Because they represent so many product lines and affect so many constituents, distributors have always been one of the better barometers to measure the health of the computer industry.
Judging by the disclosure Wednesday from Ingram Micro, a leading computer products distributor, that results for the second quarter will likely be flat or even in the red to the tune of $10 million, then one might conclude that distribution is in the tank. After all, just two weeks ago, the industry's second-largest independent distributor, Tech Data, released results for the first quarter that were anything but robust. Then the Clearwater, Fla.-based distributor reported that sales for the first quarter totaled $4.7 billion, down from $4.9 billion reported one year ago.
Despite the bad news, distribution is not in as bad off as some perceive. A number of companies, in fact, continue to grow within the sector. Bell Microproducts, for example, reported first-quarter revenue of roughly $535 million, up approximately 45 percent from one year ago. Avnet Computer Marketing, meanwhile, posted higher sales and earnings compared with a year ago for its fiscal third quarter 2001 ended March 30. And Melville, N.Y.-based Arrow Electronics posted higher sales for the March quarter of $3.3 billion from $2.8 billion in the prior year period. Finally, ScanSource, a distributor of specialty technology products, reported March quarter sales jumped 29 percent, to $155.2 million from $120.4 million.
Even among those that are struggling to grow their top-line numbers, there are several companies that are at least keeping their earnings up. Tech Data's recent earnings for the second quarter, for example, met Wall Street expectations, though they were off several million dollars from the year-earlier period. ScanSource, too, posted healthy earnings. For the quarter ended March 31, income rose 35 percent, to a record $4.2 million. Reflecting on his company's recent quarterly performance, Tech Data CEO Steve Raymund told VARBusiness: "Considering all the factors, it was a very good quarter." Raymund, for one, says he believes the industry as a whole is actually healthier than in 1999, when competitive pricing pressures caused distribution margins to deteriorate.
While price wars again have reared their ugly head, higher-end distributors see reasons for optimism.
"All the anecdotal information would say that we have hit bottom and we can expect to see a slow climb back up," says GE Access CEO John Paget. "All of the activity, including the numbers of quotes we do, our backlog, etc., gives me reason to start to smile a little more than I have in the past. I believe the second half of the year will be better than the first half of the year. So I am encouraged right now. But I do not believe that we are going to be writing home to mamma and saying what a wonderful back-half it is."
Though many companies continue to be optimistic, there are several that are unquestionably suffering. That's especially true among commodity players. Avnet's Computer Marketing Group, after all, has hot-selling IBM P-series midrange servers to offer the market that are generally insulated from acute price competition. But lower-end distributors who offer PCs and other commodities are experiencing renewed price competition amid the slowing economy. The double-whammy is clearly having a negative impact.
Despite its growth, the diluted earnings of 1 cent per share that Bell Microproducts reported for the March quarter were just 1/16th of what analysts had expected. Furthermore, they were down sharply from the 21 cents per share that the company reported for the same period last year. When it announced its numbers, the company cited a softening demand for electronic components--particularly industrial OEM disk drives and semiconductors in North America--as one reason for the reduced earnings.
Among those most affected by the touch economic times is Merisel, which has decided to phase out the rest of its distribution business in the United States. It reported a net loss for the year of $95.8 million on sales of $2.1 billion. The margin of loss widened from the previous year's net loss of $61.2 million on sales of $4.2 billion. As a result of the tough conditions facing the company, Merisel kicked off 2001 with a new initiative to focus solely on three businesses--Merisel Canada, Optisel%E4 and U.S. software licensing.
And with so many vendor companies struggling, it's unlikely that the distribution sector will see a speedy recovery. Sun's financial troubles continue. It recently revised earnings expectations for the fiscal fourth quarter ending June 30, 2001. Compaq, too, is expected to struggle to meet estimates for the current quarter. And just this week, Quantum decided to cancel the IPO of its Snap Appliances division, citing sluggish sales and a weakened environment for IPOs.
