VARs: Wall Street Free Fall Won't Derail Robust Sales Growth

Solution providers do not expect the precipitous 513-point drop in the Dow Jones market index Thursday to stop their robust sales growth this year.

In fact, some solution providers believe the economic downturn heralded by the stock market dive could accelerate operating expense-based cloud computing services sales. They say, unlike the recession in 2008, technology is now seen as a business driver to save money and create operational efficiencies.

"Obviously everyone is always worried about the macroeconomic situation, but in general for us there's a big emphasis on cloud and managed services,’ said David Powell, vice president of managed services at TekLinks, a Birmingham, Ala.-based VAR. ’Even though the market is up and down, we've had fairly consistent growth around cloud services."

"Customers are using [cloud and managed services] as a tool to operationalize expenses and not rely on capital investments,’ said Powell. ’There was no cloud in 2008. Now, customers are saying they don't want to manage [IT], they want to consume it. In 2008, that wasn't an option for them. That option has emerged."

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The Dow Jones industrial average Thursday plunged 512.76 points, or 4.31 percent, to close at 11,383.68, while the Nasdaq took a 136.68 point dive, or 5.08 percent, to close at 2,556.39.

Jamie Shepard, executive vice president of ICI, a Marlborough, Mass., solution provider, expects technology purchases to take a "short term hit,’ but even with Thursday’s stock market dive he expects ICI to have a record sales growth this year.

The IT industry is going through a renaissance of sorts for companies focused on delivering cloud computing services, Shepard said. Corporate belt tightening is pushing more customers to adopt operating expense-based cloud computing service solutions rather than big capital expense based IT projects, he said.

"The world economy has been terrible since 2008," said Shepard, whose company just posted record second-quarter sales growth. "It has been horrible. That has everybody looking at op-e based IT versus cap-ex based IT. And the easiest way to get to op-ex IT is to adopt some kind of cloud computing services."

Greg Knieriemen, vice president of marketing at Chi Corp., Cleveland, Ohio, expects the worst-case scenario in the current economic malaise will be longer sales cycles and more scrutinizing of budgets.

The big difference between IT spending expectations now and a couple of years ago is that customers have already been through many of the hard decisions, Knieriemen said.

"When the economy fell a couple years ago, it caused a reality check among customers," he said. "IT companies have done well since then. So things should remain constant, but sales will drag out longer."

But the recent economic worries are in stark contrast to the banner years that many VARs have experienced thus far in 2011.

NEXT: Limited Impact Expected

Brad Thompson, executive vice president of sales and marketing, at Bear Data Solutions, San Francisco, Calif., said his company's sales through July have already surpassed revenue for all of 2010.

Solution providers who sell core technologies like storage and virtualization should see only a limited impact from the current economic situation, Thompson said.

"We'll take a hit, but not as bad as in the past," he said. "Will resellers have to roll up their sleeves and work harder? Absolutely. Will there be as much of an impact as two years ago? No. Will a 500-point fall in the stock market impact us? No. But if it drops 500 points tomorrow and 500 points the next day, call me again."

In the last two weeks, the Dow Jones has lost 10.5 percent of its value since closing at $12,724.41 on July 21. The Nasdaq is down 10.6 percent since its July 22 close of 2,858.83. It’s the biggest crash since both indices fell more than 20 percent in early October 2008.

Brian Alexander, managing director of equity research at Raymond James & Associates, said the lack of confidence in the economy could have an impact on IT spending through the rest of 2011.

"Corporate confidence has taken a hit given the melees in Washington," Alexander said. "It's reasonable to expect that business spending will be soft until the macro picture picks up a bit."

Still, some VARs expressed concern that customers will hold back projects or defer them until the fourth quarter.

"We have been bit tight for some time now," said Romi Randhawa, president and CEO of Fremont, Calif.-based HPM Networks. "Only spending where it makes sense. I might freeze all Q3 internal initiatives and move them to Q4."

How the new economic downturn will impact customers depends heavily on how well the customers are doing, said Jerry Pape, principle at Excalibur, a Big Sky, Mont.-based small business MSP.

"It will accentuate the difficulties with customers who are economically pressured," Pape said. "And it will cause caution among customers who are not economically pressured. If you don't know where the client's income stream is coming from and how it's impacted by the market, you'd better learn."

Michael Oh, president of Boston-based Apple partner Tech Superpowers, said his company still has many "austerity" measures in place from the previous recession, so tightening belts — if necessary — won't be too difficult again.

"The challenge for us is that we were betting on growth from here on out, not huge but upward growth, and our numbers so far this year were stellar," Oh said. "So an economy-wide pull back would really put a damper on these plans. I'm not worried yet - usually there's at least a three- to six-month delay before Wall Street news hits our numbers - but obviously, I'd rather things get back on track rather than stall out here.’

Todd Swank, vice president of marketing at Burnnsville, Minn.-based system builder Nor-Tech, said most customers now work every angle to get as many bids as possible and get by only with what they really need. "It seems like there was some momentum going with the excitement around social media companies like LinkedIn and Groupon. Now it seems like there is a lot of fear in the air," Swank said. "I'm always an optimist. I think we have the best system in the world. We just need a catalyst that is going to get everything going again.’