Resellers Pick Up Some Slack
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