ScanSource at Raymond James Conference: Embracing Recurring Revenue

On Wednesday, 05 March 2025, ScanSource (NASDAQ: SCSC) presented at the Raymond James & Associates’ 46th Annual Institutional Investors Conference. The company, led by CFO Steve Jones, unveiled its strategic transformation from a traditional hardware distributor to a specialized technology distributor with a focus on recurring revenue streams. While the company highlighted growth in gross profit margins, it also acknowledged challenges in net sales and operating income.

Key Takeaways

• ScanSource is transitioning to a hybrid distributor model with a focus on SaaS, connectivity, and cloud services.
• Recurring revenue now makes up over 30% of consolidated gross profits, significantly improving gross profit margins.
• The company aims for consistent mid-single-digit growth, targeting a 5% adjusted EBITDA margin and mid-teens ROIC.
• Net sales for Q2 2025 saw a 15.5% decline year-over-year, though gross profit increased slightly.
• ScanSource is increasing share repurchases, supported by strong free cash flow.

Financial Results

• Recurring Revenue Growth: This revenue now accounts for over 30% of gross profits, up from 10% in 2016.
• Gross Profit Margin Expansion: Margins have improved to over 13% in fiscal 2025, compared to 10% in 2016.
• Q2 Fiscal Year 2025: Net sales were $747.5 million, down 15.5% year-over-year. Gross profit rose by 1% to $101.7 million, with margins increasing to 13.6%.
• Operating Income: Dropped by 31.2% to $18.4 million compared to the previous year.
• Free Cash Flow: Generated $34.3 million in the first half of fiscal 2025.

Operational Updates

• Segment Performance: Specialty Technology Solutions grew at mid-single-digit rates, while Intelisys and Advisory segments outpaced hardware growth.
• Customer and Supplier Base: ScanSource partners with 25,000 channel partners and 500 technology suppliers, including significant contributions from Zebra and Cisco.
• Geographic Revenue: Primarily from the U.S., with less than 10% from Brazil.

Future Outlook

• Growth Strategy: Focus on profitable growth, emphasizing gross profit over top-line growth.
• Guidance: Projected net sales between $3.1 billion and $3.5 billion, with adjusted EBITDA of $140 million to $160 million.
• Market Trends: Emphasis on cloud, SaaS, subscription models, and the potential of 5G and AI solutions.
• M&A Priorities: Targeting acquisitions that enhance capabilities in recurring revenue and digital solutions.

Q&A Highlights

• First Half Fiscal 2025 Performance: Weaker than expected but guidance remains unchanged.
• Demand and Pipeline: Positive supplier and partner feedback, although larger deals face delays.
• Confidence in Guidance: Despite top-line uncertainty, confidence remains in achieving EBITDA and cash flow targets.

For a detailed understanding, readers are encouraged to refer to the full transcript below.

Full transcript - Raymond James & Associates’ 46th Annual Institutional Investors Conference 2025:

Adam Tindall, Supply Chain Coverage: This is Adam Tindall in part of my supply chain coverage. Very happy to have Steve Jones, CFO of ScanSource and Mary Gentry, of course, from IR. In terms of the format of our time today, Steve is going to go through about a fifteen minute presentation just to kind of reintroduce. There’s been obviously a lot of evolution of ScanSource over the years, so looking forward to getting updated on the story.

And then we’ll save another fifteen minutes or so for questions. But certainly, if you do have questions as Steve is going along, please feel free to raise your hand. So with that, Steve?

Steve Jones, CFO, ScanSource: Well, thank you for that introduction, and good morning, everyone. So like Adam said, I’ve got about a fifteen minute presentation. Feel free to ask questions as we’re going along. We’ll do some Q and A afterwards, take some questions from the audience as well during that time. But I wanted to, you know, we’re really excited and very proud about the transformation that’s happened over the last few years at ScanSource.

So if you think about the company, we’re about thirty two years old. And for the first twenty five years of our history, we were a hardware distributor. And we were a specialized hardware distributor. So we were narrow in the technologies that we distributed, but we went very deep. So it allowed us to have higher gross profit margins than other distributors.

A great business model for us to then spring forward as we look at what what happened in, 2016 with our acquisition of Intelisys, where we were able to expand our technology offering and increase in the increasing digital world. So Intelisys allowed us to then start selling SaaS and connectivity and recurring revenue streams. And that’s been huge for our business model as we started in 2016. This faster growing recurring revenue has had a significant impact on both our margin profile and the predictability of our business. We’ll talk a little bit more about that as we go forward.

But I would say that if you were trying to put ScanSource in like one sentence, we’re a specialized technology distributor. We’re not broad line. We don’t do things like PCs, that compete on low margin. We’re business, I would say core business technology focused is a good way to think about it. And we’ve got recurring revenue streams now in both of our segments, which is really exciting for us from a financial profile.

A couple of things I want to just highlight here. If you look at these two key metrics, one being our fast growing recurring revenue streams from 2016 when we acquired Intelisys to now, in 2025, we’re above 30% of our gross profits, consolidated gross profits coming from recurring revenue streams that for us are reported net, so they’re almost 100% gross profit. If you look at how that translates over into our gross profit margin expansion, 2016, we were about 10%. That’s about where we’ve been as a company through our history. But then you get this inflection point where we started growing.

And in FY ’twenty five, our first two quarters, were above 13% on our gross profit margins. So very transformative in the financials of the business as we’ve been able to transform the company into this hybrid distribution. So I wanna just give a little bit of a highlight here and maybe a little little participation from the the audience. I I might have crapped out on this one a little bit. But usually, if you look in these rooms, you’re gonna see a network, device.

So a Aruba, Cisco, some kind of network device. A lot of times in these rooms, you’ll see cameras. There’s cameras, security cameras setting up all over the place. Those are two of the technologies that you interact with every day that a reseller, our customer, comes to the to the venues and installs. And so they’ll be they’ll be the in customer part of the transaction.

They get the technology from ScanSource. So we’re a two tiered distribution model. They’re buying the technology from ScanSource and we’re getting it from the manufacturers. So, if you look down at the specialty technologies that we’re in, mobile computing and barcodes. So, think about, when the Amazon guy comes to your house and he’s got the little mobile computer that kind of looks like a cell phone, but you either sign it or he’s taking a picture of your your package that’s delivered.

That would be some of the technology that we’re talking about. Things that are that happen inside a warehouse, any kind of data capture with barcoding, those are the kind of technologies that we’re talking about in that space. Security and networking, very easy. You interact with these things every day. You see the security cameras pretty much everywhere.

You see the network devices everywhere. And again, a growing opportunity for us because security is getting more and more integrated into companies and networking gets more and more complicated with security. Point of sale, again, things that you interact with every day if you think about the self checkout units that you use or the card swipe machines that you use, we distribute those to our resellers. Communication and collaboration, this is really where the company started but has probably had the most evolution in terms of the technology. So think about in your room tonight or last night, you had a phone.

Well, that’s an old communication technology that we distributed for the last twenty five years. But then also think about the collaboration. So think about when you’re on a Zoom call. So Zoom, 8x8, RingCentral, those would all be technologies around collaboration that have really displaced, in many ways, the hardware, and the old technology. So we’re really excited about that.

That’s still in kind of the growth phase of that transition. Connectivity. This is where we get into the Intelisys space. So think about all of the network gear has to connect to an ISP. You need that connectivity.

And so suppliers like Spectrum, Verizon, Lumen, AT and T, Comcast, Those are some of the base technologies that our agents support with their end users. And then last but not least, cloud services. And so think about Microsoft, as an example in terms of security Fortinet, some of those types of suppliers. So, we love our line card. We feel like it’s very relative to the business environment that we’re focused on.

Then we talk about our two operating segments. We’ve got a Specialty Technology Solutions segment and we’ve got this Intelysis and Advisory segment. Let me just talk about the differences. So both have recurring revenue, but the Specialty Technology Solutions segment, that’s where most of revenue is going to be because that’s where most of the hardware sits. When you talk about the Intelysis and advisory, this is going to be where a lot of our digital, SaaS, connectivity revenues come into play.

Much less impactful on the top line, but at a 100% gross profit, very impactful on our gross profit. When you think about the growth between those two, you’ve got kind of a mid single digit growth on the hardware and you’ve got a faster growing kind of a two x that load team growth on the technologies and the Intelisys and advisory. And so those then combine to give us what we’ll talk about in a bit, which is our mid range goals. But just kind of who are we and what do we do? We’ve got about 25,000 customers.

So these are going to be channel partners that purchase from us and do the installs. We represent about 500 technology suppliers. In a lot of the cases, we’re their number one or number two distributor. We’ve got about 2,300 employees. Most of our revenue comes out of The U.

S. We do have about 10% or less of our revenues that come out of Brazil. So we’re the number two distributor in Brazil, technology distributor in Brazil. But it’s still a pretty small part of our revenue base. Then when we talk about this recurring revenue at 28%, this was 2024 data, so now it’s grown to 30% plus.

This is a key to knowing that our transition’s happening. And we’ll go into that a little bit more detail.

Adam Tindall, Supply Chain Coverage: Steve, I guess you’re probably gonna answer it here in a second. But on specialty technologies, there’s a couple areas there where there’s a big transition from sort of, you know, legacy type of vendors. Right? I’m thinking Avaya, Mitel, Shoretel, those types of guys. Particularly, if I think about point of sale, collaborations and communications and collaboration, two areas that are really going digital.

I think sometimes investors get confused and tie scansource to more of the legacy vendors. But in those two areas in particular, and maybe you’ll answer it a little bit on the next slide, can you talk about maybe the mix of sort of the new, faster growing type of vendors for ScanSource?

Steve Jones, CFO, ScanSource: Great question. And, you know, we we kind of get trapped behind our name a little bit in the twenty five years that we’ve been in business. But really, when you think about that communication collaboration, and that’s going to be sitting in the specialty technology, I would say that the, you know, the Avayas are much less. They’ve seen their and the Mitel’s, they’ve kind of seen their their process go down. I call it the lunatic fringe.

There’s always going to be these replacement hardware units that are out there. Great margin for us, but you also have to worry about the working capital, so you got to manage that really close. But a lot of that has then been displaced by the it’s a combination. It’s really a tech set. So it’s the connectivity.

And then it’s going to be, you know, the RingCentral’s, the five nines, the the f fives. Those collaboration tools have taken over in terms of what we use every day in business. And so it has been a it’s been a longer transition than we thought, in terms of our in terms of the impact to our P and L. We thought it would be a faster, you know, a faster decline and a shorter tail. But the tail is long.

We’re going to continue to support Avaya and Mitel as long as that margin makes sense for us. It’s a great question. This just gives you a little idea of the supplier base that we have in our in our portfolio across those technologies. And we have two that we call out in our Ks and Qs that are more than 10% of our of our business, and that’s gonna be Zebra and Cisco. And Cisco is interesting.

We don’t have the full Cisco line cards. We have the collaboration and we have the networking, part of Cisco’s business, but that’s still more than 10 of our total revenues. Did I answer your question, Adam? Okay. Anybody else have any questions?

Just feel free to interrupt. So I want to talk a little bit about how do we think about growth in our business. And we really think about it from a profitable growth. We were talking this morning with someone, and we said, you know, our top line probably isn’t the best measure of our growth. It’s really gonna be the GP.

There’s two things that are going on. You think what happened back years ago in the software business when they went from perpetual to recurring revenue stream, there’s a there’s a chasm of the way that that monetary transaction works. We’re seeing that in a lot of our key suppliers as well. Cisco being one of them, where they’re putting more value in the security and in the software and less value in the hardware itself. And so that’s going to be that’ll be a continued trend.

But when we look at what’s going on from a bigger perspective, this shift in buying consumption preferences to cloud, SaaS, and subscription, People don’t buy the hardware first. They buy the solution first. And then our value added resellers, our partners, are then building solutions for them around the hardware and the endpoints that they need. More tech more complex technology solutions as devices, software, and services are bundled together. No longer do you do you typically see a an end to end solution with the same supplier.

So it’s gonna be multiple suppliers that have to work together. This allows our our tech teams to work with our resellers to be able to come up with with the right solution for the end user. Connected devices enabled, automation, worker productivity. You know, more and more, we’re asking frontline workers to do more, to be more productive. They need technology to be able to do that.

Investments in advanced networks and five gs connectivity into five gs networks. This is probably the area that I’m most excited about right now. When you think about what happens with data, the more data you use, the more AI enabled things you use, the bigger pipeline you need from a connectivity space. And then when you talk about five gs networks, if you’re reliant on data, you can’t have network interruptions. And so five gs private networks, five gs connectivity is a way to solve that for a company.

And it allows them to not have to be reliant on a single provider. So we love this space. We’ve invested in this space in the last couple of months. And we’ll continue to look to there for additional growth. Heightened emphasis on security.

I mean, it’s obvious. Right? As we go forward, there’s more and more security needs. There’s more and more access points that because everybody’s connecting. I think I saw a research that said for even a small businesses, there’s there’s usually a hundred plus devices connected to their network at any time.

You can imagine what security problems that brings if you don’t have have the right security. I know in my house, I’ve got, like, I’ve got four kids. So I’ve got, like, 30 devices connected at all times. I’m not even sure what they all are, but but it’s, you know, they they tell me it’s okay. Yeah.

I’m pretty sure. And then AI. And for us, the the realization of AI is really in our CX. So so AI enabled CX solutions, that would be UCaaS and CCaaS. We see that happening today.

There we are monetizing that AI technology today. So it’s real for us. We’re we’re excited about it. It’s an upsell to all of those suppliers and will increase our, the the gross profit and the revenue on our Intelysis segment. So how do we create value?

We get this question a lot. So as a as a two tiered distributor, what what role do you play? And so there’s really two roles that we play. And and I would probably tell you that our value is more related to the suppliers than necessarily it’s related to the resellers. And the reason why is because the resellers can go from very small, where we can help them do a lot, to very large where they’re self sufficient and they just need us to help them fulfill their orders.

So if you think about the technology suppliers, what do we do for them? We expand their reach at a variable cost, which is very important, especially for the SaaS suppliers. They’re always thinking about CAC, cost of customer acquisition. And our routes to market are variable for them. So if it’s not a sale, they don’t pay anything.

Multiple routes to market. So we work with MSPs, VARs, agents. We have multiple routes to market, that allow them to put resources other places. We talked about the lower customer acquisition costs, recruit and train new customers. So we have an investment to recruit and bring in new VARs, new agents into the technology space.

And then, of course, we manage their credit. So we have a fairly large accounts receivable. We’re the, kind of the go between the manufacturer and the customer on credit. And we can work with them on end user credit terms as well. From a channel partner perspective, we like to say that we meet our customers where they are.

So we go the gamut for our 25,000 customer from mom and pop VARs to very large private equity owned resellers. And so if they need our technical support, if they need education, if they need tools, we can provide that. If they just need the product and maybe a little bit of technical advice, we can do that as well. So we can we can flex our offering based on where the customer is. Just for time, I’m gonna skip a couple of these real quick.

And if we have time, we can come back. But I wanted to talk about what does all this mean from a from a financial profile. So when we look at kind of the four pillars of of how we think about the financial profile of the business, we’re not going to be a fast grower. We’re going to be a consistent mid single digit grower because of the mix of hardware. So if you think about our top line revenue, it’s mostly hardware.

It’s at 10 points of margin roughly. But we also then have this recurring revenue business that helps us expand our margin. And we talk about adjusted EBITDA margin as kind of our measure for profitability. And our midterm goal is to be between from 4,500,000,000 building to $5,000,000,000 and then, we think there’s opportunity to continue to grow that as well. When we think about over the last couple of years, Adam will appreciate this, we’ve really built a cash culture inside of ScanSource.

Historically, we’ve used our balance sheet to drive deals. So we would buy inventory. We would get margin by holding more inventory. We would extend customer terms to help get deals off the street. So we had a very heavy working capital business over the last few years, especially as we cycled out of kind of the COVID and the supply chain disruption.

Our teams have been focused on generating free cash flow, having a good free cash flow yield based on the business. And so, you know, we’ve done a good job. I think there’s additional areas where we can improve. There’s always technologies that you can deploy in inventory management. But we love that the teams have really embraced this cash culture.

And it’s been a big change for our business. Last thing I would say is we have a very strong balance sheet. We have very low leverage. We have plenty of capacity to do the things that we want to do from a strategic perspective. And I would say a few years ago, when we had a higher working capital balance, we had a lot of our EPS getting consumed with interest.

That’s not the case today. And we’ve got plenty of cash to be able to fund our core business. So what do we do with all this cash? And where is our balance sheet? And how do we think about it?

I’m going to really focus on the priorities. So one of our key priorities is to maintain a very targeted net debt level to our EBITDA. Very, I would say, very conservative. One to two times is, it allows us to have a lot of flexibility. And then, it really becomes the priority of this disciplined M and A.

And it’s thematic. So, we’re looking at things that can expand our capabilities in recurring revenue and digital, maybe some hardware, but that hardware would have to we’ll talk about Advantix. That hardware has to come with recurring revenue streams with it to be interesting to us. And so that would be one of the priorities. The other priority that we’ve really stepped up in the last couple of years is our share repurchases as we’ve generated more free cash flow, and that’s becoming more and more predictable for us.

So those are our priorities. When you look at, kind of our q two ending, our net leverage ratio was almost 0.2%. We have a hundred and 11,000,000 in cash. Credit facility available of $350,000,000 total total debt is really our fixed debt is a hundred and 40,000,000. So we’ve we’ve got a flexible balance sheet.

We’re we’re poised to do what we wanna do strategically to execute our mid range goals.

Adam Tindall, Supply Chain Coverage: And Q2 is a December ending, so it’s fiscal Q2.

Steve Jones, CFO, ScanSource: Yes. It’s yeah. Great point. We were just talking about this this morning. We’re one of the weird ones.

We’ve got a June 30 year fiscal year end, so, we’re we’re always off cycle. It’s a good point. I’ll talk a little bit about the last two acquisitions that we did really back to back and why they’re thematic for us. So when we look at resource, resource is an agent. So we were thinking really hard about, do we go and buy something where we’re competing right with our customer base?

And Mike Bauer, our CEO, went to the top, our top customers in that space and talked to them about what we wanted to do. This is not about competing in the agent space. This is about building the channel model of the future in this agency space. So let me just step back and talk about what that really means. So agents are typically coming out of OEM direct sales and then they go on their own.

The reason why they do that is because if they’re selling for Zoom, they can only sell Zoom technologies. If they’re an agent, they can sell all the technologies that are on the Intelysis line card. And the economics to them are pretty much the same. So think about agents as being almost like independent insurance agents. They don’t work for Allstate.

They work for all of the all the different insurance companies. They can get you as an end user, they can get you the best deal. They can get you the best supplier. The problem with that is there’s a lot of variation in how they operate. And we believe long term for this channel, which is growing but still pretty immature, the suppliers need more consistency.

And so our investment in this space was really a management team and a set of leaders that had a lot of discipline in what we think the channel model of the future looks like. So our investment here is really around, best practices, tools that we’ll take back to the Intelisys community and help the entire channel be better. So that’s the idea there. And it is recurring revenue and it does fit our theme, but we felt it was important to be a leader in this space. As other TSDs are Intellisys businesses as a technology service distributor, TSD.

It’s gone through a lot of different terms. But the other large ones are private equity backed. And are they in it for the long haul? We’re not sure. We don’t know what their plans are, but we know what our plans are.

Our plans are to be in this for a long time. Advantix. I’ll try not to geek out here. But we’ve been doing business with Advantix for about five years, And they’ve got a very unique solution. So if you think about five gs, one of the problems that you have with five gs is who your carrier is and the connectivity of that carrier as you go across the country.

And they have a smart SIM that can take all of the major carriers and allow them to switch real time to have the best connectivity. So if you think about fleet management where you may be talking about trucks or other things that would go across state lines on a regular basis, you need that to be able to track. You don’t want to have gaps in your connectivity. So we love this. We announced a few months ago that we’ve got some agreements with our OEMs.

We think this fits well with our hardware, particularly security and mobile computing, being able to do value added distribution even if we’re not the distributor, but we can use it to Bantix. Even if it’s another distributor doing it or our direct deal, we can add value there. So we love this business. Last thing I want to talk about is our mid range goals, and we’ve had these out here for a while. Probably three years, Mary.

About three years. It’s really the way to think about this is a set of goals. It’s individually, they’re interesting, but not compelling. But when you look at them as a set, this is the transformed company that we’re talking about. So net sales per year, it’s really going to be driven by the hardware.

And so we look at what do our key suppliers think about their growth, what does IDC and Gartner think about the growth of the technologies that we’re in. It’s going to be kind of a mid single digits growth on the hardware side. The recurring side will grow faster than that. That will help us improve our margin. So when we talk about our adjusted EBITDA margin expanding to this 5% plus that we’re kind of here.

So this is we’re in a kind of a weird period where these were our midterm goals three years ago. We’ve hit a lot of these, and we’re stay tuned, we’re going to be needing to update these. But our expanded margin is really a mix discussion. Adjusted ROIC being in the mid teens, this is really management effectiveness. When we think about where we deploy capital, we want to make sure that we’re keeping a high ROIC as just almost a checkpoint for management decisions.

And then last but not least, this recurring revenue as a percent of gross profit. This was a bold thing to do three years ago when we were kind of in the teens to say we were going to double it. And we we’re there now. You know, it it hasn’t been all organic. It’s been some acquisitions, some small acquisitions.

We think there are other acquisitions that we can do that can can really step this up to a different level, and we’re excited. So just stay tuned. We’re excited to update these mid range goals soon. The other one that we’re really excited about, we talked about the cash culture. We love the idea of being able to talk more about our cash generation in our strategic plans.

So with that, Adam, I’ll open it up for questions. If you’ve got any, or we can open it up to the room.

Adam Tindall, Supply Chain Coverage: Probably have time for one, and we’re going to continue the discussion and the breakout downstairs. Doesn’t look like so let me get this one out on the public webcast, Steve. So just near term fiscal first half of twenty twenty five, so September and December, right, because the June ending fiscal year have been a little bit weaker than you were hoping for out of the gate, but you also decided to hold guidance for fiscal ’twenty five despite a little bit of underperformance in the first half. Anything to update on that? Or what’s giving you and the team confidence that the back half will rebound to hit the targets?

Steve Jones, CFO, ScanSource: Well, I’ll go back to what we talked about in January. We wouldn’t be able to comment on the current quarter or kind of give guidance update at this point. But I think, you know, first of all, if you look at our guidance that we came out of earlier in the year, it’s a very wide range on the top. And we were really trying to signal there’s a lot of uncertainty in this demand cycle. We’ve got good messages from our suppliers.

We get good messages from the channel when we hear from our channel customers that there’s pipeline building. But these larger deals are pushing out. And so, we knew that was going to be a problem for us. The fact that we’re also a June 30 timing, we get really we’re way ahead of our key suppliers in terms of their next year. And so that kind of put us into this big wide range on the top line.

We’re much more confident on our adjusted EBITDA. We manage that very carefully. And so when we think about how we’re thinking about our profitability, as you think about that range of $400,000,000 on the top line, we’re very confident that we can be our EBITDA margins will come out to the right place given where the top line goes. And then our free cash flow. Again, that one’s one that we’re very confident in because again, the teams have embraced that.

So I would say that the top line is still very uncertain. And and really our our guidance was we talked a lot about do we how big is the range gonna be? And we felt like that was our best guess. And we still believe that there’s second half opportunity, even even in this this crazy world we’re living in right now.

Adam Tindall, Supply Chain Coverage: That’s right. Cordova four is the breakout. Thanks, Steve. Thank you.

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