ScanSource CEO: MSPs Becoming A ‘Source Of Growth’ For The Distributor
‘What we’re finding in the U.K. and in Brazil is that this idea of ScanSource providing additional capabilities, and this is more on the recurring revenue and the Software-as-a-Service area, those capabilities, which we really are just starting to exploit in the U.S., are bringing us MSP customers,’ says ScanSource CEO Mike Baur.
ScanSource’s top executives Tuesday said a hybrid distribution strategy is helping the company differentiate itself from its peers while propeeling it to strong growth.
John Eldh, president of Greenville, S.C.-based ScanSource, told CRN after the company released its fiscal third-quarter 2022 financial report that the key to ScanSource’s growth during the quarter was its hybrid distribution strategy and helping its channel partners connect devices to the cloud.
“When we talk about hybrid distribution strategy, we’re really talking about enabling our partners to deliver technology solutions based on end-user customer requirements,” Eldh said. “And usually that means some combination of client hardware, software, connectivity and cloud services. And our job is really to facilitate pulling all that together to enable our partners and help take the friction and complexity out of the entire process for them, and help them shorten their time to value and revenue.”
Eldh said ScanSource’s hybrid distribution strategy is differentiated because of the channel community it serves.
“We have customers, whether it’s the VAR community, or the agent community or the MSPs. ... What separates us is the whole focus around specialization,” he said. “And we are not a broadline distributor. We are specialized and very focused in areas which brings us a differentiated level of expertise.”
Eldh gave two examples of how ScanSource thinks about hybrid distribution.
The first was a communications solution provider working with an end-user retailer that was moving from premises-based communications to a cloud-based solution for 2,200 locations, with ScanSource providing the engineering support and facilitating support via all its suppliers to build a communication solution that included hardware, software and connectivity.
The second was a mobility and bar-code solution provider that was implementing an outdoor video surveillance solution for a construction company at over 3,000 sites. Eldh said the partner needed connectivity for the solution to the cloud. ScanSource helped with a solution that included surveillance cameras, cellular SIM cards, connectivity and remote monitoring.
“We think all of these were strong examples of the strength of our capabilities in hybrid and our specialized capabilities,” he said. “And it really gives a better sense for how we’re helping our VARs to drive their own recurring revenue strategies, and helping them to drive growth and success.”
ScanSource Chairman and CEO Mike Baur, when asked by CRN about the impact of the merger of Tech Data and Synnex into TD Synnex, said his team normally declines to comment on competitors.
“For us, it was a great quarter of growth,” Baur said. “And we’re focused on our hybrid strategy and continuing to help our partners grow in this market.”
At the same time, Baur said, ScanSource does not really compete with broadline distributors like TD Synnex because ScanSource is much more specialized than such broadline distributors.
However, he said, he still believes that history shows consolidation is not in the industry’s best interest.
“I‘ve been doing this for about 35 years,” he said. “There’s never been a time where consolidation provides more value to the channel. The channel doesn’t benefit from consolidation, just big guys getting bigger. The IT channel benefits when there’s innovation and there’s additional value being created. And we historically haven’t seen that when we have consolidation on the supplier side, or the distributor side, or even the partner side, the VAR side. It just doesn’t happen. We think there’s always going to be some consolidation. But we think you can have too much in an industry, and it doesn’t create innovation.”
Baur also told CRN that MSPs are a growing part of ScanSource’s business, especially since ScanSource acquired U.K.-based MSP distributor intY. But while ScanSource has a lot of MSPs in the U.K. and in Brazil, MSPs have not been a primary route to market for the distributor in the U.S.
However, Baur said, that is changing.
“What we’re finding in the U.K. and in Brazil is that this idea of ScanSource providing additional capabilities, and this is more on the recurring revenue and the Software-as-a-Service area, those capabilities, which we really are just starting to exploit in the U.S., are bringing us MSP customers,” he said. “They’re wanting to do business with ScanSource. So it is a source of growth for the company.
That said, MSP platform provider Kaseya’s planned acquisition of rival Datto has no direct impact on ScanSource because the distributor does not work with either directly, Baur said.
“But I certainly think the MSP marketplace is interesting. ... From an overall opportunity for partners, I think that our MSP partners have been very successful for many, many years. It’ll be interesting to see whether consolidation brings innovation.”
For now, recurring revenue is an increasingly large part of ScanSource’s business, Baur said. Gross profit from recurring revenue went from zero before 2016, when ScanSource acquired master agent Intelisys, to 25 percent today, he said.
“And the reason that that’s very important to the channel is because we’re finding more and more of our channel partners that were traditionally VARs are excited about adding recurring revenue to their business,” he said. “And we believe that this hybrid distribution model of combining recurring revenue and hardware is something that ScanSource can do better than anybody else in the industry. We’re excited about the growth. [This quarter] the growth of our Intelisys business was 18 percent. This high growth that we’re experiencing in recurring revenue is evidence that our hybrid distribution model is working.”
For its third fiscal quarter 2022, which ended March 31, ScanSource reported total revenue of $846.0 million, up 15.9 percent over the $729.9 million the company reported for its third fiscal quarter 2021.
That total included sales of $503.1 million for its specialty technology solutions business, up 15.3 percent over last year, and $342.9 million for its modern communications and cloud business, up 16.9 percent.
The distributor also reported net income on a GAAP basis of $23.5 million, or 91 cents per share, up from last year’s $13.1 million, or 51 cents a share. On a non-GAAP basis, the company reported net income of $26.9 million, or $1.04 per share, up from last year’s $18.2 million, or 71 cents per share.