ScanSource (SCSC) Q1 2027 earnings review
ScanSource hardware sales surge, but large deals cut its profit
ScanSource, a distributor of business hardware and telecom services, grew sales rapidly in North America while its profit fell. Underlying revenue rose 27%, and chief executive Mike Baur raised the full-year outlook to include the newly acquired MicroAge IT services business. However, a shift toward lower-margin large hardware deals and customer credit losses in Brazil pushed profit per share excluding one-offs down 19%, and working capital needs burned $44 million of free cash flow.
| Sales from businesses owned a year ago | +26.8% reported revenue $962.3M, +30.1% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.86 -18.9% from a year ago |
| Adjusted EBITDA margin | 3.25% down 2.0 percentage points from a year ago |
| Full-year Adjusted EBITDA outlook | Raised $18.5M middle of the range: $180M, including MicroAge |
⚖️ Verdict: 🔴 Bearish
The story got worse because surging hardware volume came at the expense of margins and cash, while the MicroAge acquisition diluted the profit mix it was meant to lift. Even after adding MicroAge, the raised full-year outlook implies an adjusted EBITDA margin of 4.6% by our math, still below last year's 4.7% and no closer to management's 6% three-year goal. On the positive side, North American hardware demand accelerated for a third straight quarter.
The question now is whether first-quarter margin compression was a one-off hit from large deals and Brazilian bad debt, or the new normal for hardware distribution. To hit the middle of its full-year profit plan, ScanSource must lift its adjusted EBITDA margin from 3.25% this quarter to 5.1% over the rest of the year by our math. Second-quarter hardware gross margin and bad-debt expense will show if that rebound is underway.
🐂 Bull Case
North American Hardware Demand Accelerated
ScanSource distributes barcode scanners, communications gear and cloud services to technology resellers. Its hardware recovery sped up this quarter. Sales from businesses it owned a year ago rose 26.8% to $937.5 million, accelerating from 17.2% growth in the fourth quarter.
- Specialty Technology Solutions (hardware distribution): $917.3 million, up 27.5% on an underlying basis
- United States and Canada: $914.0 million, up 30.7% on an underlying basis
- Products and services revenue: $919.9 million, up 30.8% from a year ago
This matters because the top-line rebound in North America is broad-based and easily beat an easy prior-year comparison, when sales fell 4.6%. Management did not update its timeline for ramping Hewlett Packard Enterprise's Juniper networking line in the second half.
What to watch: underlying sales growth in the third and fourth quarters. Those periods face much harder comparisons from last year's large deals, which will test whether hardware demand can stay above 6%.
MicroAge Acquisition Lifts Full-Year Targets
ScanSource wants to sell more IT services alongside hardware. On September 1, the distributor paid $217.8 million in net cash to buy MicroAge, an IT solutions integrator and managed services provider with 2,400 US clients. MicroAge sits inside the renamed Intelisys & Solution Services division and contributed $20.0 million of revenue in September alone.
Following the close, ScanSource raised its full-year revenue outlook to $3.8–4.0 billion and lifted its adjusted EBITDA plan by $18.5 million at the middle of the range, to $175–185 million. By our math, that increase adds about $416 million of revenue for the ten months ScanSource will own MicroAge this fiscal year.
What to watch: recurring revenue inside Intelisys & Solution Services next quarter, the first with three full months of MicroAge. A step-up above $30 million would show the deal brings recurring managed services rather than one-off hardware resales.
🐻 Bear Case
Large Deals Cut Profit Despite Sales Growth
“Top-line demand was strong this quarter, and we grew net sales and gross profit in both segments,” chief executive Mike Baur said. That top-line surge did not reach the bottom line, because profit fell by double digits even after excluding one-offs.
- Cost of goods sold (cost of buying hardware): 87.8% of revenue, up 2.38 percentage points from a year ago
- Specialty Technology Solutions gross profit: up 3.2% to $86.6 million, on 28.2% sales growth
- Adjusted EBITDA: down 18.9% to $31.3 million, with margin down 1.97 percentage points to 3.25%
- Profit per share, excluding one-offs: $0.86, down 18.9% from $1.06 a year ago
Gross margin fell 2.38 percentage points to 12.2% because of “strong hardware demand and a higher mix of lower-margin, large deals”, ScanSource said. Even adding back $0.16 per share of unusual bad-debt costs in Brazil, profit per share excluding one-offs was $1.02 by our math, still below last year's $1.06 despite 30% revenue growth.
What to watch: Specialty Technology Solutions gross margin next quarter. A reading stuck near 9.4% would show that winning hardware market share requires permanent price givebacks.
Brazil Sales Shrank and Credit Losses Grew
ScanSource's international business sits almost entirely in Brazil, and conditions there worsened. Revenue in Brazil fell 15.9% from a year ago to $48.3 million, and dropped 20.5% after removing currency swings. That marks a steeper contraction than the 12.7% constant-currency drop for all of last fiscal year.
Falling sales came with customer defaults. Selling, general and administrative expenses (overhead and sales costs) rose 28.2% to $96.5 million. That line included $4.5 million of higher bad-debt expense “primarily related to specific customer credit exposures in Brazil”, the company said, which cut diluted profit per share by $0.16.
What to watch: provision for doubtful accounts on the cash flow statement next quarter. A reading back near last year's $1.9 million level would show the Brazilian credit losses were isolated to specific customers.
MicroAge Dilutes Margins and Slows Buybacks
ScanSource said MicroAge “adds higher-margin technology solutions capabilities” and helps reach its three-year goal of a 6% adjusted EBITDA margin. The first-quarter numbers cut against that claim. Including one month of MicroAge, gross margin inside Intelisys & Solution Services fell 30 percentage points from a year ago to 67.4%, and the division's adjusted EBITDA margin fell 11.3 points to 25.1%.
By our math, the full-year outlook raise implies about a 4.45% adjusted EBITDA margin on the added revenue, which pulls ScanSource's total guided margin of 4.62% further away from its 6% goal. Funding the deal also pushed net debt from $13.0 million to $286.5 million (2.0 times trailing 12-month adjusted EBITDA), so share buybacks slowed to $4.8 million from $21.3 million a year ago.
What to watch: Intelisys & Solution Services adjusted EBITDA margin next quarter. A reading below 20% with a full quarter of MicroAge would confirm the business carries much lower margins than legacy Intelisys.
Intelisys Growth Remains Slow
Intelisys connects telecom and cloud suppliers with sales agents and earns recurring commissions, which carry nearly 100% gross margin. ScanSource relies on this unit to reach its three-year goal of getting 50% of total gross profit from recurring revenue. Excluding MicroAge, Intelisys & Solution Services sales grew 3.2% from a year ago to $25.0 million, matching last year's slow 3.2% billings pace.
Because hardware sales grew much faster, recurring revenue gross profit rose 12.5% to $38.3 million, and its share of total gross profit was 32.8% — up 1.1 points from a year ago, but below last fiscal year's 33.7% average. The release again gave no figure for new-order bookings.
What to watch: underlying sales growth in Intelisys & Solution Services next quarter. A rate stuck near 3% would show that private-equity-backed rivals are still limiting ScanSource's agency growth.
Risks this quarter didn't answer
Three standing risks from last year's annual report got no new data in the first-quarter earnings release.
- Second-half revenue comparisons: the third and fourth quarters lap 8.8% and 17.2% growth; second-half results will test whether underlying growth stays above 6%.
- Hardware goodwill headroom: Specialty Technology Solutions carried $173.9 million of goodwill with only 2% fair-value cushion at the last annual test; the quarterly filing will show if lower hardware margins triggered an interim review.
- Supplier concentration: Cisco and Zebra each represent over 10% of sales on short-notice contracts; the quarterly filing will show any changes in vendor terms.
💲 Other KPIs
ScanSource used $44.1 million of free cash flow this quarter, compared with generating $20.8 million a year ago and using $4.8 million in the fourth quarter. Accounts receivable rose 46.4% from a year ago to $815.3 million, and collection time lengthened by eight days to 76 days, “primarily reflecting working capital investments to support strong growth”, the distributor said.
Weighted-average diluted shares fell 7.7% from a year ago, down from 22.4 million, and held nearly steady against 20.7 million in the fourth quarter. Past buybacks cushioned the per-share profit drop this quarter, so non-GAAP diluted profit per share fell 18.9% while non-GAAP net income fell 25.2%.
Annualized return on invested capital, excluding one-offs, dropped 3.9 percentage points from 14.6% a year ago and fell from 18.2% in the fourth quarter. The measure now sits well below management's mid-teens three-year target, because quarterly adjusted EBITDA shrank while average funded debt rose by $105.2 million to pay for MicroAge.
🔮 Guidance
Raised. The updated plan folds in MicroAge and calls for 20.9% revenue growth at the $3.9 billion middle of the range, up about $416 million from what the prior 6–10% underlying growth target pointed to by our math. That leaves about 18.2% growth for the rest of the year by our math, down from 30.1% in the first quarter as comparisons get tougher.
Raised. Adding MicroAge lifted the middle of the range by $18.5 million to $180 million, or 18.8% growth from last year. After a 18.9% drop in the first quarter, the full-year plan requires adjusted EBITDA to grow 31.6% over the rest of the year at a 5.06% margin by our math, up from 3.25% this quarter.
Unchanged. ScanSource kept its full-year cash floor at $85 million despite adding MicroAge. Because working capital absorbed cash in the first quarter and left free cash flow at negative $44.1 million, the hardware distributor must generate at least $129.1 million of free cash flow over the rest of the year by our math to meet its floor.
❓ Key Questions
What are MicroAge's standalone revenue mix and profit margins?
MicroAge added $20 million of September revenue, and the outlook raise implies a 4.45% adjusted EBITDA margin on the added sales by our math. Investors need the split between hardware resales and managed services to judge whether the $217.8 million price was sound.
Did ScanSource change its underlying growth or margin outlook?
The company replaced its 6–10% underlying revenue growth target and $158–165 million adjusted EBITDA plan with combined dollar ranges that include MicroAge. Without an underlying range, outsiders cannot tell if first-quarter margin pressure lowered the standalone profit plan.
Are the Brazilian customer credit losses finished?
Higher bad-debt expense in Brazil cost $4.5 million and cut profit per share by $0.16, while constant-currency sales there fell 20.5%. Management did not say whether its $33.4 million allowance for doubtful accounts now covers all troubled resellers in that market.
What was new-order growth at Intelisys this quarter?
Management stopped reporting Intelisys bookings last quarter after growth fell below its target. With underlying Intelisys & Solution Services revenue up only 3.2%, the order book is the only indicator of whether commission growth can pick up later this year.