ScanSource CEO Mike Baur Talks Reorganization, Acquisitions And Why He’s Bullish About Growth

‘We're now putting all of our hardware business and associated services with it in one segment called Specialty Technology Solutions, and then we have the second segment, which is new, called Intelisys and Advisory. That's where we're putting the ‘NewCo’ that we introduced a quarter or two ago that included a company we acquired, Resourcive,’ says ScanSource Chairman and CEO Mike Baur.

Greenville, S.C.-based distributor ScanSource said this week that it reorganized its business units to both provide channel partners greater clarity into their recurring revenue opportunities and provide investors with greater clarity into how the company is doing financially with those opportunities.

The company, which announced the changes during its quarterly earnings call on Thursday, also introduced Channel Exchange, a new offering built in part on its 2019 acquisition of cloud services platform provider intY. Channel Exchange will not only provide a way for vendors to more easily provide cloud services to channel partners but will also provide channel partners with a cloud marketplace to better reach out to their customers.

ScanSource Chairman and CEO Mike Baur told CRN in an exclusive meeting that the new reorganization, which brings hardware and associated services into the new Specialty Technology Solutions segment and Intelisys and newly acquired Resourcive into the new Intelisys and Advisory segment, makes the company more channel-friendly and investor-friendly.

“What we want to say to the channel community is this is why we’ve been calling ourselves a hybrid distributor,” Baur said. “We're a transaction hardware business that partners can buy hardware from, like they have, but they also can sell recurring revenue, and we have different margin opportunities for the channel.”

Baur also talked about making recurring revenue a priority as ScanSource moves into 2025. He also explained the reason why ScanSource reported an 11.5-percent year-over-year drop in first fiscal quarter 2025 and why he is not worried.

There’s a lot going on at ScanSource. For more, read on.

With all the changes in the IT space and your most recent quarter, have you recently redefined ScanSource?

Maybe the place to start is the quarter, and this is primarily an investor message, where we redefined our segments so that we can better describe our business. And we think that's going to be very helpful for our investors to understand that we are in the business of selling hardware and recurring revenue. But when we added the Intelisys business, there were a lot of questions about how different that business is, and it was harder for us to describe it in our financials. Today, we're now putting all of our hardware business and associated services with it in one segment called Specialty Technology Solutions, and then we have the second segment, which is new, called Intelisys and Advisory. That's where we're putting the ‘NewCo’ that we introduced a quarter or two ago that included a company we acquired, Resourcive. So it’s Intelisys and a new agency business. That’s the new news for the quarter.

That’s the message for the investors. How does that reorganization impact your solution provider customers?

Not at all. They won’t even realize it. It really is a way for us to better describe the business from a business model. For example, the gross margins of a hardware business are dramatically different from an agency commission recurring revenue business like Intelisys, and by putting them together, it wasn't easy for some of our investors to understand which part of our business is contributing to the overall profitability. We could describe it in a broad stroke. But to give you an idea, the gross margin of the Specialty Technology Solutions business is around 10 percent, and the gross margin of the other segment is around 99 percent. So you start there, and you're like, ‘Whoa, these are totally different businesses. How in the world does this work?’

And so this is going to let us describe how we end up from an EBITDA perspective with one business at about 3.5-percent and the other business at around 38 percent. These are two different businesses. But what we want to say to the channel community is, this is why we've been calling ourselves a hybrid distributor. We're a transaction hardware business that partners can buy hardware from, like they have, but they also can sell recurring revenue, and we have different margin opportunities for the channel. And that's why we've been calling ourselves hybrid. We have a high-margin hardware business versus other distributors because we're specialty, and we have a recurring revenue high-margin business through Intelisys. And that's what we really want [the channel] to see.

You mentioned the acquisition of Resourcive, one of two acquisitions that ScanSource has made recently. Talk a little bit first about Resourcive.

Resourcive is in the intelligence and advisory segment. Resourcive is an agency, so it's a business that sells to the end customer. We acquired this small company so that we could better understand two things: how the model works, and how to help all of our other partners who buy from Intelisys. We're trying to create the channel model of the future. We believe Resourcive, a very small company, if we can help them develop the right tools and the right offers for the end customers, we can extrapolate that information and share it with the rest of our Intelisys community. But we’ve separated those two businesses, even though they're in one segment.

If Resourcive is still selling directly to the end-user community, what about channel conflict with the rest of ScanSource’s business?

When we decided to do this, I got in front of our top Intelisys community partners to explain exactly that. I said the reason we're doing this is because all of our competitors are doing it, and our partners were asking us, ‘Hey, ScanSource and Intelisys, are you interested in acquiring partners?’ And we were saying no, but our competitors were saying, ‘Sure.’ And so we believe that we were not responding to the partner community asking us to do that. Now, obviously, we have to be careful how we do this because we're not intending to buy a bunch of partners and then have them compete with Intelisys. And what I said to the partner community [was] our intent here is if, if we are aware of any channel conflict, then Resourcive will back out, and we will support the Intelisys partner who is in that account. That's our commitment.

How about the other acquisition, Advantix. What does that company do for ScanSource’s partners?

The good news for our investors and for [the channel] is Advantix is going to be in the other segment. It's showing how we're going to provide this hybrid model distribution plus recurring revenue for all of our partners. It's in the Specialty Technology Solutions segment. It’s also part of a new strategy that we also announced last quarter called the Integrated Solutions Group or ISG. Advantix is focused on providing and introducing to our partners, mostly the VAR audience, how to sell recurring revenue when you sell, for example, a bar code scanning mobile device. What recurring revenue will the end customer want to buy to go with that mobility device? So we bought Advantix, which provides exactly that solution. They provide wide area, meaning cellular, connectivity capabilities on a recurring revenue basis to mobile devices that can use SIEM (security information and event management) technology. We're selling data plans through the channel to the end user, and we're able to do that with most of the carriers in the marketplace.

Is ScanSource known as an acquisitive company? Or are Resourcive and Advantix departures from the norm for the company?

We acquired a lot of companies before 2019, and we were at that point digesting what we had because we bought Intelisys, POS Portal, and intY in the U.K. But in 2019, we had to restructure our sales force to make sure that we had the right strategy about how we sell these new technologies. So before 2016, we made about 28 acquisitions, and they were all primarily in the same type of business. A distributor would get us another set of customers or another set of suppliers, but it was the same sales motion. Since 2016, we have bought companies that bring us a different model or different technologies that we were not in before. And that's why Advantix and Resourcive are different. Also, they're in keeping with what we told investors, which is they don't require a lot of working capital, and they have high margins for us and for our partners.

Looking at the first fiscal quarter 2025 results, ScanSource reported an 11.5 percent drop in total revenue. What happened?

Well, if you recall, this past year there's been soft demand throughout the technology distribution industry. We're not alone. The challenge has been that the market got soft. And really, I think it's probably the fifth quarter in a row where we have continued to say what's happening in the marketplace and what we need to do differently, if anything. And the channel keeps telling us, ‘Hey, we don't have the demand from the end user,’ so it's not that they’re choosing a different distributor. This is a market dynamic. What we told our investors was this year, and for us our year started on July 1, for this next three quarters after this quarter, that we expect by the end of the year, if you total up four quarters, we'll be back to a roughly flat year-over-year revenue growth at the midpoint of our guidance. We're having double-digit declines right now. We expect that to go to single-digit declines as we go through the year. And we believe we'll actually start growing again once we get to the end of our fiscal year.

And what is going to lead that growth?

We think market demand will come back. And meanwhile, as you saw from our results, we've adjusted our business to where we're still very profitable, even in a softer demand environment, and we've done that routinely over the years. And not only do we maintain strong profitability, but also generate strong cash flows.

We're coming up pretty soon on 2025. What's your strategic priority for the year?

We've given a plan for the year that, again, suggests at the midpoint that we'll have flat to modest growth, but will be very profitable and generate free cash flow. And we want to make sure that we're in position, though, for the future. So we believe, when we look out two to three years, that we're in a business that the channel community will want to learn more about: How can they participate in this growing market of specialty technologies and recurring revenue? We think we've got something nobody else has: The combination of devices and hardware and recurring revenue. We believe that helps our partners build a stronger business long term. As a matter of fact, I just said a few minutes ago we bought a company called intY to get a platform to do more recurring revenue than what we were doing with just Intelisys. And we just announced Channel Exchange. I’d love [Intelisys President] Ken Mills to talk about it.

What is Channel Exchange?

Mills: We've learned that our customers want to purchase technology in a number of different ways, and Channel Exchange gives us an opportunity to bring a marketplace to our customers and allow our channel partners to sell into that marketplace with their customers. It also gives new suppliers an opportunity to get introduced to the Advisory side of the business. A lot of these suppliers have not done business with the Advisory side of business, or some of the MSPs that we have on the Intelisys side. It really opens up a whole new opportunity for growth for them, as well as a flexible route to market for our partners and customers to transact the way that they want to transact. We are officially kicking it off at the Intelisys Channel Connect conference November 18 to 20 in Nashville. We are already moving customers over to this new platform today and will do a more detailed review and make it live the following week.