Channel Financials: 6 Solution Provider Earnings Reports Show The Power Of Services

Shift To Services Evident In Channel Financials

This was an interesting week for the channel with a number of large solution providers reporting their quarterly financial results. A common theme among them seems to be a slowdown in product revenue accompanied by an increase in services revenue.

Services-oriented focuses such as digital transformation, the cloud and more are taking hold in the IT market, and solution providers that respond with a focus on services, which tend to bring significantly higher margins that product sales, are showing greater growth in earnings even if their top-line growth slows down.

CRN has condensed the financials of six top solution providers. Here’s a look at how they are doing.

Insight Enterprises
Tempe, Ariz.

Third fiscal quarter 2018 ended Sept. 30.
Reported Nov. 7.

Revenue: $1.75 billion, down less than 1 percent year over year

GAAP Net Income: $32.2 million, up from last year's $22.4 million

Non-GAAP Income: $36.3 million, up from last year's $26.5 million

GAAP Earnings Per Share: 89 cents, up from last year's 62 cents

Non-GAAP Earnings Per Share: 91 cents, up from last year's 73 cents

Insight, No. 12 on CRN's 2018 Solution Provider 500 list, said that while total revenue for the quarter fell compared with the year-ago period, the company's rise in income came from strong growth in services revenue. Insight reported North American product revenue for the quarter of $1.21 billion, down about 5 percent from last year's $1.28 billion, while services revenue in the geography rose 24 percent to reach $158.4 million.

Insight expects full-year 2018 sales to grow in the mid-single-digit range.

Office Depot
Boca Raton, Fla.

Third fiscal quarter 2018 ended Sept. 29.
Reported Nov. 7.

Revenue: $2.9 billion, up from last year's $2.6 billion

GAAP Net Income: $60 million, down from last year's $98 million

Non-GAAP Income: $172 million, up from last year's $167 million

GAAP Earnings Per Share: 11 cents, down from last year's 19 cents

Non-GAAP Earnings Per Share: 13 cents, down from last year's 14 cents

Office Depot, No. 12 on CRN's 2018 Solution Provider 500 list, reported a 1.1 percent rise in product sales to $2.45 billion and a huge 123.7 percent jump in services revenue to $434 million.

Office Depot's Business Solutions Division saw sales of $1.4 billion in the quarter, up 6 percent compared with last year due to the impact of acquisitions and e-commerce growth, with sales in adjacent products, core supplies and services leading the growth. However, without the acquisitions, sales would have grown only about 1 percent. Its Retail Division saw a 6 percent drop in sales to $1.3 billion caused by planned store closures and the adoption of new revenue recognition standards. Its CompuCom division reported sales of $268 million in the third quarter, down 4 percent year over year due primarily to a reorganization at one of its largest customers.

ePlus
Herndon, Va.

Third fiscal quarter 2018 ended Sept. 30.

Reported Nov. 7.

Revenue: $701.6 million, down 5.8 percent year over year

GAAP Net Income: $18.0 million, up 4.5 percent year over year

Non-GAAP Income: $29.9 million, down 10.3 percent year over year

GAAP Earnings Per Share: $1.33, up year over year from $1.23

Non-GAAP Earnings Per Share: $1.53, down year over year from $1.68

ePlus, No. 34 on CRN's 2018 Solution Provider 500 list, said its technology segment net sales fell 7.1 percent compared with last year, while financing segment sales fell 19.0 percent due to a decrease in post-contract earnings from the early terminations of several large leases in last year’s quarter.

President and CEO Mark Marron told analysts that the revenue fall came from a couple of issues, including a large competitively bid project, most of which was delivered in the first half of the year, and a change in business model that shifts how ePlus recognizes revenue.

Services, however, continued to be a bright spot. Marron pointed to ePlus's higher-margin services business lines as one key contributor to the company's increased gross margin in its technology segment. As the company moves to transform its business to meet the high-demand areas of cloud, security and digital infrastructure, ePlus is leading with consultative and advisory services and then providing managed services "to create value and impact for our customers," Marron said.

Presidio
New York

First fiscal quarter 2019 ended Sept. 30.
Reported Nov. 7.

Revenue: $731.2 million, up 2.6 percent year over year

GAAP Net Income: $19.9 million, up 26.1 percent year over year

Non-GAAP Income: $36.3 million, up 1.1 percent year over year

GAAP Earnings Per Share: 21 cents, up 28.6 percent year over year

Non-GAAP Earnings Per Share: 38 cents, up 10.5 percent year over year

Presidio, No. 20 on CRN's 2018 Solution Provider 500 list, said revenue was in line with expectations. Product revenue rose 2.5 percent year over year, while services revenue rose 3.0 percent year over year. Digital infrastructure revenue rose 7.1 percent and security 4.1 percent, but cloud revenue fell 16.2 percent compared with last year. The company said the drop in cloud revenue resulted from a shift in revenue recognition from point-in-time accounting to recognition over the life of the contract because of a move to multiyear, recurring revenue contracts.

For all of fiscal year 2019, Presidio reaffirmed its outlook including revenue growth of 3 percent to 5 percent to between $2.850 billion and $2.900 billion and non-GAAP earnings per share in the mid to high teens.

DXC Technology
Tysons, Va.

Second fiscal quarter 2019, ended Sept. 30. Reported Nov. 6.

Revenue: $5.01 billion, down from last year's $5.45 billion

GAAP Net Income: $259 million, down from last year's $265 million

Non-GAAP Income: $573 million, up from last year's $492 million

GAAP Earnings Per Share: 92 cents, up from last year's 67 cents

Non-GAAP Earnings Per Share: $2.02, up from last year's $1.67

DXC, No. 10 on CRN's 2018 Solution Provider 500 list, saw revenue fall about $200 million below expectations due to a slow ramp-up on a few large digital contracts and a fall in its application and maintenance management, said Mike Lawrie, chairman, president and CEO, during his quarterly financial analyst presentation. Even so, digital revenue grew 6.4 percent over last year, while bookings grew 50 percent year over year, he said.

DXC's global business services business revenue reached $2.1 billion, down year over year from last year's $2.3 billion. However, profit margin for the business grew to 18.9 percent from last year's 16.0 percent because of the company’s in-sourcing of contract labor and shifting some operations to near-shore and low-cost locations. Global infrastructure services business fell to $2.9 billion from last year's $3.14 billion.

Unisys

Blue Bell, Pa.

Third fiscal quarter 201 ended Sept. 30.
Reported Nov. 6.

Revenue: $688.3 million, up from last year's $666.3 million

GAAP Net Income: $6.1 million, up from last year's loss of $41.1 million

Non-GAAP Income: $28.6 million, up from last year's $22.7 million

GAAP Earnings Per Share: 12 cents, up from last year's loss of 81 cents

Non-GAAP Earnings Per Share: 39 cents, up from last year's 31 cents

Unisys, No. 21 on CRN's 2018 Solution Provider 500 list, recorded its fourth consecutive quarter of overall revenue growth and second consecutive quarter of services revenue growth. The company also reported strong contract signings with total contract value up 46 percent year over year, with new business total contract value up 133 percent.

For the quarter, services revenue grew year over year by 5.2 percent to $605.6 million, while technology revenue fell 8.9 percent to $82.7 million.