Is The IT Recession Over?

The IT recession is over, VARBusiness 500 executives say. Our exclusive quarterly survey of VARBusiness 500 solution-provider executives reveals that VARBusiness 500 executives are hiring, expecting big increases in fourth-quarter sales and putting their people to work at rates not seen 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 partner, Boston-based Bernett Research Services, connected with 80 VARBusiness 500 executives to gauge their impressions of business closed during the third quarter ended September, plus their expectations for the December quarter. Like no other time since we began polling these executives more than one year ago have we uncovered so much optimism. Our Q3 findings reveal that approximately one-third (31 percent) of VARBusiness 500 solution providers' Q3 revenue was ahead of expectations. What's more, only 13 percent described their revenue as being "below expectations." That's a substantial improvement from previous quarterly findings, where 20 percent reported revenue to be below their expectations.

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

Who is doing better? One such company is Cognizant Technology Solutions (No. 136 on the VARBusiness 500). The Teaneck, N.J.-based solution provider saw a revenue increase of more than 60 percent in its Q3 revenue and earnings, thanks in large part to solid operating margins of 19 percent to 20 percent. Kumar Mahadeva, founder, chairman and CEO of Cognizant, said during the company's earnings call that Cognizant's pipeline is currently the strongest it has ever been.

When asked about their customer's spending habits, more than two-thirds of our VARBusiness 500 respondents answered positively. In fact, nearly 7 out of 10 VARs (69 percent) assessed their customers' IT investments as increasing between July and September. Twenty-three percent of VARs reported a vigorous investment improvement of more than 20 percent, while 31 percent of VARs reported healthy IT investment growth within the range of 10 percent to 19 percent. Another 15 percent 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.

In addition to the quarterly survey disclosing positive Q3 results, there are positive future expectations regarding operating margins. More than half of the survey participants (53 percent) reported receiving positive-percent increases in their firms' 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 anticipate increases in operating margins in the upcoming fourth quarter of 2003--October through December--compared with the past quarter. Only 6 percent expect operating margins to decrease.

Hiring is also 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 less than 3 percent of VARBusiness 500 solution providers foresee the need to reduce their workforces by the end of this year. That's much more optimistic than the 12 percent that anticipated a decrease in their workforce earlier this year.

Emerging Technologies
Each quarter we ask two new 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 (54 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; 43 percent said RFID wasn't gaining traction within their engagements, and more than one-third (36 percent) said they weren't even familiar with RFID technology.

Still, some solution providers that are 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 Services (VAR500 No. 26), at Forrester Research's recent Executive Strategy Forum in Boston, which focused on RFID technology.