we have. And Steve indicated, we do have a pipeline of acquisitions.

At the same time, we believe that especially at these share price levels that a good use of our cash right now is for share repurchases. And so we like the fact that we are in -- we have the capability to do both. And right now, that's the message we're trying to continue to reemphasize is that we're still doing both acquisitions and repurchases.

[Operator Instructions] Our next question comes from the line of Greg Burns of Sidoti.

The business development investments you're making in Intelisys, are you seeing that translate into pipeline activity? I'm just wondering when we might start to see maybe some of those investments start converting into stronger revenue growth for the segment?

Greg, it's Mike. I'll take that. One of the ways that we're talking about the success or not is the new order growth rate because an order doesn't get billed and, if you will, either installed or delivered for anywhere from 6 to 18 months in the Intelisys model. And it is different based on the type of technology being deployed. Because of that, we have put a much bigger emphasis starting, frankly, last year on new order growth. And in this quarter, we had double-digit new order growth year-over-year and quarter-over-quarter. And we believe that's our benchmark as to are the investments working.

Thank you. I would now like to turn the conference back to Steve Jones for closing remarks. Sir?

Thank you, and thank you for joining us today. We expect to hold our next conference call to discuss December 31 quarterly results on Thursday, February 5, at approximately 10:30 a.m.

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

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]

I would now like to turn the call over to Mary Gentry, Senior Vice President, Finance and Treasurer. Ma'am, you may begin.

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 will review our operating results for the quarter and the year and then take 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 on this call are forward-looking statements and subject to risks and uncertainties that could 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, 2025. 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 and have provided reconciliations on our website and in our Form 8-K.

I'll now turn the call over to Mike.

Thanks, Mary, and thanks, everyone, for joining us today. We are excited about the growth opportunities ahead for our channel partners and the expanding role of technology distribution. The convergence of IT, connectivity and cloud computing is propelling a shift toward converged solutions that are redefining success in technology distribution. We are the leading technology distributor uniquely positioned to build cutting-edge skills, capabilities and expertise to excel in a connected cloud-driven world.

We believe end users face increasing complexity when making technology investment decisions. Because of this complexity, end users are looking to the indirect channel for their technology solutions, given the need for integration and the number of solutions, especially as advanced technologies like AI become part of the solution.

Our multiple sales channels are a key competitive advantage for ScanSource, with our suppliers as they seek new routes to market. Our channel partners have different skills and capabilities and for certain opportunities, they will take advantage of additional services that ScanSource can deliver to end users on behalf of our partners.

We are building capabilities that end users require and our partners' demand in our converging technology ecosystem. This includes an innovative supplier portfolio, financial enablement, expert pre- and post-sales engineering support, powerful tools, marketing support and an exceptional customer experience.

Last quarter, we announced the creation of Launch Point, a new business development team that will identify and assist emerging innovative technology growth companies as they are getting ready for channel success. The Launch Point team has an active pipeline of innovative suppliers and has recently signed contracts with companies offering products to enhance our smart warehouse initiative, which includes private cellular networks, robotics, drones and additional IoT solutions. We have channel partners in both segments that have end-user demand for converging solutions that include hardware, software and services.

To illustrate with an example. We have a channel sales partner who developed a converged solution for a leading auto parts retailer that bundled wireless connectivity plans with 30,000 mobile computing devices. Our ability to support the converged solution was a differentiator, allowing the partner to win the deal and providing the end user with an improved business outcome. We see hardware plus software plus services convergence as the future of technology distribution. This is the vision for our strategic plan, and the new 3-year strategic goals that Steve will introduce in his remarks.

Our goals reflect our confidence in our growth strategy to deliver complex converging solutions for our partner ecosystem that will increase our addressable market.

I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2026.

Thanks, Mike. Q4 was a strong close to our fiscal year. We delivered on our guidance for revenue, adjusted EBITDA and free cash flow. Net sales returned to growth, and we delivered strong profitability. Net sales for the quarter grew almost 9% year-over-year, while adjusted EBITDA grew 13%, and non-GAAP net income grew 17% over last year. Our Q4 non-GAAP earnings per share of $1.02 grew 27.5% year-over-year.

Now turning to our segments. I want to call your attention to additional information that we included in our earnings infographic on our key technologies and growth drivers. I'll start with our Specialty Technology Solutions segment. Net sales increased 9% year-over-year and 16% quarter-over-quarter, with broad-based hardware growth in North America, led by double-digit growth in mobility and barcode, physical security, and managed connectivity. We also benefited from some large deals that were pulled in late in the quarter. We estimate the pull-ins contributed $30 million to $40 million of revenue in Q4.

Gross profit followed revenues growing 8% year-over-year, reflecting a higher mix of hardware for the quarter. For the segment, the percent of gross profits from recurring revenues totaled approximately 11%. Segment gross profit margin was similar to last year at 10.3%, while the segment adjusted EBITDA margin was up 35 basis points to 3.6%.

In our Intelisys & Advisory segment, net sales and gross profits increased 1% year-over-year, including the positive contribution from our Resourcive of acquisition, while adjusted EBITDA for the segment declined 4%, due to increasing investments in SG&A to drive future billings growth and expand our technical capabilities in emerging technologies like AI.

Annual end-user billing for Intelisys increased 4.5% year-over-year to bring annualized net billings to approximately $2.8 billion, including double-digit growth year-over-year in CX, which includes UCaaS, CCaaS and AI-enabled CX solutions. This segment operates in a very competitive landscape, as sales models and partner needs evolve. We believe that we have a unique competitive position with the combined capabilities from our businesses in both segments, as we enable the channel model of the future.

As we look back on our full year results, we delivered strong profit growth, while facing tough market conditions. Full year net sales totaled just over $3 billion, a year-over-year decline of 6.7%, while gross profits of $408.6 million and adjusted EBITDA of $144.7 million grew by 2.4% and 2.8%, respectively. Gross profit margins increased 120 basis points year-over-year to 13.4%, and adjusted EBITDA margins increased 45 basis points to 4.76%.

For the year, recurring revenues represented 32.8% of our consolidated gross profits compared to 27.5% last year. The higher contributions and concentration of netted down revenues in the -- is the primary driver of our improved margins.

Non-GAAP net income of $85.1 million is an increase of 9.6% over last year, and full year free cash flow of $104 million represents a 122% conversion of our non-GAAP net income. Non-GAAP EPS of $3.57 increased by 15.9% year-over-year, including the benefit of share repurchases, which totaled $107 million.

Going a bit deeper on our balance sheet and cash flow. We ended Q4 with $126 million in cash and a net debt leverage ratio at approximately 0 on a trailing 12-month adjusted EBITDA basis. Adjusted ROIC for the quarter is 14.9%, and full year adjusted ROIC is 13.6%.

Our Resourcive and Advantix acquisitions completed last August were accretive to both EPS and ROIC for both the quarter and the full year results. Share repurchases for the quarter totaled $25 million, and we're pleased with the contributions from our 2 acquisitions and what they bring to our channel capabilities and our strategic plans.

We have an active pipeline of acquisition targets for both segments. These targets could expand our capabilities and help us drive additional value across our partner ecosystem, while supporting our strategic goals.

As we start our new fiscal year, we think -- and we think about delivering on our strategic plans, we want to clarify our capital allocation framework. We'll continue to maintain our discipline in evaluating M&A opportunities and believe there's room for both acquisitions and share repurchases, while maintaining a targeted net debt leverage of 1 to 2x adjusted EBITDA.

We want to provide FY '26 full year outlook, and we believe that the full year net sales will range between $3.1 billion and $3.3 billion. Full year adjusted EBITDA will range between $150 million and $160 million, and we will deliver at least $80 million in free cash flow.

We also believe that revenue will accelerate in the second half of our fiscal year and expect low single-digit growth for the first half, as we continue to navigate the dynamic macro environment.

Our adjusted EBITDA is expected to grow year-over-year and includes investments we believe will help us drive expanding margins. Our free cash flow expectations reflect the confidence we have in our team's ability to manage working capital, while taking advantage of growth opportunities.

Today, we're also introducing new 3-year strategic goals. Our new goals are included in the infographic that accompanies our earnings release, and our updated investor presentation posted on our website. Our new goals replace our midterm goals we initiated several years ago and successfully delivered.

We updated our targets for adjusted EBITDA margin, the percent of gross profits from recurring revenue and ROIC. We've included GP growth as a better metric to represent business growth, and we're introducing a new free cash flow metric. Our goals reflect our confidence in our strategy and the drivers we have to create long-term value for our shareholders.

We'll now open it up for questions.

[Operator Instructions] And our first question comes from the line of Adam Tindle of RJ.

Okay. And congrats on a strong finish to the year-end. I just wanted to start on the midterm targets. I was noticed that free cash flow as a percent of net income was included, Steve. I wonder if you could maybe just expand a little bit on why to include that metric. Obviously, I was happy to see it, but just a little bit more on the conversation on including that metric.

And if we start doing some math here, based on your current leverage, which is fairly minimal and in the future cash generation, we're going to have quite a bit of cash coming in. I think you mentioned it on there, but if you could just talk a little bit more about the capital allocation priorities with that incremental cash? And then I have a follow-up.

Sure, Adam. When we thought about the free cash flow conversion metric for our long-term -- or kind of a longer outlook that we provided we wanted to do 2 things. One, we wanted to build on the back of what we said before that we were building this cash culture. This, I think, really puts a stake in the ground for us and how we're thinking about the business. We also think this is a key -- a key reason why we're very attractive. Our financial position is very attractive is to have this kind of metric and this kind of discipline in generating free cash.

When we think about our capital allocation framework, we want to do 2 things. If you look at the combined set of targets that we have for our 3-year goals, you'll see several things. One is we need to expand our GP. We also are expanding that percent of recurring revenue. That will come through acquisition and faster growth in some of these emerging technologies that we have. But we also think it's important to balance that with returning cash to shareholders when we don't have opportunities to deploy that to help us hit those goals.

Okay. Got it. Yes, I wonder if it might make sense at some point to kind of split up and do a percentage of cash flow for shareholder return, or a pie chart or something like that. Is that something you guys would consider?

Still early in our ability to generate cash. We think we've gone out here and put some pretty aggressive 3-year goals out there.

Okay. That's fair. And maybe, Mike, as a follow-up. Obviously, as we kind of look at the segment results, the Intelisys & Advisory segment has very healthy margin in total and attractive margins. But the adjusted EBITDA, I think you said was down for the year.

I just wonder if you might expand a little bit more kind of how you're thinking about that segment strategically. And on a forward basis, I think in the press release, you talked a little bit about investments expected in fiscal '26. I wonder if maybe it's related to that segment or if you could expand on the nature of the investments that you're thinking about?

Yes. Sure, Adam. We believe that the opportunity to grow the Intelisys business is substantial. And one of the things that we learned over the last couple of years as we saw the competitive pressures from some of the PE-backed companies, there was a land grab for partners and their business. And along the way, we did everything we could in our old model to retain that.

And what we are learning is that we need to do some new things. And a couple of those that we've already invested in last year that really will see the payoff over time is a different partner segmentation strategy to make sure that we're providing the right, I'll call it, mix of services for partners.

We tended to treat our partners mostly based just on volume historically, and we've changed that. And under Ken's leadership, our team has added more head count to focus on strategic partners and a strategic partner for us going forward is a partner that can grow. In the past, we were, frankly, having partners that were earning a lot of resources and taking resources from our teams, but they weren't growing.

And so we really are driving a new sales demand strategy around finding the places that growth is happening and putting our resources there. So we've done a significant amount of reorganization within the Intelisys team. And what we've learned is that our partners trust us that we have this level of trust about the simple stuff for us, which is making sure that partners get paid on time and accurately. And we believe that we're still the most attractive distributor for these trusted advisers. But we're also cognizant that we have these private equity-based competitors who are still trying to do a land grab.

So we're going to use our balance sheet to better support the growth partners that we believe can drive future opportunities for us. So we're going to invest in some cases, our balance sheet with these partners, and we've talked about this in the past some of our programs, we've got some new names for them, but there's one we call a revenue accelerator program, where we'll invest alongside the partner if they are committed to making sure all of that future revenue comes to us exclusively.

So those are the things that we've started in FY '25 that we'll see happen and pay off throughout the year, but we certainly saw in '25 kind of a disappointing growth year, because we didn't make these investments in FY '24. So I really believe we've got the right team. We've got the right programs, and we're making the right investments because we still believe this business can grow substantially.

[Operator Instructions] Our next question comes from the line of Keith Housum of Northcoast Research.

Congratulations on a good quarter. And thanks for the added information and the infographic on the businesses and what makes up the different segments, much appreciated.

Just kind of piggybacking on Adam's question in terms of the Intelisys business. It looks like sequentially, the revenue is down in that segment, which is the first. I understand there's some competitive challenges there. But perhaps can you -- perhaps talk about the expectations here as you look into '26 and how quickly you can turn that around? And is it possible to quantify how much strategic investments you need to put forward during the year?

Yes, Keith, Mike again. We've been looking at this, frankly, for more than a year. We saw this and we identified it, I think, 3 years ago that there was -- as we all know, there was revenue pressure because we had margin pressure from the land grab by some of the PE-backed competitors, who are willing to make little to no margin to get partners to move their business from Intelisys to them based purely on a commission split change.

So we had to decide how to react to that. And in some cases, we lost some partners that went away. And what we decided to do is let's start, let's build for the longer term. And one of the things we did last year that I know you remember is we created this new strategy around Channel Exchange and what the reason for that was, was we needed to start adding new suppliers to help drive growth, too. We had not really added a lot of significant suppliers along the way.

And we needed the suppliers that -- some of the strategic partners that we're trying to recruit that I talked about a few minutes ago, the ones that can drive growth. These strategic partners were asking us for suppliers that transacted differently than the old Intelisys model. So the Channel Exchange transaction model without getting too much in the weeds, is allowing us to add new suppliers. We just added Sophos and [ Trustifi ]. And we think those are examples of the kind of new opportunities that are going to be incremental to our revenue and -- so these aren't suppliers that will replace existing revenue. So we've got a pipeline of new suppliers coming online.

And again, as we all know, we've been following this Intelisys model, we won't see all of that show up in our revenue as quickly as we'd like, but there are new orders and deals being done now, and we've modeled for FY '26, a reasonable approach to growth. And what that means is we're doing everything we can to add sales resources, financial enablement and new suppliers, so that as we exit '26, we expect to be back on a significant growth trajectory.

Great. And as we think about the guidance for next year, perhaps maybe some puts and takes on that. Again, come back to adjusted EBITDA guidance you guys gave at the low end of the range, it's only 3% growth, but you at the top end of the range, it's obviously in the double digits. How are you thinking about, I guess, what has to go right, what has to go wrong in order to meet the top and bottom end of your ranges there?

Well, Keith, as we were talking about last year, similar as we're sitting here this year, looking at FY '26, we see the growth coming in the second half. We see a faster growth trajectory coming in the second half as we're still in this kind of choppy tariff and interest rate environment.

So the low end of the range, both ends of the range include our investments that we need to make. What Mike was talking about in Intelisys, what we're talking about in our other businesses, we've got investments in that guidance. What we'll do as we go along is we'll throttle those investments to make sure that we manage to that EBITDA margin. And so that's how we're thinking about it.

The other thing that can swing through there a little bit is mix. And as we think about the mix, the mix can move around a bit on our EBITDA. And so those are the key things that we're thinking about as we think about that range.

Great. Appreciate it. And maybe just one more for me, if you don't mind. Talking on the 3-year strategic goals, getting your recurring revenue as a driver of gross profits up to -- building towards 50%, obviously, a pretty massive move considering the 31% you have here in this quarter or so. How much of M&A is part of that is involved in that versus what you guys believe you can do organically? And then if -- is '26 going to be like a rebuilding year for that? Is this really a '27, '28 fiscal year performance?

Well, Keith, I'll go back to what we called out in our prepared remarks. We went from 27.5%, I think, to 30 -- almost 33% for the year in recurring revenue as a percent of our gross profits. A lot of that is because of our acquisitions, and they weren't big, but they're very impactful. We also see that those advanced emerging technologies, they're going to transact more in that netted down revenue space. And so that will help us grow as well. And I think Mike has some comments.

Yes. And one other thing we added in our materials we provided, I don't know if you've had a chance to look at them yet, Keith, but on Page 12 of our supporting materials, we added a new schedule, which shows the recurring revenue gross profit and how it's changed over time. And if you look at that, we're going in the specialty technology area, we were 6.6% back in Q4 of '24, and now we're at 11%.

And so we're seeing what Steve just said is we're making some acquisitions that seem to be fairly small on the scale of the Advantix and Resourcive, but look at how quickly they can change and add to our recurring revenue contribution. So we believe -- and if you remember from our last -- I think it was our last call, I talked about the fact that we have 4 presidents that each have a strategy around acquisitions. And each of them have a real focus on how do they increase the recurring revenue in their particular business. So we feel very good about the ability to get on this path towards 50% even as we exit '26.

[Operator Instructions] Our next question comes from the line of Gregory Burns of Sidoti.

You mentioned some strong, I guess, broad-based growth in the Technology segment. Were there any detractors, though in the quarter?

Well, Greg, we continue to have a very profitable business in our communications business. And that's probably the one that has -- we've talked about for a very long time, has -- does not have a growth -- real growth path to it, but it is very profitable for us, and it helps us also sell other solutions. So I would say that's the one that probably is setting out there that's the slower growth. I'd also just kind of send you to our infographic. And if you look at that Specialty Technology segment, you can kind of see how that breaks out.

Great. And then can you maybe update us on the outlook for Brazil? Any changes there? And what your expectations are for that market?

Well, Brazil is an interesting dynamic for us. They're growing in local currency. And they're now getting ready to lap a pretty significant supplier shift out of some channels. And so we like where Brazil is going. We're just going to have to settle through these FX headwinds that we're seeing.

And Greg, this is Mike. One other comment to that. We talked about, obviously, Brazil a lot recently. And what I want to remind our investors is Brazil's model, business model is what we're trying to move to, frankly, in the U.S. They've been selling many more products that are in the cloud, recurring. They've been selling converged solutions before we started calling them converged solutions.

And so really, we've been able to -- because in Brazil, we're one of the dominant players. We are not a small distributor. There's not the scenario where we can't get suppliers like we have in some cases in the U.S. So we're really -- we love the fact that we've got a business that is profitable, that we have a very engaged team, and they're able to recruit suppliers in Brazil and sell the suppliers on the value proposition of ScanSource and our channel in a way that we're still getting suppliers to understand in the U.S.

So we love that business. We hate the economic environment they go to as a country and the political environment. But it's a profitable business, and we have a very strong management team that understands exactly what we're trying to accomplish now in the U.S. with our recurring revenue business.

[Operator Instructions] And our next question comes from the line of Damian Karas of UBS.

Congrats on the progress.

Thank you.

Yes. Thank you.

So I just have a couple of more specific questions. First, I wanted to ask you about barcoding and mobility solutions and what your expectation is there for that part of the business that you have factored into your fiscal 2026 guidance?

And I think typically, like the fourth calendar quarter of the year, so your guys second quarter is when like a lot of the larger project activity kind of often consummates for that part of the business. Just curious if you think there might be still larger projects that are fewer in number, comparable level maybe to what you saw last year, or if there's the possibility that there might be a larger project ramp as we kind of get through the end of this calendar year?

Yes. Thanks for the question. So when we think about the mobility and barcode technologies, what we talked about in our prepared remarks is that was a great growth area for the fourth quarter. What we also want to caveat is we're still facing -- and our large deals, particularly some uncertainty in the macro environment that we're not sure if that's a first half or second half growth trajectory for us. So I think it's a bit of a wait and see on when those big deals start rolling out. We saw some of that happen in the fourth quarter. We were happy to see it, but it's not widespread yet.

Really helpful. And then I guess kind of a new news item in the last month is Zebra acquiring Elo. I was just wondering if you could maybe discuss ScanSource's relationship with Elo? And do you think that transaction potentially changes anything on your side for either of those product categories, barcoding and point of sale?

This is Mike. I'll take that one. We try not to comment on our partners' acquisitions or their strategy per se. But our relationship with both of them, I can comment on. And we've been a long-time partner with Elo, Obviously, Zebra as well. And I talk to both of their CEOs about it and what they're trying to accomplish.

And for ScanSource, what is interesting is, in general, to be very transparent, consolidation of suppliers rarely helps us, okay? It only helps us as if there is a creation of a new market opportunity. And so what we're hoping to see from something like this is they're going to create new solutions that will go to the market in a way that ScanSource and our channel partners can benefit from.

And there is that -- there is this idea that, that could happen. And we talked about throughout our prepared remarks, the idea of converged solutions, which is a multi-vendor thought. And what that typically means is no one vendor can provide all of the pieces to that. Now that you have Zebra and Elo together, there's still going to need to be other parts of that solution that we can provide. And anything they're going to do to invest in retail is good for us. We've always had a strong retail channel presence. And we think that this is going to drive new technology at the front end of retail, which is what they communicated. We think that's nothing but positive for ScanSource and our channel partners.

Very interesting. Good luck.

You bet.

Thank you.

[Operator Instructions] I'm showing no further questions at this time. I'll now turn it back to Steve Jones for closing remarks.

Yes. Thank you for joining us today. We expect to hold our next conference call to discuss September 30 quarterly results on Thursday, November 6, at approximately 10:30 a.m.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.