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ScanSource CEO: Intelisys Deal Will Help Partners Weather Changes To Legacy Communications Landscape

A steady stream of profitable telecom services business through Intelisys -- now officially part of ScanSource -- will provide ScanSource partners with a hedge against potential changes at many traditional communications vendors.

A steady stream of profitable telecom services business through Intelisys will provide ScanSource partners with a hedge against potential changes at many traditional communications vendors, ScanSource's chief executive said Monday.

The Greenville, S.C.-based distributor said many of its top communications vendors have either been acquired over the past 18 months or are exploring strategic alternatives, resulting in increasing competition for ScanSource and less certainty around where solution providers should be placing their bets, according to CEO Mike Baur.

Baur urged communications partners facing disruption among their vendors to take advantage of telecom and cloud services offerings from master agent Intelisys, which officially became part of ScanSource Monday with the closing of an acquisition for $83.6 million plus earn-outs.

[RELATED: CRN Exclusive: ScanSource Storms Into Telecom-Cloud Services With Deal To Buy Recurring Revenue Powerhouse Intelisys]

"The Intelisys acquisition fits perfectly with some of those challenges that those communications VARs have," Baur said during the company's earnings call with analysts Monday. "We're trying to provide a solution for the VARs that we believe they will benefit from while some of our traditional vendors are going through some challenges."

ScanSource said earnings in its fourth quarter for fiscal 2016, plummeted 21 percent from $16.4 million, or 57 cents per share, last year to $12.9 million, or 50 cents per share, this year. On a non-GAAP basis, net income fell 31 percent from $19 million last year to $13.1 million this year, or 51 cents per share, falling well short of Seeking Alpha's estimate of 71 cents.

Sales for the quarter, which ended June 30, increased 2 percent from $856.7 million last year to $877.5 million this year, missing Seeking Alpha projections of $886.2 million. Excluding ScanSource's September 2015 acquisition of Cisco videoconferencing distributor KBZ, sales actually fell 6 percent year over year after factoring out changes in foreign currency exchange rates.

For the full year, ScanSource reported a 10-percent increase in net sales, from $3.21 billion last year to $3.54 billion this year, though sales remained flat on a constant currency basis after excluding the KBZ acquisition. But net income fell 3 percent, from $65.4 million last year to $63.6 million, or $2.38 per share, this year.

Wall Street responded very unfavorably to the numbers, with ScanSource's stock price falling 12.4 percent in after-hours trading to $37.40 per share. Earnings were announced after the market closed Monday.

ScanSource is predicting a decline in communications sales in the coming quarter as four of the company's top vendors have either been acquired or are exploring strategic alternatives.

Specifically, HP's March 2015 acquisition of Aruba, Brocade's April 2016 acquisition of Ruckus, Polycom going private in July 2016 and Avaya's May 2016 plans to explore strategic alternatives have created uncertainty for partners and more competition at the distribution level for ScanSource.


"We're seeing some competitive market share threats in that business, and that was a business [in which] we were enjoying very healthy growth a year ago," Baur said. "We didn't expect growth to slow down with those vendors like it did."

Avaya is one of ScanSource's three largest vendors, accounting for more than 10 percent of the distributor's overall sales in the fiscal year that ended June 30, according to a filing with the U.S. Securities and Exchange Commission (SEC).

Communications and services sales sunk 3.1 percent, from $301.3 million last year to $291.9 million this year.

Meanwhile, barcode and physical security revenue climbed 5.4 percent, from $555.4 million last year to $585.6 million this year. But excluding the KBZ acquisition, sales for the division actually fell 8.4 percent.

On a geographic basis, ScanSource's U.S. sales climbed 3.5 percent from $629.2 million last year to $650.9 million this year. International sales, though, slipped 0.4 percent from $227.5 million last year to $226.5 million this year.

For the next quarter, ScanSource expects non-GAAP earnings per share of 60 to 68 cents per share on sales of $875 million to $925 million. That compares to a Thomas Reuters projection of 76 cents per share on revenue of $933.8 million.

Year-over-year sales are expected to fall roughly 3 percent in the coming quarter, with communications and services sales tumbling 5 percent and barcode and physical security revenue dipping 1 percent.

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