IT Recovery A Long Ways Off2:56 PM EST Fri. Aug. 21, 2009
Are we out of the woods or still in them? Based on the financial results posted by Ingram Micro and PC Connection last week, it is difficult to decipher just when the channel will experience a widespread rebound. The results by Ingram Micro are closely watched as the company serves as an industry bellwether while PC Connection's results provide more insight into the corporate and public-sector markets where profitability is hard to maintain. Let's put all the expense controls and cost-cutting aside for a moment and just look at the pure sales data.
Ingram Micro posted a second-quarter sales decline of 25 percent accompanied by a statement that the massive distributor plans to get more aggressive driving sales in the second half. I am not exactly sure how to interpret that, but usually when a distributor uses the word "aggressive" it implies price cutting.
In North America, Ingram Micro sales declined 22 percent. In the first quarter, the company recorded a 16 percent drop in North America sales, so the pace of the decline accelerated through the quarter for a region that accounts for some 41 percent of Ingram's sales. Analysts at investment firm Raymond James were expecting to see the first signs of stability in the second quarter "albeit at a low level" and were expecting a 15.5 percent decline in IT shipments through global distribution channels in the second quarter. It is certainly not a pretty picture. Sequentially, Ingram's sales slipped to $2.74 billion from $2.77 billion. Ingram's CEO Greg Spierkel addressed the financial results stating that Ingram does not anticipate an economic rebound in the near term. "We now plan to place a greater emphasis on securing incremental sales," he said. No doubt the competition between Ingram and its fiercest rivals Tech Data and Synnex is bound to heat up in the coming weeks.
Ingram has a huge hold on the market for commodity products such as displays, printers, notebooks and networking gear, which show few signs of a rebound. But if the company gets more aggressive on the sales side, VARs and their customers could benefit from some good deals. Whether the sales push, details of which are somewhat sparse up to this point, will really stimulate sales is anyone's guess. In Raymond James' assessment of the second quarter, the number-crunchers and analysts at the Atlanta-based investment firm expect IT spending to recover when corporate profits rebound and the availability of credit improves. They see positive signs now that credit is becoming less constrained while corporate profits are near historical lows. So perhaps an uptick in IT spending is on the way in a couple of quarters. But don't open the champagne just yet. Keep it on ice, though, because if you study the correlation between IT spending and corporate profits/credit availability you will see a strong relationship.
After squeezing out a 0.2 percent gain in the third quarter of 2008, distribution shipments in North America headed south in the fourth quarter (down 8.1 percent) and down nearly 16 percent in the first quarter with an estimate of another 16 percent decline in the second quarter. You have to look back a long way to find three consecutive quarters of declining sales.
PC Connection, which, unlike Ingram, sells directly to customers, said second-quarter sales were off 16 percent but up 16 percent over the first quarter. PC Connection was willing to sacrifice margin to prop up sales in the quarter as it struggled with weak demand. On the product front, PC Connection watched notebooks and PDAs plummet by 22 percent, with desktop computers and servers declining some 13 percent. The company, which posted sales of $377 million for the quarter, recorded a loss of $6.45 million vs. a profit of $5.08 million a year earlier due to a special charge.
Without the charge, second-quarter net income would have plunged to $1.1 million vs. $5.1 million a year ago.
So here is the good news inside PC Connection's results. While its SMB business unit was down 25 percent with its large account segment off 14 percent, its government and education business unit was up 6.1 percent to $90 million. So much like the silver lining in IBM's recent earnings report, public-sector sales were also the bright spot for PC Connection. Company chairman and CEO Patricia Gallup had at least that news to cheer about. But she is also managing a company that is increasing its software business. Sales of software emerged as the company's largest product category in the quarter aided by several large federal deals.
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