Q3 2024 Earnings Summary
- Strong Growth in CCaaS and UCaaS with AI-driven Opportunities: ScanSource is experiencing continued growth in Contact Center as a Service (CCaaS) and Unified Communications as a Service (UCaaS) billings, with no significant change in sales cycles. They are leveraging AI in contact centers, attracting significant interest from partners and end-users, and conducting educational seminars with high attendance to capitalize on this opportunity.
- Strategic Expansion into Agency Ownership to Enhance Margins: Recognizing margin pressures due to agents taking a larger share, ScanSource plans to acquire agencies to recapture these margins, which is expected to be margin accretive to the company. With many agency leaders at the end of their business cycles, there is strong interest from agencies to be acquired, providing an opportunity for ScanSource to create the best agency with best practices and programs, thus becoming a player of interest in the market.
- Emerging Growth Opportunities in Physical Security, Barcode, and Mobility: Despite near-term uncertainties, ScanSource is seeing green shoots of opportunity for growth in their physical security, barcode, and mobility businesses. Some of their larger barcode partners have expressed optimism for an improvement in the second half of the calendar year, and top customers are cautiously optimistic, suggesting potential for growth despite macroeconomic concerns.
- Significant Pricing Pressure in UCaaS and CCaaS Markets: The company is experiencing declining seat prices, which makes it harder to grow revenue from the existing customer base. Both UCaaS and CCaaS are facing pricing pressure at the end user, affecting profitability. Agents need to sell more seats to achieve the same revenue as before.
- Uncertainty and Decline in Hardware and Networking Sales: There is considerable uncertainty around the backlog in networking products, particularly with Cisco networking, and no definitive answer on when demand will recover. Additionally, the macro environment is creating concern among customers, leading to softer demand and potentially prolonged negative impact on sales.
- Margin Compression in Intelisys Business: The margins in the Intelisys segment have compressed, with the margin shifting to agents due to a higher commission split. This has reduced the profitability of the segment, and the company is now trying to participate in the margin that has moved to the agents.
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Agency Initiative and Margin Expansion
Q: How will the new agency initiative affect margins?
A: Management explains that margins on the Intelisys side are compressing as agents take more of the margin share. By creating a new agency entity, separate from Intelisys, they aim to participate back in that margin, expecting this move to be margin accretive to the overall company. -
Acquisition Strategy for Agencies
Q: Are you acquiring agencies to expand?
A: They plan to acquire agencies to accelerate growth, as competitors have already started, and they are catching up. This strategy involves acquiring agencies or their contracts, even parts of agencies like $1 million of annual recurring revenue, to build the best agency and leverage their balance sheet to grow. -
Channel Conflict with New Agency
Q: Will the new agency cause channel conflict?
A: Management is aware of potential channel conflict and has surveyed partners to understand concerns. By creating a separate entity, reporting directly to ScanSource with its own management team, and firewalling off data, they aim to mitigate conflicts and ensure separation from Intelisys partners. -
Agency Market Dynamics
Q: Are agency owners looking to exit?
A: Many agency owners are ready to exit and have expressed interest in selling. Roll-ups are occurring as private equity investors acquire agencies or their contracts. ScanSource sees opportunities to acquire parts of agencies, allowing owners to take some chips off the table without selling the whole business. -
Timing of Agency Strategy
Q: When will agency strategy be implemented?
A: Management expects to share more about their investment and channel expansion soon. -
Outlook for Hardware Business
Q: Any optimism for hardware sales?
A: They see green shoots of opportunity for growth in physical security, barcode, and mobility businesses. However, uncertainty persists due to macroeconomic concerns, with customers cautiously optimistic but also concerned. -
CCaaS and UCaaS Growth
Q: How are CCaaS and UCaaS sales cycles?
A: Sales cycles remain unchanged, with strong growth reported in CCaaS and UCaaS billings. There's high interest in AI, especially in contact centers, but technology changes could lengthen sales cycles and potentially slow transactions. -
Pricing Pressure in UCaaS and CCaaS
Q: Is there pricing pressure on UCaaS/CCaaS?
A: There is pressure on seat prices, which continue to decline. Agents now need to sell more seats to achieve the same revenue as two years ago, affecting both UCaaS and CCaaS markets.
Research analysts covering SCANSOURCE.