Enterprise Prospects Have VARs Looking Up

The June CRN Business Spending Survey, which polled 125 IT executives of companies with at least 1,000 employees, found that enterprises are attaching greater importance to technology expenditures. Of the 19 hardware, software and Internet-related technology categories that CRN monitors regularly, 17 showed a higher level of spending priority in June vs. March, the last time large companies were surveyed.

Security topped the enterprise market's spending list, with intranet development, Web services, wireless and e-commerce also tabbed as key priorities, according to CRN research.

"The enterprise customers are doing serious upgrades--server consolidation, blade servers, Itaniums. It's really happening in the large enterprise," said Dennis Hunter, owner of Missouri Information Solutions, a Kansas City, Mo.-based solution provider.

Other than the usual summer lull, there hasn't been any enterprise spending slowdown, according to Julia Grant, founder and CEO of Adraft, a Fairport, N.Y.-based engineering management company and Autodesk premier partner. Adraft's sales were up 50 percent year over year in the second quarter, she said.

"We had a lot of deals come through that we had been working," Grant said, adding that July sales so far have been better than those in July of the previous two years. And for the full year, she expects Adraft's sales to top $2 million, up from $1.4 million in 2003.

Yet financial news in the enterprise software arena earlier this month would seem to indicate that business has slumped. Enterprise ISVs such as PeopleSoft, Siebel Systems, Veritas Software and Computer Associates International, among others, said sales and earnings for their most recently ended quarter will fall short of earlier estimates. Similarly, IBM attributed flat year-over-year software sales in its second quarter to the same deferrals in software spending that led some ISVs to issue sales and earnings warnings.

In a conference call with financial analysts last week, IBM Senior Vice President and CFO Mark Loughridge said the company saw an "overall disappointing software performance" but remains confident that big software deals will close in the third quarter. "The number of large deals was down [in the second quarter], and as a result our average deal size declined," Loughridge said, pointing to a longer sales cycle. But most of the deferred deals "still represent good opportunity for us," he added.

Adraft's Grant scoffed at enterprise software vendors' cries about a slide in large software deployments at the end of the second quarter. "It's amazing. Every summer, I see these reports out of software vendors. They act like it is a brand-new phenomenon," she said. "They also take credit when the economy gets better."

That view reflects the findings of a new study by The Yankee Group. In a survey of 1,100 IT administrators, the research firm concluded that eight out of 10 businesses will have launched a major software upgrade by year's end. The upgrades are expected to range from client/server and off-the-shelf applications to custom software, and take place alongside hardware and network infrastructure investments, The Yankee Group said.

The market flux has solution providers speculating whether more growth will occur in the enterprise or in smaller accounts. Nevertheless, they agree that spending growth will continue.

"Now it's the businesspeople who are saying, 'This is the functionality I want, and this is what I'm willing to spend,' " said Srini Voruganti, vice president of Pegasus Knowledge Solutions. Business at the Schaumburg, Ill.-based infrastructure solution provider is up 17 percent this quarter, Voruganti said.

A big reason for such optimism is that a rising number of customers are pulling the trigger on new projects and purchases, solution providers said.

According to the June CRN Monthly Solution Provider Survey, the channel's overall expectation for near-term IT spending remains high. In the notebook and PC server segments, particularly, VARs are more encouraged about sales prospects now than they've been in several years, CRN research found.

"Customers are doing new projects, especially in storage and security, and that's a good thing," said Tracy Barney, vice president of Computer Tech, a Houston-based solution provider and IBM business partner.

Overall, VARs' sales expectations dipped from the four-year high registered in May, with drops in their outlook for networking hardware, networking software and Unix/RISC server business. Yet that decline was almost entirely balanced out by the channel's soaring sales expectations in the notebook, desktop and PC server spaces, the CRNsurvey found.

Rich Baldwin, president and CEO of Nth Generation Computing, a San Diego-based solution provider, said the rally in IT spending has helped lift his company's run rate 10 percent higher than it was in the first half of last year. "June was my biggest month in bookings for years," Baldwin said.

While overall business technology spending appears to be picking up steam, customers aren't spending willy-nilly, as many did during the Y2K upgrade cycle, solution providers noted.

"They're showing caution in what new projects they do and when the projects go through," Computer Tech's Barney said. "The environment has opened up, but it's not a free-for-all."

And some in the channel may be under more pressure than others. For instance, CRN research found that the percentage of VARs citing custom systems as their best-selling PC brand slipped in June compared with May. White-box desktops, PC servers and Unix/RISC-based servers all saw declines, though custom-built notebooks saw a slight increase. Some system builders said branded vendors are starting to turn up the heat to counteract the white-box segment's steady market-share gains.

"The tier-one players have really decided to be ultra-competitive. They've really set out to essentially take business from our loyal customers and to do so with price," said Steve Bohman, vice president of operations at Columbus Micros Systems, a Columbus, Ohio-based custom-system builder. "That has certainly added to the challenge of channel members."

Tier-one system players adding market share included Dell, which gained 5 percent share in the desktop space from May to June, and IBM, which picked up 8 percent share in the Unix/RISC server space during the period.

On a more positive note for system builders, a component supply crunch in May eased up in June, according to CRN research. For example, 21 percent of custom-system builders surveyed last month indicated severe or moderate shortages in microprocessors, down from 28 percent in May. Likewise, the percentage of white-box makers reporting moderate to severe shortages of motherboards fell to 17 percent from 27 percent in that time. Shortages also eased in memory and hard drives.

At this time, it's unclear if the supply constraints lessened as vendors prepared for the back-to-school season buildout, or if other factors played a role. Intel, for one, said in its second-quarter financial report that it encountered an unexpected supply imbalance, which the chip giant attributed to a new manufacturing process and a slower-than-expected ramp up of a new desktop processor. As a result, company executives said, average selling prices could decline in the third quarter.

JOSEPH F. KOVAR and STEVEN BURKE contributed to this story.

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