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Resellers Pick Up Some Slack

Light Reading
News Analysis
Light Reading
8/23/2002

If anyone's benefiting from the telecom downturn, it may be resellers and systems integrators. As vendors of telecom gear continue to lay off sales and marketing staff, many are increasingly turning to channel partners to take up the slack.

"We're definitely seeing suppliers rely on us more," acknowledges a Texas-based sales representative at Sprint North Supply, one of the leading U.S. telecom reseller/systems integrators and a subsidiary of Sprint Corp. (NYSE: FON).

"We have seen a long-term trend toward distributors and resellers gaining share from direct sales," says Robert Damron, senior analyst with SWS Securities. Suppliers of networking gear for both enterprises and carriers are increasingly choosing to outsource warehousing, logistics, product distribution, and even handling of credit to customers, he notes.

Damron is clear that resellers are still suffering from the downturn: "On a relative basis, resellers are holding up better, but clearly demand is incredibly soft," he says.

But a glance at the largest public companies in the segment demonstrates that "suffering" is a relative term. Compared with the vendors whose gear they distribute and their carrier customers, large North American equipment reseller/integrators are sitting pretty.

Alltel Corp. (NYSE: AT), for example, reported $209 million in revenues and $24 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) for its Communications Support Services segment for its second quarter, which ended June 30. That segment includes product sales to telcos and enterprise customers, although Alltel's not giving out percentages. And even though segment revenue is down year-over-year, it's only down 4 percent to 5 percent from the same time in 2001 -- hardly a match with the double-digit declines marring recent earnings reports from equipment vendors and carriers. Alltel expects revenues from Comm Support Services to fall between $185 million and $195 million for next quarter, with $19 million to $22 million in EBITDA.

Another big reseller, Anixter International Inc. (NYSE: AXE) has a market cap of $873.7 million, cash of $82.1 million, and a 52-week share price ranging from $20.10 to $32.00, according to Yahoo (Nasdaq: YHOO). Anixter reported revenues of $617.3 million (diluted earnings per share of $0.30) for the quarter ended June 28. While that represents a 26 percent year-over-year decline, operating profits of $22.5 million were up 10 percent from the previous quarter. Anixter expects third-quarter sales to be "flat to slightly up," and the company thinks it sees signs that telecom customers who've backed down their spending may be increasing it again.

Several of North America's largest telecom reseller/integrators aren't public, such as Graybar Electric Co. Inc. and KGP. Others, like Sprint North Supply and Verizon Logistics, are subsidiaries of larger companies that don't break out the financials for their particular businesses. But one thing is certain: Resellers aren't hurting like their suppliers and customers. And sources say their stability reflects the fact that large equipment suppliers are increasingly turning to them for help as they cut their own in-house resources.

Sprint North Supply is a case in point. Within the last year, it's inked two big resale agreements: one with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) in January 2002, and one with Nortel Networks Corp. (NYSE/Toronto: NT) in May.

These announcements are significant. Nortel's reduced staff by more than 60 percent over the last year; Alcatel's closed facilities worldwide, including ones in Texas, where the previously cited Sprint North Supply sales rep says her company's getting a lot of Alcatel orders. Clearly, the help's coming in handy for these companies.

A Sprint North Supply spokesman acknowledges that his firm is doing a wider range of hands-on work for customers than ever before: "Several years ago, we were mainly distributors," says Bradford Warner, manager of marketing communications at Sprint North Supply. "Now we are much more of a supply chain integrator." Customers, including carriers, are turning to Sprint for expertise in putting together multiproduct solutions, maintaining them, and performing a range of business tasks associated with the end result.

Don't expect to find the trend toward reseller outsourcing to carriers trumpeted very broadly. Most distributors contacted for this article did not respond to repeated inquiries, perhaps fearing to alienate their key suppliers by reflecting on their ongoing cutbacks. Vendors in particular don't like to talk about an increased reliance on reseller/integrators, perhaps because it appears to reflect an objectionable handoff of precious carrier customers to outsiders. And in Europe, there appears to be an extra sensitivity associated with layoffs and staff reductions that make the idea of outsourcing what formerly was strictly an in-house function particularly distasteful.

Alcatel spokespeople in France, for example, insist that the company sells gear only directly to carriers and that it outsources sales only to enterprise customers. Yet Sprint North Supply's January 2002 press release clearly states otherwise: "Sprint North Supply currently provides Alcatel products and multi-vendor solutions to a variety of network service providers, including regional bell operating companies, independent telephone companies, and others."

Another supplier based on the continent, Siemens AG (NYSE: SI; Frankfurt: SIE), also claims its gear is only sold directly to carriers. But the vendor has a channel partners program for enterprise distribution that includes over 30 layers of possible qualification for resellers. A spokesman in Germany concedes that some carriers may buy gear through enterprise channels.

There are several downsides to the reseller/integrator trend, sources say. One is for startups, who are finding it tough to get a foot in the door with resellers who are focused on satisfying larger players, some of whom may have signed on relatively recently.

Bradford Warner of Sprint North Supply acknowledges that his company is choosy: "We look for manufacturers who bring a business customer or a specific niche application -- not just any widget will do." There are just too many manufacturers looking for resellers to waste time on small fry.

"You need to show up with deals, ready to go," says Chad Dunn, director of product marketing at multiservice switch maker WaveSmith Networks Inc. The big reseller/integrators, he says, won't consider small companies that can't bring them any new business right away. At this point, he says, WaveSmith hasn't yet tackled the reseller issue and is still working on direct sales to prime customers.

By the time many startups get large enough to think about resale arrangements, some folk think the market will change again. "When the market picks up, big companies will hire back their sales and marketing teams," says the former CEO of an Ethernet equipment startup. That's going to spell a downturn of another sort for big resellers, he says.

Still, others say the trend out of house has the look of permanence to it. "Companies want to focus on R&D," says Damron of SWS. "The most effective distribution channel [situation] is where everyone focuses on their core competency."

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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lilgatsby
lilgatsby
12/4/2012 | 9:53:07 PM
re: Resellers Pick Up Some Slack
Outsourcing the sale of enterprise, ie LAN and WAN data hardware is nothing new. The notion that the cable-jockies at Graybar or Anixter can sell, support, configure, design or add any value in the Optical & Transport industry is about the best joke I've heard all year. When's the last time you dropped into your local Graybar? These people are motivated by manufacture spiffs to offload equipment of any flavor, despite what is best for their customers.

Are there some outfits that can do these task well, you bet. IBM, EDS, Lockheed, TRW...does Anixter belong on this list? The Verizon arm and Sprint North Supply have the capability and background. The point here is do not overhype a group of companies because they are making money on the sales of 19" racks, crimpers and media converters.

lg
Iipoed
Iipoed
12/4/2012 | 9:53:02 PM
re: Resellers Pick Up Some Slack
But they always bring fresh donuts when they show up at the customer's office, sometimes even Krispy Kreames.
opto
opto
12/4/2012 | 9:52:55 PM
re: Resellers Pick Up Some Slack
Mary,

This story is in need of some clarification.

1. A reseller is not what you seem to be covering in this article. A reseller is someone who buys used equipment - often from a bankrupt or distressed carrier or enterprise, or from a company that decided to change out existing equipment for a new vendor - and then tries to resell it to other carriers that use that equipment. It is a bit shady of a business, as the mfgr does not offer a warranty or support, and really wants these resellers to go away, as they hurt sales volumes of new equipment. Thing is, it is hard to tell, if you are Alcatel and you sell a lot of gear to a carrier, if they bought some of it from a reseller. As would seem obvious, these folks are probably doing a good business these days, since there are a lot of distressed assets on the market. Prices are probably not good, even for them, but they run very lean, and often don't even touch the equipment - it just goes straight from the seller to the buyer with them as the go-between. You will have a hard time finding any numbers for this market, as they are a bit surreptitious.

2. What you are covering in this article is distributors, for the most part. The likes of Anixter and Graybar. That is what they call themselves. There is, and always has been, a broad range of types of distributors. There are those that are very sell focused, and have essentially no tech support. They sell the commodity products for which no one needs tech support, and sometimes try to sell complex systems, but usually they get into trouble doing it due to lack of product knowledge. The higher level ones are distributors plus more, as Mr Warner states in the article. They have a technical staff, and they do design engineering, for which they charge fees. And they are able to do consultative sales of complex systems. Typically a vendor, such as Alcatel, where I was in sales, will try to sell the less complex systems through high level distributors that are technically competent. And if they account grows to become sizeable, the OEM will want to bring the account in direct. That is always an issue for the distributor, so if you want to keep them on your good side, you have to work a deal where they get commissions for some period of time for establishing the account. These companies are not called systems integrators. Warner is explaining that they also do supply chain management services, which basically means they do a lot of the paperwork and managing of sparing throughout a large network, and ensuring that there is lower total inventory, yet the customer can quickly get spares when needed. As carriers try to run leaner, outsourcing supply chain tasks is a very good way to improve margins. Also, in this downturn, there is probably a trend towards distributors selling more than they used to, or at least migrating higher up to more complex and higher dollar systems. The reason this makes sense is a distributor sales rep can go into an account and have a big bag of goodies to sell, whereas a specific vendor will only have a few things. Thus the distrubutor's cost of sales is lower per catalog item. And customers like to have fewer sales persons calling on them, as long as they get a good level of technical advice when needed.

3. Systems Integrators are mainly in the enterprise. They do datacom almost exclusively. They also range from technically very competent, such as EDS and Perot Systems, to the myriad mom and pop integrators that come and go by the dozens in local regions. They typically don't know much about telecom, only ethernet routers and firewalls and such, though a really big one like EDS pretty much is skilled in everything. Their market here has been hurt by the economic downturn, but not really from the telecom VC caused meltdown. The recession hurts business spending, and I suspect if you did the numbers, you'd find that their business, overall, is off by about that which you would expect from a typical recession. Telecom, on the other hand, has had a double whammy. Telecom is also suffering from a massive overinvestment hangover, on top of the recession. Until 2 years ago, telecom was the high margin business that everyone want to invest in, and did, to the point of utter ridiculousness. Idiots were getting funded, and those idiots are now going out of business, as they should. But the enterprise has traditionally been a lower margin business, and so while telecom investment was running out of control, enterprise was not nearly so. Thus enterprise systems integrators are not feeling the double hit of VC hangover + recession. (this is also why Finisar has fared better than other components companies - they focused on the enterprise market that others felt was less glamorous due to lower margins).

I am sorry to sound so critical, but you really should re-write this entire article so that it makes sense. It is a good subject and worthwhile to cover properly.

Good Luck!
Iipoed
Iipoed
12/4/2012 | 9:52:53 PM
re: Resellers Pick Up Some Slack
The majority of manufacturers consider channels (how they sell their equipment other than direct) to be resellers. You can call them Distributors, VARS or just plain resellers. This is a fact. Having managed resellers channels for years for a manufacturer(s).
Most VARs simply push which manufacturer is giving them the best terms i.e. 90 day payments etc. Seldom stock much product. Distributors stock quite a bit and seldom will resell a manufacturer's gear if they stock the product.

There are resellers of refurbished equipment including Ebay by the way. This is semantics but OPTO still needed to be corrected
Iipoed
Iipoed
12/4/2012 | 9:52:52 PM
re: Resellers Pick Up Some Slack
Seldom stock much product. Distributors stock quite a bit and seldom will resell a manufacturer's gear if they DON'T stock the product.

Sorry about that, was typing to fast
opto
opto
12/4/2012 | 9:52:37 PM
re: Resellers Pick Up Some Slack
VAR is a term used exclusively in the enterprise market.
opto
opto
12/4/2012 | 9:52:37 PM
re: Resellers Pick Up Some Slack
I think it must depend on what part of the business you come from. "Reseller" was never a term used to describe Distributors where I have been, (large telecom systems companies).

Also, I suspect Distributors would not like to be called "resellers", as that makes it sound like they add no value, an image which they are always trying to avoid.
lilgatsby
lilgatsby
12/4/2012 | 9:52:30 PM
re: Resellers Pick Up Some Slack
Exactly! Enterprise and Telecom are getting closer and closer so terms will start to blend.

Enterprise Resellers, VARs OR Distributors to smaller resellers: Anixter, Graybar, Anicom, Kent-Datacomm, Sprint Nort Supply, etc..etc

Enterprise Distributors: Tech Data, Ingram Micro, Merisel, etc...

Integrators: IBM, TRW, Lockheed, etc...

I belive we are all talking the same talk but on different sides of the fence. Some enterprise-data resellers are trying to become telecom resellers is what I get out of this article...and still I am laughing. Although some Krispy Kreme donuts packaged with a 64 channel DWDM metro system is a interesting offer...but what do you spiff a reseller for selling a $3m system?
lowbandwit
lowbandwit
12/4/2012 | 9:52:24 PM
re: Resellers Pick Up Some Slack
opto said:

A reseller is someone who buys used equipment - often from a bankrupt or distressed carrier or enterprise, or from a company that decided to change out existing equipment for a new vendor - and then tries to resell it to other carriers that use that equipment. It is a bit shady of a business, as the mfgr does not offer a warranty or support, and really wants these resellers to go away, as they hurt sales volumes of new equipment.

___________________________________

I was (unfortunately) part of a start-up carrier who tried *really* hard to get LU to do all the design and configure work and then buy used from a reseller. Needless to say when the sales team figured out what was going on they became very tight-lipped. The weird part was the CEO yelling at the sales team because they weren't 'helping' him out. Funny, LU wanted something for their work!
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