VARBusiness 500: What You Need To Know

There's good news and there's...good news to report this year, based on the 2005 VARBusiness 500, this magazine's exclusive research package that charts the results of North America's top solution providers during 2004. And that good news starts at the top of the list and winds its way down to the bottom.

First, the top companies--there are more of them than at anytime in the past three years. A total of 57 companies (five more than last year) nailed more than $1 billion in sales (Little Rock, Ark.-based Acxiom brings up the rear guard of this mighty billion-dollar club with $1.01 billion posted).

Not surprisingly, those that crested the milestone were pleased by the feat.

"The most important accomplishment for GTSI this year was that we blew through the billion-dollar mark," says Dendy Young, chairman and CEO of the Chantilly, Va.-based government solution provider. GTSI is No. 55 this year, up from No. 58 last year. "We grew by increasing the depth of our technology practices and by expanding our customers sales teams," he says.

Last year, the threshold for inclusion on the 2004 VARBusiness 500 dropped noticeably. That is, a company gained entry onto the list with $15.3 million in sales, down more than $3 million from 2003. Spin-meisters might argue that due to an active M&A climate, companies got larger at the top of the list while smaller companies getting bought disappeared from the bottom.

But, the good news trickles all the way down to the bottom this time. The bar has been raised considerably this year--up $3.2 million to $18.5 million. While consolidation activity continued apace this past year, new solution providers also flourished.

And VARs grew stronger at every level, according to our proprietary research. Examining the list at various midpoints, this year's No. 201--Sierra Systems Group--posted sales of $115.4 million, while last year's No. 201 posted sales of just $108.3 million. Similarly, No. 300 this year, Paradigm Solutions, recorded revenue of $61.8 million against last year's entry at the same slot, which came in at $59.6 million.

"2004 was a very good year, and it ended phenomenally," says Steve Tepedino, president of Avnet Technology Solutions, Americas. "In large part, that's because many suppliers have been opening up space for partners to play. They figured out the channel is doing a great job for them."

Solution providers that did well last year was smart, with a good sense of focus and a good value proposition, Tepedino adds. "They knew their customer, their geography and the market," he says. "They have good fundamentals and didn't try to grab the world."

CyberCore Technologies (No. 194) is one company from the top 500 that represents the Avnet paradigm.

"We achieved exceptional success in 2004," says Kevin Powderly, CyberCore president. The company more than doubled its sales, from $55.7 million in 2003 to $122.2 million in 2004.

"We knew there would be a huge opportunity in the homeland security space, so we geared our company for it," he explains, adding he expects his company's sales to grow to about $150 million in 2005. "We got all our clearances. There's a tremendous amount of work out there if you have major authorizations from the top manufacturers and you get on their schedules. We have 85 cleared engineers and are hiring about one employee per week."

Up Close With The Big Five

At the top of the list--no surprise--Somers, N.Y.-based IBM Global Services finishes No. 1 for an unprecedented 10th year in a row, this time with an even more muscular $46.2 billion in sales. That's an 8 percent increase over last year, but a significant drop over the 17 percent increase it enjoyed the year before. In addition, earlier this spring, IBM stunned Wall Street with disappointing first-quarter numbers, due, in part, to difficulty closing transactions in the final weeks of the quarter and short-term Global Services signings. Job cuts followed.

"Most of the time, what you find is that 90 percent or more of everything that goes into a business is correct....It's the ability to find the elements that aren't working as well, and to make the right decisions about them, that is often the difference between being just OK and market leadership," said John Joyce, IBM senior vice president and group executive of Global Services, in an e-mail exchange with VARBusiness.

Perennial bridesmaid EDS finished No. 2--again--after a difficult 2004 that saw sales drop 4 percent to $20.6 billion from $21.5 billion, after a sales increase of almost 7 percent the year before that. The company doesn't expect a sales increase until 2006, when cost-cutting measures pay off and vendor alliances bear fruit.

The big story among the 11-digit club (companies with sales of $10 billion or more) is Accenture. The integrator moved up two slots to No. 3 on the list, with 2004 sales of $15.1 billion. Net revenue increased in each of its five operating groups--financial services, government, communications, high-tech resources and products.

The integrator also saw a turnaround in consulting, with a 7 percent increase in FY '04 to $8.59 billion. In addition, outsourcing grew 35 percent to $5.08 billion at the same time that companywide SG&A costs dipped 280 basis points to $2.83 billion, or 20.7 percent of net revenue.

At No. 4, Computer Sciences Corp. (CSC) also had a spectacular year, with a 31 percent revenue gain to $14.8 billion. That's like adding an entire BearingPoint in one year to its top-line growth without adding head count. HP Services dropped one notch to No. 5, with sales of $13.8 billion.

A Composite Look

The VARBusiness 500, the top rung of North America's integrators, powers our national economic engine--both its private and public sectors--and keeps it competitive. Doug Robinson, executive director of the National Association of State CIOs (NASCIO), says his membership looks to "the VARBusiness 500 to bring [the] best practices; to understand politics, culture and business." Robinson says some of these firms can become "a trusted adviser."

Aggregate revenue in 2004 was $333.6 billion for the VARBusiness 500, a healthy increase of more than $14 billion over the previous year when total sales for the 500 was $323.7 billion. Among the solution providers that made the list, products still accounted for a majority of sales: 56 percent. Roughly one-quarter, 27 percent, came from technical services, while consulting services accounted for 17 percent of revenue, the study indicates.

Solution providers were divided on which segments of the market--enterprise or midmarket--provided the most billable action for them in the past year.

"Both segments grew significantly. But on an existing base as a whole, enterprise grew more," says Jeff Medeiros, CEO and president of rs-unix (No. 399). "They spent more to take advantage of new business prompted by the economic recovery and, also, they had more to protect their revenues from the existing customer base."

Adds Jack McDonald, CEO of consultancy at Perficient (No. 306): "Enterprise has always been our key market, with 85 percent of our revenue coming from clients with more than $1 billion in sales. During the Internet bubble, we avoided the easy dot-com money and, instead, invested millions on e-business integration solutions for the enterprise."

To keep operating margins at 13 percent to 15 percent, McDonald's advice is to keep the cost of sales in single digits. "To do that," he says, "you have to drive repeat business with existing customers that are large enough to need repeat demand. Those are enterprise customers."

That said, many 500 members indicate that the midmarket proved to be an increasingly strong source of revenue.

"Our midmarket demand increased quite dramatically in 2004; we increased sales 35 percent in VoIP," Tom Burger, CEO of NEC Unified Solutions (No. 83) tells VARBusiness. "It used to be the enterprise market that drove VoIP."

In general, there was more consistency this year: 89 percent of the current companies appeared on the list last year; 86 percent were repeats in 2004. And, as always, we delved as deep into the P&L portion of the list as members allowed: Of the 121 firms that would reveal their gross-profit margin, 97.5 percent said they were in the black. As for net-profit margins, 89.7 percent of the 97 of the VARBusiness 500 that answered saw gains.

In addition, 221 VARBusiness 500 companies posted sales of $100 million or more this year, up from last year, when 214 VARs reached the $100 million mark. USi, at No. 221, was the last one in. There were 280 publicly held companies populating the list this year compared with 220 privately held companies.

Full-time employment was up this year. Companies reported employing a total of more than 2.5 million people during 2004, up more than 17 percent from last year's total of nearly 2.2 million. Still, more than one CEO noted that finding good workers was still very difficult.

Lew Johnson, CEO at Siwel Consulting (No. 256), says now more than ever "having the right people is key. The only thing that the company is, is the people in it. You can talk about products and services, [but without] the right people, it's not going to work. This is especially true for resellers of my size [80 employees]. They need the drive and initiative to see that building the company will give them money, peace of mind or both."

Nancy Hedrick, president and CEO of Computer Software Innovations (No. 332), which went public earlier this year, added: "Keeping good salespeople was a challenge. Our competitors tend to know who they are and go after them." To find good employees, she relies on competitive pay and existing relationships with workers at vendors or clients.

Vendors of Choice

Microsoft, at 58 percent, once again ranks first as the vendor most VARBusiness 500 members say is important to their businesses. That's a gain of five percentage points over last year. And good news for Hewlett-Packard: The company was cited as the second most important vendor, at 52 percent. Last year, it came in fourth. Conversely, IBM, cited as the second most important vendor last year, came in fourth this year, with 50 percent. Meanwhile, Cisco stayed the course: third last year and third again this year, with 52 percent--putting it behind HP by less than 1 percent. Rounding out the five most important vendors for the VARBusiness 500 is Sun, finishing a distant fifth with 27 percent.

Further, the top technologies VARBusiness 500 companies are buying from these vendors include servers (74 percent of the top 500), storage hardware (73 percent), networking equipment (73 percent) and security software (70 percent).

Rudy Casasola, president of communications at solution provider Presidio (No. 155), says that his company, which produced roughly a 5 percent net profit in 2004, was gaining traction in the past year around VoIP and security. "There aren't that many players that can understand it and do it well," he tells VARBusiness. "As they say, 'Where there's mystery, there's margin.'"

Vertically speaking, almost one out of every five VARBusiness 500 company, 18 percent, said they served the accounting/banking/financial services sector. The federal government placed second, with 16 percent. Coming in third, exactly 12 percent said that manufacturing was their most important industry. Wholesale/distribution came in fourth at 10 percent. And health care/medical/dental was the fifth, with 7.8 percent of the top 500 saying that was their main revenue generator.

Certainly, 2004 was not without its challenges. Jim Carrick, CEO at Strategic Computer Solutions (No. 295), acknowledges that even though it did well last year, "consulting wasn't growing at the same rate as the rest of the business." On the other hand, software was up about 300 percent, he adds.

NEC's Burger says IT integration has become more complex, and that customer satisfaction has become the No. 1 concern. To that end, "the company spent a tremendous amount of money--easily over $1 million--to train its services, sales and marketing team."

Mergers-and-acquisitions activity continued to demonstrate vigor in the market, creating larger total solution providers with broader geographical reaches. The trend compels small solution providers to either partner more frequently with other solution providers to compete, or increase their strength in specific verticals to become the go-to guy for particular engagements.

Between January 2004 and April 2005, a total of 36 companies changed hands, seven of which appeared on last year's VARBusiness 500: Concord EFS (No. 32 last year) was acquired by First Data; Titan (No. 42 last year) was acquired by Lockheed Martin (No. 6 this year); CompuCom Systems (No. 46 last year) was first acquired by Platinum Equity, which then combined with GE IT Solutions, and will still operate under the CompuCom name (No. 50 this year); and Veridian (No. 49 last year) was bought by General Dynamics Advanced Information Systems (No. 28 this year).

In other major acquisition news, American Management Systems (No. 55 last year) was purchased by CACI Group (No. 54 this year). Infonet Services (No. 72 last year) was picked up by BT Infonet (No. 73 this year), and PeopleSoft (No. 82 last year) was acquired by Oracle (No. 38 this year).

On the Horizon

Looking ahead to 2005, many of the VARBusiness 500 players are enthusiastic about the likelihood of another strong year. Vendor partners, sensing a kill in the midmarket, should continue opening up lines to solution providers to make inroads.

"Look at Network Appliance and what they are offering to their solution-provider partners," says Avnet's Tepedino, who believes the upcoming year has the opportunity to be strong if the economy stays healthy. "I think the solution-provider industry can grow twice as much as the technology industry because of the broadening of solutions they will be able to sell."

Siwel's Johnson says that the coming period "will separate the men from the boys."

"Sarbanes-Oxley and the Rudman Act have brought accountability to our customers in a way they've never experienced before. At the end of the day, we will have to give them what they want at a fair price and make them look good," he explains. "Companies that stay on top will have to be flexible, innovative and have the right people."

Rs-unix CEO Medeiros says he believes customers are now, and will be, specifically focused on funding six- to 12-month projects that will show profit to the bottom line. Why that time frame? "It's the period of time in which they're paid," he says.

And Presidio's Casasola says he expects sales to climb about $30 million in 2005 to $210 million, and to hold onto his 5 percent net margin.

"No surprises--more competition and pressures on hardware will remain," he says. "Maybe the industry will see an uptick in storage and video. At Presidio, we're sticking with our knitting."

A wealth of information follows this overview, which is a good introduction to the valuable research you hold in your hands. Thanks to all the companies that participated, and congratulations to the 500 that made the list.