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Boom Times: Why 2018 Is Shaping Up To Be A Very Good Year

With tax cuts spurring IT spending and fueling sales, solution providers say 2018 is shaping up to be a very good year.

Aqueduct Technologies CEO Manak Ahluwalia couldn’t be happier about the state of the economy and the impact it is having on information technology spending and his business.

Aqueduct -- which has been named to the CRN Fast Growth 150 list for the last two consecutive years -- expects to grow sales 40 percent this year, in no small part due to the strength of the economy.

Make no mistake about it, said Ahluwalia, tax reform legislation passed in December has resulted in economic boom times for the channel, leading to the strongest IT spending environment he has seen since founding his company seven years ago.

“For smaller companies like us the tax cut has been huge because [previously] so much of our free cash has gone toward covering our tax liability at the end of the year,” he said. “This has allowed us to increase major technology initiatives for next year. Whether you are C Corp. or an S Corp., this is putting money back into play that is being reinvested in the business. We are heavily into reinvestment mode.”

The Tax Cuts and Jobs Act, which went into effect Jan. 1, cut the corporate tax rate from 35 percent to 21 percent for large corporations and provided a 20 percent deduction for pass-through businesses like Aqueduct.

By Ahluwalia’s estimate, the tax reform has resulted in a 15 percent increase in customer IT spending. What’s more, the tax cut has allowed Aqueduct, No. 363 on the 2018 CRN Solution Provider 500, to add to its highly prized engineering talent with a 10 percent to 15 percent increase in new hires this year. “That’s pretty significant,” he said.

Specifically, Waltham Mass.-based Aqueduct, which has garnered praise from customers for its “100 percent” guarantee that all of its solutions will “perform as promised” or customers don’t pay, is making game-changing digital transformation bets with the cash savings from the tax cut. Those bets include deep investments in cloud-based omnichannel customer engagement solutions and major software-defined infrastructure initiatives that are driving customer-facing competitive advantages.

“Those investments are not going to materialize until 2019 or 2020, which means that effectively we should be able to continue to grow at a pretty aggressive rate,” said Ahluwalia. “At the same time, we are seeing our customers starting to make bets, which is leading to a bump in business.”

In fact, Ahluwalia is seeing robust increases in IT spending from customers in the greater Boston area who are also benefiting from lower tax rates. He calls it an economic “perfect storm” that is being driven by a talent pool fueled by some of the best universities and hospitals in the country.

“We have got a lot of biopharma [customers] that are leveraging a lot of the tax benefits to grow pretty heavily,” he said. “That has opened up a lot of services opportunities and cloud opportunities for us as they make investments in IT they may not normally have made. In many cases, these companies have more favorable tax rates now.”

Ahluwalia is not alone in his assessment that the channel is experiencing economic boom times. Solution providers on average are seeing a 20 percent increase in customer IT spending, according to the results of a survey of executives set to attend the 2018 Best of Breed Conference, an annual gathering of some of the country’s top solution providers hosted this month in Philadelphia by CRN parent The Channel Company.

As for the economic impact of the Tax Cuts and Jobs Act, 64 percent of solution providers said the new law has resulted in increased customer IT spending.

Dr. Douglas Holtz-Eakin, former chief economist of the President’s Council of Economic Advisors under President George W. Bush, said the underlying strength of the economy has gotten lost in the divisiveness of the political discourse under President Donald Trump.

“The basic discussion of the economy has been lost to a great extent,” said Holtz-Eakin. “The economy is doing really well. It is probably the biggest story of 2018. You certainly haven’t heard that. … I do think the basic economic good news has gotten lost.”

Gross Domestic Product (GDP) -- a commonly used indicator of economic health that measures the value of produced goods and services -- grew at 4.1 percent in the U.S. in the second quarter, the best quarterly showing since 2014.

Holtz-Eakin believes the Trump administration’s deregulation efforts are also having a positive impact on the economy. “The Trump administration’s efforts at deregulation have been quite striking and, I think, underappreciated. They have added essentially no regulatory burden in the first year and a half in office, which is extraordinary.”

Holtz-Eakin said the economy has turned a corner with help from the president’s tax cuts and deregulation policies. “Everyone was frustrated with muddling along at 2 percent economic growth,” he said. “We are now much faster. Everyone was frustrated with the absence of any sort of wage growth. That is starting to pick up. Everyone was frustrated with the lack of reinvestment in modern technologies and low productivity growth, and we have seen that swing north as well. Those are all fantastic signs.”

Fantastic signs indeed. Solution providers attending the BoB Conference expect the good times to continue to roll into 2019, with 77 percent expecting to see an increase in IT spending in the new year, according to the CRN survey.

For 2019, BoB Conference attendees are forecasting on average a 21 percent increase in profits on a 24 percent increase in sales. What’s more, those solution providers expect to increase their staff by 20 percent next year.

Holtz-Eakin said solution providers are feeling the economic benefits of increased spending on technology products and services. “We have seen in the economy for the past five years that one of the Achilles’ heels has been poor productivity growth,” he said. “Behind that has been poor spending on high-tech equipment and the upgrades of basic infrastructure of firms to modernize them and make them more productive. This is a real opportunity to do that, and we are seeing a big increase in orders for those kinds of goods. We have seen a rise in the spending on tech goods. I expect more of that in 2018 and into 2019.”

Paul Anderson, CEO of Novacoast, a Santa Barbara, Calif.-based security solution provider standout, said his company’s sales are up 23 percent this year, on pace to break the $100 million mark. “This year is exceptional,” he said. “The economy is definitely helping. The good thing about economic boom times is the funds are available [for customers to make security solution purchases]. As a business owner, I have to leverage this time right now. If I am not growing rapidly right now, then I shouldn’t be in business. There can’t be a better climate to grow your business than the one we are sitting in right now.”

Novacoast, No. 224 on the 2018 CRN Solution Provider 500, has increased its headcount by 20 percent this year to 297 employees—with hiring focused primarily on top-notch engineering talent—up from 242 at the start of the year. “As we grow and become more profitable, we use that money to hire new employees and reinvest in the business,” he said.

In fact, Novacoast’s ability to attract and retain top-notch security talent—a core competency—is paying off given that businesses are turning to the channel to manage critical IT infrastructure as they struggle to find top talent. The unemployment rate is at a generational low of 3.9 percent.

“If you are a service provider, these record-low unemployment numbers have to be music to your ears,” said Anderson. “Customers can’t hire the high-end IT resources they need internally so they are leveraging more MSPs and service providers to get a project completed. That aspect of the economy is definitely helping our business.”

Among the recent blockbuster deals won by Novacoast: a three-year $5.2 million managed services deal for a health-care company and a $1 million managed security services deal for an entertainment company.

Another factor: Technology, particularly in the security market, has gotten so complex that customers are turning to experienced solution providers like Novacoast. “It has just gotten so complicated that a lot of customers have thrown up their hands realizing they can’t keep up with the pace of innovation in security, so they need to hire experts like us,” said Anderson.

That, in turn, is fueling new investments by Novacoast. The company has just greenlighted a plan to open a fourth Security Operations Center (SOC) in Guatemala City, adding to SOCs in Santa Barbara; Ann Arbor, Mich.; and Manchester, U.K. Those SOCs are providing Novacoast customers with 24x7 security monitoring. “SOCs are the foundation for our future growth,” he said. “It is the next generation of what we are delivering today and the wins we are going to get in the future. We need those SOCs to manage security offerings for customers. That is where the growth of the business is.”

Anderson is optimistic about the prospects for continued growth in 2019. Conservatively, he expects sales growth of 15 percent to 20 percent next year—on top of the anticipated 20 percent growth rate this year. That means hiring an additional 10 percent to 15 percent more employees primarily in engineering.

“Based on our pipeline, I don’t see any slowdown,” he said. “If anything, it is accelerating. It’s an incredible economy matched with a security business that is the right place to be right now. You can be in an incredible economy selling buggy whips and you are still going to go out of business. If you are in an incredible economy and you have a solution that the market is demanding at the moment, then that is the perfect storm.”

Solution providers attending the BoB Conference ranked security as the No. 1 priority for IT spending in 2018, and they expect it to remain the top priority in 2019.

“Security is top of mind for customers, which is why we have doubled down on new solutions and professional services there,” said Dominic Grillo, president of Atrion Communications Resources, a Branchburg, N.J., solution provider with a heavy focus on security. “There is certainly not going to be any lack of spending on security. You need secure data—no matter where it lives—whether it is on-premises or in the cloud. We are all in on security.”

Atrion has added a chief security officer (CSO) to the team and built up its security engineering talent as part of a new virtual CSO offering. Overall, the company has increased its security staff by 25 percent in the last year.

Atrion has also added a new wave of security partnerships with companies including BlackRidge, BluSapphire, Cyxtera, DB CyberTech and TrapX.

Grillo expects security sales to be up double digits this year and remain strong into 2019. “Security is now a topic at the board level,” said Grillo. “Those folks are well aware they need to keep their data secure or their jobs are on the line.”

It’s not just security that is driving big purchases. Public cloud is the No. 2 priority for IT spending in 2019, followed by hybrid cloud, according to BoB solution provider attendees.

Tom Colleary, president of F3 Technology Partners, West Hartford, Conn., and No. 422 on the 2018 CRN Solution Provider 500, said a new wave of technologies like hybrid cloud, hyper-converged platforms and flash storage is driving big gains for his company.

F3’s product sales are up 40 percent this year, while its professional services business is up 30 percent. “I think we are in the midst of a natural IT refresh cycle,” he said. “We have had a couple of monster projects that came in this year, but they had been on the drawing board for two years. They took two years of assessment and audits to come to fruition.”

Colleary said the current IT refresh cycle is the strongest he has seen in the last decade, with impressive product cycles from his key vendor partners like Dell EMC and NetApp. “We are seeing bigger deals again,” he said. “In the past couple of years, companies were refreshing as little as they could get away with. Now they are bringing in all-new technology. There is capital available if the projects are clearly defined and have attached outcomes.”

F3 is also benefiting from pressures on IT departments, including cuts in IT staffing or staff redeployment to more strategic projects. “That has allowed companies like ours to fill the void,” said Colleary. “At the enterprise level, the CIOs are becoming much more strategic and aligned to the business side. As a result, they are putting their good people into strategic projects. That allows us to do more work in data center operations.”

Among the bigger deals F3 has closed this year is a major storage refresh for a utility that simply didn’t have the IT staff to do the product evaluation and assessment, request for proposal and the management of the project. “We became their storage admins,” said Colleary.

F3 is also in the midst of a two-year major cloud readiness assessment for a regional bank looking at what applications can be moved to the cloud. That project includes proofs of concept and testing of applications in new cloud environments, along with a new backup/recovery strategy for the bank. “A lot of these customers don’t have cloud talent,” he said. “So we are helping do those with our data center, storage and hybrid cloud advisory services.”

The new projects and technology refresh have paved the way for F3 to increase its engineering staff by 25 percent this year—some of those hires coming from larger technology vendors that have laid off strong talent.

As for the 2019 outlook, Colleary said he is “cautiously optimistic” about the future. “Our customers are asking us for agility and flexibility from their IT resources. If we can help them do that with data center modernization, application availability and cloud strategy, then that is where they will invest.”

That investment by businesses in digital transformation with a focus on cloud strategies is paying off in a 20 percent increase in sales this year for Involta, a Cedar Rapids, Iowa, solution provider that recently launched a new hybrid cloud service and has made big investments in new security solutions.

“Companies are looking for ways to focus on their core business and are outsourcing the pieces of their business that are not core to them,” said Bruce Lehrman, founder and CEO of Involta, which was recognized as a 2018 CRN Fast Growth 150 solution provider. “Everybody in our organization wakes up every day to take care of IT infrastructure. That is our core business.”

One of the company’s biggest recent wins is with UPMC, an integrated health-care provider, which was the anchor tenant in Involta’s new 40,000-square-foot data center in Armstrong County, Pa. “They have tremendous wherewithal to go do their own thing, but they are focusing on their business and letting us manage the data center,” he said.

Another big deal for Involta—which owns and operates multitenant data centers throughout the country—is a deal with a large health-care software maker that is using Involta data centers to host two applications.

Those kinds of big wins are propelling a 20 percent to 25 percent increase in new hires by Involta, said Lehrman.

Although the tax cut has had an impact on the economy, the biggest growth driver is customers anxious to get out of the business of IT, said Lehrman. Companies are reducing their IT risk and costs by outsourcing their IT infrastructure, said Lehrman. “There are not many opportunities like this for a CIO or a CFO to reduce risk and cost,” he said.

Lehrman is optimistic as he looks to 2019 with plans to again grow the business at about a 20 percent to 25 percent clip, with expectations for a similar increase in new hires for Involta. “I think we have a ways to go with the boom market,” he said. “I think there are a lot of positive trends.”

Gordon Martin, president of Peak UpTime, Tulsa, Okla., No. 482 on the 2018 CRN Solution Provider 500, said he sees the “tectonic” digital transformation shift along with the strong economy driving what he expects to be a period of dramatic growth for the next three to five years.

“I anticipate a similar 3.5 [percent] to 4 percent GDP profile in 2019 and GDP has a correlation to IT infrastructure,” said Martin. “Underlying GDP growth will help our business grow and then you need to layer on the financial impact of cloud and [Internet of Things]. There are a lot of positive forces lining up for our business. If [the U.S.] can maintain 3.5 percent and 4 percent GDP, I see a good three- to-five-year run here. IoT could be an accelerator even further.”

Martin expects Peak UpTime sales to grow 10 percent to 20 percent this year, with a plan to bring on board a similar percentage increase in staff. He expects the same kind of growth and additional hires in 2019. The positive forces have Martin planning for some of the largest increases in wages for his team in many years in 2019. “We are going to increase wages because of the tight market,” he said. “It’s been a few years since we were looking at 6 [percent] to 8 percent wage increases.”

The challenge for solution providers is to keep up with the rapid technological change and the shift to the recurring revenue model. “It’s never easy, but your opportunity for success goes up when you have a growing economy,” he said. “It literally creates a good environment to partner with your clients and bring them digital transformation thinking and cloud infrastructure. This is a good time to be in this business.”

Aqueduct’s Ahluwalia sees 2019 as another strong year for the economy and the channel, but worries about the potential for trouble in 2020. “I think 2020 is a year of concern—not economically but because it is an election cycle,” he said. “The country is very torn on politics. The economy and organizations in general don’t like variants. They don’t like unknowns. That always adds some level of risk into any type of financial decision, and sometimes it chokes some of those financial investments.”

Some economists are also worried about an economic slowdown in 2020.

Dr. Mark Zandi, chief economist for Moody’s Analytics, a provider of economic research, said he sees GDP growth going from 3 percent in 2018 to 2.7 percent in 2019 and then falling to just .08 percent growth in 2020. “The recession risk will rise pretty significantly in 2020,” he said. “That is when all the [Tax Cuts and Jobs Act] stimulus goes away. There [will be] no tailwind from the stimulus, and you are left with much higher interest rates.”

For his part, Ahluwalia is telling his team to stay focused on differentiated services for customers, building a strong baseline of recurring revenue going into 2020. “We are making our capital investments now and getting as nimble and agile as possible,” he said. “I am a perennial optimist. We are an amazing country. No matter what, we always prevail.”

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