VARBusiness 500 Research: The IT Recession Is Over

Our exclusive, quarterly survey of VARBusiness 500 solution-provider executives reveals they are hiring, expecting big increases in fourth quarter sales and putting their people to work at rates not since the end of the dot-com boom.

Four times a year, VARBusiness asks the largest solution-provider firms in North America to measure the pulse of their businesses and their opinions regarding the IT market. This time, our survey (administered by Boston-based Bernett Research) connected with 80 VARBusiness 500 executives to gauge their impressions of business closed during the third quarter ended Sept. 30, plus their expectations for the fourth calendar quarter.

Like no other time since we began polling VARBusiness 500 executives more than one year ago have we uncovered so much optimism. Our findings for the third quarter reveal that approximately one-third of VARBusiness 500 solution providers (31 percent) reported their third quarter revenues were ahead of expectations. Some 56 percent said revenues were in line with expectations for the quarter. What's more, only 13 percent described their revenues as being "below expectations" -- which is a substantial improvement from previous quarter findings, where 20 percent reported revenues to be below their expectations.

Help Wanted
All this positive news about sales expectations is spurring the VARBusiness 500 companies to add staffers, the executives told us. Hiring is on the rise as more executives expect to add employees during the fourth quarter. More than half (55 percent) look forward to hiring more people, while only 2 percent of VARBusiness 500 solution providers foresee the need to reduce their workforces by end of this year. That's much more optimistic than the 12 percent who anticipated a decrease earlier this year.

Utilization rates have hit a six-quarter high, jumping 20 point from the year-earlier quarter. The VARBusiness 500 executives said the majority of their workforce is being utilized with few professionals sitting on the bench. Utilization has increased every quarter since the first quarter since the first quarter of 2002.

For the fourth consecutive quarter (count them, four), the percentage of VARBusiness 500 solution provider executives who expect their next quarter's revenues to exceed their expectations is substantially on the rise -- a good sign for all. Nearly three-quarters (74 percent) of those surveyed anticipate fourth quarter revenues will exceed their expectations, up from 69 percent last quarter. That number is ahead of the 58 percent reported earlier this year (Q1 '03) and the 50 percent reported for Q4 '02, the quarter before that.

Who is doing better? Companies such as Cognizant Technology Solutions (No. 36 on the VARBusiness 500). The Teaneck, N.J.-based solution provider saw an increase of more than 60 percent in its third quarter revenues and earnings, thanks in large part to solid operating margins of 19 percent to 20 percent. Kumar Mahadeva, Cognizant CEO, said during the company's earnings call that Cognizant's pipeline is currently the strongest it has ever been.

Customer Spending Habits
When asked about their customer's spending habits, more than two-thirds of our VARBusiness 500 respondents answered positively. In fact, nearly seven out of 10 VARs assessed their customers' IT investments as increasing between July and September. Twenty-three percent of the top 500 VARs surveyed reported a vigorous investment improvement of more than 20 percent, while nearly one in three VARs reported healthy IT investment growth, within the range of 10 percent to 19 percent. Another 15 percent of the quarterly survey participants reported a milder increase of 1 percent to 9 percent IT investment improvement among their IT customers. Approximately 21 percent saw "no change in customers' IT investments," and only 10 percent experienced a decline from their customers' IT investments.

In addition to that good news about customer activity, the quarterly survey data disclosed positive third quarter results and future expectations regarding operating margins, as well. More than half of the survey participants (53 percent) reported receiving positive percent increases in their firm's operating margins. A substantial 39 percent reaped increases between 1 percent and 19 percent, while an additional 14 percent enjoyed an even higher increase of 20 percent or more in operating margins. When asked to estimate future operating margin performance, a solid 43 percent of VARBusiness 500 solution providers anticipated increases in operating margins in the upcoming fourth quarter of 2003 -- October through December -- compared with the past quarter. Only 6 percent said they expect to experience decreased operating margins in the fourth quarter.

Emerging Technologies
Each quarter we ask two new, special questions that touch on possible emerging areas of interest. This time we wanted to know about the degree to which solution providers are getting involved with Linux and radio-frequency ID (RFID). More than half (53 percent) of our study's solution providers reported that Linux is gaining traction in their engagements for critical applications, such as Web servers, application development tools, database management, e-mail and groupware. However, only one-fifth (21 percent) are increasing their incorporation of RFID into their solutions at this time, while 43 percent say "RFID is not gaining traction within their engagements," and more than one-third (36 percent) are not even familiar with RFID technology at this time.

Still, some solution providers familiar with RFID technology say it could see widespread adoption in the near future.

"It's an interesting opportunity for solutions around consumer and packaged goods," said Mark Hurd, president and CEO of NCR (No. 26 on the VARBusiness 500), at Forrester Research's recent Executive Strategy Forum in Boston, which focused on RFID technology.