The Top Four Financial Challenges Facing IT Companies
Giant distributor Ingram Micro's recent earnings report underscored the challenges global IT distribution companies face coping with the global sales downturn and showed how difficult it is to struggle successfully against a negative business tide.
Ingram Micro (NYSE:IM) reported earnings for its fourth quarter and 2008 fiscal year that saw business conditions deteriorate dramatically at the end of the period. The company's global sales in the fourth quarter fell 13 percent over one year ago, and Ingram Micro posted a loss of $564 million (compared to a $114 million profit one year ago), thanks mostly to a one-time non-cash charge of $742.6 million. Even worse, the sales decline is likely to accelerate this quarter.
In a prepared statement and conference call, CEO Gregory Spierkel noted that near-term conditions will be "bumpy" for Ingram and many other companies, and suggested things may get even worse in the short-term. In fact, the Ingram Micro laid off 300 employees this week.
"While the economy continued to challenge us in the fourth quarter, our focus on enhancing gross margin and reducing expenses helped us deliver solid operational results," said Spierkel. He added: "Based on our sales figures to date, we expect first-quarter sales to experience a year-over-year percentage decline in the low-to-mid twenties. "
Ingram Micro isn't alone in the IT industry in facing tough financial challenges. Among the most critical:
Global sales are dropping everywhere. In the fourth quarter, sales dropped 1 percent in North America; 21 percent in Europe, the Mideast and Africa (EMEA); 23 percent in Asia; and 5 percent in Latin America. With sale softening everywhere, a global business can no longer depend on overseas sales to compensate for the economic weakness in the U.S. market. No region is a safe harbor.
Reducing expenses is becoming more difficult. Spierkel noted that it's getting impossible to cut expenses rapidly enough to compensate for the rate of falling sales. "We've made good progress on our expense-reduction program.," he said. "However, we expect it will be difficult to reduce expenses in line with the pace of the current sales decline." IT companies that have already cut employees and expenses to the bone will likely struggle to make up for their deteriorating sales.
The strong dollar is hurting. A year ago, currency swings were providing some ballast for American IT companies struggling to make a profit. No longer. With the dollar getting stronger against Asian and European currencies, playing the currency game has ricocheted against U.S. companies with strong overseas operations. As Spierkel noted, "We expect 2009 to be even more challenging. Demand continues to soften across most of the countries in which we operate, and the stronger dollar is also creating a translation headwind."
Finding high-margin business is tougher. Concentrating on products with higher margins is a time-tested remedy for declining sales, but what happens when customers become more skittish about all their purchases? Spierkel noted, for example, that turning down unprofitable business couldn't salvage the weak European sales picture." Efforts in the second half of 2008 to deliberately exit or turn away unprofitable business, coupled with weak demand for technology products, contributed to the year-over-year decline in sales," he said.
(Al Senia is managing editor of ITChannelPlanet.com)