VARBusiness' Midyear State of the Market Report

You don't have to tell Nathan Archer it's been a tough year. Six months into 2006, the CEO of solution provider X 1.0 says inflation, fuel prices and even the war in Iraq are hurting sales. So Archer says he's fighting the unexpected downturn with the best weapon in his arsenal: his wallet.

"We've spent money. We've increased our portfolio in a number of ways," says Archer in New York. "This is what we have to do to stay competitive. If we're losing on hardware, we have to make sure we're offering a broad range of solutions."

Some businesses are tempted to cut and run when the going gets tough. But the frontier stock that is the VAR crowd is meeting adversity head-on, staring down a challenging market by adding new products at a record clip. What's more, while many solution providers say sales are falling short of expectations, they continue to flex into new, more complex engagements that include high-touch offerings such as consulting and professional services.

The gritty outlook is among the findings in the first-ever VARBusiness Midyear State of the Market report for which VARBusiness surveyed 397 solution providers, resellers, integrators and consultants in May. The idea is to deliver a reality check on the results of the magazine's last annual State of the Market report, conducted in the fourth quarter of 2005.

So here's the reality: It's been a trying year thus far. Despite optimistic outlooks for 2006 in the annual survey, the first-half results show that sales fell short of expectations for 39 percent of service providers. A deeper look at the figures shows that while VARs expected a 27 percent increase in sales this year, by May just a quarter of them were up 20 percent year over year.

"We're now taking a conservative approach to the market as well," X 1.0's Archer says. "There are a few factors we feel are pushing things down--the pressure of inflation and the expense of power consumption. People are just not spending on technology solutions. Even the war is having an impact. It's uncertainty."

That difficult first half has put a damper on the enthusiasm reported in the 2005 year-end report. Now, just 26 percent of VARs say they are on track to top 20 percent growth, while a majority (53 percent) have adjusted their estimated year-over-year sales growth to 1 to 19 percent.

When VARBusiness polled solution providers in December, 34 percent said they anticipated sales would "increase greatly," while 47 percent said sales would "increase somewhat."

In the midyear survey, however, just 19 percent of VARs reported that revenue performance exceeded expectations; 43 percent said their revenue so far has merely met expectations. Those struggling the most in early 2006 say sluggish hardware and software sales was the biggest factor contributing to their revenue falling short of expectations.

NEXT: But VARs aren't taking the slow market lying down.