B2B Forecast: Windows 11, Hybrid Work Create Growth Opportunities

Analyst Mike Crosby of Circana talks about the B2B sales forecast through 2025, including what solution providers should expect from the impact of Windows 11 migration, hybrid work, lingering effects of supply chain challenges and channel opportunities in vertical markets.

[Video Transcript]

Jennifer Follett, Executive Editor, CRN: This is Jennifer Follett with CRN, and I am here with Mike Crosby of Circana. Mike, thank you for joining me today.

Mike Crosby, Executive Director, Circana: You bet, thanks for having me again.

Follett: It’s a pleasure to see you. We are here to talk about some of the more recent research coming out of Circana, the Future of B2B Tech Report. Tell us a little bit about what that is.

Crosby: Future of B2B Tech, we’ve been doing it now for about a year and a half, and it combines three different sets of data. First of all, historical data that we have and generate significant amount of POS history. It’s also managed by macroeconomic indicators that we use third party for. Then lastly, it’s judged by myself and the staff that we have in thought leadership. So it’s a tool really used to generate a forward-looking forecast, not only for the balance of this year, but its units, dollars, ASP (average selling price) out through 2025. It’s published twice a year, and to your point, we just published the most recent one.

Follett: Give us maybe a high-level view of some of the most interesting points that came out of the most current round of round of research that would really be something the solution providers need to be aware of.

Crosby: Yeah, I think just starting off from the top, I mean, the question I get more often than anything is where’s the bottom? When’s the bottom? And when do we anticipate something to be able to turn around both hardware, software, maybe cloud. And the good news with the tool, it provides us that visibility.

So to your point, high level, early seeing 2023, really finding the floor, and then we’re looking to see some expansion in growth beginning in 2024, accelerating even more in 2025. So from the standpoint of where we sit, I think we still have a little bit more challenge to go through for the second half.

We are seeing declines narrow a little bit, but ultimately modeling suggests that we’re going to see some climb out, again, starting in 2024 and then accelerating.

Follett: One of the expected bright spots on the horizon is the state of the PC market, particularly as it refers to refresh. Give us a little overview of what you’re expecting to see there for partners in the next year or two.

Crosby: Great question. That’s one that I field probably 10 or 15 times a day. It’s really specific as we just suggested, because of what occurred during the early stage of the pandemic, and then ultimately we saw supply chain kind of improve, we saw a little bit of a pull forward that was occurring within B2B and we saw a lot of devices in 2021 and in 2022, and then come out in 2023, we were down pretty materially.

So part of this is just that normalization that’s going to occur when there’s some pull forward. But what we’re excited about is based on a couple of different factors, we’re anticipating to see a nice turnaround and recovery really beginning modestly in ’24, accelerating in the second half. And then, as I said, really significantly ramping up as economic conditions get a lot better, and you’re going to see business investment come back.

We’re anticipating the cost of capital and some of the other things that can restrict investment right now beginning to improve. As we’ve already been seeing inflation continues to come down. We’re nearing that target point of about 2 percent, and we believe once that occurs, and if we can keep unemployment relatively in check, the expectation is we’re going to start to see that acceleration on business spend and business investment.

And to your point on refresh, it’s timing out roughly about a four-year window, which is pretty consistent with what we’ve seen historically as far as time for people to manage a technology refresh.

[Related: Software Channel Trends For 2023 And Beyond]

Follett: Another driving factor in that potential refresh as we look forward is Windows 10. Microsoft’s planning to sunset that in 2025. So what’s your take there on how that’s going to impact the market?

Crosby: It’s going to be interesting. In fact, I’ve had a number of calls over the last couple of weeks, chatting with partners and other contacts that it’s a real issue if people wait. And so what you’re starting to see is people anticipating this move, timing it in an alignment with this 2024/’25 refresh, and ultimately, I think you’re already seeing a lot of activity, people wanting to do it sooner than later.

Rough estimates I’ve seen, there’s about 70 percent of the Windows install base that still operating Windows 10 or older, so there’s going to be a pretty significant migration, and I think the other benefit of this, which is really going to be nice, is there’s also a minimum performance requirement around processor, storage, memory, GPU, etc. that’s going to really help drive up ASPs a little bit, for a little bit more performance-driven solutions.

So I think you’ve got the convergence of kind of some nice timing. Economically, we’re aligning to a really nice position. Inflation meets the target. We start to get interest rates possibly cut mid-2024. You’ve got that four-year refresh where you’ve got companies now investing and looking to refresh that technology, plus that added kind of leverage that’s going to be this Windows 11 migration and needing to get it done sooner than later before the support times out. So again, I think rarely do you see three or four key things really aligning in unison, and I think for this recovery that’s one of the things that we’re excited to see, and I know the channel is as well.

Follett: Do you see solution providers maybe encouraging those refreshes a little earlier because the pain of the supply chain issues is still very much in people’s memory?

Crosby: No question. I think you’re absolutely right. And in fact, as I mentioned, we’re hearing more and more of that RFP, RFQ activity is up, and part of that dialog is certainly that migration. People don’t want to wait to the last minute, especially midsize and enterprise-level companies. They want to make sure they’ve got plenty of runway in the event they run into some challenges or anything along the way on the integration, they can address those pretty easily and without a ton of impact to their business overall. I think people have been through it once, or twice, and now they’re kind of comfortable in knowing the better we plan and the earlier I think that we start, I think it’s better. And to your point, I think the channel partners in general are really seeing the opportunity to balance both services, product, as well as the integration and configuration.

Follett: What about the supply chain issues? Where do those sit now and what’s the expectation for those issues, whether they still even exist or not, in 2024 and in 2025?

Crosby: It used to be my No. 1 question and now it’s dropped to probably four or five, but it’s still there. We are still seeing the healing kind of a supply chain continue. There are certain areas of it still a little bit fragile, but I think from the standpoint of becoming a smarter, more intelligent supply chain, you’ve got redundancies now built in, you’ve got new technologies that are built in. You’re also getting more, as we’ve already seen, kind of this deglobalization, you’re seeing on-shoring of now semiconductor here with the CHIPS Act. You’re seeing now, looking at alternatives to China, like looking at the Philippines, looking at India, looking at Vietnam, where lower cost of labor, but also in some cases, they’re a little bit more available and ready to be able to manage China-plus-one as a strategy. You’re going to see continued more and more of that.

I will tell you, there’s a couple of things kind of smoke on the horizon. One, we saw potentially some labor that was an issue on the West Coast ports and then it migrated up to Canada. Looks like both of those were addressed. But one other one that’s still lingering is they’re having issues at the Panama Canal. They use a lot of the freshwater capacity to fuel and fund and to flood the docks as they migrate ships through. And the challenge is right now, the drought is so severe, they’re actually having to lighten the loads, less frequent, and that’s actually driving up a little bit of cost.Now that’s for the East Coast sale, but for the most part, I think if nothing else really changes, I think you’re going to continue to see good pricing. I think you’ve got good capacity that’s available. And I think once the labor was addressed on the West Coast, I think we’re in much, I think, calmer kind of territory relative to what we can expect.

The other thing that I will add just quickly on the supply chain is inventory levels. I know we saw, because it was so irregular between demand and supply, we also had challenges with supply chain where it was a lot of times kind of feast and famine, we got too much or we didn’t have enough. And as we ended really kind of 2022, we saw this glut of supply in certain categories, certain price bands. And I think for the most part, not in all cases, but in many cases, we’ve seen a lot of that deleveraging that’s been occurring in 2023 in getting those inventory levels back down again. So we can find some kind of normalization of supply chain. And I think we’re getting closer to that. I do think you’re going to still see more buffer. I think people have a long memory relative to running out of supply. Especially as we start to see demand begin to accelerate they want to be careful that they’re not going to run out. So that’s where I think they leverage, obviously, distribution pretty significantly to make sure that they’ve got what they need and when they need it. So I know disties have really kind of spun up their business and I think they’re prepared to manage for the increase because everybody is looking for the bottom to be over and certainly start to see this climb out on top.

Follett: We’ve talked about supply chain quite a bit on our last conversations. We’ve also talked a lot about remote work and, you know, the trend right now seems to be maybe a pullback on that by some companies and more mandates to get people back in the office. How is that impacting IT sales right now?

Crosby: Yeah, it’s a real challenge, I think. There’s a lot of midsize and enterprise-sized companies that have made some modifications to their original work-from-anywhere planning. And as they’ve seen the economy slow down a little bit, you’ve seen a little bit of leverage swing back towards the employer. So in many cases, they’re eliminating a lot of that variability that they had. They’ve also got a lot of investment that’s been made in core headquarters locations that were basically sitting vacant. So I think what they’re trying to do is with rescinding some of that, they also realize they have to set up the office differently, which ultimately brings some opportunity as you do some reconfiguration and reconfiguring of these office environments. How do you take advantage of hoteling with different space that you have potentially if you have three days in, two days out, and all those different iterations in between?

Certainly more collaboration software, certainly we’re seeing more investment continue to be made in ways that we can work more collaboratively and more effectively. So while it’s been changing from the standpoint of now this migration kind of back, there’s still going to be an element, certainly, that’s there. It’s not maybe to the extreme that we saw that also fueled a lot of redundancy, right? You had to have multiple docking stations, multiple displays. You had to have this redundancy in multiple of these environments. So maybe some of that starts to settle down a little bit. But again, I believe you’re going to see more investment needing to be made now to optimize these office environments to really be able to keep people as productive.

One of the things, I had an interesting meeting that happened a couple of weeks ago, and they had some unofficial polling with some of their employees. They said, you know, it wasn’t bad being back in the office, but they felt like they had to get home that they could really get a lot of work done. So they were in different environments, then their home space was actually tuned now to be more productive than ultimately the space that they were working in within the office environment. So there’s going to be some balance that’s going to be needed to be done.

Follett: For the channel in particular, the software category, security in particular, has been very strong throughout the dips that other categories have seen. Is that continue through all the way into 2025, that strength?

Crosby: You are, you’re still seeing that as a significant portion and you’re likely to see that continue. The good news is, and as we look at the outlook moving forward, we’re still seeing, again, good double-digit cloud growth, even in 2023. Software is a little bit more modest, but to your point, security is still a significant driver of that. Also the collaboration, also just general productivity tools and management. So those three areas really continue to be that, and we’re anticipating that’s going to likely accelerate. So we’re in the forecast as we look at it, IT hardware is seeing that compression that’s going on mainly around devices. We still see actually decent growth that’s occurring even in ’23 with software and with cloud, and that expectation is that’s going to actually accelerate.

Follett: Say partners are looking ahead to 2024, even into 2025. What will be the trouble spots when they get to that point?

Crosby: 2024, I think what you’re going to see is you’re going to start to see an improvement on a comping year over year. Now it’s fairly easy to do that when you saw 2023 with pretty significant declines around devices. But you’re going to start to see the device number begin to uptick a little bit and then really build some momentum, I think, in the second half of 2024. Communication continues to still be great. You’re still seeing a lot of investment that’s being made around those areas. You’ll likely see monitors and displays kind of lag a little bit on PC, but ultimately see some acceleration second half.

And then as I said, ’24 is kind of this, lack of a better word, it’s kind of a transition period. Momentum is starting to build. And again, at the same time, you’re seeing these improvements being made, where inflation’s coming down again and all the things that are going to help drive additional investment by business are improving. So I think once we get to that second half and rates start to get cut, you’re really going to start to see that growth. And as you had said, software, cloud, continue to be double digit. The IT hardware space, though, is really where that improvement is going to come, and a lot of that’s going to come out of devices.

Follett: What about if you look at specific vertical markets, maybe government, maybe medical, education, what are trends there that the channel should be preparing for?

Crosby: Yeah, another great question. I get asked quite a bit on which sectors are performing now, and where do we see the opportunity as we head forward. And right now what’s interesting is there’s probably three or four that are doing reasonably well, actually, No. 1 probably being public administration. If you look what was approved again about a year and a half ago with the Biden administration around the $1.25 trillion on the infrastructure package. While everybody saw that it wasn’t really kind of, you know, ready-to-go day one. That there was going to be some lead up, budgeting, selection of vendors, etc. And so you’re starting to see that now begin to roll out or accelerate. So you’re already seeing about an 8 percent growth.

Government’s certainly going to carry forward not only in ’24, but in ’25. You’ll start to see education come back a little bit. Education today is still down, still a significant part of the business, but running about 6 percent behind last year. You’re also seeing areas like oil and gas, and you’re seeing things like that do well. So if you look at some specific kind of areas: construction, doing well, oil and gas, and as I said, government. The areas that we’re really challenged right now and unfortunately, it’s kind of, we’ve even heard people dubbed this, kind of, the tech downturn a little bit. We’re in the information sector, information vertical. And that would align with Meta, that would align with Amazon, that would align with Alphabet. So large tech companies, you know, we’ve seen some of those shifts that were going on. That’s probably the biggest material decline that we’ve seen within B2B. They’re down about almost 40 percent on a year over year basis. Significant portion of that too, was device. So where you saw that sector leading the last couple of years, it really helped accelerate the device number. And where you see now this sector is really kind of seeing some compression. It’s a double hit relative to some of the impact on some of the other categories. But as we climb out of it, I think what you’re going to see, health care right now is about 5 percent decline on a year over year basis. But expectations are good economies, bad economies, health care is health care. We’re going to continue to see that investment continue to grow and scale. So that looks good for the future. Education looks good for the future. Government, as I’ve mentioned earlier. Professional and scientific will look good. Finance and insurance. So any of those that are still marginal today, they really align nicely as we get into ’24 and ’25.

One thing that we are doing too, Jen, that’s kind of interesting: We have the ability to cut data now, not only by sector vertical but also by small, midsize and enterprise. So we actually can see now that performance and that trend going on. And a couple things kind of jumped out I thought I’d share with you. One is if you look at it from a distribution, rough numbers, midsized businesses that are basically 100 to 999 employees represents about 50 percent of the channel business. So it’s about half. And then you split enterprise and small business about 25 percent/25 percent. What’s interesting, though, is midsize has fallen probably the most between 13 and 15 percent year over year. Enterprise is near that, but slightly better. Small business was the surprise for me, that IT spend is only down about 8 percent. Normally it’s the opposite. Normally, small business, because they tend to be a little bit more financially impacted by downturn, They don’t have a lot of operating flexibility. In many cases, small businesses stick with technology longer, but in this case, we’re actually not seeing it. Now, some of that is adoption of better software, adoption of services. You’re also seeing additional things around cloud expansion.

So it’s a little bit more diversified but it was an interesting data point that came out of it that I was a little bit surprised by.

Follett: Is it that because small businesses have gone longer without refreshing and now they need to? Is that where they’re at?

Crosby: I think so, yes. Even though they haven’t fallen off as much, again, what typically happens and you’d mentioned earlier in the in the podcast around refresh, typically small business sticks with products a little bit longer than midsized and enterprise. Midsized/enterprise on average, pretty good about four-year refresh. Small business tends to be more 5 to 6 years, and if you go to desktops it’s even longer. So the challenge typically with small business is they, again, don’t have the funding in many cases, and they stay with lower technology longer. But they’re also seeing that loss in productivity where older devices tend to break down more, you have more service challenges and they’re not quite, honestly, as efficient. So they kind of have to balance that a little bit, but I agree. I think once the economy really starts to show improvement and you start to see some acceleration in probably mid-’24, I think you’re going to see small business really jump in and start to do the things that they know that need to be done.

Follett: All in all, the big view. We’re kind of at the bottom now, looking ahead at an upward trajectory. What are your numbers then, the full-on growth numbers, this year, next year, 2025?

Crosby: If you look at it from a revenue standpoint, 2024, we’re up, as I said on revenue, we’re up about 3 percent if you look at it for ’24 versus 2023, but then you’re going to accelerate to about 7 percent in 2025. You’re also going to continue to see ASPs still be compressed a little bit, but that’s going to gain some relief as we get into a stronger, growing economy. And other than that, you’re going to start to see ASPs probably creep up just a little bit, between 2 percent and 3 percent. So all in all, I think, like I said, you’re going to start off a little bit modest, but certainly good news, and seeing a positive comp mainly in the first half. Look for acceleration, second half and then ’25, get ready. I think there’s going to be a real nice opportunity, really for everybody.

Follett: Sounds like a lot of cause for optimism.

Crosby: Yeah, I agree, I agree.

Follett: Excellent. Well, Mike, thank you so much for joining me. Really appreciate it.

Crosby: Always a pleasure. Thanks for the time. Appreciate it.