ScanSource, Inc. (NASDAQ:SCSC) is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, Software as a Service (SaaS), connectivity and cloud. The company operates primarily in the United States, Canada and Brazil, providing technology solutions and services from more than 500 leading suppliers of mobility, barcode, point-of-sale (POS), payments, physical security, networking, unified communications, collaboration, connectivity and cloud services to its approximately 25,000 customers.

Business Segments

ScanSource has two reportable segments - Specialty Technology Solutions and Modern Communications & Cloud. The Specialty Technology Solutions segment includes the company's business in mobility and barcode, POS, payments, security and networking technologies. The Modern Communications & Cloud segment includes the company's business in communications and collaboration, connectivity and cloud services.

Financials

In the third quarter of fiscal year 2024, ScanSource reported net sales of $752.6 million, a 15% decline compared to the prior-year period. The Specialty Technology Solutions segment saw a 14.5% decrease in net sales to $483.7 million, while the Modern Communications & Cloud segment experienced a 15.9% decline to $268.9 million. The company attributed the lower sales to softer demand across its hardware technologies, including a significant decline in networking products, including Cisco networking.

Despite the revenue decline, ScanSource maintained strong profitability, with a gross profit margin of 12.6% in the quarter. The Specialty Technology Solutions segment reported a gross profit margin of 9.3%, while the Modern Communications & Cloud segment achieved an 18.4% gross profit margin. The company's focus on higher-margin recurring revenue streams, such as its Intelisys connectivity and cloud services business, helped offset some of the pressure on gross margins.

Intelisys, ScanSource's technology services distribution business, continued to perform well, with net sales growing 4% year-over-year in the quarter. Intelisys' end-user billings increased 7% year-over-year to approximately $2.68 billion on an annualized basis, driven by strong growth in Contact Center as a Service (CCaaS) and Unified Communications as a Service (UCaaS).

For the full fiscal year 2024, ScanSource provided updated guidance, expecting net sales of at least $3.3 billion and adjusted EBITDA of at least $140 million, representing an EBITDA margin of approximately 4.25%. The company also increased its free cash flow outlook to at least $275 million for the fiscal year.

Liquidity

ScanSource's balance sheet remains strong, with $159 million in cash and a net debt leverage ratio below zero on a trailing 12-month adjusted EBITDA basis as of the end of the third quarter. The company's capital allocation strategy focuses on a balanced approach of funding growth, particularly in high-margin, recurring revenue businesses, as well as share repurchases. During the quarter, ScanSource repurchased $20 million of its common stock, and the company's Board of Directors has authorized a new $100 million share repurchase program.

Outlook

Looking ahead, ScanSource is navigating a challenging demand environment, with the company citing macro uncertainty and the normalization of supply and demand as creating a difficult forecasting environment. The company is managing its selling, general and administrative (SG&A) expenses to align with its revenue expectations, including a workforce reduction plan executed in January 2024 that is expected to result in $10 million in annualized expense savings.

Recent Developments

In addition to its core distribution business, ScanSource is making strategic investments to expand its presence in the technology services distribution (TSD) market. The company recently announced plans to create a new business entity, separate from Intelisys, to serve as a platform for the "channel model of the future." This new entity will focus on acquiring existing technology services agencies and providing digital tools and best practices to help ScanSource's channel partners grow their businesses.

Geographic Footprint

ScanSource's geographic footprint is primarily in the United States, Canada and Brazil. In the third quarter, the United States and Canada accounted for 89.2% of the company's net sales, while the international segment, which includes Brazil, contributed 10.8% of net sales.

Financial Performance

The company's financial performance in fiscal year 2023 has been mixed, with net sales declining 11.5% to $2.51 billion, compared to $2.84 billion in the prior year. Net income for the year was $60.9 million, down from $71.0 million in the previous year. Operating cash flow was $316.9 million, a significant improvement from the $20.5 million used in the prior year, while free cash flow increased to $158.0 million, up from negative $45.7 million in the previous year.

ScanSource's balance sheet remains strong, with a current ratio of 2.2 and a quick ratio of 1.38 as of the end of the third quarter. The company's debt levels are modest, with a debt-to-equity ratio of 0.16. ScanSource's return on invested capital (ROIC) was 8.0% in the third quarter, reflecting the company's ability to generate solid returns on its capital investments.

Conclusion

In conclusion, ScanSource is a leading hybrid distributor navigating a challenging demand environment with resilience. The company's focus on higher-margin recurring revenue streams, strong balance sheet, and strategic investments in the technology services distribution market position it well for long-term growth. Investors should closely monitor ScanSource's ability to execute on its strategic initiatives and manage its costs in the face of ongoing macroeconomic uncertainties.