ScanSource: Our Focus Is On ‘Mission-Critical Technologies Versus A Nice-To-Have’

‘[This quarter] was driven in large part by the technologies that you’ve heard us talk about on the call: automation, worker productivity, customer experience, digital transformation, remote work and return-to-the-office collaboration—all these technologies gave us a strong quarter,’ says ScanSource President and CRO John Eldh about the distributor’s strong second fiscal quarter.

ScanSource President and CRO John Eldh

Thriving During Trying Macroeconomic Times

IT and telecom distributor ScanSource Tuesday reported a strong second fiscal quarter 2023. The Greenville, S.C.-based company Tuesday reported revenue for the quarter of $1.0 billion, up 17 percent over last year. It also reported GAAP net income of $25.4 million, or $1.01 per share, and non-GAAP net income of $26.9 million, or $1.06 per share, both up over last year.

ScanSource Chairman and CEO Mike Baur, President and CRO John Eldh and Senior Executive Vice President and CFO Steve Jones, in an exclusive interview with CRN, said that ScanSource is increasing its guidance for the next quarter and full fiscal year despite macroeconomic issues arising from a potential recession, inflation and tech layoffs.

The first half of fiscal 2023 gave ScanSource the confidence to raise its guidance, Jones said.

“As we got through the first half of the year, and we had such an outstanding first-half performance, we got more confident in two things,” he said. “One, we have better visibility to our fiscal third quarter. And we feel that even if there are macro pressures, we can still deliver a higher number than we thought when we gave our first guidance at the beginning of the year.”

That confidence comes despite the looming threat of a recession or tech layoffs, Baur said.

“Historically, when our suppliers go through layoffs to reduce their costs, they actually push more of their business to distribution,” he said. “So we typically see our business grow because we’re a variable cost for the suppliers. They would rather have variable costs in distribution than fixed costs with their own people.”

The IT world may be in for a rocky calendar 2023, but the impact on distribution, and on ScanSource, may be the opposite of what the rest of the industry could face. Here is what the executives had to say.

Congratulations on the quarter. It looks like ScanSource did very well. What was the big takeaway for the quarter?

Eldh: I think you heard from the results, we had really strong demand across the technologies that we support, putting us in a position to drive to a record billion-dollar quarter and a record EBITDA quarter as well. And it was driven in large part by the technologies that you’ve heard us talk about on the call: automation, worker productivity, customer experience, digital transformation, remote work and return-to-the-office collaboration, all these technologies gave us a strong quarter. And I think the other thing is if you think about the space that we’re in, these technologies are all what we think of as mission- critical technologies versus a nice-to-have. And I think that also helps drive demand for us.

It also looks like ScanSource is also raising its outlook for fiscal year 2023. What’s behind that optimism?

Jones: Part of the thing that we said early on [this year] was we don’t have a lot of visibility to the second half [of the year]. As we got through the first half of the year, and we had such an outstanding first-half performance, we got more confident in two things. One, we have better visibility to our fiscal third quarter. And we feel that even if there are macro pressures, we can still deliver a higher number than we thought when we gave our first guidance at the beginning of the year. So that’s why we upped our guidance, both from a revenue perspective and a profitability perspective.

How is a potential recession impacting IT distribution?

Baur: I think it gets back to what Steve said about our guidance. We feel very good about the demand we saw in Q2 that we talked about on the earnings call. We believe that demand will continue through this year. We just can’t quantify it as well as we would have liked in the past. One thing for ScanSource that’s important to remember is our quarter coming up, our Q3, which is the March quarter, is our seasonally weakest quarter. And so we’re coming into our weakest quarter seasonally, with careful analysis of what we think we can achieve for the rest of our year, which is two more quarters. So right now we’re optimistic that demand will continue. However, if a recession were to happen, then we do believe we have to be prepared for that. And we are. Business is always about flexibility and being prepared with our customers for difficult times. And we’ve gone through recession before. All the distributors came through that successfully. We all found ways to reduce costs when we needed to when we saw demand weaken. But at this time, we don’t see that happening.

What do you think the chances are of a recession negatively impacting distribution?

Baur: The last time we saw a significant impact was back in 2008 or 2009. And it definitely affected the top-line revenue for all distributors. We don’t see that happening right now. And we still see strong demand [for] technologies. … So we don’t see right now that any of the distributors are going to be affected as much by recession. But what we have seen, and we’ve been reading about it, and you have too, is the PC market is definitely going to be weaker right now. But we don’t play in that. And that’s why we’re not selling commodity PCs and server products. We’re really into specialized mission-critical technologies. And that’s how ScanSource will be different from the other distributors.

In the IT space, we’re seeing a lot of tech layoffs happening. How does that impact IT distribution? In other words, are layoffs at the vendors impacting you? Or are you seeing any changes in your personnel needs? Are you still hiring?

Baur: Historically, when our suppliers go through layoffs to reduce their costs, they actually push more of their business to distribution. So we typically see our business grow because we’re a variable cost for the suppliers. They would rather have variable costs in distribution than fixed costs with their own people. ... Some of the suppliers in Silicon Valley are doing [a rationalization of their costs], but not the ScanSource suppliers as a big group. We’ve seen a little bit of that with some of the cloud companies, but not with our hardware suppliers today. ...

Any ideas in terms of what kind of hiring goals you have for the year?

Baur: Our goal right now is to make sure that we stay flexible. We talked about that in terms of our guidance. We want to make sure that we understand what our investments are going to be like in people as well as inventory. So we talked about working capital and our people resources. And so we’re going to make sure that we don’t get ahead of ourselves. As John mentioned earlier, this past quarter was one of record profitability. We’ve achieved a nice scale in our business today, both in our hardware business and our Intelisys [business telecommunications and cloud] business. And we believe we can continue that throughout this fiscal year.

ScanSource has its own cloud marketplace, right?

Baur: We don’t call it a cloud marketplace, but in essence it is similar. Yes. We call it a platform. So we have a cloud platform that allows our VARs and our agents to transact business in multiple ways. That’s how we define it.

Do any of your products, services or other offerings to your channel partners go through the cloud marketplaces of some of the big public cloud vendors?

Eldh: The offerings that we have go through our own platform

For distribution in general, are you seeing any belt-tightening in the industry?

Baur: The other distributors out there, we really don’t focus a lot on them because we think that with our hybrid distribution story, we’re unique. And we believe that this combination of having cloud and connectivity services aligned with hardware puts us in a position where we’re actually taking market share. And so our business continues to grow nicely, as we showed in Q2. And we believe we’re poised to continue to do that through our fiscal year.

You mentioned cloud services. What are you doing different in cloud services so that you don’t really need to work with the public cloud marketplaces?

Baur: Our cloud offerings are really focused on markets such as UCaaS [Unified Communications as a Service] and CCaaS [Contact Senter as a Service]. We talked about how those are growing at a tremendous rate, year over year, and has been quarter after quarter. And so we’re finding this move from telecom on-premises to telecom in the cloud to be a strong driver of our cloud services. To make it clear, we’re not in the business of selling data center in the cloud. We’re not selling AWS. We’re not doing Google Cloud Services. That’s not a part of our story, providing data services. We’re providing application services in the cloud. I think that‘s where we’re different.

What can we look forward to from ScanSource in 2023? What are some of your key initiatives?

Eldh: We had our Channel Connect event this past fall. It was the largest event we’ve ever had. It was focused on hybrid and hybrid technologies and helping our partners to make that transition and helping them to drive more profitability. And so that will absolutely be one of the key events this year. I think in addition to the big events, we are doing a ton of things all around hybrid technologies and how we can help our partners to drive more growth and add more value to their end customers. And as I said before, be more profitable. And really, our priority is enabling these customers and helping them to get to this hybrid environment.

When you say, hybrid offerings, can you spell that out a little bit?

Eldh: When we talk about hybrid, we’re really talking about putting our customers in position to deliver for their end users how they want to consume technology. And so this is really all about us enabling customers to sell across solutions that would incorporate hardware, software, connectivity and cloud services. And it’s also about offering our customers choice while also removing the complexity and friction in the transaction, while also helping them to drive shorter time to value and revenue. For this, what we think the benefits are for our customers is really helping to broaden their portfolio in this digital world, but also to help them offer more value to customers, and really begin to build and capitalize on a recurring revenue stream that can help drive and foster growth for them, as well as increased profitability.