'More to Come' in ScanSource M&A as Execs Detail Acquisitions

Wide-ranging guidance for ScanSource's upcoming fiscal year reflects the uncertainty of the broader technology sector.

The hybrid distributor on Tuesday revealed results from its fiscal year fourth quarter, which ended June 30. Rather than forecasting a change in its net sales growth – ScanSource gave an outlook of "at least 3%" for fiscal year 2024 – the company puts guidance for its net sales between $3.1 billion and $3.5 billion for fiscal year 2025. Executives cited a "soft demand environment" for products from vendors like Cisco and Zebra.

ScanSource's Mike Baur

"I think our guidance was a real challenge for us, and would be for anybody to say, 'What does your business look like a year from now?'" ScanSource chairman and CEO Mike Baur told Channel Futures in an interview. "I was actually uncertain with whether we should give guidance for the year, but I think our investors want it, and we decided we needed to take a shot at it, even though last year we proved that we were not good at it. And that is reflective of how our business works. Our business still averages around $2,000 per order on the hardware side. So we do $3.2 billion, $2,000 at a time with no backlog."

Net sales decreased 21.2% to 746 million in fiscal year Q4 for ScanSource. Gross profit totaled $97 million, down 10.4% year-over-year, but gross profit margin ticked up.

Related:ScanSource Investors Get the Skinny on New Agency Business

For the full fiscal year 2024, ScanSource's net sales totaled $3.3 billion, down 13.9% compared to the prior year. Both two main segments at the distributor – Specialty Technology Solutions and Modern Communications and Cloud – saw decreases for the year. Specialty decreased 14.3% to $2 billion, and Modern Communications decreased 13.4% to $1.3 billion. While "more cautious spending" impacted Specialty's macroenvironment, a lull Cisco in products and communications hardware impacted Modern Communications.

At the same time, the ScanSource C-suite emphasized improvements in free cash flow. Free cash flow improved from negative $18.7 million in fiscal year 2023 Q4 to $53.4 million in FY 2024 Q4.

ScanSource's Steve Jones

"We are very pleased with the progress we're making on our working capital efficiency. Our goal throughout the year was to improve our working capital efficiency while maintaining appropriate inventory levels to meet channel partner demand," chief financial officer Steve Jones told investors in an earnings call. "We saw inventories decrease $245 million year over year, and sustainable improvements in our inventory terms. Our accounts receivable balances are in line with our change in revenue, and both our inventory and accounts receivable portfolios are healthy."

Related:ScanSource PartnerFirst: VARs Adding Tech to Adapt to Economy

That free cash flow helped ScanSource get back to M&A in the latest quarter. Notably, it purchased technology advisor and agency Resourcive for its channel advisory business (known colloquially as NewCo), and bought managed connectivity experience provider Advantix to anchor its new Solutions and Services (ISS) Group.

Chasing 'Double Digit' Intelisy Growth

Tech services distributor subsidiary Intelisys, which is housed inside of ScanSource's Modern Communications and Cloud segment, continued to stay in the green. Intelisys net sales increased 6.6% year-over-year in the quarter. Annualized net billings now sit at $2.67 billion for the tech services distributor. Moreover, end user billings increased 9% year-over-year for Intelisys in the quarter. CCaaS billings grew 35% and UCaaS billings grew 13%.

In addition, a "higher contribution" of Intelisys revenue has helped ScanSource's gross profit margin from 11.5% to 13%.

Intelisys in July appointed former Epic iO CEO Ken Mills. Mills stepped into a position Baur had been heading for nearly a year.

Baur said Mills and other members of leadership have taken a "hard look" at Intelisys's unique value in the TSD market and how to invest in the company for future.

Related:ScanSource Acquires Resourcive, Names Advisory Business President

"Ken is leading our next phase of growth for the channel, as we are making investments in advanced technologies such as AI and private 5G. We also see partner segmentation as a strategy to demonstrate our differentiated value to partners who require a customized set of services. Our focus will be on the fastest growing partners, including IT VARs, advanced technology partners and telco agents," Baur said in the earnings call.

Baur said ScanSource is "bullish" on the tech services distributor (TSD) model.

"As matter of fact, Ken and I discussed that going forward we believe we can get back to double digit growth at Intelisys," Baur said.

Recent ScanSource Acquisitions

While ScanSource did not incur any acquisition and divestiture costs in Q4 2023, those costs totaled $503,000 in Q4 2024.

Analysts on the call queried Baur and Jones about how Advantix and Resourcive will impact ScanSource's revenue and how they will scale. Jones said companies are relatively small compared to the distribor. They are both "capital-light" and predominantly recurring revenue. Resourcive, Jones said, is close to 100% recurring. The tech advisor's sourced suppliers compensate it in a monthly commission model.

While Resourcive founder Tom Gesky is moving, his leadership team of Kyle Hall, Nick Creasey and Kyle Gotzman will play a key role in the ScanSource channel advisory business going forward, working with Mark Morgan, president of ScanSource Channel Advisors

"They're on board. They're staying, and we're excited about their ability to build a team that can continue to perform well going forward. We believe this is the kind of the starting point for this leadership team," Jones said.

Baur added that this is not the only acquisition that will form the core of the advisory business. Baur has said at multiple points in 2024 that ScanSource is looking for technology platform that will allow NewCo to more effectively manage its client base to identify refresh and cross-sell opportunities.

"We believe we still need to find that other piece of the puzzle. We need to find a technology tool, rather than us building it ourselves. If we had to choose between acquiring a tool or a leadership team first, our preference was leadership team first, and that's where Resourcive really shined," Baur.

Baur emphasized that Advantix, which has provided technology/telecom expense management (TEM) for Intelisys agents, is not that tool. Jones said Advantix will help VAR partners sell a wider range of the technology stack, particularly hardware.

But partners shouldn't view this as ScanSource buying a TEM provider.

"They've only been in this mobility space selling connectivity for a few years, and they really found the traction in the VAR community, not in the agent community. The agent community knows them from a TEM offering. Not from selling Wide Area connectivity on a Zebra mobile device, but that's where the specialty team embraced Advantix. [It was about]five years of a lot of trial and error working with the VARs."

ScanSource had previously dedicated a single member of its Specialty team to the Advantix relationship, but now "hundreds" of people will be collaborating to scale opportunities, Baur said.

Jones said it's notable that ScanSource had not made an acquisition since 2018 (Canpango), but announced two deals in less than 10 days. Jones said ScanSource is "balancing out our business" by making acquisitions on the advisory and VAR sides.

"We've got opportunity across our different businesses to invest and drive more recurring revenue. Things are lining up for us with the strategy and the people. You've got to have the strategy, you've got to put the structure around the strategy, and then you can go execute. And we're in execution mode. We've got more to come."