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Office Depot, CompuCom: Revenue Shortfall Warning

Office Depot’s CompuCom division will generate weaker-than-expected revenues in Q1 of 2019, hurting overall performance at the office equipment retailer and IT services provider, the company warned this morning.

Office Depot’s stock (Symbol: ODP) fell about 20 percent on the news.

Related: FBI investigates Office Depot’s CompuCom Business Division

Office Depot-CompuCom: The Update

Office Depot acquired CompuCom in 2017 to offer IT solutions, consulting and managed IT services to SMB customers. CEO Gerry Smith says the company still believes in its long-term business strategy and the CompuCom business unit. However, the company disclosed the following business challenges today:

  • The CompuCom division is expecting to report an operating loss of approximately $15 million in the first quarter of 2019, primarily driven by lower than expected revenue from existing customer projects compounded by less than commensurate reductions in associated expenses, the company said.
  • Profitability was further pressured by ongoing expenditures to develop and market additional service offerings, the company added.

Boil those two bullet points down to a single sentence, and Office Depot essentially is saying that CompuCom’s sales aren’t meeting expectations despite new R&D and marketing efforts.

Office Depot CEO Gerry Smith

To strengthen operating performance, Office Depot is taking the followings steps, the company indicated:.

  • Streamlining its operational structure to improve service velocity and efficiency;
  • reorganizing its customer-facing organization to better align with customer needs; and
  • realigning the sales team to more effectively identify new opportunities to increase penetration of existing customers and accelerate cross-selling opportunities.

Office Depot did not mention whether the reorganization and “streamlining” will involve layoffs.

Office Depot Statement: CompuCom Revenue Weakness, Strategy

In a lengthy prepared statement, CEO Gerry Smith said:

“Despite the current challenges we are facing, we are confident that our transformation is on track to drive long-term value for our stakeholders. CompuCom’s operating performance was clearly disappointing and the actions we are taking to improve its operations and sales performance are expected to yield improving results in 2019. CompuCom is an important strategic asset for our future with approximately 6,000 certified technicians providing unique services capabilities, cross-selling opportunities, and partnering opportunities with some of the most highly regarded companies in the world. I am pleased with the actions we are taking across the business to position us for long term success. To ensure our success and to address potential headwinds, we are pursuing a company-wide profit improvement plan to further improve cost efficiencies throughout the entire organization. These initiatives include organizational improvements and leveraging the use of technology and automation in our facilities and offices.”

Office Depot is expected to share more details during the company’s quarterly earnings call on May 8.

Office Depot Pays FTC Fine: This is the second IT services-related setback for Office Depot in recent days. The company last week agreed to pay the FTC (Federal Trade Commission) a fine to settle remote computer support fraud charges.

The alleged Office Depot fraud and alleged Support.com fraud involved PC Health Check — a check-box system that recommended malware removal services regardless of whether customer PCs were actually infected, the FTC asserts.

Office Depot: CompuCom IT Services Background

Meanwhile, CompuCom certainly has scale but the company performed inconsistently ahead of the Office Depot deal. Some folks, including me, believe the retailer overpaid for the IT solutions provider.

Office Depot acquired CompuCom in 2017 for $1 billion — a lofty 10 times EBTIDA valuation. The deal arrived when most IT service provider and MSP buyouts were valued at about six to eight times annual EBITDA, ChannelE2E estimates.

The Office Depot-CompuCom deal began to show progress in late 2018, though there was still room for improvement as of November 2018, ChannelE2E reported at the time.

Big Box retailers have tried several times to buy their way into the IT services market. The results have been mixed at best. Best Buy acquired then exited mindSHIFT (2011 to 2014), and Staples acquired then exited Thrive Networks (2007 to 2014). Neither MSP performed particularly well under big box ownership, ChannelE2E believes.

Rival Staples: Up for Sale?

The shift toward cloud and e-commerce services continues to pressure traditional office equipment retailers. Staples, for instance, could be up for sale again as private equity parent Sycamore Partners apparently seeks to reduce or eliminate its stake in the retailer.

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8 Comments

Comments

    Peter Radizeski:

    It is no small thing to turn a legacy ship around. It takes longer than anyone expects and that company has to have a strong CEO that sees the vision and believes in that vision. One problem OD had was trying to take Enterprise IT provider (CompuCom) and provide IT-in-a-box for SMB. That just doesn’t work in reality. That would be like BoA calling Geek Squad! If they can ignore Wall Street and stay the course, they may make it work.

    Joe Panettieri:

    Hey Peter: You raise some key points. I’ll toss in another: CompuCom wasn’t exactly a growth company when Office Depot acquired the business.

    I’m a solutions provider advocate, so I certainly hope Office Depot and CompuCom regain some momentum here.

    Still, the M&A story between big box retailers and IT solutions providers seems to be stuck on repeat, and I haven’t seen any of the performers produce a hit…
    -jp

    Peter Radizeski:

    M&A hardly ever meets the synergies projected.

    George:

    Quite Strange that Gerry Smith 1 month ago was super Optimistic about Office Depot and today they issued Profit Warning . 1 month ago I am sure they already knew the situation….So…several people bought ODP Shares because of Gerry Smith Optimism and yesterday…they lost ALL!!. The SEC should investigate

    John:

    Hi. To me it sounds like Management is preparing the path for a dirty cheap takeover. Gerry Smith is like a Ghost. We can see him just once every 3 months and, I guess, this is not good for a company that is making a huge transformation. The Ceo should be much more visible. All the times the stocks get higher…”something” happens and then they plunge down, again and again. In December 2018 they still had 46M$ stocks buyback (the old buyback that expired at the end of 2018) but they didn’t use it when the stocks got 2.1$(Maybe they thought that the stock could go even lower?) This “Collaboration” with BABA sounds strange to me…I guess they want the shareholder to get tired and then…the Buyer (BABA?) will make a very low offer (around 3$?). I have seen a similar thing with Power One Takeover.

    larry shulman:

    Having been in the IT support business before there was really IT (40 years this July) I have found that success in our business and markets is totally dependent on deep labor quality and solid offerings. Tools and innovation does help drive better bottom lines but It does not seem possible that a 1 Billion dollar company can provide the support of a 10 million dollar specialized service company like LMS Technical. Small business needs relationships with small businesses. We understand how to make money and how to help our clients do the same. Its is really still mom and pop for us. I spent decades worrying about how the big guys would put us out of business, I have finally given up worrying. Our biz plan is based on the next 40 years, not the next quarter.

    George:

    Dear Larry Shilman. Has What you wrote something to do with Office Depot? I don’ t see any connection. Cheers

    larry shulman:

    The comment points to the development of the mega MSP trend, Office Depot purchasing CompuCom and entering the MSP market. Watching the development of computer services from the start, I have seen it renamed into MSP delivered services, automated software driven, process driven, with all emphasis on removing people directly from supporting clients and processes. As others have stated, and what I have personally seen, the final outcome in providing best services will never come from the tool, but rather the individuals using it. OfficeDepot, Best Buy, Staples, are never found in our SMB space, our clients would never let their business futures be in the hands of big box decision makers. Not saying it can’t ever happen but really doubt it. High level services delivered by companies with long term employees, rooted deep into the local territories they serve, with vested interest in the long term relationships of their clients is, and has been the winning strategy for really successful service providers. If this doesn’t clarify, kill the thread, it was my best shot. Or let the theme be “using MSP tools don’t make you a service provider, service does. Tools are only as good as the hands that use them, large mega MSP can’t deliver to the small and mid markets that I define as 20-100 user clients”

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