Outlook Slow Until New Year
By Sandy Portnoy & Pedro Pereira Computer Reseller News
New York
2:00 PM EST Wed., Nov. 24, 1999
The fourth quarter may be disappointing, but channel executives expect a sales explosion after the first of the year.
Many corporations and government agencies are locking down their systems until after the new year as a safeguard against potential year 2000 compliance problems.
In addition, some corporate customers may be putting off major purchases in anticipation of the February release of Windows 2000 by Microsoft Corp., said channel executives.
A backlog of delayed purchases is building among customers, said analysts. Sometime in the first quarter of 2000, corporate America will turn the spigot on and an overflow of purchases will pour into distributor and reseller ordering systems, industry executives said..
"There's just no project activity right now," said Steve Raymund, chairman and chief executive of distributor Tech Data Corp., Clearwater, Fla. "At the same time, there's an incredible backlog in demand and it's going to explode in February or March," he said.
The fourth quarter will produce "decent business," but 2000 will come in like "gangbusters," said Joel Pitt, vice president and channel analyst at Credit Suisse First Boston, New York. Larger corporations may start off a little slow, but sales to consumers, seasonal patterns and the good economy will get things rolling. And when that happens, the "floodgates will open for buying IT products and services," Pitt said.
Jim Illson, president and chief operating officer at distributor Merisel Inc., El Segundo, Calif., said he, too, has noticed a lot of pent-up interest that should translate into a significant increase in business during the first quarter.
Corporate system lockdowns are happening more out of caution than a real premonition of doom, said channel executives. Conventional wisdom in the channel is that Y2K-related problems will be minimal, as opposed to a flood of complications requiring major remediation.
David Sturtz, senior research analyst at Volpe Brown Whelan & Co., San Francisco, agreed that Y2K will not be a major problem in the United States. However, he said he foresees problems overseas, which "may have some effect on us, but [it won't be] significant."
Federal and state government agencies also are locking down their systems, said Robert Grambo, president of Santa Ana, Calif.-based Ingram Micro Inc.'s North American operations. Some states have extended their lockdowns well into the first quarter, which will have an effect on the channel's government business, Grambo said.
"I think they're just being extra conservative," Grambo said. "After we get through year 2000 issues, the lockdowns will free up."
Traditionally, the fourth quarter generates more revenue than other quarters, partly as a result of the holiday shopping season. Even though analysts predict a healthy shopping season among consumers, Y2K-related lockdowns are dampening what could otherwise be a blockbuster quarter.
Another potential sales booster is the planned release of Windows 2000 in February. Sales will build slowly, Illson said. "People will move into Windows 2000 on a carefully planned basis," he said. "We don't think that it will have an immediate huge impact."
Pitt said the end of January will be a time of celebration for the vast bulk of resellers, which will see their stocks and profits rising.
Tech Data's Raymund also sounded a note of optimism about profitability. He said he hopes channel companies will focus more on improving profits, because current margin levels make it very difficult to generate enough capital for investments.
Distributors and traditional VARs still struggle with tight margins and low stock valuations. But Internet integrators and E-business-focused resellers continue to shine on Wall Street, said Sturtz. "Internet integrators will continue to gather steam and will generate more business than they can deal with," he said.
Sturtz is watching companies such as Whittman-Hart Inc., Keane Inc. and Cognicase Inc. He sees Scient Corp., IXL Enterprises Inc., Razorfish Inc. and USWeb/CKS on the upswing.
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