ScanSource Reveals Cash Spent on M&A, CSP Refresh

ScanSource's hybrid distribution strategy is taking on a three-pronged approach as the company realigns its business units and introduces a new version of its cloud service provider (CSP) platform.

The South Carolina-based distributor recently unveiled its fiscal year first quarter (ended Sept. 30) results, which show a revamped reporting structure. ScanSource previously split its earnings between its Specialty Technology and Modern Cloud & Communications segment. Now the majority of Modern Cloud folds under Specialty Technology, with the combined unit representing ScanSource's hardware practice. Now sitting in its own unit is "Intelisys & Advisory," which is ScanSource's tech services distributor (Intelisys) business, its new technology advisor (Resourcive) business, the RPM Telco commissioning platform and the newly formed Channel Exchange platform, which takes the place of recently divested intY.

These changes create better alignment between ScanSource's financial results and its strategy, chief financial officer Steve Jones told Channel Futures.

"If you think about the way we're thinking about our go-to-market strategies and how we're thinking about helping our end users and helping our partners address their end user needs, we're now aligned to our sales models better, and structure follows strategy. It's been our strategy for a while, and with the [Resourcive] acquisition it's much more clear what we're doing," Jones said.

Related:Intelisys Has Doubled Net Sales Since 2018

ScanSource's Steve Jones

CEO Mike Baur added that shifting Modern Cloud & Communications under Specialty reinforced the notion that recurring revenue exists in both of ScanSource's segments.

"We wanted to make sure people understood there is recurring revenue in our specialty segment because it wasn't clear enough in our previous segmentation," Baur told Channel Futures.

Baur said the purchase of Advantix, a hardware-focused managed connectivity experience (MCx) provider and telecom lifecycle management provider, brought over a source of recurring revenue. He added that traditional hardware vendors like Cisco and Avaya, which previously situated themselves under Modern Comms, also drove some level of recurring revenue.

ScanSource's Mike Baur

"We've had other recurring revenue opportunities, but they were generally pretty small, and we anticipated more hardware being sold on a recurring revenue basis years ago. It's just been slower to happen, but it is starting to happen now, and we wanted to make sure we could still work with those customers, partners and suppliers in the way they choose," he said.

Related:ScanSource Acquires Resourcive, Names Advisory Business President

ScanSource noted that recurring revenue grew 18.8% year-over-year in the latest quarter, compared to products and services decreasing 12.5% in net sales. For ScanSource, recurring comes mainly comes from commissions, software subscriptions and hardware rentals.

Leaning into Cloud Post-intY

ScanSource in December 2023 sold the Microsoft-focused cloud distributor intY, but cloud distribution remains part of ScanSource's strategy. ScanSource on Dec. 9 will introduce Channel Exchange, a revamped platform for its CSP efforts. U.S. partners had used intY's Cascade platform for making orders from vendors like Cisco and Microsoft.

"That platform didn't allow us to do some of the things we need to do strategically in the future," Baur told Channel Futures. "So we basically are launching a new platform with a new user interface, which will allow the partners more capabilities than we had before."

A key change is bringing in more suppliers in addition to Microsoft. Baur said intY was delivering a few other small vendors but was "hamstrung" to bring new suppliers onto the platform.

"We wanted more suppliers. Our partners were asking us for them. They were very happy with what we were doing for them with Microsoft, but it was all very customized for Microsoft. It was a Microsoft-specific platform. This was an investment that we made after a lot of consideration, and we tested it actually two years ago in Brazil," he said.

Related:Ingram, TD Synnex Partnerships Propel AppDirect's Convergence Thesis

Baur said Intelisys spearheaded the rebrand to Channel Exchange. The TSD will make announcements about the platform at the upcoming Channel Connect conference in Nashville next week. In the Channel Exchange model, Intelisys will function as the cloud provider on behalf of agents/advisors. Intelisys will resell the license from the supplier to the end user and bill the end user. That's a key element for agents/advisors, who traditionally avoid billing the end user. While advisors typically work with suppliers that bill the end user, many vendors prefer to leave the billing to the partner. Intelisys taking on the billing for these SaaS products helps fill that gap.

"The difference in those suppliers, is we end up billing the end user on behalf of the partner, instead of instead of the supplier billing the end user, like in the Intelisys traditional TSD model. This allows us to help partners still receive commissions just like normal. They don't have to set up a billing mechanism. We do it for them," Baur said.

Baur said Microsoft licensing is growing more strategic for agents, and anecdotes from partners back that up. More and more technology advisors have established Microsoft practices as a foot in the door with clients and a means of widening their portfolio. Moreover, the line card of Microsoft offerings in Channel Exchange better reflects what agents want to sell, Baur said.

"We had a hard time getting agents to want to sell Microsoft early on, because they saw it as not as strategic as it is today... The real thrust of the Microsoft effort was around Microsoft 365, as an example. Desktop applications," he said. "And most of our advisory community want to sell enterprise solutions. This is going to allow them to sell Azure."

This procurement option could represent a trend in the market.

Two months ago subscription commerce provider and part-TSD AppDirect announced strategic partnerships with broadline distributors Ingram Micro and TD Synnex. That vision behind that shift was "choice," AppDirect chief operating officer told Channel Futures. Specifically, the choice for partners to bill the end user on their own paper, through the paper of a vendor or AppDirect's paper.

"We want to give our partner, the advisor or an MSP, the choice between those three things, yeah. I don't understand actually why it's traditionally been so rigid. I don't understand why it's like, 'No, we're TSD; we never invoice, and we'll never power invoice,'" AppDirect CEO Nicolas Desmarais told Channel Futures in September.

'Soft Demand,' Solid Cash Flow

Overall net sales in the quarter declined 11.5% to $775.6 million, for a gross profit of $101.6 million. The two new divisions saw different results. Specialty declined 11.9% to $752.3 million, while Intelisys & Advisory grew 4.1% to $23.3 million. The vast disparity in net sales size – $752.3 million to $23.3 million – may cause a scratching of the head, but the difference in business models accounts for the large ratio. ScanSource in its Specialty segment is buying a product from the supplier and reselling it to the value-added reseller (VAR) partner, who in turn resells the product to the business customer. The Intelisys and Advisory businesses use the agency model, in which supplier technically sell directly to the end user and provides a monthly commission to the agent. Thus, the gross profits (listed below) appear much more balanced in size, although Specialty remains a little more than three times larger.

Jones and Baur said they were not surprised by the "soft demand environment." Instead, Jones highlighted the "strong profitability and the strong cash flow."

"What that really suggests to the channel community is that ScanSource is doing very well financially and is positioned to make investments for the future as growth comes back. We really are saying we're in very strong position to do the things we told investors we would do with our balance sheet, which was stock repurchases and mergers and acquisitions," Jones said.

Cash Usage for Acquisitions

ScanSource offered up some numbers on the investments it made in the last quarter, particularly its purchases of Resourcive (Aug. 1) and Advantix (Aug. 15). Notably, ScanSource paid $56.8 million in cash for its business acquisitions in the first quarter of its fiscal year 2025.

Jones said that number does not represent the exact cost of those two companies.

"I would probably frame it as usage of cash more so than what they spent. I think it's more accurate," he said.