November 06, 2008

Cisco’s Earnings: What You Need to Think About—NOW!

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Another week and more financial earnings reports. This time, the IT tiger, Cisco Systems, reported its first fiscal quarter results for the August through October period after the market closed on November 5. The semi-good news: Cisco reported flat profit with an 8.1% rise in revenue. Bravo, particularly after a ‘bloody’ October. The ‘semi-not-so-unsurprising’ and quasi-bad news: management indicated Cisco will begin to feel the slowing and negative economic effects of the global financial turmoil in its second fiscal quarter (November through January). Translation: management expects a decline in sales of 5% to 10% compared to the same quarter last year. The silver lining: John Chambers (Chairman & CEO) isn't changing Cisco's long-term projected growth of 12% to 17% over the next three to five years.

In typical Cisco style, Chambers announced the company had implemented a number of cost cutting initiatives to combat “fuzzy” visibility. These include:

  • “Pause” in hiring
  • Trimmed travel, meetings, and events budgets, including cancellation of all off-site meetings unless with clients and expanded use of its “Telepresence” video conferencing system
  • Frozen (select) capital projects

The cumulative goal of these steps is to reduce expenses by $1 Billion by the end of its present fiscal year. Yes, Chambers said $1 Billion—with a “B”… And, while spending is being trimmed, Cisco is continuing to make strategic investments in the U.S. market.

Chambers, in his typical matter-of-fact style, said “we are in a bit of uncharted waters,” but the “things we can control or influence are ok.” He also believes the Cisco vision, strategy, and execution are in good shape.

What should we take away from this earnings call? Three points:

  • First, focus on what you can control and influence and double check your vision, strategy, and execution to ensure you, too, are in good shape. Great advice in a back-to-basics market.
  • Second, double check what you are selling or manufacturing to see if it is bullet proof in a down market. As Chambers pointed during the call, network spending is less discretionary today compared to earlier this decade. And even though some customers may “run longer and hotter without replacements,” Cisco’s products are well positioned in an expansion or replacement market.
  • Third, invest in new and adjacent markets to capture momentum areas. For partners, this means looking at add-on or complementary offerings, such as expanding services around your core product offerings

No company is immune to the widening global economic “flu” and neither are its partners who sell and support products. However, since Cisco offers technology for nearly everything between the user and the servers it is trying to access, chances are better than not that Cisco and its partners will have less of a bumpy road ahead and be early beneficiaries of market recovery.

October 28, 2008

Cash is King

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Actor Will Rogers once said, "It's not so much the return on my money that concerns me as much as the return of my money."  How poignant for today’s market.

I’ve talked with a number IT channel partners and vendors over the last two weeks about what the Wall Street mess means for the IT industry—at least for the next two quarters.  The key concern for the channel is about access to credit, while the key issue for vendors is will the channel remain financially viable.

Nearly every morning in the pre-dawn hours, I walk my two dogs.  One guy that I see nearly every day is a commercial banking executive.  I asked last week what may be happening with commercial credit and after an hour long chat, he strongly recommended getting access to as much cash possible and as quickly as possible, including drawing on credit lines, because credit has tightened dramatically over the last three weeks and he expects a significant credit freeze for the next six to nine months, including cancelation of credit lines as banks retreat to risk adverse lending practices.  This view was echoed by a top guy in the IT finance world who said there is a fear if banks freeze credit in the commercial market, it could have an impact on the IT industry. 

Pretty dramatic statements, but given the stock market melt-down and US banking woes, which have spread to Europe, you may need to stop and smell the ‘greenbacks’ in the bank.

We have returned to a market where cash is king.  For most resellers and distributors who live on razor thin margins, cash is always important, but in today’s market, this is the beginning of a new market where you must re-evaluate your business model from a financial perspective.  In other words, if you are not getting back as much as it costs you to get capital, you have no choice but to immediately change your business model—and fast.

Yes, we’ve all heard about this before, but what I’m hearing from a handful of channel partners is credit lines are being frozen.  Some partners thought they had credit lines available for use, but when one tried to use it last week, he learned a hard lesson that there is a difference between a “committed credit line” and a discretionary or signature credit facility. 

So, what can or should you do?  Diversify your credit sources—and fast. 

There are four key sources of credit, but most channel partners are not diversified or diversified enough.  These are:

  • IT Vendors (manufacturers, software publishers):  One of the most untapped sources of liquidity in the IT channel is IT vendors.  Most have been reluctant to offer credit directly to channel partners—for obvious reasons.  But, the savvy move is for vendors to partner with an expert finance company, like GE Commercial Distribution Finance, to support credit to the channel and control risk.  So, you may need to re-evaluate the vendors you sell in order to tap into supported credit offerings. 
  • Distributors:  one of the primary sources of channel liquidity.  Each distributor offers some vendor-support credit programs, as well as some open account terms.  Distributors are a great resource, so working with a distributor to include products in your purchases that come with financial support may bring a couple of profit points into your deal.

  • Committed bank credit lines:  traditional credit lines, but make certain you read the fine print to ensure you are operating within the “covenants” of the agreement regarding your balance sheet strength, DSOs, inventory levels, and so forth.  In other words, now is not the time to give your banker the opportunity to close or reduce your bank line.

  • Discretionary credit facilities:  this is similar to the consumer equivalent of a HELOC.  If you read the smallest fine print, most banks can decline a draw on the credit line for any reason, at any time.  For many channel partners, these are the typical bank credit line, so don’t count on this line in a bear market unless you want to immediately draw on the line and sit on the cash—which I do not advocate because of the potential risks.

That said, a key benefit of drawing in the credit line is that the money is there and available for use.  But you have to protect it to ensure you won’t lose it.  In other words, the stock market is not the place for safe keeping!  The negative is you have to pay for any borrowed money now, even if you don’t need it now.  And, a big draw on a credit line could trigger your bank to descend on your business to review your financials. 

How much of your credit should come from each source?  For my money, I’d say:

  • IT Vendors (manufacturers, software publishers):  40% to 60%
  • Distributors:  30% to 60%
  • Committed bank credit lines:  25% to 50%
  • Discretionary credit facilities:  less than 10%

Finally, it’s worth repeating—cash is king.  Now is the time to:

  • Keep your eye on your balance sheet
  • Ensure you are getting paid within your credit terms—and making payments within your credit terms
  • Continually monitor and manage your financial exposure to your customers
  • Confirm your inventory is in check
  • Diversify credit sources and research availability of supported credit programs each and every time you are ready to bid a deal or purchase through a distributor.  Brand shifting may not be your gig, but if it comes with financing, it may be critical to your survival

In other words, back to basics with traditional ‘blocking and tackling.’

And remember, IT vendors have a big financial stake in the channel selling their products, so it is time that they open their wallet to support sales.

October 24, 2008

Ingram Micro Earnings Call: What We Should ALL Learn and DO

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Ingram Micro announced its third quarter results yesterday.  This earnings call was my eighth earnings call this week.  And yet, it was one of the most important for business survival—if you listened to the messages.

Greg Spierkel, CEO, of Ingram Micro and his top executives, gave a sober market assessment of the U.S., European, Asia Pacific, and Latin American business environment for the technology company.  It was not a pretty picture, other than in Latin America, which is headed by Frenchman Alain Maquet, one of Ingram Micro’s best kept secrets. 

As Spierkel indicated, the July to September period was bumpy and the typical post-summer business bounce was AWOL.  Not much of a surprise given the daily heartburn most have been feeling watching the stock market’s volatility. 

Beyond the Ingram Micro regional performance snap shots, which anyone involved in global business should study, management provided business priorities that are applicable to ever IT business—VAR, distributor, hardware manufacturer, software publisher, and so forth.  Here’s an excerpt of three Ingram business priorities that we should all immediately adopt: 

  • Continually align operating expenses with the declining demand environment
  • Focus on improving profitability through old fashion belt tightening and new growth investments
  • Focus on your (customer) sweet spot and, when necessary, prune unprofitable business relationships

Concise.  Thoughtful.  Actionable.  On point.

There is no doubt that some geographies and businesses are facing the worst economic environment in years.  As Spierkel pointed out after the earnings call, “the big question that hangs over all business, not just tech, is when is the recovery and what form will it take.  Until then, many of us are in for more choppy times.” 

So take a page from the Ingram Micro play book and get ahead of the pain cycle.  These Ingram Micro business priorities will help every business weather the chaos, no matter if it is six months or three years. 

October 17, 2008

10 Steps to Helping Your Customer’s Weather Market Turbulence

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Chances are better than not that customers are or have told you that end of year and 2009 IT purchasing and projects may be scaling back.  Here are my thoughts about coping with the present market challenges.

  • Audit your customer’s IT infrastructure to help them prioritize IT spending for the next 14 months
  • Identify best practices in your customer’s industry to help your customer understand opportunities and challenges with particular focus on where IT can create productivity gains in the business
  • Look for opportunistic buying.  As we move through the last calendar quarter with uncertain and possibly sluggish demand, IT manufacturers and publishers will need to move products through the supply chain, so now is the time for deal making.  In other words, don’t be shy about asking for special pricing and other incentives.  If you can’t get it with your primary vendor brand, looking at other brands cost savings and margin profit opportunities
  • Have a heart-to-heart chat with your distribution account representatives.  They need to move significant volumes of products, particularly in CQ4:08 and into CQ1:09 and they are great resources to find options and possibilities
  • Talk with your top three IT manufacturers and software publishers to ensure you are taking advantage of and receiving the maximum benefit of every program they offer or subsidize
  • Look at financing tools to help customers finance IT products and services through leasing, extended payment plans, deferrals, and trade-in allowances.  Finance companies are still in business and, in some cases, are being paid by tier 1 brands to wraps financing opportunities into sales programs.  With access to credit challenging in today’s market, financing experts are more likely to lend based on the strength of a customer’s balance sheet
  • Evaluate the services that you provide to determine if you can provide them to customers at a lower cost than they are currently paying for them through other 3rd parties or employees.  Whatever the project, providing the customer with a lower cost option could be the beginning of a long-term or expanded relationship
  • Assess the value you deliver to your customers.  I know that most partners don’t have the time to think about their business, but this is the time to make certain that you are not just delivering value, but you are delivering the right value that will make your customer’s more successful, profitable, and drive costs out of their business
  • Bone up on what your competition is doing.  Very few partners have the time or resources to evaluate how they stack up against competitors.  Now is the time to make certain you are competitive in your offerings and pricing.  And, you don’t want your competitors to snatch your profitable customers away from you
  • Now it the best time to roll-up your sleeves and build a trusted partner relationship with your customers.  You want to give your customers an on-going reason to pick-up the phone and talk with you even when there is no transaction or project on the table

Just remember, the strongest relationships are started and stopped during times of stress, so make the market chaos a silver lining for your business plan and customer retention and growth strategy.