Agency Revenue Buoys ScanSource Profit Amid 'Soft Demand Environment'Agency Revenue Buoys ScanSource Profit Amid 'Soft Demand Environment'

Profit and recurring revenue growth gave ScanSource executives optimism in what they called a "a soft demand environment."

The hybrid distributor on Thursday unveiled the results for its fiscal year 2025 second quarter (ended Dec. 31, 2024). Net sales for the quarter declined 15.5% year-over-year to $747.5 million, with ScanSource leadership attributing the drop to a double-digit decline in large deals. Specifically, large deals in its Specialty division.

"We thought that we would have a typical increase in large deals, and to have a double-digit decline year over year was the surprise," chairman and CEO Mike Baur said on the earnings call. "We really believe this was a large deal-driven miss, if you will, on our expectations for the specialty hardware business."

ScanSource Profit Gets Boost

However, the newly created Intelisys & Advisory segment and its agent-based model grew 4% year-on-year and quarter-over-quarter to $24.2 million. Moreover, the agency side of the business helped ScanSource's gross profit margin rise from 11.4% a year prior to 13.6%. ScanSource's recent acquisition of technology advisor Resourcive helped bolster the segment. ScanSource's 31.2% increase in recurring revenue is helping the distributor get more visibility and predictability for its gross profit, senior executive vice president and chief financial officer Steve Jones said.

Related:ScanSource Reveals Cash Spent on M&A, CSP Refresh

"Most of our topline [revenue] comes from the hardware, which we ship every day. We're taking orders. We don't work with backlog, so our visibility is tough in that environment," Jones said.

Baur also pointed to recently purchased Advantix and Advantix's managed connectivity experience (MCX) offering. That solution, which slots into the Specialty segment, combines devices and recurring revenue.

Gross profit increased 1% to $101.7 million for the quarter.

Resourcive, Channel Exchange Join the Mix

ScanSource bought New York-based technology advisor and agency Resourcive in August, cementing its plans to launch a customer-facing advisory business that would operate separately from Intelisys.

Jones said the latest quarter is the first time Resourcive's numbers are included in the earnings release. They are part of the Intelisys & Advisory segment that ScanSource recently formed, having removed it from the former Modern Cloud & Communications division and slotted Modern Cloud within the Specialty segment.

Jones said Resourcive added roughly $1.7 million of revenue in the quarter. Gross profit margin for Intelisys & Advisory was 99.5% in the previous quarter, and it has loomed just decimals under 100% for many quarters. However, gross profit margin stood at 98.9% for the latest quarter. While that may only seem a tiny shift, the change reflects some of the revenue-generating services Resourcive offered that Intelisys does not.

Related:Intelisys Gets a Cloud Marketplace. What Does It Mean for Partners?

The latest quarter also reflects the first time Channel Exchange, Intelisys' new SaaS marketplace based off intY, is tracking in the earnings report. Channel Exchange officially launched Dec. 9, three weeks before the quarter ended. Jones noted that while Channel Exchange's numbers are currently "immaterial," it has seen double-digit growth. Intelisys and ScanSource executives have noted in the last few months that Channel Exchange has provided a ramp for agents to access vendors that were unable to create a full agent program. Channel Exchange performs the billing and commissioning, which agents typically require of their partners and which these vendors weren't able to do.

"Our Intelisys partners are going to get more suppliers to be able to sell with, and what ScanSource and Intelisys can offer to the partners is unique. The other TSDs don't have this tool," Jones told Channel Futures.

Partner Segmentation at Intelisys

Intelisys end-user billings increased 5% year-over-year to $2.77 billion, annualized. ScanSource reported "double-digit growth" in the Intelisys category of CX, which includes contact center as a service (CCaaS), unified communications as a service (UCaaS) and customer experience (CX) solutions.

Related:At Intelisys Channel Connect, Flexibility Is the Name of the Game

Baur elaborated on new Intelisys president Ken Mills' plans to introduce partner segmentation into the TSD's strategy. Part of that segmentation includes treating its loyal, long-running partners in a way that's different from its "long-tail partners." In addition, Baur said Intelisys is "aligning our value proposition differently."

"That means, if we have a partner that doesn't need all the value added services, we'll make sure that we give them the best possible commission split," Baur told analysts.

Baur told Channel Futures that he continues to hear from large partners that one of the most important functions of a TSD is to pay commissions accurately and on time. ScanSource's acquisition of the RPM commission platform is evidence of Intelisys' commitment to that role, Baur said.

"The bigger the trusted advisor, the more commissions [they have], and the more commissions across many suppliers. It's very difficult for a trusted advisor to to track their commission stream, and we do that better than anybody. In some cases, if your value is commissions, that's enough to win business. But over time, we got paid less for that value," Baur told Channel Futures.

Baur added that Mills and Intelisys have "additional value offers" for smaller tech advisors that lack the in-house capabilities of their larger peers.