Scansource close to securing buyer for hardware business

Distributor expects the sale of $632m-reveneue unit to close in next quarter

ScanSource CFO Gerry Lyons has told investors that it is closing in on a buyer for its non-US hardware business, and that he expects the deal to close in its next quarter.

CEO Mike Baur first told CPI of plans to sell off the entirety of the distributor's $623m-revenue hardware business across Europe, Latin and South America - both in unified comms and point-of-sale in August, as part of a pivot to software.

That business generated net sales of $156m in its Q2, ending 31 December 2019, out of a total of $989.5m.

Lyons said Scansource will likely reach a sale agreement within the next few months.

"A process is underway to sell these businesses and, based upon the interest we have received, we anticipate having an agreement by the end of the third quarter of our fiscal year 2020," he said.

It was a rare spot of good news in a quarter that otherwise disappointed investors.

ScanSource's CEO blamed a weak financial quarter on "self-inflicted" disruption stemming from the reorganisation of the distributor's VAR sales teams in North America.

The US firm's sales were down five per cent year on year in Q2, to $989.5m, while operating profits tanked by 38 per cent on a GAAP basis to $18.5m and 17 per cent on a non-GAAP basis to $28.9m.

The firm missed earnings estimates of $0.82 per share at just $0.77 a share.

In an earnings call transcribed by Seeking Alpha, Mike Baur said that restruturing its sales teams in North America to push cross-selling and growing recurring revenues has caused ScanSource to lose customers.

"For the quarter we missed our sales forecast primarily from lost sales as we reorganised our North American VAR sales team," he said.

"We are setting up our VAR sales teams to sell solutions, connectivity, cloud and SAS, including offerings from our Intelisys and intY acquisitions."

The restructure began in April last year, when the distributor combined its five North American VAR business units into one.

Baur acknowledged that this aggravated customers and lost the distributor business.

"We reorganised our teams by customer segments. We changed customer assignments, we introduced team selling, we implemented Salesforce CRM and we adopted a new sales compensation plan.

"In certain cases we have customers that said, ‘hey, I'm not happy with a new sales person or sales team. I want somebody different or I'm going to go away'."

He added: "We just made some customers mad, because we took their sales rep and promoted them to another team because they were really good and we thought they could provide the company more value."

Baur said that this realisation means that the company is confident it can win those customers back.

"It's going to take probably a visit by an executive…We now have a large group of account executives that we didn't have before prior to April. Account executives are essentially our field sales teams. We didn't have that for these customers. So we believe the new structures will enable us to go have those conversations and win back the business.

However, Baur warned investors that the restructuring will be ongoing into the next quarter, and that he is anticipating a 10 per cent decline in Q3, but a 10 per cent upswing in Q4.

Meanwhile, CFO Gerry Lyons noted that there had been a bigger decline in the company' premise-based communications business.

Net sales for ScanSource's global communications and services segment declined 12 per cent year over year due to "significant headwinds" in the market in North America.

Net sales for its worldwide barcoding barcode, networking and security segment also declined, by two per cent year on year.

Lyons said that this segment was bolstered by growth in mobile computing and in our payments business.