MicroWarehouse's York Sees Channel Consolidation

York, the former CFO of IBM and Chrysler, made the comments at the Raymond James IT Supply Chain Conference here.

York, who took the IT products reseller private with other investors in a buyout two years ago, also said he is not planning on an economic recovery in 2003. "I think that 2003 will, for the most part, feel like 2002, " he told CRN in an interview.

"We think the U.S. market is more or less at bottom," said York. "On the other hand, we are planning that there will be no recovery in 2003. Hopefully, there will be one by 2004.

"This is the seventh recession I have been through and the other six ended, so this one will end too," said York, drawing laughter from a room packed with fund managers and analysts.

York said he sees intense channel consolidation in Europe. "The whole channel space over there is under incredible pressure."

Characterizing the current IT spending environment, York said, "October was kind of OK-minus. November was 'Where is the bottle of arsenic, I want to kill myself.' Fortunately, December is substantially more like October."

Since Thanksgiving, MicroWarehouse has seen a 50 percent increase in its consumer business, he noted. He attributed some of that uptick to a "substantial improvement in response rate to a newly redesigned MicroWarehouse IT products catalog."

"In terms of the commercial business and gov/ed [government and education market, you don't find any strength anywhere."

Although MicroWarehosue sales have been down 25 percent over the past two years, York said sales, general and administrative expenses are down 40 percent to $49 million per quarter from $82 million per quarter.

"Despite the major loss in sales with the improved efficiency, we have been able to stay profitable," said York. MicroWarehouse has EBITDA margins of 2 percent and has seen a $14 million improvement in net cash in the wake of the major consumer business uptick in the past several weeks. Without that uptick, the company's cash position was at nearly zero.

MicroWarehouse's acquisition debt has been reduced from $320 million to $228 million. "We think that is pretty good given the last nine quarters have been recessionary," York said. The company is $30 million ahead of the original seven-year amortization schedule for the debt.

That said, York added, " I won't kid you. Our banks are nervous. They hate anything with the name IT on it. The only thing they hate worse is telecommunications and airlines."

York praised Ingram Micro and Tech Data for being supportive of MicroWarehouse in the midst of the IT spending slump. MicroWarehouse sources about 30 percent of its products from those two distributors.

York said MicroWarehouse's key challenge is to transition its sales force from a catalog business to an outbound relationship sales model similar to CDW Computer Centers. The company plans to open a Montreal-based sales call center in January. The reseller has 50 call center reps in training with a plan to add 100 more by the end of 2003.

York estimated the cost of running that center is less than half it would be if it operated in the United States, due to lower wages and some government assistance. MicroWarehouse is also in the early stages of looking to move additional operations to Canada.

The company is also aggressively expanding its government business and has recruited executive talent from competitors.

Responding to the IBM turnaround, York said the book "someone needs to write about Lou Gerstner and the team he put together is 'The Turnaround That Really Lasted.' Unlike Kodak. Unlike Xerox. Some of these other large old-line American companies that looked like they had turned around but didn't really."

York said the key to IBM's success was Gerstner's "unending and uncompromised focus on the customer." York said he is "highly confident" new IBM CEO Sam Palmisano "will carry on where Lou left off."