CRN Research: VARs Turn Pessimistic About Third Quarter Sales
CHANNEL BUSINESS OVERVIEW
Solution providers' overall sales expectations for the third quarter plunged to their lowest level since CRN began publishing sales expectations data more than two years ago. The overall sales expectations for the third quarter came in at 60, compared to 94 in the second quarter 2006 and 80 in the year-earlier period. (The data is based on an index figure of 100 from April 2004 to compare results).
The decline in sales expectations was broad-based, encompassing all major product categories, as shown in Chart 1. Desktops, notebooks, networking software, storage, VPNs, supply chain management, application development tools and data warehousing were among the product categories seeing the steepest declines.
Solution providers' sales expectations for the third quarter dropped sharply in all three business segments, including large firms, midsize companies and small businesses. The drop was particularly sharp among large companies (with at least 1,000 employees), with sales expectations at their lowest level in more than two years. CRN, however, believes that solution providers may be significantly underestimating the sales potential in the large company market.
The list of categories where solution providers have the highest sales expectations for the third quarter showed a major turnover compared to the second quarter. Five new categories joined the list, many of them with a services-related theme: voice over IP, Web services, Web site design and development, hosting and anti-spam. These replaced desktop PCs, notebook PCs, networking hardware, firewalls and anti-spyware.
Both Dell and Hewlett-Packard saw significant declines in their PC hardware market position in the second quarter compared to the first quarter. In contrast, Lenovo saw a significant strengthening in its position in the small and midsize company markets for desktops and notebooks. The results for IBM were also positive, especially in the PC server market. Overall custom systems also showed strength in the second quarter, reversing some of the losses that took place in the first quarter in areas such as desktops and PC servers.
The delay in the release of Microsoft Vista until January 2007 has also made its presence felt in the list of the top 10 products and technologies that solution providers plan to sell or recommend to their small and midsize business clients in the third quarter. Branded desktops and notebooks dropped off the list, consistent with other CRN data showing that sales expectations for these categories dropped significantly from the second to third quarters.
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Click on these links to get the latest spending outlook from CRN Research by technology segment:
• Hardware
• Software
• Networking
• Security
• Custom Systems
NEXT: SOLUTION PROVIDER FORECAST SOLUTION PROVIDER FORECAST
Solution providers' overall sales expectations for the third quarter plunged to their lowest level since CRN began publishing sales expectations data more than two years ago.
The overall sales expectations for the third quarter came in at 60, compared to 94 in the second quarter 2006 and 80 in the year-earlier period. (The data is based on an index figure of 100 from April 2004 to compare results).
The decline in sales expectations was broad-based, encompassing all major product categories, as shown in Chart 1. Desktops, notebooks, networking software, storage, VPNs, supply chain management, application development tools, and data warehousing were among the product categories seeing the steepest declines.
In the case of PC hardware, it is likely that the delay in the general release of Microsoft Vista played a role in the drop in sales expectations for the third quarter, and this is likely to spill over into the fourth quarter as well.
Indeed, with the operating system now set for general release in January 2007, some brokerage firms and technology research houses have sharply cut their forecasts for PC unit sales growth for 2006.
Lehman Brothers, for example, recently lowered their forecast of unit sales growth to 9.8 percent vs. their earlier forecast of 12.4 percent. Industry researcher Gartner expects PC sales to grow 10.6 percent this year, compared to 15.5 percent in 2005. The downward revisions extend to notebooks as well as desktops.
A few technology categories, mostly services related, showed smaller declines in sales expectations for the third quarter compared to other categories. These included voice-over IP, managed services, Web services and CRM. Sales expectations for managed services and voice over IP remain relatively strong, despite the drop, a sign of the growing importance of these categories to solution providers and their business customers.
The RISC server category was the only one of the 29 categories included in the sales expectations index that showed a gain in the third quarter compared to the second quarter.
The level of sales expectations has been running about 16 percent lower so far this year compared to the same period in 2005. A combination of factors, including rising interest rates, energy prices at record levels, the delays in Vista's launch and predictions by many economists that there will be an economic slowdown in the second half of the year, is causing solution providers to become more pessimistic about the overall growth of their sales revenue this year compared to last year.
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• Software
• Networking
• Security
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NEXT: BUSINESS SPENDING PLANS BUSINESS TECHNOLOGY SPENDING PLANS
Solution providers' sales expectations for the third quarter dropped sharply in all three business segments, including large firms, midsize companies and small businesses.
The drop was particularly sharp among large companies (with at least 1,000 employees), with sales expectations at their lowest level in more than two years.
CRN, however, believes that solution providers may be significantly underestimating the sales potential in the large company market.
In the June CRN Business Spending Survey, 67 percent of the 125 large company IT executives surveyed said they expected their company's technology budgets to increase over the next 12 months. This was a significantly higher percentage compared to small and midsize companies (see Chart 2) and only slightly below the record figure of 70 percent in the fourth quarter of 2005.
In addition, large companies that plan to boost IT budgets are much more committed to actually carrying out their budget plans compared to their smaller counterparts. Some 89 percent of these large companies are either "extremely committed" or ""strongly committed", compared to 77 percent of midsize companies and 69 percent of small businesses.
But this is not to say that solution providers should ignore the SMB market segment. The outlook for spending growth is solid, and a strong majority of companies that plan to increase IT budgets over the next 12 months are committed to actually doing so.
In general, strong sales opportunities are likely in categories with a services-related component, such as voice-over IP. Hardware and software related product categories are also likely to offer slightly better sales opportunities as a whole compared to Internet-related categories, according to the data.
More specifically, channel sales opportunities remain strongest in security, regardless of market segment. This is particularly true for small business, where the level of spending priority for security has been moving up steadily over the past several months. Other areas that warrant channel scrutiny include Web services, PC servers, Intranet development and application/database development.
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• Networking
• Security
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NEXT: HOT GROWTH CATEGORIES
HOT GROWTH CATEGORIES
The list of categories where solution providers have the highest sales expectations for the third quarter showed a major turnover compared to the second quarter.
Five new categories joined the list, many of them with a services-related theme: voice over IP, Web services, Website design and development, hosting and anti-spam. These replaced desktop PCs, notebook PCs, networking hardware, firewalls and anti-spyware.
Managed services, one of the hottest technologies in the market today, remained atop the list and was joined by voice over IP, also a fast-growing technology area. Remote access, another services-related category, made a big move up the list, jumping from tenth place in the previous report to third place in the current report.
The five categories that dropped off the list are all related by a common theme, that being the delay in the general release of Microsoft Vista until January 2007. The delay, announced in March, almost certainly affected solution providers' sales expectations for desktops and notebooks in the third quarter, and is likely to do the same for the fourth quarter as well.
For example, recent CRN survey data show that 24 percent of solution providers expect PC hardware sales growth in the second half of 2006 to be slower than in the first half. This is only slightly higher than the 19 percent that expects sales growth to be slower in the second half of 2006.
This is a far cry from technologies such as managed services. In that category, the percentage of solution providers expecting sales growth to be faster in the second half (47%) of the year far outnumbers the percentage expecting slower sales growth (10%).
Some of this impact may also have spilled over into related categories such as networking hardware, software and client security. However, these categories remain on the top 10 list of products and technologies that solution providers plan to recommend to their business clients in the third quarter. As a result, sales in these categories will probably not be as strongly affected by the delay in Vista compared to notebooks and (especially) desktops, in CRN's opinion.
The crucial data point for desktops and notebooks will be sales expectations for the first quarter 2007. The degree to which these increase from their current low levels will be an indication of the extent to which solution providers believe the release of Vista will actually take place in January as scheduled.
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Click on these links to get the latest spending outlook from CRN Research by technology segment:
• Hardware
• Software
• Networking
• Security
• Custom Systems
NEXT: TOP-SELLING BRANDS BEST-SELLING HARDWARE BRANDS
Both Dell and Hewlett-Packard saw significant declines in their PC hardware market position in the second quarter compared to the first quarter.
The percentage of solution providers citing these vendors' products as their best selling desktop, notebook, PC server and RISC server all declined, in some cases significantly.
In contrast, Lenovo saw a significant strengthening in its position in the small and midsize company markets for desktops and notebooks. In both categories, the best-selling percentages were also higher compared to year-earlier levels. Even so, Lenovo continues to lag well behind market leaders Dell and HP, though it continues to rank ahead of custom systems in the notebook PC arena.
The results for IBM were also positive. The vendor gained share in the PC server market, and managed to hold on to most of the huge jump in best selling RISC server percentage that took place in the first quarter of this year.
Custom systems showed strength in the second quarter, reversing some of the losses that took place in the first quarter in areas such as desktops and PC servers. The gains were limited, however, by the fact that component shortages increased significantly in the second quarter in many key areas, including motherboards and memory. In addition, the RISC server market appears to be consolidating around the three major vendors—IBM, Sun, and HP—with custom systems playing only a peripheral role.
MORE RESEARCH
Click on these links to get the latest spending outlook from CRN Research by technology segment:
• Hardware
• Software
• Networking
• Security
• Custom Systems
NEXT: SOLUTION PROVIDER RECOMMENDATIONS VAR RECOMMENDATIONS TO BUSINESS CUSTOMERS
The delay in the release of Microsoft Vista has also made its presence felt in the list of the top 10 products and technologies that solution providers plan to sell or recommend to their small and midsize business clients in the third quarter.
Branded desktops and branded notebooks dropped off the list, consistent with other CRN data (see section 3 above) showing that solution providers' sales expectations for both of these categories dropped significantly from the second to third quarter.
Previous CRN research data had shown branded systems moving up the list of the top 10 product recommendations, suggesting a new product replacement cycle might be in the works. With the release now delayed until January, however, CRN expects the upgrade cycle to almost certainly be delayed until at least the first quarter of 2007.
Managed services joined the list this quarter, not surprising given the fact that this is one of the hottest areas of technology and a category where solution providers continue to have high sales expectations. Look for other hot services related categories such as voice over IP and Web services to join the list in the future.
MORE RESEARCH
Click on these links to get the latest spending outlook from CRN Research by technology segment:
• Hardware
• Software
• Networking
• Security
• Custom Systems
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EDITOR'S NOTE
JOHN ROBERTS is director of research at CRN . He can be contacted via e-mail at [email protected].
Each quarter, CRN randomly surveys readers on a range of topics, such as near-term sales expectations, best-selling technologies, business customer segments and custom systems. Several hundred responses are received from solution providers.