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ScanSource to flog 'non-digital' businesses worth over $600m in revenue

Distributor announces sale of 'non digital' operations in UK, mainland Europe, Latin and South America affecting 490 staff

ScanSource has announced it plans to sell parts of its business across the UK, the rest of Europe, Latin and South America totalling $623m in annual revenues.

The news emerged as the US distributor posted poor Q4 financials where revenues decreased three per cent to $960.8m and operating income shrank four per cent to $29.4m.

CRN's sister title Channel Partner Insight (CPI) has delved into ScanSource's earnings call and financial figures to find out all you need to know about the distributor's planned divestiture - and where it's heading next.

1. A global divestment

On the same day it posted its fiscal results, the VAD revealed that it is planning to sell off operations totalling $623m in revenues across Europe, Latin and South America.

The South Carolina-headquartered firm is planning to sell operations worth $623m in revenues in Europe, including the UK, Mexico, Colombia, Chile, Peru and Miami in the US.

The divestitures will be made in what ScanSource describes as its "non-digital" distribution business and will affect around 490 employees.

ScanSource CFO Gerry Lyons told investors on an earnings call trascribed by Seeking Alpha that the sell-off will affect both its Barcode and its Communications business.

"In Europe, it's both segments, so it's both communications products and our point-of-sale barcode, primarily barcode products in Europe. And in Latin America it's the same as well, so it's both communications and barcode," he said.

In a statement, CEO Mike Baur said that the move reflects ScanSource's strategy to focus on its "higher-growth, higher-margin businesses".

"After considering our strategic options, we decided that the planned divestitures would offer opportunities to accelerate our profitable growth and cashflow," he said.

"These actions will enable us to focus our investments on our higher-growth and higher-margin businesses in the US, Canada and Brazil, as well as our digital businesses globally. This will give investors increased insight into our long-term growth opportunities."

Answering one analyst's question about whether ScanSource will write down any of its operations, Lyons said that a sale is the "only plan" at the moment.

Lyons revealed that the divestiture would allow ScanSource to pay off some of its debts, which amounted to $360m as of 31 June 2019, as well as pour investment into its strong US and Brazilian markets.

"These regions aren't performing at the rate that we need them to perform, so we're going to invest some of those dollars in the higher-performing areas that we still have, which would be the US and Brazil as we've indicated," he said.

"We did have some disappointing results in the barcode segment. I think we indicated on the call that most of that was just lower sales volumes. So we're expecting that we're going to improve in both segments based on executing on these planned divestitures."

Baur sought to reassure investors that its vendor rebate agreements will not be affected as a result of the planned sale.

" We're certainly not expecting that because today we get no programme benefits across those geographies. All the suppliers negotiate terms and conditions and rebate targets based on what we do in a particular geography. For example, our revenue in Europe does not affect our rebates and programmes and benefits in North America and vice versa," he said.

The VAD has made three acquisitions in two years: payment devices firm POS Portal, Salesforce partner Canpango and UK cloud aggregator intY. The first two are US businesses, while intY is based in the UK.

2. 'Disappointing' Q4

ScanSource's top and bottom line were down for its Q4 2019.

Revenues decreased three per cent year on year to $960.8m (€865.86m). Meanwhile, non-GAAP operating income decreased four per cent to $29.4m (€26.49m).

Baur conceded that the US VAD suffered from "lower sales volumes" and "did not finish the fiscal year as strongly as we started".

"For the quarter, we had inventory turns of 4.7 times, which are slower than our typical range," he said.

"This reflects the higher inventory levels from the opportunistic inventory purchases and lower than planned sales in the fourth quarter."

However, ScanSource's FY2019, as a whole, fared better.

Revenues increased one per cent to $3.9bn. Non-GAAP operating income increased four per cent to $128.5m.

3. Growth in unified comms business

The VAD reports its business in two segments - barcode, networking and security; and communications and services.

Its FY2019 report reveals that the latter logged revenue growth of 5.4 per cent, while the former contracted by 1.5 per cent.

The growth in its communications business ties with comments made by ScanSource's senior EVP of corporate development, Mark Morgan, who told CPI last month that a key strategy for the firm is to focus on the growing UcaaS and CcaaS (contact-centre-as-a-service) markets.

Morgan emphasised that its investment in intY, which it snapped up last month, is part of the VAD's strategy to make good on those opportunities.

Baur reiterated the point in yesterday's earnings call.

"Our Cisco partners have embraced the new digital solutions offers with WebEx in a significant way. Our Cisco subscription business has more than doubled year over year," he said.

"Now with our new CASCADE cloud platform from intY, we are adding capabilities to accelerate our Cisco collaboration subscription business for our sales partners with new billing choices."

4. Up to $1bn in sales forecast next quarter

Both ScanSource's CEO and CFO, Gerry Lyons, expressed confidence that its Q1 FY2020 will show signs of financial recovery.

Lyons said that ScanSource overhauled its sales structure last year, effectively combining five sales forces into one team, which caused some customer disruption.

"We started that a year ago in July, and we phased a bigger group of our customers into that new sales structure in March… by combining five sales forces into one, there was definitely some disruption and some customers said, 'I now have a new salesperson or sales team, how does this work?'

"We believe that some revenue was lost in the quarter and that we'll get it back once the new sales team start to perform. We believe that our customers, based on feedback, like this new structure. They maybe didn't understand it at first, but we believe that they will - they'll benefit from it and we will too."

Lyons forecast that he expects ScanSource to post sales of $970m to $1.03bn, up from its current quarter total of $960.8m.