Distributor Downturns Could Be More Than Macroeconomic Factors

Avnet’s 1Q13 earnings release for the September-end quarter does not auger well for IT spending.  The Technology Solutions group that sells servers, storage, networking and related products to end users and to computer resellers saw revenue drop 15% year-over-year to $2.2B and miss the low end of the expected revenue range by a couple hundred million.  EMEA dropped the furthest at 18%, followed by the Americas at 16% and Asia at 6%.  (Read TBR Analyst Krista Macomber’s take on the announcement here.)

In the call Avnet representatives indicated the drop was fairly even across all industries.  Avnet also noted that some technology segments were up, such as virtualization, storage, networking and security.

That pretty much, as Avnet indicated, leaves servers in the tank.

Avnet went on to talk about seasonality and delayed orders near the end of September.  They talked of a negative book-to-bill in the quarter that had climbed back into the positive (or above “1”) in the first three weeks of this quarter.

I have to wonder if such talk is just whistling past the graveyard, however.

As I wrote here about distributors, there’s a fundamental shift going on in the way commercial customers acquire and manage IT that seriously calls into question the core distributor value proposition.  Listen to any analyst relations pitch at a major IT vendor these days, and you hear very similar variations on the select few themes of  cloud, mobility, big data (analytics) and security.   

The soon-to-be released TBR 2012 Cloud Professional Services Study offers some data points suggesting shifts in IT procurement patterns have considerably more to do with the cratering of core iron such as servers than the inability of European and American politicians to get off the dime and solve their structural deficit problems. 

Yes, weak macroeconomic factors play a role, but it looks to be more pervasive than that.  Consider the following:

1. Cloud utilization rises.  IT departments move out of the proof of concept phase, deciding cloud has a role in their IT departments by a 2:1 margin.
2. Backward compatibility to their legacy applications which they want to migrate over to the cloud represents their biggest concern.
3.  There’s a huge jump in consideration of all “as-a-Service” offerings, with IaaS consideration/evaluation in the mid 80s.

Put that all together and you can expect a big jump in cloud adoption.  It puts the server rapidly over into commodity status and into the land of “build your own” for the large IaaS vendors.

Now consider these points:

1. Meg Whitman has entered the public confessional booth and acknowledged HP’s challenges will take several years to correct.  The hardware-centric giant has some big hurdles ahead of it.
2. IBM’s System and Technology Segment reported a 13% drop in revenue, with their high end System Z dropping 20% (and admittedly due for a technology refresh).
3.  In the call, Avnet officials talked about their revenue performance being in line with their major suppliers indicating the shortfall came more from macro factors than any self-inflicted missteps in the market place.

There’s been rumblings of the so-called “paradigm shift” in IT procurement patterns for quite some time.  The reseller channel has been struggling, with analysts expecting there to be considerable fall out within the channel as the need for the base hardware delivery, integration, maintenance, and support services wanes.  ISVs have a much better shot at migrating over to MSP status than do VARs, as the challenge will be in software tech support rather than in hardware "break/fix" maintenance and repair.

At least to the external world, the Avnet executives did not seem alarmed.  But adding up the recent results from the likes of IBM and HP, coupled with the recent TBR research into cloud adoption, and it looks to be the start of another cyclical transformation in this utterly fascinating industry that is going to wreak havoc on reseller enterprises.