SCSC Q3 Deep Dive: Revenue Miss Sparks Focus on Profitability and Acquisition Strategy

Technology distribution company ScanSource (NASDAQ:SCSC) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 4.6% year on year to $739.7 million. On the other hand, the company’s full-year revenue guidance of $3.2 billion at the midpoint came in 0.6% above analysts’ estimates. Its non-GAAP profit of $1.06 per share was 14% above analysts’ consensus estimates.

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StockStory’s Take

ScanSource’s third quarter results were met with a negative market reaction, as sales came in below Wall Street expectations and declined year over year. Management attributed the underperformance largely to continued weakness in Brazil and the effects of reporting more netted down revenue, particularly in the company’s Specialty Technology Solutions segment. CEO Mike Baur acknowledged that while some technology categories grew in North America, certain legacy areas remained in decline, tempering overall top-line momentum. Baur highlighted ongoing gross profit margin improvements and growth in recurring revenue, stating, “Each of our segments achieved year-over-year gross profit growth and higher EBITDA margins.”

Looking ahead, ScanSource’s management sees opportunities for profitable growth driven by acquisitions and a shift toward higher-margin, recurring revenue businesses. CEO Mike Baur explained that the company’s four business presidents are now directly responsible for pursuing both organic and inorganic opportunities in their markets, with a renewed emphasis on strategic M&A and channel programs for emerging tech suppliers. CFO Steve Jones cautioned that while the company is confident in its full-year outlook, the timing of large deals and the evolving mix between traditional and newer revenue streams could still introduce variability in quarterly performance. Management believes that investments in AI education, channel expansion, and acquisition integration will underpin future growth.

Key Insights from Management’s Remarks

Management pointed to several factors shaping Q3 performance, including segment-level weakness in Brazil, a favorable shift in gross profit mix, and the initial benefits from recent acquisitions.

• Brazil and currency headwinds: The company faced macroeconomic and foreign exchange pressures in Brazil, which reduced sales but had a limited impact on profitability due to matched local costs. CFO Steve Jones noted, “Brazil is less than 10% of our total revenues for the company,” emphasizing a focus on gross profit and working capital returns in the region.
• Gross profit mix improvement: Despite lower sales, gross profit margin rose as recurring revenue contributed a higher share—36% of consolidated gross profits for the quarter. Management credited this to increased contributions from recent acquisitions and more profitable vendor programs, helping offset lower traditional hardware sales.
• Acquisition strategy gains traction: The purchases of Advantix and ResourceTip have been accretive to both earnings and return on invested capital. CEO Mike Baur said these deals validated ScanSource’s approach to acquiring “higher margin opportunities in a working capital light model.”
• Growth in AI and advisory services: The Intelligence and Advisory segment, bolstered by ResourceTip, saw increased demand for AI-enabled customer experience (CX) solutions, with nine new suppliers added, many focused on AI. Management highlighted the AI master class and certifications as differentiators for the Intelisys channel.
• Channel tools enabling supplier growth: The Channel Exchange platform has facilitated onboarding smaller, innovative suppliers, especially those in AI and SaaS, by simplifying transaction processes and accelerating new partner contributions. Baur emphasized that Channel Exchange “knocks down one of those obstacles to signing new suppliers.”

Drivers of Future Performance

ScanSource’s outlook is shaped by expanding its acquisition pipeline, continued growth in recurring revenue streams, and strategic investments in emerging channel technologies.

• Acquisition-driven expansion: Management signaled that new acquisitions targeting high-margin, working capital-light businesses will be a priority, with four business presidents now empowered to pursue deals in their markets. CEO Mike Baur stated, “Our board felt like if we could continue to not only continue share repurchases, which we have indicated, but if we find more than one or two acquisitions over the next year, we want to do them.”
• Recurring revenue focus: The company is increasing its emphasis on advisory services, AI-enabled CX solutions, and integrated offerings like wireless connectivity, all of which support higher-margin recurring revenue. CFO Steve Jones cited that recurring revenue now represents over a third of gross profits, and this trend is expected to continue.
• Risk of large deal variability: Management acknowledged that the return of large hardware deals, while positive for top-line growth, can pressure gross profit margins due to their lower margin profile. Jones noted, “As the percentage of large deals increase, that will put some pressure on our gross profit margins,” but expects recurring revenue streams and acquired businesses to help balance this effect.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) the pace and integration of new acquisitions in emerging, high-margin segments, (2) the continued growth in recurring revenue streams from advisory and AI-enabled services, and (3) stabilization or improvement in Brazil’s demand environment. Execution of the Integrated Solutions Group’s new business development initiatives and onboarding innovative suppliers will also be important markers for sustained profitability and growth.

ScanSource currently trades at $40.37, down from $41.83 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).

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