ScanSource Earnings: Intelisys Stayed Strong Amid Ransomware Attack

A cyberattack that impacted ScanSource in the spring loomed large in the hybrid technology distributor’s recent quarter, but the latest ScanSource earnings release shows areas of optimism in the business.

Net sales and gross profit both declined over the quarter a year ago (1.6% and 1.9%, respectively) in the latest ScanSource earnings, and executives from the company attributed those data points to the ransomware attack that it disclosed on May 14. ScanSource could not use its core system to accept orders, receive inventory or ship products for two weeks in May. The disruption came smack dab in the middle of the distributor’s fiscal year fourth quarter, which ran from ran from April 1 to June 30. ScanSource chief financial officer Steve Jones said the company is still working to calculate the revenue loss associated with the attack.

ScanSource’s Steve Jones

ScanSource president John Eldh praised his team for working to stay in communication with members of its ecosystem during the outage.

ScanSource’s Mike Baur

“Our customers and suppliers were appreciative of our consistent and continuous outreach and collaboration during this outage. Our teams worked hard to minimize the impact of our outage on our customers,” Eldh said.

The cyberattack most impacted ScanSource’s specialty technology solutions segment, which saw net sales decrease to less than $562 million. In particular, mobility, barcoding and point-of-sales suffered the most. However, networking and physical security offset those challenges.

On the positive side, executives said they saw a continued “normalizing” of the supply chain. And that relaxation is freeing up ScanSource’s balance sheet to prioritize M&A more in the next quarter, executives said.

ScanSource’s John Eldh

Chief financial officer Steve Jones said ScanSource’s capital allocation priorities in fiscal year 2025 will focus on “M&A opportunities to accelerate our strategic plan,” as well as share repurchases.

“We’ve got a strategy of continued investment in the places that we see ScanSource can differentiate. We believe that the markets we’re in are highly specialized, and we continue to be the leader. Yet we also believe that we should find a way to expand our growth potential.”

CEO Mike Baur said ScanSource acquisitions in recent years might have fit into the category of “tuck-in,” but the distributor is eyeing ways to acquire in a “more aggressive and larger way.”

ScanSource bought the technology services distributor (TSD) Intelisys seven years ago.

Intelisys Stays Steady

Eldh said the cyberattack did impact Intelisys, which pulled its weight big time in the fourth quarter. Several Intelisys sales partners told Channel Futures that they did not see a disruption to day-to-day activities. Intelisys operates in an agency/referral model, in which its sales partners source carrier and cloud services to end customers and do not need to worry about shipping hardware.

End-user billings increased 8% year-over-year for Intelisys in the quarter, and net sales were up 8%. Annualized net billings approached $2.5 billion.

UCaaS billings increased 14%, and CCaaS billings were up 20%. Moreover, Eldh called awards from providers RingCentral, 8×8, Nice and Genesys as validation of Intelisys’ strength in UCaaS and CCaaS.

And Eldh said investing in the team has helped propel its customer experience (CX) practice. Recent promotions within the company include Kristy Thomas moving to vice president of partner experience and enablement.

“The team is has thought leaders, practice leaders and technical folks that are helping our customers with not only their knowledge and understanding, but also helping them to close deals.

Intelisys helped keep ScanSource’s modern communications and cloud unit net sales sales growth positive at 1%. The entire unit drove almost $386 million. Per usual, on-premise communications hardware is declining. ScanSource has encouraged its hardware-based communications providers to adopt the UCaaS offerings in the Intelisys portfolio.

ScanSource executives also answered questions about the state of the technology services distributor (TSD) market, in which Intelisys competes. Last quarter execs disclosed that Intelisys was facing margin pressure as more TSDs increase they amount of commissions they pass on to their sales partners from the suppliers.

“While we did still see some continued downside pressure, it wasn’t of any significance for the quarter,” Eldh said.

Different TSD leaders have spoken to the challenge of share-shift, where they compete for the same base of agents to offer the best pass-through. ScanSource, however, sees greenfield opportunity in converting its large base of hardware resellers into Intelisys deals.

“One of our good fortunes is having this hybrid opportunity, enabling customers to sell on-prem, SaaS, connectivity, cloud services, and based on customer requirements, help them to move into the cloud opportunities,” Eldh told Channel Futures. “And in those instances, those partners generally ended up putting us in a position where we end up with with better margins.

Eldh said ScanSource is expecting a 7% growth rate for Intelisys in the next quarter.

ScanSource Earnings Show Inventory Challenges

ScanSource is executing a multi-quarter capital improvement plan to improve its inventory efficiency. This should free up at least $150 million cash flow in the next fiscal year. Baur said the distributor needs to reduce its inventory levels.

“We’re not achieving the appropriate inventory days on hand commensurate with expected slower growth. We are working with our suppliers and customers to reduce our inventory levels quickly and get back to normal, based on supplier-specific return on working capital metrics,” Baur said. “Our goal is to better align profitability and inventory turn metrics. Our employees across the company are laser-focused on improving our return on working capital and ROIC metrics for fiscal ’24.”