CompuCom to focus on IT services
New CEO says he's set to accelerate the transition
cbs.marketwatch.com
By Lisa Sanders CBS MarketWatch
Last Update: 11:29 AM ET Apr 1, 2000 NewsWatch
DALLAS (CBS.MW) -- PC reseller CompuCom Systems is hoping its new CEO, Ed Coleman, will leverage it's IT services business and take the company on a more profitable path.
"The capabilities we have in the services space are far greater than I expected, and far greater than the market is aware of."
Ed Coleman
CEO, CompuCom
Currently, only 10 percent of CompuCom's (CMPC: news, msgs) $3 billion in annual revenue comes from services such as business process and information technology outsourcing and systems integration.
The company, whose majority shareholder is Safeguard Scientifics (SFE: news, msgs), provides services to Internet start-ups and Fortune 1000 companies like Delta (DAL: news, msgs) and Continental Airlines (CAL: news, msgs), Cisco Systems (CSCO: news, msgs), and Bristol-Myers Squibb (BMY: news, msgs).
Its very hard today to make a buck reselling PCs, and CompuCom, like others, is realizing that better profit margins lie within their IT services instead.
As CS First Boston analyst Joel Pitt notes: "[IT services] is the most profitable piece of their business. On the resale side, the gross margin is 7 to 8 percent, and it's constantly under pressure, verses a gross margin of 35 to 40 percent on the service side. Services are a relatively scarce commodity, and essentially most of the large resellers have been moving to this."
Pitt, who has a "hold" on CompuCom, said the company is in a good position to succeed. But he's keeping the "hold" rating in place until he sees that CompuCom has "scored a touchdown."
"They're doing a lot of things right. They've streamlined their business model, disencumbered themselves of a lot of baggage in going to a virtual model, and dispensed with unnecessary bricks-and-mortar. And they've clearly cleaned up their operating expenses," Pitt said. "But they're in a tough place, and if I was certain they would make it across the goal line, I would have more than a "hold" on them."
CBS.MarketWatch spoke with Coleman about the challenges ahead and the progress the company has made thus far.
CBSMW: How is your past experience relevant to CompuCom?
Coleman: I was recruited to come over here from Computer Sciences Corp. (CSC: news, msgs) because I had the outsourcing background. Computer Sciences is a much bigger company than CompuCom, and it's 100 percent IT services, and that's what we're moving toward.
CBSMW: So what's your strategy?
Coleman: What we're trying to do is accelerate the transformation from a product-based company to a services-based company. Historically, we are a corporate PC reseller that sold its IT services as an adjunct to product sales. We're shifting over to more of a services environment because of declining margins in the resale business. PC manufacturers are looking more and more to implement a Dell-like model where they will sell directly to corporate America, as opposed to going through a reseller like ourselves.
CBSMW: Has your stock price been under pressure due to declining gross margins in the resale business?
Coleman: Yes. The all-time high for CompuCom was $13 a share about three and a half years ago, and then we bottomed to around $2. But we were at 3 1/4 when I started, and it's at 6 1/2 today. I think it's because of new leadership, and we're recruiting people from companies we want to emulate. We have a more structured mission and strategy than we had before, and some of our major competitors have been having some tough times.
CBSMW: Has the transition negatively affected earnings?
Coleman: The transition on the upside hasn't affected earnings negatively. Where we've taken special charges and costs is to downscale the infrastructure on the product side of the business.
CBSMW: What's the greatest challenge to making profits?
Coleman: To accelerate the growth of our service business and to get the market awareness that we need. We've got a great customer set, which is very appreciative and supportive of the services we provide. Probably what's pleased me the most are the capabilities we have in the services space are far greater than I expected and far greater than the market is aware of.
CBSMW: Has CompuCom developed any proprietary technology?
Coleman: We have a very interesting capability called "Ready" that is exclusively ours. It's an image management tool which allows customer to deploy the image that exists on their machine in an automated way and a Web-enabled way. For instance, if you have a PC with an old version of an operating system on it, you've got it set up with your toolbar the way you like it and the color scheme the way you like it, and everything is laid out on that screen just the way you like it. If you upgrade to Windows 2000, then you go back to the default options on everything. Ready allows us to capture the personality of your screen on your PC, upgrade it to the new release of the operating system, and replace the personality on your new PC. When you power it on, everything is the way it was. Typically a professional with a PC will spend a day or two days getting it back just the way they liked it, so it's a huge productivity improvement.
CBSMW: What do you bring to the table versus a major competitor like IBM?
Coleman: What we bring in the distributed systems outsourcing space are tremendous capabilities and tremendous flexibility. We are second to none if we're limited to that space. If the scope is bigger than that, we would be an excellent teammate.
CBSMW: What would you like investors to know about CompuCom?
Coleman: We're in a terrific marketplace that is growing very quickly, and we have a great customer set. We have capabilities far greater than the market is aware of, which is frustrating, but better than the opposite. And our alliance with Safeguard gives us access to new technology and capabilities that can augment what we offer. This is an important year for us in terms of the transition, but we're well-positioned to be a success.
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