ScanSource Q2 Earnings Call Highlights

Key Points

• ScanSource reported 3% year-over-year net sales growth and 1% gross-profit growth, but profitability declined versus Q1 due to unexpected period expenses (freight, product mix, a customer-specific bad-debt reserve) and timing of large deals; management updated FY‑2026 guidance to Revenue $3.0–3.1B, Adjusted EBITDA $140–150M, and free cash flow at least $80M.
• Management created a new converged communication sales team to unite hardware and Intelisys cloud offerings under one go-to-market, enabling Intelisys reps to sell hardware and reducing handoffs to drive more recurring/cloud revenue and fuller solutions for partners.
• Balance-sheet and capital-allocation highlights: about $83M cash, net-debt leverage roughly zero, $18M of share repurchases in the quarter with $179M remaining authorization, a new five-year credit facility, and continued selective M&A evaluation.

ScanSource NASDAQ: SCSC executives told investors the company delivered net sales and gross profit growth in both operating segments during the fiscal second quarter, but said unexpected expenses weighed on profitability versus a “very strong” first quarter. Management also announced the launch of a new, unified communications sales team intended to align the company’s hardware and cloud-based communications offerings under one go-to-market structure.

Quarter highlights: growth in both segments, but margin pressure

Chair and CEO Mike Baur said ScanSource generated “strong free cash flow” in the quarter and posted organic net sales growth in both segments. However, he noted profitability was “negatively impacted due to some unexpected expenses” in the quarter, leading to declines in gross profit and EBITDA margins compared to the first quarter.

Chief Financial Officer Steve Jones said second-quarter net sales grew 3% year-over-year in both segments, while gross profits increased 1% year-over-year. He attributed the profit pressure to higher period expenses in the Specialty Technology Solutions segment, which affected both cost of goods sold and SG&A.

Specialty Technology Solutions: large deals timing and higher costs

In the Specialty Technology Solutions segment, Jones said net sales increased 3% year-over-year and 4% sequentially, while gross profits rose 1% year-over-year. He said higher period expense, including freight costs and product mix, reduced gross profit margins by about 30 basis points. Excluding those costs, he said gross profit growth “would have been in line with the revenue growth for the segment.”

Jones also said recurring revenues represented approximately 18% of segment gross profit, including positive contributions from the acquisitions of Advantix and DataXoom.

Segment adjusted EBITDA margin was 2.8%, and Jones estimated higher period expenses reduced the segment’s adjusted EBITDA margin by roughly 60 basis points.

During Q&A, Jones added detail on the quarter’s cost items, pointing to mix and freight expense in cost of goods sold. He also cited bad debt expense related to a customer-specific reserve, while emphasizing the company “closely” manages receivables and views the issue as “more period related.”

Baur said Specialty performance was also impacted by large deals being “broken up into smaller pieces,” which affected invoicing timing. He said the company has seen a “slowdown in large deals that are being invoiced in the quarter,” and described this as part of the challenge for the hardware business. Baur said the company’s updated guidance assumes large deals resume, and he expressed confidence based on recent discussions with ScanSource sales teams and feedback from partners and suppliers during an internal sales kickoff.

Intelisys and Advisory: steady growth, focus on new orders

In the Intelisys and Advisory segment, Jones said net sales increased 3% year-over-year, “in line with our expectations.” He said annual net billings increased to approximately $2.85 billion, while gross profits rose 3% year-over-year. Segment adjusted EBITDA margin was 41%.

Baur said the company is investing in Intelisys ahead of revenue, noting it typically takes about a year for new orders to convert into billings. As a result, he said new orders are increasing faster than current revenue from billings. In response to an analyst question, Baur characterized recent activity as adding sales capabilities rather than restructuring, and said management expects the higher rate of new order growth to translate into future results given the lag between order signing and billing.

Baur also explained that ScanSource has emphasized new orders as a metric as competitive dynamics and margin pressure in the technology services distribution (TSD) market made revenue trends harder to interpret. He said a closed order may not be billed for 6–12 months, and in some cases 15 months, making new order growth an indicator of future revenue.

New “converged communication” sales team

Baur announced the launch of a new converged communication sales team that combines ScanSource’s communications hardware portfolio with Intelisys cloud-based products and services. He said the goal is to address increasing convergence across hardware, cloud (including UCaaS), and customer experience (CX) platforms, and to help channel partners sell more complete solutions.

He described the prior approach as requiring handoffs between teams—for example, Specialty sellers focused on hardware would send leads to Intelisys for connectivity or cloud services. Under the new structure, one team will cover both hardware and recurring cloud offerings for communications partners. Baur also said Intelisys employees participating in the unified team will now be able to sell hardware, addressing what he described as incentive and coordination challenges under the previous model.

Jones clarified the change is a management and go-to-market alignment and will not alter segment reporting.

Balance sheet, capital allocation, and updated outlook

Jones said ScanSource ended the quarter with about $83 million in cash and a net debt leverage ratio of approximately zero on a trailing 12-month adjusted EBITDA basis. Adjusted ROIC was 11.9% for the quarter and 13.3% for the first half of fiscal 2026. The company repurchased $18 million of shares during the quarter and had $179 million remaining under its authorization. Jones also said the company closed on a new five-year credit facility intended to support strategic objectives and capital priorities.

Management reiterated a focus on three-year goals that emphasize increasing gross profit from recurring streams, expanding profitability, generating strong free cash flow, and disciplined capital deployment. Jones said ScanSource continues to evaluate acquisition opportunities that could expand its technology stack and partner capabilities, while also maintaining share repurchases as a capital allocation priority.

For the first half of the fiscal year, Jones said gross profit margin was close to 14% and adjusted EBITDA margin was over 4.6%.

ScanSource updated its full-year fiscal 2026 projections, with Jones now forecasting:

• Revenue: $3.0 billion to $3.1 billion
• Adjusted EBITDA: $140 million to $150 million
• Free cash flow: at least $80 million (unchanged)

Baur told investors the guidance update primarily reflects large-deal timing rather than product shortages. When asked about industry memory-related supply issues, Baur said suppliers have indicated the situation may affect them, potentially through pricing and shortages, but visibility remains limited and the potential impact is “not significant” in the company’s current guidance.

Looking ahead, management said it is optimistic about growth in the second half, expecting an increase in large deals along with continued investment in Intelisys to drive new order growth.

About ScanSource NASDAQ: SCSC

ScanSource, Inc is a global provider of technology products and solutions designed to help businesses enhance operational efficiency and customer engagement. The company specializes in the distribution of point-of-sale (POS) systems, barcode and data capture devices, networking and communications equipment, and value-added software and cloud services. By combining hardware, software and professional services, ScanSource supports channel partners in delivering end-to-end solutions across multiple industries, including retail, hospitality, healthcare and logistics.

Founded in 1992 and headquartered in Greenville, South Carolina, ScanSource has built a broad international footprint, serving customers throughout North, Central and South America as well as Europe, the Middle East and Africa.

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