The $100 Billion Barometer

Given that this is our annual State of the Market issue, you must be wondering just what the state of your business is, and that of the overall IT market. With all the mixed messages coming from political commentators, economists, Wall Street analysts and the leaders of IT companies, it's hard to tell whether we should hide in a bomb shelter bracing for an IT recession or take out an advance on next year's bonus because we're going to blow through the numbers. In the past few weeks alone I have suffered whiplash watching the Nasdaq swing wildly--a result of one vendor's view that the glass is half-full while another claiming it's half-empty. The lack of agreement here is akin to a debate over whether the Red Sox or Yankees have the better baseball team.

Things got even more interesting in late October when Microsoft turned in a great fiscal fourth quarter and then provided a positive outlook for tech spending. Stocks surged, VARs danced in the streets and all was good in the world. But that contrasted with Cisco's John Chambers, who on Nov. 7 said he expects tech spending to be "lumpy," which sent stocks tumbling and everyone running for cover. But just in the nick of time came word from Hewlett-Packard that it's now bigger than even IBM as its fiscal year sales topped the $100 billion milestone--$104.3 billion with a capital "B," to be exact--and that Mark Hurd's company expects a 7 percent gain in the coming year.

As we all know, good salespeople are incredibly adept at sandbagging, so you have to wonder whether Hurd & Co. figure they have $111.5 billion already in the bag for next year and expect to do even better. If you delve deeply into this issue, you will find that the majority of solution providers are much like Hurd in their optimism. Their business models aren't all that different from HP's in that they have a healthy mix of system sales, software, networking, storage, printing and imaging, and services. The lesson to be learned from HP's results as well as from the State of the Market survey is that the VAR model must remain nimble so as not to miss any sudden opportunity.

But is there something hidden in the numbers that should worry the red-blooded American VAR? The answer is yes. I am not sure if it warrants flying the recession flag, but HP did benefit from the weak dollar along with strong international sales--and sales outside the United States account for 67 percent of the company's revenue. So Mr. Main Street USA VAR watched HP's overall revenue climb some 15 percent, but it rose only 10 percent in the "Americas." If you factor in growth in South America, where Brazil alone grew some 37 percent, the picture gets a bit less exciting and maybe downright depressing. Then factor in an adjustment for favorable exchange rates and it knocks off a full point of growth in the Americas--and 1 point of $104.3 billion is a lot of coin, as they say.

That point--as well as the overall health of the economy--is not lost on your average solution provider. As part of the State of the Market survey we asked VARs some macroeconomic questions, and it turns out their top two concerns center on businesses pulling back on spending followed by the value of the dollar. Guess what was a very close third? You got it, fear of a recession. I hope our presidential candidates are listening carefully.

VARs have always been a great barometer of the U.S. IT economy and a leading indicator of a coming boom or bust. While we don't have comparative numbers on those three questions, the fact that four of every 10 VARs are concerned about a recession is alarming. It also shows that VARs are reading between the lines when it comes to vendor financial performance, grasping the fact that a weak U.S. dollar is contributing more to IT growth than many people realize.

So what's your take on HP and the outlook for IT spending? Give me the view from Main Street.

Robert C. DeMarzo is vice president and editorial director of CMP Channel. Contact him at rdemarzo@cmp.com.