ScanSource (SCSC)

Technology distribution company ScanSource (NASDAQ:SCSC) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 6.3% year on year to $704.8 million. The company’s full-year revenue guidance of $3 billion at the midpoint came in 3.5% below analysts’ estimates. Its non-GAAP profit of $0.86 per share was 11% above analysts’ consensus estimates.

Company Overview

Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ:SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.

IT Distribution & Solutions will be buoyed by the increasing complexity of IT ecosystems, rising cloud adoption, and demand for cybersecurity solutions. Enterprises are less likely than ever to embark on these complicated journeys solo, and companies in the sector boast expertise and scale in these areas. However, cloud migration also means less need for hardware, which could dent demand for large portions of the product portfolio and hurt margins. Additionally, planning for potentially supply chain disruptions is ongoing, as the COVID-19 pandemic showed how damaging a pause in global trade could be in areas like semiconductor procurement.

ScanSource competes with broad-line technology distributors such as Ingram Micro and TD Synnex across most of its markets. In specialized segments, it faces competition from security distributors like ADI and Wesco, AIDC and POS distributors like BlueStar, and technology services distributors such as Avant and Telarus.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $2.97 billion in revenue over the past 12 months, ScanSource is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, ScanSource’s demand was weak over the last five years. Its sales fell by 1.5% annually, a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. ScanSource’s recent performance shows its demand remained suppressed as its revenue has declined by 11.6% annually over the last two years.

This quarter, ScanSource missed Wall Street’s estimates and reported a rather uninspiring 6.3% year-on-year revenue decline, generating $704.8 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 9.9% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates its newer products and services will spur better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

ScanSource was profitable over the last five years but held back by its large cost base. Its average operating margin of 3% was weak for a business services business.

On the plus side, ScanSource’s operating margin rose by 1.1 percentage points over the last five years.

This quarter, ScanSource generated an operating profit margin of 3.2%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

ScanSource’s EPS grew at an unimpressive 5.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.5% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

We can take a deeper look into ScanSource’s earnings to better understand the drivers of its performance. As we mentioned earlier, ScanSource’s operating margin was flat this quarter but expanded by 1.1 percentage points over the last five years. On top of that, its share count shrank by 6.9%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, ScanSource reported EPS at $0.86, up from $0.69 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects ScanSource’s full-year EPS of $3.35 to grow 10.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

ScanSource has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.6%, subpar for a business services business.

Taking a step back, we can see that ScanSource failed to improve its margin during that time. Its unexciting margin and trend likely have shareholders hoping for a change.

ScanSource’s free cash flow clocked in at $64.64 million in Q1, equivalent to a 9.2% margin. The company’s cash profitability regressed as it was 11.8 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

ScanSource historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.2%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, ScanSource’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

ScanSource reported $146.3 million of cash and $155.5 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $113.8 million of EBITDA over the last 12 months, we view ScanSource’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $1.47 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing ScanSource beat on EPS this quarter and provide full-year EBITDA guidance that topped analysts’ expectations. On the other hand, it lowered its full-year revenue guidance, and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter, but the stock traded up 2.4% to $36.91 immediately following the results.

Updated: May 23, 2025 at 12:00 AM EDT

When considering an investment in ScanSource, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

ScanSource falls short of our quality standards. For starters, its revenue has declined over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other business services companies. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

ScanSource’s P/E ratio based on the next 12 months is 10.7x. This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $49 on the company (compared to the current share price of $39.80).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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