The latest quarterly earnings reports for ScanSource and Tech Data did not make Wall Street happy, nor have many of the IT industry’s powerhouse companies in 2016. Neither IT distribution company met its projections and the stock values of each have fallen more than 12% since their most recent financial updates (as of 10 am ET, 8-31-16). Combined with the expected sale of Ingram Micro to the conglomerate Tianjin Tianhai and other disruptive forces at work in this crucial segment of the IT channel, we could be in for an interesting finish to the year.
In the accompanying press release, ScanSource CEO Mike Baur highlighted an issue that everyone in our industry should be paying closer attention to ̶ not just distribution employees and other investors. “While we had strong profitable growth in the first half of our fiscal year, we faced organic growth and margin challenges in the second half. We had a disappointing finish to fiscal year 2016 with sales and EPS below our expectations due to lower sales volume and lower gross margin.” While the company’s net sales increased 2% in the fourth quarter and 10% for the year, operating income was down significantly from Q4, 2015. This isn’t cause for panic. But those vested in the IT industry should take time to understand the underlying issues and factors at work when their key business partners’ earnings fall below market expectations.
In ScanSource’s case, strategic investments seem to have played a bigger than expected role in the company’s financial returns. The organization acquired KBZ, a major Cisco video conferencing distributor, in September of 2015 and just completed its purchase of Intelisys, a cloud and telecom master agent. Those activities require capital and, depending on the speed of integration, patience on behalf of investors.
Tech Data and other distributors are surely making similar investments to keep pace with the rapidly shifting needs of the IT industry as well. As with any large organization, many of those transformational activities go on behind the scenes and won’t get the same level of press coverage as a merger or acquisition. But when it affects the bottom line, it gets more attention. Despite the fact that SYNNEX, Avnet and Ingram stock prices have increased or remained steady, each of those distributors has also been actively adding new services and revising their business models. Optics and timing are everything in business.
The challenge is keeping investors and channel partners from focusing on the short-term financial implications of innovation. Finding the mix of value-added services required to support the industry’s strategic needs isn’t easy…or cheap. The transformation of distribution (and vendors) to meet tomorrow’s IT channel needs may be a bumpy road at times, so their partners should keep an open mind and look beyond the news and market hype. Short-term pain may actually be a prelude to long-term success. Time (and the right business decisions) will tell.
The Major Disruptor
Among the biggest challenges/opportunities facing distribution is cloud. It may sound strange to position it that way, but companies that put the right programs and portfolios in place to support the virtual solution delivery model will surely have a great advantage over those who don’t in the next few years.
After all, some distributors are still trying to define their role in a business model that theoretically doesn’t require their involvement. That challenge isn’t their alone. Many solution providers are grappling with the same issue, trying to convince their clients why they should be the “one throat to choke” for everything IT-related. As those in the IT industry have learned over the past few years, the real value derived from cloud solutions is ensuring the work and meet the specific needs of each end user. The distributors who have already made investments in this space understand.
Whether they built stand-alone divisions or made acquisitions to improve their position, most have come to realize they have a unique play here. Distributors can enable their partners with platforms, training and even end-user support services to ensure their mutual end customers enjoy the experience. Collaboration on solution design and compatibility is essential, as is the ability to leverage supplier support and merge payment systems.
The cloud is just one of the challenges facing distribution. ScanSource’s latest acquisition was also intended to boost its capabilities in the telecom industry, according to its related press release. The frontier is growing and the savvy distributors are leveraging their experience and assets to gain ground in new areas. The SMB push for big data applications will offer additional growth opportunities for these channel partners, as should IoT. Others continue to push further with managed print and other business services that solution providers can deliver to their clients. The key for distribution is finding the right mix for their particular partners, and making it easier to deliver at a suitable margin.
Some have been predicting for more than a decade that the end of distribution is right around the corner. Chances are just as good, if not better that those organizations, as a whole, with thrive over the next decade. Their executives seem to be gauging and responding to industry trends fairly accurately and adjusting their business models to keep up with (if not stay ahead of) the curve. Just like solution providers, distribution will likely continue to adapt to meet the shifting needs of their customers.
But providers still need to track industry changes closely and continue to forge stronger alliances with the companies that understand their goals and business requirements. Is there concern for VARs and MSPs? Sure, some technologies may grow and others may slow, but distribution will be a valued partner of solution providers for quite some time.
Brian Sherman is Chief Content Officer at GetChanneled, a channel business development and marketing firm. He served previously as chief editor at Business Solutions magazine and senior director of industry alliances with Autotask. Contact Brian at Bsherman@getchanneled.com
