Berkeley, CA February 4, 2002 Despite having weathered the worst of last year's economic storm, the networking equipment market is making cautious moves into 2002, according to high-tech consulting firm Global Touch Inc., which announced the results of its quarterly Channel Tracker report focusing on networking equipment.
The survey monitors the information technology (IT) networking equipment channel in both the United States and Europe, examining such factors as demand, supplier outlooks, pricing and inventory levels. In its third consecutive quarter of tracking networking equipment issues, the Q4 2001 report, for the period ending December 31, 2001, includes data obtained from almost 500 IT industry channel partners (i.e. distributors, systems integrators, VARs, and other resellers).
According to the report, three key indicators what Global Touch terms a triple whammy' collided during 2001 and now have the potential to create significant challenges for networking equipment suppliers and their channel partners in 2002: anemic demand, margin compression and declining average sales prices (ASPs). Data from the Networking Equipment Channel Tracker survey suggests that there are cumulative imbalances in these indicators. "When two or more of these indicators come under pressure, the process for making money gets out of balance, forcing channel partners to compensate by selling more products or changing their business models to achieve the same overall profits," said Denise Sangster, president and CEO of Global Touch. "But 2001 was a year where adjusting business models for out-of-sync indicators in order to protect deteriorating bottom lines was difficult at best, if not impossible."
Even more problematic is the drop in the networking equipment 'attach rate', according to the report. Key technologies, such as networking equipment, servers, and some software applications, drive strong additional revenue in add-on hardware, software bandwidth and services. "We estimate that the attach rate at the end of 1999 was approximately 1:14. That means, for every $1 in networking equipment sold, an additional $14 in add-on products were sold or provided as a result of the networking equipment sale." But as demand plummeted over the last two years, Global Touch estimates that the attach rate fell to an estimated 1:3.7 in the fourth (calendar) quarter of 2001. "Thus, cumulative effect of the triple whammy and the compressed attach rate has the potential to form the 'perfect storm' in 2002."
In addition, the Q4 Networking Equipment Channel Tracker also looked at "abnormal" pricing pressure in the channel and asked participants if they had seen special deals, including manufacturers selling below channel prices to capture business. Sixty-four percent of European respondents indicated that they faced pricing pressure from brokers or liquidators. Thirty-six percent of U.S. respondents indicated that they faced pricing competition from vendors selling below best channel prices, while 31 percent indicated that all prices in networking equipment were down by at least 20 percent.
"The European data confirms that the channel's inventory discipline is indirectly fueling vendors reliance on the emerging brokers or liquidator channel, which is selling new, but excess inventory. The U.S. data shows pricing pressure, but also that suppliers are willing to compete directly against authorized channels for business."
The latest edition of Networking Equipment Channel Tracker also shows that customer demand for networking equipment was well below seasonable levels. "Seventy-eight percent of U.S. respondents and 55 percent of European respondents indicated that the network equipment sales [revenues] were flat as compared to the prior [3rd calendar] quarter. These are alarming numbers and indicate that the most crucial quarter of the year, which often accounts for up to 60 percent of the year's profits were below seasonal levels," stated Sangster.
Some of the other key findings listed in the report are:
· Revenue Expectations Both U.S. and European respondents reduced their expectations for the quarter. Based on reduced expectations, 92 percent of U.S. and 95 percent of European respondents met revised (lowered) revenue plans.
· Gross Margins 91 percent of U.S. respondents indicated that gross margins were in-line with expectations, but 59 percent of European respondents indicated that gross margins were below expectations.
· Y/Y Revenue Comparison In year-to-year comparison for the fourth quarter (Q4 2001 compared to Q4 2000), 79 percent of U.S. respondents and 65 percent of European respondents indicated that revenues were flat.
· Sales (CQ1:02) During the first quarter of 2002, 54 percent of U.S. channel partners expect sales (revenues) to be down 1 percent to 9 percent or moderately down 10 percent to 20 percent as compared to Q1 2001. 53 percent of European respondents expect sales (revenues) in this same period to be "flat" (no increase or decrease) or moderately up 1 percent to 9 percent compared to Q1 2001.
· Pricing (CQ1:02) During the first quarter of 2002, 62 percent of U.S. channel partners expect prices to be down 1 percent to 20 percent as compared to Q1 2001. In Europe, 91 percent of European respondents expect prices to be down 1 percent to 20 percent as compared to Q1 2001.
The complete Q4 2001 Networking Equipment Channel Tracker report, including charts that reflect the key data, is available online at the Global Touch Web site (http://www.globaltouch.com/networking) or by e-mailing [email protected]. The report contains all of the survey results for both the U.S. and Europe, including specific information on key industry vendors. Details of the survey's methodology and respondents are included in the report.