ScanSource CEO: ‘One Of Our Goals Is To Sell More Of The Technology Stack Through Channel Partners’

'We would like our channel partners to start selling more of the stack, which could include servers, could include data center. That is something we’re investigating before making a decision on what kind of investments it would take for us and for our channel partners to do that,’ says ScanSource Chair and CEO Mike Baur.

ScanSource is looking to increase the recurring revenue portion of its Specialty Technology Solutions (STS) business, which is currently centered around more transactional business.

While the Greenville, S.C.-based distributor’s STS segment in its second fiscal quarter 2025 saw a 16 percent year-over-year drop in sales, it actually saw a 0.2 percent increase in gross profit thanks to recent moves by the company to make recurring revenue a bigger part of its business, ScanSource Chair and CEO Mike Baur told CRN.

“With the Intelisys and Advisory [I&A] business, we get visibility into a potential transaction, and then once it bills it bills for three years,” Baur said. “We have a much longer runway on the I&A business because it’s all recurring versus STS, which is mostly nonrecurring. We’re doing more recurring in STS, but it’s still mostly non-recurring.”

Even so, Baur said ScanSource is also looking at adding more data center infrastructure business. “One of our goals is to sell more of the technology stack through our channel partners,” he said. “We would like our channel partners to start selling more of the stack, which could include servers, could include data center.”

Baur also told CRN that he expects relatively little impact from potential new tariffs the new U.S. administration is proposing.

“The suppliers we’re working with have done a good job in the past of managing their supply chains globally,” he said. “As a result of what happened with COVID, many of our suppliers now have alternative countries that they’re producing in. They’re not all as China-based as much as they used to be.”

For its second fiscal quarter 2025, which ended Dec. 31, ScanSource reported revenue of $747.5 million, down 15.5 percent from the $884.8 million the company reported for the same period last year.

Following is more of CRN’s conversation with Baur.

How would you say the quarter went?

The overall sentiment we have is we were disappointed in the revenue, that demand continues to be softer than we had anticipated for where we are in the year. However, talking to our teams who have talked to their partners in the channel and to their suppliers, we still believe that the next two quarters’ business will come back and allow us to still achieve our yearly guidance through June 30.

A 15.5 percent drop in sales is significant. What’s behind it?

It sure is. One of the things we talked about is the lower number of big deals. Every quarter we have a forecast amount from our teams of big deals that are likely to close, and we had far fewer of them close in the quarter. And so that was a big part of the revenue miss.

Why didn’t they close in the quarter?

Well, that’s the unknown. Typically, when we get a large deal forecast, we’re hearing that from a channel partner who is, of course, working with the end user and generally the supplier, and there are various reasons, depending on the quarter. A lot of our suppliers have a calendar year focus. There’s generally a big push at the end of the calendar year, but sometimes the end customer decides to pause or wait before agreeing to that order. We’ve had this happen before. Unfortunately, it was more than we anticipated for this quarter. But we still believe in our annual guidance. We’ll still have large deals to play a role.

As you look at those large deals or any deals going forward, have you factored in the possibility of increased tariffs?

I go back and remind investors that when tariffs were enacted a couple of years ago, ScanSource generally did not [feel] a significant impact. What generally happened is the tariffs resulted in price increases we passed on through the channel to the end customer. In the past, it did not impact our profitability or the channel. In some cases, the end user paid a higher price without saying, ‘No, we’re not going to buy products.’ So we did not see an impact in demand. So really, for all of us, it was a higher selling price, which can somewhat inflate your revenue.

But this time, the potential for tariffs is different, given talking that the current administration is looking at tariffs of up to 35 percent on everything imported from China, which is the source of a lot of products IT distribution sells. Could tariffs have the potential for a larger impact now?

Well, we don’t know. But I have a couple of anecdotes. One is, we have inventory on hand today that we bought at the existing price, and so if there’s a price increase, we would have inventory at the lower price. So that’s one thing. That’s a natural buffer against something short term. And typically, the suppliers we’re working with have done a good job in the past of managing their supply chains globally. As a result of what happened with COVID, many of our suppliers now have alternative countries that they’re producing in. They’re not all as China-based as they as much as they used to be. So that’s changed.

Looking at the second fiscal quarter 2025 results, the 15.5 percent fall in net sales seems to be pretty much due to the 16 percent drop in ScanSource’s Specialty Technology Solutions segment, as opposed to the Intelisys and Advisory segment, which saw sales rise 4 percent. Why is the I&A business doing so much better than STS?

STS is still primarily hardware, and our hardware revenue and sales efforts are transactional. We get an order, we ship it, we bill it, we collect. It’s not recurring, and so it can be very volatile. We can get an order today and ship it today so we don’t have a backlog, whereas with the Intelisys and Advisory business, we get visibility into a potential transaction, and then once it bills it bills for three years. We have a much longer runway on the I&A business because it’s all recurring versus STS, which is mostly nonrecurring. We’re doing more recurring in STS, but it’s still mostly nonrecurring. And so that means it’s going to be more volatile not just on a quarterly basis, but on a daily basis because we don't have any backlog.

ScanSource’s Specialty Technology Solutions segment, like you mentioned, is primarily hardware. Are there any changes in the hardware mix that you foresee for calendar 2025 that might impact ScanSource’s business?

Technologies that were growing in the quarter were our barcode and mobility technology and our physical security. Of our other three big technologies, one is Cisco, because we’ve historically talked separately about our Cisco business. Then there’s our networking business and communication business. So those are the other three that we would typically be talking about.

Do you see any changes in the technologies your customers are looking for in 2025 versus 2024?

Two answers. One is yes, we are anticipating bringing on new hardware suppliers this year to add to the portfolio. That will be part of our growth strategy for 2025. And the other thing we’re doing to change the mix is we’re also now adding recurring revenue to the Specialty Technology Solutions area. Our recent announcement of the acquisition of Advantix is an example of that. I believe our recurring revenue for the quarter for Specialty Technology Solutions accounted for 12 percent of our gross profit. That’s a big change from over the last few years.

How about in terms of revenue?

The revenue is not impacted significantly by the move to recurring revenue. And so when we miss on top-line revenue, it’s a hardware story. The hardware, nonrecurring part of our business.

By the way, you mentioned picking up some new vendors this year. Can you say who?

Not yet, because the deals aren’t signed.

You didn't mention PCs, servers and storage. Are those areas ScanSource pretty much avoids?

They’re areas that we haven't participated in in the past. I wouldn’t say ‘avoided.’ It was more our traditional channel was not selling those products. However, one of our goals is to sell more of the technology stack through our channel partners. We would like our channel partners to start selling more of the stack, which could include servers, could include data center. That is something we’re investigating before making a decision on what kind of investments it would take for us and for our channel partners to do that.

Anything else you think we should know about ScanSource this quarter or in general?

I would say the real story of the quarter was the continued strength of our recurring revenue and how that continues to do well, including how well our Intelisys business continues to do. We have a new president for Intelisys, Ken Mills, who started last July. He’s doing a great job driving our Intelisys strategy. I think the Intelisys story is something we see continuing to do very well now and in the future.

Intelisys last quarter announced a new offering called Channel Exchange. This is where we’re going to bring on new SaaS suppliers to offer their products to the Intelisys advisory channel. For example, today we have Microsoft on that platform, and what’s new is we're selling it through the Intelisys channel. We’re also going to recruit other SaaS suppliers to sell through the Intelisys channel. We’ve got several on board that we’re signing the documents with shortly, so we expect to have some announcements on new suppliers.