ScanSource CEO: Communications Business Shifts From Devices To The Cloud
Joseph F. Kovar
‘What we look at all the time is where are we making our bets for the future. And we would certainly say that our bet for the future is on the cloud in the communications space, and the recurring revenue. ... But right now, we’re just making sure that our investments in our growth business are appropriate. And that’s really where we’re making our future bet today—our growth business, which is the cloud,’ says ScanSource CEO Mike Baur.
Shifts In Business For ScanSource
ScanSource is on a roll. The Greenville, S.C.-based IT distributor Tuesday reported that revenue for its third fiscal quarter 2023, which ended March 31, rose year over year by nearly 5 percent, while net income fell less than expected, leading the company to increase its full fiscal year EBIDTA over previous guidance.
The quarter reflects a change in ScanSource’s business as its Specialty Technology Solutions segment, which includes its enterprise mobile computing, data capture, barcode, point-of-sale and networking businesses, grew year-over-year revenue by 12 percent while its Modern Communications & Cloud segment, which includes communications hardware and cloud, saw revenue fall by nearly 7 percent.
ScanSource CEO Mike Baur, in an exclusive conversation with CRN, said that the Modern Communications & Cloud segment business, which includes ScanSource’s Intelisys business communications service, has been on a downward trajectory revenue-wise even as its gross profits have grown.
[Related: ScanSource Gets New President, Reports Q2 Growth: 5 Things To Know]
Even so, that is a natural effect from changes in that part of the market as ScanSource’s communications business migrates more toward the cloud and recurring revenue, shifting more of its networking business toward the enterprise, Baur said.
“As we move from selling a product, a device, to selling recurring revenue, instead of getting all of the revenue in one quarter, we get it spaced over 36 months,” he said. “So we could sell the same amount of revenue in the cloud model, but it only comes in one-thirty-sixth each month. That’s the big difference.”
So while mobile device sales are falling for now, these devices are still indispensable to businesses and so will remain a part of ScanSource’s business into the foreseeable future, Baur said.
“We’re continuing to evaluate how much of an investment should we keep in a product set that has been declining,” he said. “And we have to decide at some point, if it’s not relevant to the rest of our business, do we stay in it? But right now, we’re just making sure that our investments in our growth business are appropriate.”
There’s a lot going on at ScanSource. Here is an in-depth look at how Baur sees the business today and going forward.
ScanSource’s Specialty Technology Solutions segment saw sales in the quarter up 12 percent over last year, while its Modern Communications & Cloud segment sales fell 7 percent. What happened there?
Our business in the Modern [Communications & Cloud segment] is a business that’s a combination of a traditional device business and our Intelisys business. And if you notice, the gross profits still grew year over year even though the revenue was down. And that’s really been the trajectory of that business because in that communications businesses is our historic, on-premises hardware business. … We’ve been talking about, frankly, for about five years that it was declining as customers moved their on-premises phone systems to the cloud. This has been a migration that’s been going on for years.
And what really happened this quarter was we had such a strong response in our networking business, which is partly in the communications but mostly in our Specialty segment. That’s why [the Specialty] segment grew 12 percent. It’s a strong networking quarter for us. We have a lot of key networking suppliers, and they all did very well. We won Aruba’s Distributor of the Year because that team did exceptionally well this year.
But in the Modern Communications & Cloud segment, if the communications part is moving toward the cloud, does this mean the cloud part of that segment is not growing as fast as the more traditional businesses is declining?
We tried to give some help on that with our UCaaS [Unified-Communications-as-a-Service] and CCaaS [Contact-Center-as-a-Service] businesses growing at tremendous rates. But what you have to remember, and this is the complication too, as we move from selling a product, a device, to selling recurring revenue, instead of getting all of the revenue in one quarter, we get it spaced over 36 months. So we could sell the same amount of revenue in the cloud model, but it only comes in one-thirty-sixth each month. That’s the big difference.
What is recurring revenue trending as part of your business?
We’ve used a metric we’re calling the end-user billings for a lot of quarters now, and it grew 9 percent to $2.5 billion. And so we believe that’s the best indicator of how that part of the market is growing for ScanSource. It grew 9 percent. And our Intelisys business grew its revenue at 4 percent the way we record it, and that’s an accounting issue, just so you’re clear on that. I would look at 9 percent as an indicator of the growth of that market.
Then do you see the traditional product part of that business eventually drying up? Is that something that could disappear one day?
Well, it’s funny you say that. I was with some investors in New York a few months ago, and they were just putting in some new devices to work with their cloud system. So there’s still going to be handheld devices, speaker phones, all kinds of video cameras for videoconferencing, all kinds of communications hardware that will be sold well into the future. It’s just that the amount of that revenue has been declining for a long time, and we believe it’s going to reach this steady state and then start growing from there. We hope soon. We’ve not been able to predict it or forecast it very well, I must say.
So does that decrease ScanSource’s commitment to that business? Could it be something that, yes, it might stabilize some day but for ScanSource it won’t be worth keeping as a business? Could that happen?
What we look at all the time is where are we making our bets for the future. And we would certainly say that our bet for the future is on the cloud in the communications space, and the recurring revenue. And so that would imply that we would de-emphasize our bet on the on-premises communications area for sure. And so we’re continuing to evaluate how much of an investment should we keep in a product set that has been declining. And we have to decide at some point, if it’s not relevant to the rest of our business, do we stay in it? But right now, we’re just making sure that our investments in our growth business are appropriate. And that’s really where we’re making our future bet today—our growth business, which is the cloud.
Where did the 12 percent year-over-year growth in the Specialty Technology Solutions segment come from primarily?
Well, we talk about three areas: networking, security and barcoding. And we broke out that with a little more detail, because barcoding is a big space for ScanSource. And it really is primarily in printing and scanning. And some of our key suppliers talked about their struggles this year in some of the aspects of barcoding. But the areas that are growing are barcode printers and scanners; physical security, including cameras and access points; and networking. Because you need networking for all the other devices, including barcode printing, barcode scanning, physical security, all of those devices require access points and networking gear. And as I said earlier, we continue to outperform our competitors in the networking space with our customers.
For the rest of 2023, are there any new strategic initiatives that ScanSource will be focused on?
When I look out to the rest of the calendar year, we feel very excited about the portfolio of products we have. We’ve really got ScanSource in position now—we talked about this a couple of quarters ago—that we have been transformed. We have what we think is a very good business model today with great suppliers and great channel partners, and we just have to execute. We believe if we execute well, we will continue to see strong profitability. And we will grow at or slightly above market rates. We believe that is in store for us the rest of the calendar year.
How about new initiatives for the rest of the calendar year?
Well, we would always love to find new suppliers who we believe can add to our diverse portfolio. Having that diversity allows us to benefit when some products go out of favor with end users. And what we saw this past quarter was networking was strong even as the communications hardware continued to decline. We offset that with a strong networking, barcoding and security quarter. And we’re always, always looking at how can we add new customers. And so we always make sure that we’re going after new customers. We’re doing a number of events every year. And between now and the end of the year, I would guess we’re going to do 100 events on a regional basis to not only recruit new partners, but also to educate and train our community.