New Pinacor Chief To Grow Outsourcing Business

By Richard McCaffery, Staff WriterDistributor Pinacor Inc.'s new leading executive is focused on forming new alliances with suppliers, adding to the company's range of services and growing its outsourcing business. President Jim Manton, who took responsibility for the Tempe, Ariz., company's daily operations when chief executive Robert O'Malley resigned June 1 to pursue other interests, said he is confident Pinacor is headed in the right direction. That is clearly good news for a company whose parent's stock is trading near a 52-week low. Also, one of its major suppliers, Compaq Computer Corp., recently overlooked Pinacor for a key partnership.Last October, Pinacor sealed a five-year outsourcing agreement worth up to $1.5 billion with Electronic Data Systems Corp., Plano, Texas, to provide customization and integration of IT systems. Under terms of the deal, Pinacor is leasing an EDS distribution center in Allen, Texas, to provide the procurement services. Manton said Pinacor is in discussions with about 10 integrators and resellers to provide similar services, and he expects to finalize several new deals before year's end."It's among one of our most important strategies," he said.Pinacor, the third largest computer-products distributor in the United States, distributes computer products and services to more than 25,000 resellers in the United States and Latin America. The company was created formally in March 1998 but has been in the distribution industry much longer.Pinacor is a subsidiary of MicroAge Inc., a Tempe, Ariz., systems integrator founded in 1976. MicroAge executives created Pinacor as a separate business unit last year to clear up confusion among investors and to eliminate the appearance of any conflict of interest between Pinacor's customers and its own, Manton said.The two companies operate as separate businesses in separate buildings in Tempe. MicroAge reported sales of $1.8 billion for the year that ended Nov. 1, 1998, and Pinacor had sales of $5 billion for the same period. As a whole, MicroAge reported a loss of $8.3 million as a result of accounting charges. The company does not break out Pinacor's net income separately.Government revenue represents 6 percent of Pinacor's total business, according to Kelly Ross, director of Pinacor's government and education program. Its government business is growing fast. The company had sales of $310 million in 1998, up from $90 million in 1997. The government unit has 40 employees and keeps an office in Tempe.Ross said he, too, is looking to expand his unit's outsourcing business this year. But to do this, Pinacor has to compete with Ingram Micro Inc. of Santa Ana, Calif., and Tech Data Corp. of Clearwater, Fla. The two big-cap companies are hungrily pursuing outsourcing initiatives in government and commercial markets.Michael Whitney, director of technology research at Advest Inc. of Hartford, Conn., said Pinacor will have its hands full competing for these types of contracts. Its main challenge this year, he said, will be either finding a way to replace revenue lost as a result of Compaq's move to realign its channel strategy, or reducing already lean operational costs to put them in line with the resulting revenue loss.On May 10, Compaq cut from 39 to four the number of distributors that can obtain directly many of its computers. For the Houston computer giant, the move is aimed at improving efficiency in the sales channel. The company selected distributors InaCom Corp., Ingram Micro Inc., Merisel Inc. and Tech Data Corp. as its partners under the program."I think losing Compaq hurt them competitively quite a bit," said Whitney. "They will still be able to carry the Compaq line, but at the end of the day, it comes down to two things for distributors: price and availability."Pinacor did slightly more than $1 billion worth of business with Compaq last year. It represented 26 percent of Pinacor's sales last year, and has been the company's leading supplier for at least the last three years, according to Pinacor's annual report. Still, Manton said Pinacor will continue to be a strong customer of Compaq's, and Ross added that Pinacor buys so much product from Compaq, it can continue to expect large volume discounts to pass on to resellers. "The bottom line in all this is that it still comes down to relationships," Ross said.Meanwhile, MicroAge's stock is trading around $6 a share, near its 52-week low of $4.25 reached in May and down from a high of $18.75 last fall.This is the result of several factors, including the Compaq deal and tough times throughout the distribution industry as competition from direct sales companies, such as Dell Computer Corp. of Round Rock, Texas, increased, computer prices fell, profit margins shrank and the year 2000 problem crept into investors' minds. For the quarter that ended Jan. 31, MicroAge had revenue of $1.4 billion, up 24 percent from the year before, and net income of $2.1 million or 10 cents a share, compared to a loss of $6.1 million the year before. But the results were not good enough to match the expectations of analysts, who predicted earnings of 15 cents a share, according to Zacks Investment Research Inc. of Chicago.MicroAge, however, was not the only distributor that stumbled in recent quarters. Most of the leading distributors failed to meet analysts' initial estimates for the quarter, and some scaled back expectations for the year.Meanwhile, Pinacor had revenue of $1.3 billion for the quarter that ended Jan. 31, up 23 percent from the year before. Net income nearly tripled to $16.9 million.On the government side, Ross has set a lofty goal for 1999. He wants to see $700 million in revenue, a number he said is a stretch. But one way he expects to ultimately boost revenue is by submitting a proposal to hold a General Services Administration schedule on behalf of resellers. The unique plan would allow Pinacor to better serve resellers nationwide by giving them access, perhaps for the first time, to government customers, he said. Imagine a reseller that wants to sell to the government but does not have the resources to hold and maintain a schedule. Pinacor's initiative will open a channel for them, he said.The plan is controversial. "It could very well be appealing to a certain class of resellers," said Joe Corini, president of Computer Marketing Associates of Vienna, Va. CMA is a marketing and consulting firm that provides GSA schedule contract support and business development services. "It could work, but the major dealers want to have their own contract. They want to control their own destiny. On the surface, I don't think it would be appealing to mid and large-size resellers."Very few other distributors hold a GSA schedule, mainly because it can give the appearance the distributor is doing business directly with end users."We have no immediate plans to hold our own schedule," said Matt Millen, Tech Data Corp.'s director of government sales. "It's something that comes up every year. It's a possibility, but it's something we don't want to do because we feel it brings us too close to the government end user."The path chosen by Tech Data and many other distributors is to offer GSA schedule support. In other words, let the manufacturer or reseller hold the schedule, and simply provide procurement and other support services on their behalf.Ross stressed Pinacor will not be selling directly to end users. "Essentially, we are going to have a GSA contract that will be direct, but we won't be fulfilling it that way," he said. "We'll have an agent, and the agent will be a reseller."The whole reason we are doing this is to take the back office [functions] away from the reseller, so all they have to do is focus on the customer," he said.Is Ross worried about creating the perception Pinacor is selling directly? "There's certainly going to be a perception, but all I need is a few minutes with the reseller to explain how it works," he said.