Redherring.com - Westcon distributes a solution... -
[Cached Version]
Published on: 1/30/2001
Last Visited: 1/30/2001
Everyone would like to have Westcon distributing their products, says James Wade, an analyst with Deutsche Banc Alex.Brown.If they are not selling your [ product ], then they are selling someone else's..
As expected, Cisco accounted for the largest portion of Westcon's sales last year with some $ 1.1 billion, or 67.3 percent.Reliance on such a limited number of customers is certainly worth noting as Westcon approaches its public offering.
From a customer point of view, however, purchasing equipment directly from value-added distributors like Westcon, Great Britain's Azlan Group, and the Netherlands-based Landis Limited is a great situation.
...
This structure offers customers a better array of options than are available through one outlet or by working with one networking company, says Mr. Wade.As such, a customer can choose from a range of products from a variety of manufacturers that will be installed by trained technicians.Not only does it give customers more choices, resellers also extend a manufacturer's channels of distribution.
...
Although Cisco's margins stand around 60 percent for the sales it handles directly, Mr. Wade says that the value-added distributors like Westcon only pull in about 15 percent to 20 percent margins on average -- and 30 percent at best.According to Westcon's filings, the company recorded gross margins of 10.88 percent for the nine months ended November 30, 2000.
The discrepancy in margins is simply a matter of moving down the food chain, Mr. Wade notes.The farther away a company is from designing and manufacturing the networking solutions, the less valuable the company is in the mind of investors, and the stock valuation will reflect that over time.And even though Cisco is giving away some of its margin in order to reach more customers, Mr. Wade says that there's nothing stopping Cisco from renegotiating its contracts with the resellers and internalizing more of those sales.After all, says Mr. Wade, every dollar Cisco gives away [ to the distributors ] is a dollar out of its own pocket..
While Westcon's gross margins will always be lower than those of Cisco, the company has managed to grow its revenue stream and secure its margins over time by acquiring the smaller value-added distributors.Prior to 1988, Westcon operated primarily as a sales channel for Nortel, but through its acquisition of Comstor in August 1999 the company became the sales channel for Cisco.And Westcon has continued the roll-up strategy through its 2000 acquisitions of LAN Systems in April, Inacom Communications in July, and CCA Technologies in September.
This strategy has been successful to date, and management intends to use the same approach after the IPO.But the $ 100 million raised from the public offering will not be used for future acquisitions.
...
Nevertheless, Mr. Wade does feel that Westcon could be an interesting investment for many investors.Although Westcon will never capture the type of multiples of a Cisco, he believes the company should continue to grow at a good rate, provided networking firms continue to sell through the resale channel.But in this environment of uncertain capital expenditures, it's clear that growth rates are not quite what they used to be.
So even if Westcon continues down its path of profitability and improves gross margins to around 20 percent, investors may still view the company just as many analysts do today -- as a gauge for the networking market rather than a pure investment opportunity.
Discuss IPOs and IPO trends in the IPO Beat discussion forum, or check out forums, video, and events at the Discussions home page.
14 online sources [ view sources ]
Profile is not claimed [ claim profile ]
