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, Treasurer and Investor Relations.
Ma'am, you may begin.
Good morning, and thank you for joining us. Joining me on the call today are Mike Bauer, our Chairman and CEO John Eld, our President 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. Please let me remind you that certain statements in our press release, in the earnings infographic and on this Call are forward looking statements.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, those factors identified in the earnings release we put out today And in ScanSource's Form 10 ks for the year ended June 30, 2022, as filed with the SEC. Any forward looking statements Represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. ScanSource disclaims any duty to update forward looking statements to reflect actual results or changes in expectations except as required by law. During our call, we will discuss both GAAP and non GAAP results and have provided reconciliations between these amounts in the earnings infographic and in our press release.
These reconciliations can be found on our website and have been filed with our Form 8 ks filed today. I'll now turn the call over to Mike.
Thanks, Mary, and thanks, everyone, for joining us today. We started fiscal year 2023 from a position of Great, delivering 10% net sales growth and record earnings per share. This exceptional performance is a result of strong demand and working capital investments to meet the needs of our channel partners. I'd like to highlight 3 areas that contributed to our record EPS. Number 1, our consistent top line growth gives us leverage on our SG and A.
In 5 of the last 6 quarters, we delivered double digit net sales growth. The strong demand across our technologies coupled with our trusted customer and supplier relationships are making a difference in our ability to achieve above market growth rates. Number 2, I'm incredibly proud of our team in Brazil and their consistent performance in profitability and return on working capital over multiple quarters. They've proven the scalability And flexibility of our business in Brazil in spite of macro events in the region. And number 3, Intelisys.
Telesis was the catalyst for the transformation of ScanSource. With Intelesis, we opened up a new route to market through agents and started our cloud distribution journey. The Intelisys business model enabled us to build our 1st recurring revenue stream. We started from 0 recurring revenue 6 years ago and now have approximately 24% of our gross profits from recurring revenue on a trailing 12 month basis. With our proven success in this device distribution and recurring and recurring revenue, We have transformed the company into the leading hybrid distributor that we are today.
I will now turn the call over to John to discuss our business performance.
Thank you, Mike. For Q1, we delivered 10% net sales growth And 12% gross profit growth. Q1 was another quarter highlighted by strong demand for our technologies and outstanding execution By our team and our partners, while navigating ongoing supply chain challenges. In early October, We hosted ScanSource Channel Connect, the largest in person event in our history with over 1800 attendees. For the first time ever, we brought together our VAR and agent communities to discuss how they can accelerate growth across hybrid opportunities.
Our messaging resonated very well with our partners and created enthusiasm for driving hybrid solutions and growth. What was also evident is the importance and value of our customer relationships and how Critical these deep relationships built on common goals and trust are to our mutual success and growth. I want to send out a heartfelt thank you to our marketing and events team for designing, architecting and producing this incredible event. Our outstanding Q1 performance demonstrates how our hybrid strategy and capabilities are enabling partner success and growth. We are committed to helping partners execute on the expanded opportunity to sell device and digital solutions.
Let me give you an example of how our hybrid strategy is winning business. An existing customer looking to add more capabilities Brought their cloud and on prem communications business out to RFP. Through our extensive hybrid capabilities, including Our CX practice, our solutions and technical engineering capabilities and our professional services referral program, We won the business bringing all their cloud and hardware business to ScanSource. We doubled our hardware business from 10,000,000 to $20,000,000 and added a continuing stream of UCaaS and CCaaS subscription revenues. Innovative solutions like this are driving incremental value and recurring revenue for our hybrid partners and ScanSource.
The supply chain challenges are continuing, but this environment plays to our execution strengths, including our position as the largest or second largest customer for many of our suppliers. We're seeing the strongest demand from our VARs who service Large enterprise customers. These enterprise solutions consist of multiple products that have various lead times, sometimes across multiple suppliers. Our strategic advantage is that we can use our balance sheet To allow our customers to secure supply of available product by taking partial deliveries, but pay us when shipments are complete.
Let me
tell you in a little more detail about our business results for the Q1. In our Specialty Technology Solutions segment, Q1 sales grew 15% year over year. Robust demand for our hardware technologies And product availability fueled our growth. We help our partners deploy and enable mission critical devices, including mobile computing, is led by Zebra, Honeywell, NCR, Toshiba and Hanwha. Modern Communications and Cloud segment delivered 3% net sales growth.
We had incredible growth with Cisco. Our Q1 Cisco net sales grew close to 50% year over year, led by large enterprise projects. Our key areas of growth are technologies that enable remote work for the enterprise, including UCaaS and CCaaS. As part of our Intelisys business, our UCaaS business grew 20% led by RingCentral, 8x8 and Zoom, And our CCaaS business grew over 60% year over year. Intelisys continues to lead in the agency space.
For fiscal year 2023, we expect double digit year over year net sales growth for Intelisys, Driven in large part by the strength of our relationships and the trust and credibility we foster with our partners and suppliers. I am so proud of our Intelisys team, our industry leading events and our enablement and technical capabilities. Our partners look to us for thought leadership to drive growth and success across their businesses. In Brazil, over the last 5 years, we achieved scale and operational excellence across the business. Because we've achieved critical mass, this business has been able to self fund its growth while achieving its expected net profitability.
As an example of our team's operational excellence and ability to mitigate risk, our Brazil business unit Received recognition and certification from the Brazil government in the areas of importation controls and anti corruption. Lastly, ScanSource once again was named the Cisco Distributor of the Year in Brazil. In summary, we are excited about our Q1 results and our trajectory of sustainable profitable growth as we execute on our strategic plan. I want to send out a massive thank you to all our people for their dedication and commitment throughout Q1 And to our partners and suppliers for their ongoing trust and loyalty to ScanSource. Now I'll turn the call over to Steve, Who will take you through our financial results.
Thanks, John. For Q1, we delivered strong top line growth With net sales of $944,000,000 up 10% year over year and record profitability, Our non GAAP diluted EPS of $1.07 and adjusted EBITDA of $45,300,000 Our all time company records for ScanSource and highlight our consistent strong financial performance. We achieved 15.6 percent ROIC for the quarter as investments in working capital allowed us to take advantage of strong demand. Q1 Intelisys net revenue increased 7% year on year. However, Intelisys had double digit net Commission growth, which are the ongoing commissions we earn on partner sales, while supplier rebates were lower due to timing.
And as John said earlier, for the full year, we expect double digit year over year net sales growth for Intelisys. Our gross profits grew faster than sales, up 12% year over year to $113,000,000 with a 12% gross profit margin. This includes benefits from supplier price increases. Our hybrid distribution strategy is winning in the market and strengthens our financial results. Our Q1 recurring revenue of $26,600,000 grew 11% year over year And that business is close to 100% gross profit margins.
For the trailing 12 month period, approximately 24% of our gross profits are from our recurring businesses. Our non GAAP SG and A expense for the quarter of $71,600,000 Increased $7,700,000 or 12 percent year over year. This increase is primarily attributed to higher people cost from wage increases and headcount investments to support our high growth areas. Our Q1 adjusted EBITDA of $45,300,000 represents a 9% year over year growth rate and a 4.8% adjusted EBITDA margin. Q1 non GAAP EPS of $1.07 grew 8% year over year and includes interest expense of $34,000,000 of $3,400,000 Our higher year over year interest expense reflects both higher interest rates and the investments in working capital that help drive our higher growth rates and profitability.
Now turning to the balance sheet and cash flow. Our strong balance sheet enables us to invest in higher working capital to support the strong demand across our technologies and the need of our customers and suppliers. We think it's the right investment to make when we can deliver a 15.6% adjusted ROIC like we did in Q1. We used operating cash of $48,000,000 for the quarter and $116,000,000 for the trailing 12 month period. We believe our higher working capital investment driven by higher accounts receivable and higher inventory levels is temporary as we support our sales partners and suppliers in a strong demand environment.
Year over year accounts receivable increased $155,000,000 a 26% year over year increase and Q1 DSO increased to 71 days, higher than our typical range. To support the strong demand environment, we are using collared extended AR terms, both project specific and time based on a targeted basis with good payers. Our AR investments Support long project rollouts due to availability and partial shipments. As supply chain challenges ease, We would expect our collared payment terms and DSO to come back down. The overall health of our receivables portfolio is very strong.
Year over year inventory increased $182,000,000 a 37% increase year over year and Q1 inventory turns Slowed to 5.1 times, slower than our typical range. In our current environment, Availability is key to capitalizing on strong demand for our technologies. Our working capital investments have enabled us to achieve double digit sales growth In 5 of the last 6 quarters, our inventory is current and we have stock rotation, price protection and obsolescence protection with our suppliers to mitigate downside risk. On September 30, 2022, We had cash and cash equivalents of $40,000,000 and debt of $326,000,000 Our balance sheet remains strong. From a net debt leverage perspective, we ended Q1 at approximately 1.7 times trailing 12 month adjusted EBITDA.
During the September quarter, we had no share repurchases under our $100,000,000 share repurchase authorization. On September 28, we amended and extended our credit facility for $500,000,000 in committed facilities with a new maturity date of September 28, 2027. It was an opportune time to complete the new facility with a strong banking group and favorable pricing grid. Our amended credit facility provides us with the financial flexibility to support our near term growth opportunity and our midterm goals that we introduced last quarter and are included in our latest investor presentation available on our website. Finally, we are reaffirming our full year 2023 outlook of at least 5.5% for year over year net sales growth and at least $174,000,000 for adjusted EBITDA.
We expect faster growth in the first half of FY twenty twenty 3, then we see in the second half of the year. As we think about our cash flows, we expect to use cash in the first half of the year and generate free cash flow in the second half. We expect our increased investments in working capital to continue through December quarter and expect Q2 interest expense to be similar to Q1. For our fiscal year 2023, we estimate the effective tax rate Excluding discrete items to range from 26.4 percent to 27.4 percent. We are very pleased with our start to FY 2023 and how we are executing on our hybrid distribution strategy.
I'll now open it up for questions.
And our first question comes from the line of Greg Burns from Sidoti. Your question please.
Good morning. I just wanted to dig in a little bit more on the net sales growth on the modern communications side of the business. Given the kind of the growth you called out from Intelisys in the UCaaS market and the CCaaS market as well as what you saw from Cisco, Were there other offsets to get to that 3% total net sales growth? Like what is driving that? It feels like Some of the areas were growing a lot faster than that 3%.
Greg, this is John. Thanks for your question. And yes, we saw A decrease actually about 26% year on year on the on prem comms business and that was primarily driven by Three suppliers that we saw in the quarter.
Okay. And what how much of that business is now That on prem, how much that is left?
Greg, we still have a long tail on the on prem communications. We're always wondering when That bottoms out and we try to guess at that, but it's still a long tail on that one in our business. Okay.
What percent of Monarch Communications is still made up? Does that make up?
That's a good question, Greg. I don't as we switched over to looking at hardware and comps together Sorry, Greg. Thanks for that, Mary. It's less than 15% of the total segment.
Okay, perfect. Thanks. And then the decline in the gross profit, is that just a mix issue? Because typically, I would expect The gross profit to grow faster than revenue on that side of the business given how Intelisys is accounted for?
Yes, Greg. This is Steve Jones again. It really is the mix of Cisco in that segment. Cisco typically has a lower margin for us And that has seen incredible growth and so it really comes back to mix.
Okay. And then on the technology side of the business, is there specific Like demand trends, secular trends driving demand there is because I know that business performed well during the pandemic given the need for like remote computing And payment terminal upgrade cycles, but is there is that just continuing or What are the drivers in that market that you're seeing driving demand?
Yes, Greg, I wasn't exactly Sure, if you were talking just about modern comps or if you were talking about both segments, but we are absolutely continuing I guess, 1st and foremost, remember, we're playing in all large and growing markets. That's the first piece. But automation and worker productivity continue to be strong for us, Mobility, physical security and yes, POS and payments, self checkout. And then on the modern comms side, it continues to be enabling remote work, Enabling return to office and collaboration.
Okay, great. Thank you.
And our next question comes from the line of Keith Housum from Northland Coast Research. Your question please.
Good morning, guys. I appreciate it. Just focusing a little bit more on the specialty side, some of your largest barcode vendors that you And earlier is where you were having success. You've put out some pretty as cautious guidance for the Q4 and obviously investors I have ideas about the rest of the year, but obviously you guys are seeing some strength from them. So perhaps you guys can speak a little bit more about your visibility for the next quarter And where are some of your excitement coming from there?
Hey, Keith, it's John. Thanks for the question. And Yes. Look, we had a strong quarter and we're excited about what was happening in barcode and mobility. As you know, we saw some challenges with one of our suppliers and Some of their transitions from one distribution center to another, but we were able to work through that.
We had Strong inventory flows to us Q1 and Q2 and we feel good about big deals. And I guess most importantly, as you know, we just had the ScanSource Channel Connect conference that I referenced and there was Incredible enthusiasm amongst our barcode and mobility partners at that event for continuing strength and demand.
Great. I appreciate that. And speaking a bit, coming back to your question before about Cisco, did I understand that right that Cisco is now Grew sales 50% in your modern communications segment?
Keith, this is Steve. That's correct. That's where a lot of our Cisco Revenues, Sid, is in that modern communication and cloud.
Great. And obviously, from an investor standpoint, the concern is how sustainable is that Growth there. Obviously, it's beneficial as all things were lost in the on prem business. But is that something that I guess investors have a lot of confidence that kept the growth can continue, I guess, As long as we see the on prem challenges?
Yes, we believe so Keith. We believe that's a very strong business for us and we're in a good position to take advantage of the
Great. Hey, Keith, it's Mike. Just I can't resist. We With the Cisco distributor of the year, again in Brazil, the fact that we're growing so much with Cisco suggests that The customers prefer us because they have other choices. And I think the records that we're achieving is just evidence that we've got the right combination of services and relationships that Cisco appreciates.
And so we're not the biggest Cisco distributors you know, but we believe we're the best
In my understanding, Cisco is having their challenges with the supply chain equipment, especially its networking and Meraki equipment. Are you guys having success by growing your reseller base or are you getting access to more products? Maybe any color you can provide on How you guys are achieving that growth?
Yes. Hey, we're going around the horn here. Now you're back Keith, I think the we were able to deal with any supply chain constraints in Q1 Very well. As you know, we took some inventory in our own distribution centers, but did a lot of drop ship. We also We are seeing a lot of large enterprise projects as customers move from what was The early days of COVID and just trying to put technologies together short term, now they're moving towards longer, more sustainable enterprise projects.
And I think The last thing that we're so excited about is we're bringing on a ton of new Cisco partners. I think we brought on over 30 plus partners this past quarter. So we've been working hard. And like Mike said, I think the mere fact that they're coming to us is a testament that Yes, we're who Cisco prefers.
Great. And I guess one more question, since you drew out 30 is not what you added, what's kind of baseline are we comparing that to?
What's our baseline for Cisco? So Keith, that's something that we don't disclose. Okay.
Yes. No, I guess, I'm sorry, not based on revenue, but based on in terms of Of partners, you brought on 30 new partners, is that compared to several 100 partners already or is that even larger?
Yes. Again, Keith, that's not something that we disclose in terms of a number. We just really are saying that the 30 to say, When we look at our overall base, that's quite a bit to bring on in 1 quarter.
Yes. Agree, fair enough. Thank you. Appreciate it.
Thank
you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Steve Jones for any further remarks.
Yes. Thank you and thank you for joining us today. We expect to hold our next conference call to discuss December 31 Quarterly results on Tuesday, February 7 at approximately 10:30 a. M.