2004 Revenues And Operating Margins

We believe that three consecutive months of job growth (August through October) is positive assurance of an accelerating recovery. Employment grew by 126,000 jobs in October alone, the best showing in nine months, as reported by the U.S. Labor Department. Correspondingly, the results of VARBusiness' very own survey of top executives who run the nation's largest business and technology integration companies indicate that employee-utilization rates have hit a six-quarter high, rising 20 percentage points from the same period a year ago.

Moreover, since tax cuts and low interest rates have encouraged IT customers to shed some of their cautiousness in the third quarter of this year, we are optimistic that an upturn in technology spending will carry on into 2004.

Nearly two-thirds of all VARs believe they have already experienced a revival in their businesses in the past six months, according to VARBusiness' recently released 2004 State of the Market research. Plus, more than two in three VARs are optimistic about their revenues increasing in the first half of 2004, with an average 28 percent rise in revenue expected. Our State of the Market research, conducted by Answers Research, a third-party market research and consulting firm based in Solana Beach, Calif., acknowledges an uptick in customer demand as well. The study reports a majority of VARs have answered more client proposals and RFPs in the past six months than they did in the six months prior.

"We are seeing signs of a recovery," says Mitchell Weisberg, managing director at Lumen, a Westen, Mass.-based midsize management consulting firm. "More organizations are talking to us and requesting proposals. About six months ago, companies had their heads down and were focused on only cost-cutting. I think the sign of the rebound is that as more companies are talking about growth, more companies are looking to move forward with proposals."

What's more, the results of another exclusive survey, this one of of VARBusiness 500 executives, reveals an optimistic outlook for all. Conducted for VARBusiness by Boston-based Bernett Research Services, the third-quarter VARBusiness 500 survey indicates that nearly three-quarters (74 percent) of those surveyed anticipate their fourth quarter revenues will exceed expectations, up from 69 percent last quarter. That number continues an upward trend dating back to the fourth quarter of 2002, when only 50 percent said revenues would increase.

In addition, the quarterly VARBusiness 500 survey indicates positive third-quarter results and future expectations regarding operating margins. More than half of the survey participants (53 percent) reported receiving positive percentage increases in their firm's operating margins. A substantial 39 percent reported 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.

Indeed, with the improved outlook, some solution providers have shifted their focus from revenue growth to bolstering the bottom line. Among them is a VARBusiness 500 e-business service provider, Perficient (VB# 479), based in Austin, Texas. Perficient attributes its earnings growth to a focus on improving revenues and managing operating costs.

"The third quarter was another record quarter for operating income," says Jack McDonald, Perficient's chairman and CEO. "We substantially increased our earnings per share over the second quarter and continued to generate positive cash flow." The third quarter also showed sequential growth in services revenue for the third consecutive quarter, he adds.

When asked to estimate future operating margin performance, 43 percent of VAR500 solution providers said they anticipate increases in operating margins in the upcoming fourth quarter of 2003 compared with the prior quarter.

Furthermore, our 2004 State of the Market findings indicate that an overwhelming majority (approximately 90 percent) anticipate that their organization's operating margins will either increase or remain the same in the first half of 2004.

http://www.varbusiness.com/graphics/graphics03/343_chart3.gif" align="left">Consulting services accounts for more than half of a VAR's 2003 overall gross profits (53 percent), as revealed by VARBusiness' recent State of Technology survey (results will be revealed in our Dec. 15 issue). Importantly, small VARs tend to have a higher proportion of their gross profits derived from consulting services than do midsize and large VARs (S/M/L: 60 percent, 49 percent, 47 percent).

"Pricing margins have gotten so tight," Lumen's Weisberg adds. "Many companies have recognized that margins on professional services are much higher than on hardware or software sales. Moving into the more complex professional services, including change management, IT strategy and business realignment, margins become even higher."

Part 2: 2004 Staffing Plans