Bell Micro: 2nd Quarter Off On System Builder Business

The San Jose, Calif.-based distributor reported revenue of $777 million, down 1 percent from the $788 million it reported for the second quarter of 2005. Last year, the company reported its highest-ever second quarter.

Earnings for Bell Micro's second quarter, which ended June 30, were $1.7 million, or 5 cents per share, compared to last year's earnings of $3.2 million, or 11 cents per share.

Don Bell, Bell Micro's president and CEO, placed the blame for the slow quarter squarely on the company's system builder business.

"[It's] due to weakness in the system builder marketplace, and that's comprised, for us, primarily of disk drives. And the biggest impact for us was from microprocessors."

That system builder channel softness is not exclusively a Bell Micro issue, Bell said. "It's affected not just us, but we think several companies in the tech sector," he said.

The impact was felt particularly in Bell Micro's North American business, where sales fell 8 percent compared to last year. "That's one of the first declines that we've had in North America in quite a while," he said. "But we think it's an abnormality."

Jim Illson, Bell Micro's president of the Americas, COO, and interim CFO, told CRN after the earnings call that the company's second quarter is seasonally its slowest quarter, with system builders typically slowing down their orders of processors and hard drives.

"But this year, we saw some overlay from other factors," Illson said. "We've seen pricing actions by the top two [processor] vendors put a chill on the market. People are waiting to see what the impact is. They have inventory to continue to build."

A similar situation also cut into Bell Micro's hard drive sales to the system builder channel, Illson said. He said the impact was across the full range of hard drive vendors. However, he said, the impact was limited to Bell Micro's system builder channel, as sales of hard drives to its enterprise and OEM customers were robust.

The affect of price actions from the processor and hard drive vendors is expected to subside in the current quarter and return to normal patterns, Illson said. "We expect sales to rise 3 [percent] to 7 percent sequentially off our second quarter, in the range of what we normally would have," he said. "As price changes moderate, sales will go back to their normal flow. And system builders will draw down inventories. So we expect a rebound in demand."

The system builder continues to be a strong market overall, Illson said. "If there are any other problems, I'm not aware of them," he said. "People talk of recession, but I'm not seeing any impact."

Despite the hit Bell Micro took in the system builder side of its business, the company enjoyed an otherwise good second quarter.

The company's gross margins grew significantly year-over-year thanks in large part to double-digit growth in sales and profit margins by Rorke Data, the company's storage division, and by TotalTec, the company's solution provider arm, Bell said.

Solution sales for Bell Micro had a 1 percent increase over 2005, and now account for 53 percent of the company's total business, Bell said. "The increase was driven by growth in both storage systems and services," he said.

And while processor and hard drive sales to the system builder channel were down, sales of peripherals rose compared to last year, he said.

"The market for enterprise products generally was good, and the budget for companies continued to fund projects and storage system expansion," he said. "The industrial OEM market was also good, with an increase in demand as we grew our value-added business."

When asked if Microsoft's delayed release of the new Vista operating system was a factor for PC purchase delays, Bell said no.

"[Customers] had a lot of reasons to delay purchases last quarter," he said. "Vista didn't come up. That might be the next excuse that they start. . . . But no, I have not heard that. I've heard people ask the question. But I've heard a lot of things going around last quarter. There was the World Cup and Vista and Intel and AMD and all kinds of things going on. You know, maybe some of those had an impact. I personally had no knowledge of any customer who's delayed because of Vista."