November 9, 2023
As ScanSource and its customers face "softening demand" in mobility, barcode and point-of-sale, the hybrid distributor is pointing resellers toward recurring revenue opportunities elsewhere in the business.
Greenville, South Carolina-based ScanSource in its fiscal year highlighted growth in its Cisco practice and its Intelisys technology services subsidiary. ScanSource executives said those two areas are offsetting a slowdown in new bookings and orders for devices in the company's specialty technology solutions portfolio. The specialty segment brought in nearly $510 million in net sales last quarter, declining 11.6% from first quarter fiscal year 2023. The modern communications and cloud unit stayed about the same, just shy of $367 million, with Cisco and Intelisys offsetting declining communications hardware sales.
ScanSource posted overall net sales topping $876 million in the quarter, a 7.2% decrease from a year prior. Gross profit was $107 million, down a little more than 6%, with a gross profit margin of more than 12%.
Intelisys, which ScanSource bought in 2016, remained a strong player in the portfolio with almost 9% growth in net sales. The services distributor employs a commission-based agent sales model that ScanSource leaders say is ripe for further investment.
"Changes in the technology distribution market and our belief in the growth opportunities ahead make this an ideal time to use our balance sheet to be disruptive in the market, both organically and through acquisitions," CEO Mike Baur told investors. "As in the past, we will make acquisitions where we expect higher growth and higher margins for the company."
Intelisys is driving $2.5 billion in annualized net billings. CCaaS net sales grew 27% year-over-year for Intelisys, and UCaaS grew 10%, according to ScanSource.
ScanSource Earnings: Softening Specialty Demand
A reset of sorts is impacting the specialty technology side of the business – including mobility, barcode and point-of-sale – following quarters of massive pull-through revenue on record-setting inventory backlog.
"The end users are having to digest a lot of products that they acquired last year. So there's a slowdown in new bookings and new orders," Baur told Channel Futures. "There's a slowdown happening and we're no different than anybody else."
ScanSource's Mike Baur
For example, mobile computing hardware provider Zebra Technologies declined in net sales by nearly 31% in its last quarter.
"While we believe demand trends are leveling, we are not seeing signs of a market recovery based on customer behavior, and remain cautious in our planning for the remainder of the year and first half of 2024," Zebra CEO Bill Burns said.
Baur pointed to the strong adoption of self checkout technology in retail, driven in part by ScanSource resellers and suppliers. But now many partners are evaluating where else in their customer base they can implement such technologies. Baur said ScanSource is encouraging those hardware VARs to sell recurring revenue-based solutions that can offset lumps in the barcode/POS sales cycle.
"Every partner needs to have some mailbox money that helps to get them through when you have slower times on the product side," Baur said.
Recurring revenue – largely comprised of the Intelisys business – accounts for more than 25% of gross profit for ScanSource. Executives have noted in prior earnings calls and interviews with Channel Futures that some partners in the legacy ScanSource VAR base have leveraged Intelisys to sell unified communications as a service (UCaaS), contact center as a service (CCaaS), connectivity and cloud offerings in an agent route to market.
However, ScanSource chief financial officer Steve Jones said a big opportunity remains for traditional VAR partners to learn about the model and engage with it.
ScanSource's Steve Jones
"That really changes the value of their company, and it changes the way that they can invest going forward. But it is a jump to go from [one-time] revenue that comes [immediately into] accounts receivable to something that's broken up over 36 months," Jones told Channel Futures.
Intelisys received perhaps more attention than ever on an earnings call from analysts and investors. Baur and his team have said they want to emphasize the TSD more and more.
"We're very bullish on it. It continues to be an area that we are in investment mode. We love the recurring revenue. We love the high margins. We really believe that business is still in growth mode for our company and frankly for the industry as suppliers look to technology services distributors like ScanSource/Intelisys to really lead the way," he told investors.
Cisco at its annual Partner Summit this week named ScanSource its Americas Distributor of the Year. ScanSource has earned honors in the past for its Brazil business, but yesterday's award marked a milestone for its North American business.
ScanSource started partnering with Cisco in 2007 as a wireless-only distributor. The company entered the collaboration side in 2015 with the acquisition of KBZ. Baur said ScanSource began building a Cisco-only team after 2019.
"It's the only supplier that has a distinct and separate sales team at ScanSource in the U.S., and that's what's allowed us to become proficient and frankly experts at dealing with all things Cisco," Baur said.
ScanSource supplier leader Kristin Hill told Channel Futures earlier this week that it has seen major growth in its Cisco cybersecurity practice. In addition, ScanSource recently launched its Evolve Cisco Practice Builder, designed to help legacy ScanSource VARs start building a practice with the vendor.
In addition, Baur said ScanSource's Cascade digital platform gives partners the option of ordering Cisco products digitally.
"We're people-plus-digital as ScanSource and that is a distinction compared to the other SMB distributors," Baur said.
Free Cash Flow and Investments
ScanSource highlighted its $91.2 million in free cash flow. Baur told Channel Futures last month that the company can put that cash to use for investments into the Intelisys business.
Moreover, Jones said the cash-flow statistic serves as a validation of ScanSource's business model following two years of macroeconomic instability.
"After coming off of this supply chain disruption period, our business model wasn't working the way it historically has because we had such high inventory levels that we were having to adjust to," Jones told Channel Futures. "This quarter demonstrates that our business model works as we would expect. When we have mid-to-low single-digit revenue growth, we should be generating cash. That's the first thing that we wanted to highlight; things are going as they should."
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