Steve Jones: Yes, Keith, thanks. So let me maybe start back at the beginning, as you think through this. So you talked about the Intelisys EBITDA margins being kind of in the 40% when we acquired, that’s not really eroded much for us until recently as those margins started getting pressure and that margin started shifting to the agent as we were having to give up more of a split to them in terms of the commission structure. So there’s margin setting in the agent that used to be in the TSD that we want to go participate back in. And then when you look at their margins, again, we’re probably looking at this as an agent kind of commission. So it’s going to be 100% gross margins from a reported perspective. But as you know, Keith, when we look at our business, that has a problem with our top line growth, right?
Because it just doesn’t grow as fast, or it doesn’t materially impact our $3.5 billion kind of top line number as much. So we’ve got to do a good job of really unpacking how this — how the economics of this are going to work. But we expect this will be margin accretive to our overall company, and that’s why it’s interesting to us.
Keith Housum: Okay. If I think about like the barcoding space, where you got a generation of VARs that are kind of retiring out. Do you have the same thing in the agency space where they’ve been around for long enough that you’ve got owners that are in that 50 to 60-year-old groups that are looking to get out? Or is this a relatively younger, I guess, makeup of owners today?
Mike Baur: Yes, Keith, it’s Mike again. Exactly right analysis. So the reason that these roll-ups have been happening, there have been investors, let’s call them all pretty much private equity investors that have come in and acquired agencies or acquired just their contracts because many of those agency leaders are — frankly, they’re at the end of their cycle. They’re ready to exit. And they’ve asked us for the last few years. And we actually said for the last two years, no, we will not do that. It’s not in our DNA to sell to the end user and own an agency. So this is a big change for us. And — but the agency owners, they’re actually very interested. And we were nervous about just even talking about it, but it became obvious to us that part of the reason we’re getting pressure on our margins from our competitors is because they’re already doing this.
They’re already benefiting from that, and it’s because the agents, once they know that there is a buyer out there like, hey, pick me, pick me. And some of them are saying, we don’t want to sell the whole business. But as I said in my prepared remarks, they want to take some chips off the table. And unlike the VAR business, you can’t easily buy just a part of a VAR business. You can’t just buy because it’s not recurring. It’s deal by deal. Here, these are contracts that we will have a defined term with, defined amount of profitability, and we’ll be able to pretty straightforward, make an offer to just buy, let’s say, $1 million annualized of recurring revenue from a partner, and they don’t have to sell the whole business. And so that has gotten a lot of interest in the market.
So again, we’re responding to what the market is doing.
Keith Housum: And you’ve announced this several months ago at one of your conferences, and you’ve had these conversations. So I’m assuming that your M&A strategy is you want to buy a more established agency with some digital tools maybe — to use your words, in establishing good management team. Is it safe to say that you’re having these conversations now? And I guess if you’re not, is the option to go organically and to build it yourself?
Mike Baur: For us, we’ve talked about acquisitions because we want to go faster than we have been, meaning we’re catching up. And again, listening to our competitors who have all come out publicly and dodged the question, frankly of are they doing this, they’ve already started. We’re catching up. So we will absolutely want to do it through acquisition. But then we will grow it with the balance sheet that we have. That means adding headcount, people, tools, and we believe then we can become the player of interest. And what I mean by that is we’re not looking to make this agency the largest. It could happen. That’s not our goal. Our goal is to create the best agency so that this has the best practices, the best programs so that we can still recruit new and frankly, younger partners in the Intelisys channel who want to maybe do something with their business 10 years from now or five years from now.
And so we’re trying to create, as I said in my opening remarks, a different model. So we’re calling it the channel model of the future, where you can come to your distributor and take some chips off the table or potentially sell the whole business. And again, these are again, relatively, and maybe the point would be, these are all small businesses. These are not the size of Intelisys was. Now having said that, some of them have already been rolled up. Those entities have gotten large. One of our partners today has already rolled up about 30 agencies. And so they’ve acquired significant EBITDA by rolling them up.
Keith Housum: Got it. And I appreciate that you’re not going to let time dictate your schedule here. But do you have a goal in your mind about when you want to be able to have an agency under your roof and be running with the strategy?
Mike Baur: Yes. I think I said earlier, we expect to have more to share about our investment — channel expansion soon.
Keith Housum: All right. I can appreciate that. I’m going to change gears on you here and just talking about more traditional business, the hardware business. Some of your larger barcoding partners have expressed some optimism for an improvement in the second half of the calendar year. I’m not sure I’m hearing that from your conversation here today. And I appreciate the fact that your backlog is one day, two days, it’s very short. But are you hearing any constructive conversations that would give you optimism for the second half of the calendar year?
Mike Baur: Yes. Let me have — I’m going to have Tony comment on that because he can talk about we have different technologies and not all of those suppliers have been public. And so maybe Tony can just kind of give you a little summary of where we are.
Tony Sorrentino: Yes, Keith. Hey it’s Tony. So there’s certainly still a lot of uncertainty in the near-term. But I would say we’re seeing green shoots of opportunity for growth in our physical security, barcode and mobility businesses for sure. That said, there’s some optimism there, but there’s also a lot of concern as well. So I’ve spent a lot of time with our top customers over the past month and they’re cautiously optimistic, but certainly all the uncertainty in the macro environment is creating concern for them.
