ScanSource Earnings: Hybrid Distributor Up 41% Over Last Year

ScanSource finished off a strong year of growth, with cloud earnings making up for declining on-premise communication hardware revenues.

The hybrid distributor increased net sales by 13% year-over-year, to more than $962 million, according to its fiscal fourth-quarter earnings. Gross profit ticked up 15.7%, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 9.6% to $38.7 million. Moreover, fiscal year 2022 beat the previous year by more than 41% in terms of adjusted EBITDA.

Moreover, end user billings associated with the Intelisys agency business surpassed $2.25 billion for the entire fiscal year.

The company set a guidance of at least 5.5% net sales growth in its next fiscal year, with an adjusted EBITDA of at least $174 million.

ScanSource’s Mike Baur

“Our exceptional fiscal year 2022 results demonstrate the success of the new ScanSource and faster growth of our recurring revenue,” ScanSource chairman and CEO Mike Baur said. “Our hybrid distribution strategy of devices and digital is winning, as evidenced by our 12% net sales growth.”

To Baur’s point, more than 540 partners are selling in a hybrid fashion. In other words, those partners are conducting both resale-based hardware sales and commission-based service sales.

ScanSource saw growth in both of its main segments. The specialty technology solutions unit grew nearly 13% year-over-year to almost $581 million. Meantime, modern communications and cloud (which includes Intelisys), also grew more than 13%, approaching $382 million.

The distributor grew its net sales growth outside of the United States and Canada by almost 19%. In the U.S. and Canada, it was an increase of more than 12%. President John Eldh pointed to strong enterprise adoption in Brazil.

On-Prem Communications Hardware Faces a ‘Headwind’

ScanSource’s John Eldh

ScanSource executives noted that on-premise communication hardware and services decreased 28% in Q4. That represented a “faster” decline than they expected.

On the other hand, cloud-based communications is soaring. The UCaaS business grew 23%, with RingCentral, 8×8 and Zoom leading the way. The CCaaS business grew 48%, featuring vendors like Five9, Genesys, Talkdesk and Nice CXone.

Hardware in general is still seeing growth for ScanSource. Cisco was a leading vendor for ScanSource’s modern communications segment, growing more than 40%. Executives said on-prem networking and Wi-Fi currently comprise the largest parts of the Cisco business ScanSource runs. On the other hand, the agreement Intelisys formed to sell Cisco Webex in an agent model is “still in the early days,” according chief financial officer Steve Jones said.

Intelisys

Recurring revenue increased 11% in Q4 and 14% in 2022 for the TSD. It also recorded an adjusted EBITDA margin of more than 35%. This occurred “in spite of gross margin pressures,” Eldh said. In other news, although end user billings continue to grow at a healthy rate, Intelisys relies on commissions off of those sales for its actual revenue.

ScanSource’s Steve Jones

“We’re seeing a large top line growth in the end user billings. That’s up 20% year to year. So we still see a lot of tailwinds in that business as we go forward,” Jones said.

Executives in the earnings call noted that competition has increased in the marketplace. And Baur pointed to how technology evolution is playing a role.

“It really is it is margin compression just due to competition, but also margin compression due to the transition from legacy technologies to new technologies,” Baur told Channel Futures. “You end up selling a deal that used to be on-prem and $100, and now it’s $45. As a result, you’re going to have degradation there.

Read ScanSource’s results from the previous quarter.