ScanSource CEO: Some Competition Acting 'Irrationally' By Selling At Minuscule Margins

Sales for the quarter ended March 31 increased 7.7 percent, to $798.4 million, after factoring out changes in foreign-currency exchange rates. That fell way short of Seeking Alpha’s projection of $871.1 million.

[Related: ScanSource Targets More Government Business Via Channel After Solid Quarter]

But all of that growth can be attributed to its August 2015 acquisition of Cisco videoconferencing distributor KBZ. Excluding this acquisition, constant currency sales actually fell by 0.7 percent year over year.

"Some of those new distributor competitors might act irrationally, if you will, when they are new with a vendor to show that they can sell volume," ScanSource CEO Mike Baur said. "We will complain about it; we would expect the vendors to respond."

Wall Street responded unfavorably to the numbers, with ScanSource’s stock price falling 2.1 percent in after-hours trading, to $37.90 per share. Earnings were announced after the market closed Tuesday.

ScanSource has long communicated to its vendors the minimum profit margins at which it will sell discrete product lines, Baur said. But supplier consolidation over the past couple of years now means that ScanSource is going up against new competitors that are undercutting the distributor on price to gain market share.

Baur said he expects major vendor partners to ensure that ScanSource is getting appropriate margins given the distributor’s longstanding role in driving demand by adding value and creating complete solutions out of discrete product offerings.

"Our vendors understand where we need to be from a profit margin on product lines," Baur said. "If we feel like the vendors and the market are at too low of a margin, we’ll walk away from that business."

Bar-code and physical security revenue climbed 12.6 percent, to $532.5 million, on a constant currency basis. Excluding the KBZ acquisition, sales for the division actually fell by 0.6 percent.

Although ScanSource enjoyed another record quarter of growth for its payment terminals business, Baur said many small software vendors are still not certified to support EMV (EuroPay, MasterCard and Visa) technology as the upgrade cycle expands from large enterprises to smaller businesses.

As of October 2015, end-user businesses -- rather than credit card issuers -- are held responsible for any fraud that results from credit or debit transactions on systems that do not use chip and PIN EMV technology.

But Baur said many mom and pop shops don't anticipate being targeted by hackers, given the very limited number of customers that serve.

"Most of them are going to roll the dice for as long as they can," Baur said. "They are not going to purchase new gear until they have to."

However, even those small businesses looking to upgrade their payment terminals are likely unable to do so, Baur said. That’s because they tend to use point-of-sale software from small, highly specialized companies that -- unlike major players such as SAP or Oracle -- have yet to get certified by banking groups in EMV technology.

For this reason, Baur said, he expects the sale of EMV-compliant payment terminals to persist for several more years.

Meanwhile, communications and services sales sunk by 0.8 percent on a constant currency basis, to $265.9 million.

On a geographic basis, ScanSource's U.S. sales climbed 10.6 percent, to $591.7 million, while the distributor's international sales ticked up 0.7 percent on a constant currency basis, to $206.7 million.

For the next quarter, ScanSource expects earnings per share of 70 cents per share to 74 cents per share on sales of $900 million to $950 million. That compares to a Thomson Reuters projection of earnings of 76 cents per share on revenue of $929.8 million.