CRN: Tell me about your time at Westcon Group.
John O'Malley: My 10-year anniversary [was a few weeks ago] on 15 March. I joined in a senior finance position and I've been in a senior finance position ever since. The company was a US$200 million primarily US-based Nortel distributor when I got here. A public company called DataTech had just purchased a controlling interest in Westcon, so the distributor was in a position where it had to begin reporting to a public company.
We've done about 16 or 17 acquisitions, a lot of business development and we've expanded not only the geographic footprint but the vendor offering of the business as well. Back then we were looking at data only with Nortel and we suddenly became involved with other data networking vendors, suppliers, and then on top of that we expanded into the voice, security and convergence markets.
We had operations in Australia at that time, although it was pretty small, it was a start-up for us and we had just expanded into Canada from our US operations in New York.
CRN: So you were with Westcon during the dotcom bust in 2000?
JO: Absolutely.
CRN: Are there any differences between this downturn and the last?
JO: From a revenue perspective the dotcom bust was far more dramatic. Back then our revenue had just reached
US$2 billion and overnight it deteriorated. This remained the case for quite a while before we began to grow again. It was extremely dramatic across all parts of the business.
I would also say that at that point of time in this industry, vendors behaved differently than they do today. Our balance sheet was a lot bigger at that time; we paid the vendors slower, we collected our receivables a lot slower and we stocked a lot more inventory at different points of the year. So we were always in this inflated working capital consumptive position. When we became a Cisco distributor, we learnt that Cisco ran a really tight ship from a working capital perspective and ultimately I would argue that it became the model for a lot of our OEMs.
After the dotcom bust, lending and lending restrictions in our industry and lending parameters became much, much tighter. As difficult as that was for a lot of distributors to deal with, we embraced it. I would argue it made us stronger as a company and put us in a better position to weather these types of issues. I would argue that the survivors of distribution today are far more credit worthy than all of the distributors were back at that point in time.
CRN: Does that mean Westcon Group is financially strong at the moment?
JO: Right now banks are only lending to the best customers and I think that this industry and Westcon in particular has made itself a bluechip or investment-grade credit for the banking industry. If we were not we would be suffering what a lot of businesses are suffering today in terms of their ability to get capital. I would argue we were pretty timely in terms of progressively going after and shoring up our credit lines back in 2003 and 2004 when business started to grow again.
We had a nice trajectory of growth within the business and continued to expand during our fiscal year 2005 through to fiscal 2008. We lined up a tremendous amount of capital for the business in terms of committed lines of credit and that's true in all the regions we operate. Also, we put together large syndicates of lenders; all up we have 16 separate lenders around the world. We have about US$780 million in committed capital.
CRN: Do resellers feel this confidence when partnering with Westcon Group?
JO: Yes, vendors as well. I think the resellers out there feel a lot better about who they're transacting business with in this difficult time. We're coming at them with more channel options; the more options that you can have there for someone in a time like this, the better off you're going to be.
When we sit down with vendors we're trying to drive them to bring more options into the channel, to benefit the user, to benefit the reseller and to benefit the distributor.
Furthermore, we've always strived to be a lot closer to our customer, to add more value to the transaction; that's always caused us to have even more active dialogue with customers.
CRN: How are resellers responding to the credit program launched last month: Westcon Group Capital?JO: We're not about having a slick website that determines how much credit a customer can have, it's never been that way. We've always been knee-deep with the customer, with their financials, their situation, their capitalisation and having a greater understanding of what their credit profile is. Our goal has always been to help them achieve their growth initiatives and in doing so I feel we have a closer relationship with our customers.
From an OEM perspective, in the past few years we've seen rationalisation in distribution. When you read Cisco's financial statement footnote it talks about revenue recognition and the third sentence says, "we rely on distributors to determine our revenue". For me, as the CFO of a public company, for a public OEM to have to rely on a third party to tell them how much revenue they can recognise shows an amazing point of reliance.
Whether it's Cisco or a much smaller company, if you're public, you really need someone who can offer transparency, to see the product in the channel and the point of sale data that is absolutely accurate and reliable. It has to come with proper capitalisation, proper systems, proper processes and internal governance. Over time and certainly in the past few years manufacturers have drifted in the direction of larger entities that can really give them comfort in that regard.
There is a lot of logic to taking up financing as channel financing programs have become more robust. However, it's amazing that in the past couple of years leasing programs haven't been adopted more. It takes a situation like what we have today to make people focus on it more closely. I think this particular economic cycle that we're in is probably going to be a watershed event for IT financing.
The logic has been there for a long time, it's just that people need something big to cause them to change the way they think about purchasing a particular type of product. It's somewhat pain-free and the economics are there, so is the logic. I will be surprised if it doesn't get embraced significantly over the next few quarters. We are a much more stable platform than what distributors were.
Some had 100 warehouses, well we don't have 100 warehouses, we have seven globally and three or four of them are considered satellite. It makes the bank feel good when you don't have 100 warehouses scattered around the United States which makes it difficult for them.
That puts us in a better position to provide a liquidity platform to the reseller. Whatever moves capital to our end of the equation we think is good and I think it's allowed some stability out there in the reseller market. I think even small resellers that might be more thinly capitalised are looking at distribution as their capital source and distribution has stood up and said, "we're here, we know your business, we've known you for a long time, you send us financials, you're reliable, we have an open dialogue which is transparent". I'm glad to be in a position we're in because it makes life easy for them and they just keep selling.
CRN: Have expansion plans been put on hold?
JO: We're always looking. We'll wait and see what happens.
CRN: Ingram Micro has announced that it is closing some Australian branches. Are any of Westcon Group's offices facing a similar fate?
JO: No. We're lucky, our year end is February when everyone else's is in December to January. So we get to watch and see what everybody else is thinking. If you look across the broad spectrum of distribution, what you'll see is that Ingram, Tech Pacific, Avnet and Arrow are all talking about 20 percent year-on-year declines for their Q1s. It's pretty much the way they felt at the end of the year, those were pretty significant declines.
There is a bunch of distribution companies that have announced impairments and goodwill, some recent acquisitions probably didn't perform to expectations at the time they were done. They're not forecasting very far out anymore, in fact a lot of them aren't forecasting at all so it's hard to say what everyone's doing. Do I expect calendar 09 plans to be the same as what I expected them to be 18 months ago? I suspect not.
CRN: So has regulation impacted on sales?
JO: Sarbanes-Oxley (SOX) was very beneficial for distribution, it was an important thing for us. It changed the behaviour of the industry and was one of the driving forces behind getting us on better metrics in regards to transparency and reliability of important financial data. We're not that large but we are disciplined and we have wonderful corporate governance.
Having a corporate parent means the things we do from statutory taxation and all aspects of the business are really best of breed practice type things. I think SOX was a godsend for a lot of industries, it put everyone on the same wavelength which is above board, transparent, communication open dialogue, better respect for the contractual responsibilities you've got.
CRN: Have Government stimulus packages helped business?
JO: The US government has had fits and starts with its stimulus package and some of its components. It's nice to know that there is allocation to resources to specific verticals such as education, healthcare, infrastructure and construction. They absolutely will be some of the main areas touched by the stimulus package and they are areas that we focus on and sell into. I think there are chunks of the stimulus package where we should have opportunity to take advantage.
In Australia I believe the impact will be in the next three to four months. The tax-related incentive packages that have been offered will absolutely have an impact on business, added David Corcoran, chief finance and operations officer for Westcon Asia Pacific.
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