ScanSource CEO: New Vendor Relationships, Mitel Acquisition Of ShoreTel Could Drive Comms Business Rebound

ScanSource has been forced to cope with Avaya-related sales shortfalls over the past year, but CEO Mike Baur sees better times ahead.

As some of Avaya's large enterprise customers delayed upgrade and expansion decisions in light of the vendor's Chapter 11 bankruptcy filing, ScanSource has worked to secure new vendor relationships in an effort to replace some of the resulting margin loss, said Baur, who believes the business unit is just starting to see the benefits of this strategic shift.

The Greenville, S.C.-based distributor saw its worldwide communications gross profit increased nearly 15 percent year-over-year during its most recent quarter.

[Related: 6 Things To Know About ScanSource's Proposed Acquisition Of POS Portal]

"Our comms business segment is fighting through a significant decline in what we used to achieve with one of our key vendors," Baur told Wall Street analysts Monday. "We really think this shows we can bring it back. If one of our other vendors has a better outlook coming forward, that's going to help us, as well."

Baur said the continued onboarding of ShoreTel direct resellers into ScanSource's distribution channel, and the company's investment into an expanded value-added services mix contributed to improved gross margins. Mitel's acquisition of ShoreTel, which completed on Sept. 25, should drive more opportunities for revenue growth through those channel programs, he added.

Avaya is one of just three vendors – along with Cisco and Zebra – that contributed more than 10 percent of ScanSource's overall sales for the fiscal year ended June 30, 2016, according to a filing with the U.S. Securities and Exchange Commission (SEC).

"We've had some tremendous changes in our vendor landscape. That has contributed to some of the changes we've delivered," Baur said.

Intelisys delivered strong financial performance during the quarter, according to the company, recording 21 percent year-over-year growth and delivering a quarter record for new billings. Baur said Intelisys had launched a purchasing power program that allows agents to sell an expanded products lineup on top of their existing telecom, cloud and cable services offerings.

"Intelysis customer success management is an important competitive advantage," Baur said. "Their success has encouraged us to accelerate the hiring of regional channel managers and sales engineers ahead of schedule. This is critical to be in a position to take advantage of a tremendous channel opportunity ahead of us around telecom, cable and cloud services."

ScanSource reported net sales of $924.6 million for the first fiscal quarter 2018 ended Sept. 30, down 1 percent from last year's first-quarter mark of $5.94 billion. That missed Seeking Alpha's projections by $41.7 million.

Net income for the quarter was $4.1 million, or diluted earnings of 16 cents per share, down 72 percent from $14.8 million, or $0.58 a share, compared with the year-ago quarter. On a non-GAAP basis, ScanSource saw net income of $19.4 million, or $0.76 a share, up 11 percent from $17.5 million, or $0.68 a share. Those results fell short of Seeking Alpha's diluted earnings projections by $0.02.

ScanSource projects sales of $950 million to $1.01 billion during the second fiscal quarter 2018, with diluted earnings per share of $0.54 to $0.60.

Baur attributed the missed sales forecast to timing issues around a handful of large federal government deals that were expected to close during the quarter. He said ScanSource had high confidence that those deals would close during the current quarter.