ScanSource Execs On Changing Product Mix, Winning Cisco Distributor Of The Year

‘We believe are our business model is in place. What we’re seeing now is headwinds in the demand environment and in the space that we operate in. But we’ve got confidence as we look out into the technology, into this space, going longer term,’ says ScanSource CFO Steve Jones after the distributor’s first fiscal quarter 2024 earnings call.

Despite a drop in ScanSource’s revenue and income, combined with a lowered guidance for the current fiscal year, the IT distributor’s top executives told CRN after the company’s first fiscal quarter earnings call Thursday that they are confident a changing product mix will turn things around.

Thursday also marked the first time ScanSource was named Cisco’s Distributor Partner of the Year.

Steve Jones, ScanSource’s senior executive vice president and CFO, told CRN there are two key takeaways from the Greenville, S.C.-based earnings report.

“One is, our business model is in place,” Jones said. “And two, we’re generating free cash flow, as we would expect, and we expect to generate significant free cash flow this year.”

[Related: ScanSource: Our Focus Is On ‘Mission-Critical Technologies Versus A Nice-To-Have’]

Jones said the downturn ScanSource faced during its first fiscal quarter 2024 does not point to any long-term issues.

“Again, I go back to that first thing—that we believe are our business model is in place,” he said. “What we’re seeing now is headwinds in the demand environment and in the space that we operate in. But we’ve got confidence as we look out into the technology, into this space, going longer term. And that’s what we talked about in our three-year goals as well, which reflects the confidence that we have in the distribution space.”

Those three-year goals include revenue growth or top-line growth of 5.0 percent to 7.5 percent in a three-year to four-year window, adjusted EBITDA margins of 4.5 percent to 5.0 percent depending on the mix of business compared with this quarter’s 3.9 percent, a midteen adjusted return on invested capital, and recurring revenue as a percentage of gross margins growing to 30 percent from the current 25 percent, Jones said.

Jones said he doesn’t see a long-term impact from the headwinds, although ScanSource Thursday did reduce its fiscal 2024 guidance.

“For this year, we’ve taken our guidance down to $3.8 billion, which is flat year over year from where we were last quarter, “he said. “We thought we were going to see a 3 percent year-over-year increase. So near term, we’re seeing that it is impacting [us], but we still think long term there’s still a lot of opportunity in these technologies, a lot of opportunity in this space. And we continue to execute well with Intelisys. And that’s the biggest digital part of our business. And that showed a 9 percent growth rate year over year.”

ScanSource Chairman and CEO Mike Baur told CRN that when his company says it sees demand headwinds, it is talking about technologies such as barcoding, point of sale and mobility.

“When we talk to our customers and we talk to our suppliers, they’re all seeing the same,” he said. “A year ago, a lot of customers bought ahead in those technologies. And they’re digesting those investments now. And so there’s been an industry slowdown. And Zebra [Technologies, the Lincolnshire, Ill.-based barcode scanner company] has been very clear about that in the last two earnings calls.”

Baur said he expects those type of products will help ScanSource’s growth during its fiscal 2024.

“We still believe, looking back at Steve’s discussion about our guidance, that the second half of our fiscal year, which is the March quarter and the June quarter of next year, those two quarters we will see growth. It still for the year suggests flat, but we will grow. We just can’t predict how much and will it happen on time. We believe it will. But our business is not based on having a backlog. We don’t get bookings from [end] customers. So our visibility into future demand is always very limited as a distributor.”

ScanSource’s Specialty Technology Solutions business, which saw a 12 percent year-over-year fall in revenue, will require growth to return in its barcoding, point-of-sale and mobility businesses, Baur said.

“One of the things we’ve been talking about for a while is we still have growth in networking and physical security, which is in that segment,” he said. “We believe that we’ll continue to grow networking products, which are not from Cisco. We did receive recognition from [HPE] Aruba and continue to grow with them. So we believe barcoding and point of sale will come back. Mobility will come back. But right now, it’s our diverse group of technologies that really will enable us to weather this softening right now.”

ScanSource’s Cisco business is actually done in the distributor’s Modern Communications and Cloud segment, he said.

When it comes to winning the Cisco Distributor of the Year award, meanwhile, Baur said he was “proud” of ScanSource’s achievement.

“Just so you know, that means we competed against all of the distributors in the Americas, against Ingram Micro, against TD Synnex, etc.,” he said. “We’re very proud. It’s the first time we’ve won that award from Cisco. And we’ve been a Cisco distributor since 2007.”

Demand headwinds seem to be happening across the industry, Baur said.

“The demand environment is softening across the board,” he said. “So this is not just ScanSource. Earlier this quarter, and last quarter, you probably saw announcements from CDW, which has reported revenues down I think the last three quarters. It’s happening with other public companies reporting in our space. I can’t speak for the privates. But at our Channel Connect event in October in Orlando, we talked to a lot of our partners and a lot of our suppliers and saw it’s an industrywide impact. We’re not alone.”

For its first fiscal quarter 2024 ended Sept. 30, ScanSource reported total revenue of $876.31 million, down 7 percent from the $943.81 million the company reported for its first fiscal quarter 2023.

This includes revenue from its Specialty Technology Solutions business of $509.57 million, down 12 percent over last year, and revenue from its Modern Communications and Cloud business of $366.74 million, flat with last year.

Total revenue missed analyst expectations by $45.29 million, according to Seeking Alpha.

ScanSource also reported GAAP net income of $15.43 million, or 61 cents per share, down from last year’s $24.04 million, or 94 cents per share. On a non-GAAP basis, the distributor reported net income of $18.73 million, or 74 cents per share, down from last year’s $27.20 million, or $1.07 per share.

Non-GAAP income missed analyst expectations by 16 cents per share, according to Seeking Alpha.

Looking ahead, ScanSource is guiding revenue of at least $3.8 billion, adjusted EBITDA of at least $170 million, and free cash flow of at least $200 million.