ScanSource CEO: Intelisys Acquisition A 'Watershed Moment' In Telecom Market

ScanSource CEO Mike Baur said his company's purchase of Intelisys will allow VARs to tap into "the biggest opportunity in years" – the $150 billion SMB telecom services market.

"This is a watershed moment in the telecom/master agent space," Baur told CRN. "We're delighted to be signed with these guys. They are the class of the industry."

Intelisys needs more routes to the small and mid-sized business market, Baur said, and will support any ScanSource VAR willing to make the journey with first-rate education and advanced commissions. Just 10 percent of the telecom services market is served by the indirect channel today, which means there's a gaping hole that channel partners can continue to fill.

[RELATED: Partners: ScanSource-Intelisys Deal Unlocks Recurring Revenue Bonanza]

"If you're a VAR that wants to get into recurring revenue, start where it's already happening," Baur said. "This existing carrier business is massive, and these carriers need more channel partners."

At any given time, Greenville, S.C.-based ScanSource is saddled with $400 million to $500 million of inventory and $400 million to $500 million of accounts receivable, Baur said, meaning the distributor has to move lots of product to make just a little profit. Baur said ScanSource enjoys the highest operating margins in the industry, though those come in at just 3.5 percent to 4 percent.

"We have to squeeze every penny to stay at 3.5 percent," Baur said.

In contrast, Intelisys makes its money from commissions coming out of the bills carriers give their end users, meaning the Petaluma, Calif.-based master agent doesn't have to carry any inventory or accounts receivable.

Therefore, Intelisys' EBITDA (earnings before interest expenses, taxes, depreciation and amortization) is expected to come in at an astonishing 45 to 50 percent in the first full year after the ScanSource acquisition closes.

"This won't move the top-line needle," Baur said, as Intelisys' net revenues are expected to total just $34 million in the year after closing. "But it will move the operating earnings needle dramatically."

Partners taking advantage of Intelisys' offering will not experience the level of top-line revenue growth they're accustomed to, Baur said, and in fact might see their total sales shrink. But the move to a more profitable, predictable recurring revenue business will significantly alter the financial profile of ScanSource and its partners.

"I believe the channel is ready," Baur said. "This is the biggest opportunity in years here in the VAR business."

VARs shifting from a transactional to a recurring revenue model often struggle to figure out how to cash flow a business that pays a small amount over a longer period of time.

"To sell monthly recurring revenue is an obstacle to almost any VAR, unless you're very large," Baur said.

But Intelisys has cracked the code through its advanced commissions program, which Baur said lowers the barriers to entry for VARs by providing them with the upfront revenue necessary for them to successfully enter the business. Baur said ScanSource's balance sheet will fund the expansion of the advanced commission program to the distributor's legacy partners.

"I want to provide Intelisys with the balance sheet and resources needed for them to be successful," said Baur, noting that he plans to let Intelisys' management team continue to run the business as a standalone entity without interference from ScanSource.

Baur established a team of four ScanSource employees in October 2015, and tasked them with figuring out a way for ScanSource and its VAR channel to get into recurring revenue services. The team reported back to Baur in December that there's a big cloud and carrier services model served by two-step distribution, with Intelisys as the biggest player in the master agent space.

"I'll be honest, I didn't know Intelisys," Baur said. "I didn't know them."

As a result of that task force, Baur met with Intelisys co-founders Rick Dellar and Rick Sheldon in March and came away very impressed.

"After meeting these guys," Baur said, "it become obvious why they were number one."