Arrow and Agilysys Cite Weakness in Proprietary Server Sales

Published: November 13, 2006

by Timothy Prickett Morgan

Two of the biggest master distributors of IBM's servers, Arrow Electronics and Agilysys, have turned in their financial report cards for the three months ended September 30, and as you might expect, both companies cited weakness in the sale of proprietary servers--meaning mostly System i5 products and some mainframes.

Arrow, of course, has a vast distribution business, including electronic components as well as IT gear (much like rival Avnet, the other "A" of the three A-named companies who are master resellers of the System i platforms. During the third quarter, Arrow had revenues of $3.45 billion, up 27 percent, and a net income of $85.9 million, up 35 percent. Computer products sales rose by 22 percent in the third quarter, but operating income was only up 8 percent. Sales within the Enterprise Computing Solutions business--which distributes storage and servers to resellers--increased 7 percent. "Our enterprise computing business continued to demonstrate strong profitability and returns," explained William Mitchell, Arrow's chairman, president, and chief executive officer. "Growth was driven by strong performance in storage and industry standard servers in North America, and software in our European enterprise business."

But looking ahead, Paul Reilly, chief financial officer at Arrow, said that the company expected overall sales of between $3.425 billion and $3.625 billion in the fourth quarter. "We anticipate continued growth in storage, security and infrastructure software, and industry standard servers while we expect the traditional seasonal growth in our enterprise business to be tempered by the continued weakness in the proprietary server market, resulting in worldwide computer products sales between $750 and $825 million," Reilly said.

There's that "P" word again, which many people at IBM hate and which Microsoft should have applied to its Windows platform, too.

Agilysys is more focused on reselling servers and storage, particularly through its KeyLink Systems Group, but it does provide services and various IT solutions (rather than just raw IT gear for resellers) directly to customers through its Enterprise Solutions Group. In any event, in its fiscal second quarter, Agilysys saw sales decline by 5 percent to $385 million. The company said that sales were down $9.8 million in the KeyLink Systems Group, and that sales in the Enterprise Systems Group dropped by $10.3 million compared to the year-ago quarter. Hardware sales across all units fell by $19.1 million, or 6 percent; software sales were off 1.7 percent and services sales were down 5.9 percent. (The company did not provide absolute revenue figures for these categories, but if you do the math, then Agilysys had hardware sales of over $318 million in the quarter.)

Agilysys said in its 10-Q filing with the Securities and Exchange Commission that the decline in its sales was "driven by a decline in hardware sales, principally proprietary servers and storage technology."