ScanSource CEO: Broadline Competitive Acquisitions Won't Hurt Our Margins

ScanSource CEO Mike Baur said his company would maintain profitable relationships with customers and suppliers even as competitors move into the specialty distribution space.

"These broadline guys are buying a higher-margin business, which means they have to keep the margins high," Baur told CRN Tuesday after the company's earnings call. "We believe that we should not see an encroachment on our business from a margin perspective because that would then defeat the rationale behind making the strategic acquisitions."

Tech Data's February purchase of $9.65 billion Avnet Technology Solutions and Synnex's announced acquisition of $2.18 billion Westcon Americas – which is expected to close this week – will leave ScanSource and Arrow as the only publicly-traded specialty distributors in North America.

[Related: ScanSource To Buy SMB Payment Devices Distributor POS Portal For Up To $158M]

But even as the volume players have amassed scale over the past decade, Baur said ScanSource has been able to consistently maintain gross margins that are 50 percent to 100 percent higher than its broadline competitors.

"That's evidence that we're providing value to our customers and our suppliers and vendors, or else the other companies would have taken the business away from us," Baur said during the interview. "We clearly believe the market will pay for services."

ScanSource has had conversations with the vendors it shares with Westcon to make it clear that the distributor will only invest in areas where it can continue to achieve value-added margins in a competitive landscape, Baur told investors. Although Westcon might pursue different strategies under Synnex's control, Baur said he doesn't expect to see a change in the margin profile of the business.

When it comes to Europe, Baur said ScanSource and Westcon have operated in different regions, with Westcon enjoying longer relationships with a larger number of vendors. In contract, Baur said ScanSource's European operations focused only a few vendors selling premise-based communications hardware to SMB customers until its September 2014 acquisition of video conferencing player Imago.

"The line card we compete with them on is fairly narrow," Baur said during the earnings call. "We would like to think that in the markets we compete with them, we compete very favorably."

The IT industry isn't just dependent on volume to drive shareholder value, Baur said during the interview, with shareholder assessments of a company's value typically relying more on profitability once they reach a certain scale. For instance, Baur said the difference between a $2 billion company and a $9 billion company would be minimal from an operational capabilities perspective.

In fact, larger businesses can suffer from diseconomies of scale, Baur said, as ScanSource's focus on customers is much, much sharper than it would be if the distributor were much larger.

"We believe it's an advantage to be at the size we are, not a disadvantage," Baur said to CRN. "We have strong confidence in our ability to maintain relationships with our key customers."

ScanSource said sales for the company's fiscal fourth quarter, which ended June 30, jumped to $917.3 million, up 4.5 percent from $877.5 million the year prior. That smashed Seeking Alpha's estimate of $894.2 million.

Earnings for the quarter skyrocketed to $19 million, or 74 cents per share, up 47 percent from $12.9 million, or 50 cents per share, last year. On a non-GAAP basis, earnings climbed to $17.3 million, or 68 cents per share, up 33 percent from $13.1 million, or 51 cents per share, last year. That was in line with Seeking Alpha's earnings projection.

For the full year, ScanSource's revenue inched ahead to $3.57 billion, up 0.8 percent from $3.54 billion last year. Net income, meanwhile, climbed to $69.2 million, or $2.71 per share, up 8.8 percent from $63.6 million, or $2.38 per share, a year ago.

ScanSource's stock fell $1.45 (3.72%) to $37.55 in after-hours trading. Earnings were announced after the market closed Tuesday.

Barcoding, network and security revenue for the quarter climbed to $619.2 million, up 6.5 percent from $581.3 million last year thanks to healthy market demand for mobile computing, retail, network and video surveillance offerings, Baur said.

Communications and services sales for the quarter climbed to $298.1 million, up 0.6 percent from $296.1 million last year as strength around Intelisys and the Unified Communications as-a-Service offering was offset by market uncertainty surrounding the Avaya bankruptcy, particularly for enterprise customers, Baur said.

Sales in the United States for the quarter jumped to $695 million, up 6.8 percent from $650.9 million the year prior.

For the next quarter, ScanSource expects non-GAAP diluted earnings per share of between 74 cents and 80 cents per share on sales of between $940 million and $1 billion. Wall Street's expectations for ScanSource's upcoming quarter, as of Aug. 29, were earnings of 81 cents per share on sales of $938.2 million.