ScanSource executives praised their Intelisys agency business for helping the hybrid distributor drive a record adjusted EBITDA in its latest earnings.

ScanSource on Tuesday revealed earnings results for the first quarter of its fiscal year 2023. The company reported an adjusted EBITDA $45.3M in the quarter, which grew 9% year-over-year. Moreover, ScanSource reported a 10% net sales growth and a 12% gross profit growth.

CEO Mike Baur pointed to consistent topline growth and the strength and profitability of its Brazil team. Moreover, he praised the Intelisys business, which ScanSource bought six years ago. Intelisys brought on an agency modeled that differed significantly from the legacy ScanSource resale model. Agents sell services on behalf vendors, who in turn pay them with a monthly commission. Recurring revenue now accounts for approximately 24% of ScanSource’s gross profits, but it accounted for none before the acquisition.

“Intelisys was the catalyst for the transformation of ScanSource. With Intelisys we opened up a new route to market through agents and started our cloud distribution journey,” Baur told analysts.

ScanSource’s Mike Baur

And executives said Intelisys is growing. Intelisys net revenue increased 7% year on year, and its commissions grew in the double digits, Jones said. Intelisys’ UCaaS business grew 20%, and CCaaS grew more than 60%. Compare that to the previous quarter, when UCaaS grew 24% and CCaaS grew 48%.

ScanSource’s John Eldh

“They’re moving from a more tactical deployment to much more rigorous, strategic enterprise deployments, and we are participating in those deployments,” ScanSource president John Eldh told Channel Futures.

Moreover Eldh said average order size and volume are increasing for UCaaS and CCaaS.

Sales Breakdown

The distributor runs two main segments: specialty technology solutions, and modern communications and cloud.

ScanSource’s specialty technology solutions segment, which includes point-of-sale and barcode, physical security, enterprise mobile computing and networking, reported 14.9% net sales growth. Net sales totaled $576 million, and gross profit grew 28% to $58 million.

Eldh said a wide variety of technologies saw high demand, including self-checkouts, mobility and payments.

On the other hand, the company’s modern communications and cloud unit, which includes Intelisys and has buoyed ScanSource in recent quarterly earnings, totaled $367 million in net sales. That’s a 3.3% increase from $355 million a year ago. However, net sales dropped from $381 million in the previous quarter.

Executives said shrinking on-premise communications business offset the major strides the rest of the modern communications and cloud (MC&C) unit made. Bauer said on-prem communications decreased 26% year-on-year. Executives said on Tuesday that three key on-prem communications hardware suppliers were seeing a year-over-year decline.

That decline, Eldh said, represents a larger technology lifecycle trend.

“On-prem communication hardware is being replaced with cloud technologies,” Eldh told Channel Futures. “The good news for us is, we actually get to participate on both sides.”

That dual participation comes with the Intelisys business as well as cloud-based endpoints attached to premise-based hardware.

ScanSource addressed the on-prem communications hardware headwind in its previous quarterly earnings, when it reported a 28% decline. On-prem communications now represents less than 15% of the total MC&C unit.

ScanSource’s Steve Jones

“We’re always wondering when that bottoms out, and we try to guess at that, but it’s still a long tail on in our business,” said Steve Jones, ScanSource’s senior executive vice president and chief financial officer.

At the same time, ScanSource leadership has been making a concerted push for its massive base of reseller partners to add agency-driven cloud sales to their portfolio. About 30,000 partners, the majority of which fall into the reseller category, work with ScanSource. And at last check, 540 partners were selling both hardware and cloud services.

ScanSource/Intelisys’ John DeLozier

“… For us, it’s a matter of conversion and less about recruitment,” Intelisys president John DeLozier told Channel Futures last month

Cisco and Brazil Growth

Baur said ScanSource’s Q1 net sales associated with Cisco grew almost 50% year-over-year. He said large enterprise projects helped drive that growth. In addition, Eldh said ScanSource brought on more than 30 new Cisco partners last quarter.

ScanSource’s strong relationship with Cisco has helped propel the distributor’s Brazilian business “achieve critical mass.” ScanSource last week earned Cisco’s distributor of the year award for Brazil.

Eldh also praised the management team that leads Brazilian efforts.

“It’s a winning combination of leadership, talent, portfolio and market opportunity,” he said.

ScanSource in October hosted the Channel Connect event historically associated with the Intelisys business. Both legacy Intelisys agents and legacy ScanSource resellers attended, and ScanSource executives urged them to diversify their routes to market.