MicroWarehouse's York: Economic Woes Will Persist

The former CFO of IBM and Chrysler made the comments at last month's 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 isn't expecting an economic recovery in 2003. "I think that 2003 will, for the most part, feel like 2002," he told CRN in an interview. "We are planning that there will be no recovery in 2003," he said. "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," York said during the conference, drawing laughter from the crowd of fund managers and analysts.

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

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."

But, he added, "In terms of the commercial business and [government and education market, you don't find any strength anywhere."

MicroWarehouse's annual revenue run rate is about $1.8 billion, down from $2.4 billion several years ago. The company's biggest challenge has been making a transition from the catalog model to an outbound sales model, York said.

Although sales have slipped 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," he said. MicroWarehouse has earnings before interest, taxes, depreciation and amortization (EBITDA) margins of 2 percent and saw a $14 million improvement in net cash in the wake of the holiday season consumer business uptick in early December. Without that uptick, the company's cash position was at nearly zero.

York said MicroWarehouse is aggressively revamping its IT systems, spending about $2 million per quarter.

"In terms of financial performance, the company is tremendously more efficient than when we bought it," York said. MicroWarehouse's acquisition debt has been reduced to $228 million from $320 million. "We think that is pretty good, given that the last nine quarters have been recessionary."

Although the company is $30 million ahead of the original seven-year amortization schedule for the acquisition debt, York added, "I won't kid you. Our banks are nervous. They hate anything with the name IT on it. The only things they hate worse are telecommunications and airlines."

As part of its transition to an outbound relationship sales model similar to that of CDW Computer Centers, MicroWarehouse plans to open a Montreal-based sales call center in January. MicroWarehouse has 50 call center reps in training with plans to add 100 more by the end of 2003, he said.

York estimates that the cost of running that center will be less than half of what it would be if it were operated in the United States, due to lower wages and some government assistance. The company is also in the early stages of considering moving additional operations to Canada, he said.

MicroWarehouse has spent millions of dollars re-training the company's existing sales force to move to an outbound sales model. That transition has not been easy, said York.

"As someone told me a couple of years ago, if you had a woman behind a counter in Bloomingdale's selling hairbrushes and being very good at it and you hand her a suitcase with Fuller Brush painted on the side and tell her to go knock on doors, she won't do very well at that," said York. "It is two totally different personality profiles, if you will."

MicroWarehouse also is aggressively expanding its government business and has recruited executive talent from its competitors, York said. It has set up a separate government subsidiary with 20 field-sales reps in an office and call center in northern Virginia.