ScanSource Cuts 2024 Fiscal Outlook On Hardware Drag

‘For us, video surveillance has been a big technology for a long time. It’s been growing gangbusters. That’s what surprised us in the December quarter. It didn’t perform as we expected. We have some specifics that we can now look back on that we didn't know at the time were going to happen, that's for sure. It surprised us. … End users acquired more product as a result of the supply chain shortages that they're now having to work through to deploy,’ says ScanSource Chairman and CEO Mike Baur.

A drop in sales of a couple of key product lines led to hybrid IT distributor ScanSource to miss sales and earnings expectations for its fiscal second quarter and to reduce guidance for all of the current fiscal year.

However, strong cash flow and an increase in recurring revenue from ScanSource’s Intelisys hybrid workplace business were big positives for the Greenville, S.C.-based distributor, CEO Mike Baur told CRN.

Investors Tuesday took the current quarter’s miss and the reduced guidance to heart, causing ScanSource stock price to plunge over 8 percent at the opening of the trading day before recovering somewhat. Shares were down by over 5 percent at around $36.71 per share late in the trading day.

A 13 percent year-over-year drop in sales during the quarter came as ScanSource’s technologies across the board were challenged by changes in the demand environment, a situation that the distributor saw in the previous quarter, said Baur (pictured above).

“And when we gave our guidance for our Q2 December quarter, we were a little too optimistic, as it turned out, about the continued strength with some of the technologies,” he said. “Some were down, and some were still okay. And the ones that were still growing were Cisco and networking.”

Two product lines led the disappointing results for the quarter in ScanSource’s Specialty Technology Solutions business, where revenue dropped 17 percent year-over-year, Baur said.

The first was the point-of-sale business, particularly bar code scanners, as retail businesses have started to move away from self-service checkout, he said.

“Sales were lower than we had expected,” he said. “There are some industry dynamics that are happening around. It’s just so darn hard to forecast. But selling through the channel, we don't give up. And we don't have a backlog.”

The second is physical security, particularly video surveillance, Baur said.

“For us, video surveillance has been a big technology for a long time,” he said. “It’s been growing gangbusters. That’s what surprised us in the December quarter. It didn’t perform as we expected. We have some specifics that we can now look back on that we didn't know at the time were going to happen, that's for sure. It surprised us. … End users acquired more product as a result of the supply chain shortages that they're now having to work through to deploy. So it’s more inventory at the end user than they need at this time. So they're now having to slow down their purchases as they deploy the products they purchased last year.”

ScanSource’s Modern Communications & Cloud business saw a much lower drop in sales of only about 5 percent. There, Baur said, a big impact is coming from a customer push to move their on-premises communications to the cloud, which has been happening already for several years.

“So that business continues to decline,” he said.

Steve Jones, ScanSource senior executive vice president and chief financial officer, told CRN that Modern Communications & Cloud includes the company’s Cisco business as well as its Intelisys business, the latter of which saw sales grow by 7.5 percent.

“But remember, that's reported net,” Jones said. “So that doesn't have as much impact on the top line. But it does have a nice impact to us when we look at gross profit margins. The Intelisys CCaaS (contact center as a service) and UCaaS (unified communications as a service) are still growing at double digits in both of those, and that's consistent with what we're seeing.”

ScanSource continues to create value in the space served by Intelisys, Jones said. “We lean in where our partners are,” he said. “Our differentiation is our engineering and our ability to teach, especially around new technologies that are coming in that are interesting to our partners, like AI and CCaas.”

ScanSource as part of its second fiscal quarter 2024 report adjusted its guidance for the full fiscal year 2024 downward. The company now expects fiscal 2024 net sales of at least $3.5 billion vs. the $3.8 billion it had formerly predicted. It also expects at least $155 million in non-GAAP EBITDA, down from its previous guidance of at least $170 million.

“We see these headwinds continuing through our fiscal year,” Jones said.

ScanSource also confirmed its previous guidance for free cash flow for year, saying it expects at least $200 million in free cash flow for the quarter.

“This is the first year we've given free cash flow estimates for the year, and we reconfirm that at $200 million, and we did not change that,” Jones said.

While ScanSource is seeing little change in the makeup of its hardware solution providers, mergers and acquisitions are impacting its Intelisys partners, Baur said.

“In our Intelisys business, there is a acquisition strategy that's been played out where some of the partners have decided to sell their businesses,” he said. “In some cases, they've been doing it a long time, and their partners want to retire and take some chips off the table. So we're seeing some consolidation of the agents in our Intelisys business.”

However, Baur said, that is offset somewhat by the distributor’s ability to bring in new telecom agents.

“So what's happening is there’s a changing of the guard, if you will,” he said. “New partners are coming in, while some of these older partners sell their business and retire. So it’s not a meaningful impact on our business. We still see opportunity as this market continues to grow.”

For its second fiscal quarter 2024, which ended December 31, ScanSource reported revenue of $884.4 million, down 13 percent from the $1.01 billion the company reported for its second fiscal quarter 2023.

That included sales of $520.6 million for its Specialty Technology Solutions business, down 17 percent from last year, and $364.1 million for its Modern Communications & Cloud business, down 5 percent.

For the quarter, ScanSource also reported GAAP net income of $32.7 million or $1.29 per share, up from last year’s $25.7 million or $1.01 per share. On a non-GAAP basis, ScanSource reported net income of $21.6 million or 85 cents per share, down from $26.9 million or $1.06 per share.