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Office Depot Layoffs: CompuCom Delivers Weak Revenues

Office Depot’s CompuCom IT consulting and managed services division delivered “poor performance” in the first quarter, and CEO Gerry Smith vowed to deliver cost reductions across the overall business, according to a statement and earnings released this morning. The effort includes a mix of layoffs and automation.

Office Depot CEO Gerry Smith

In a prepared statement, Smith said:

“Our first quarter results were disappointing driven primarily by poor performance at our CompuCom division. We are taking decisive actions and making numerous improvements in our sales and operational processes to place this business back on-target with its long-term expectations.”

A new Business Acceleration Program, approved by Office Depot’s board on May 6, includes “elimination of certain positions and leveraging the use of technology in its facilities and offices,” a company statement says.

The plan includes:

  • A “zero-based budgeting approach” to reduce discretionary spending;
  • cost savings of at least $40 million in the second half of 2019;
  • achieving at least $100 million in annual run-rate costs savings thereafter.

The plan will cost $100 million to implement, of which approximately $70 million will be cash for severance and related employee costs, recruitment and relocation, and third-party costs including legal and consulting fees.

We’re checking Office Depot’s earnings call for more details about layoffs, reorganization or automation steps that the company plans to take.

Office Depot and CompuCom: The Financial Results

For the first quarter, overall Office Depot sales were $2.8 billion, down 2 percent from the corresponding quarter last year.

Within the CompuCom division, sales were $247 million in the first quarter of 2018, down 4 percent compared to the first quarter of 2018. Office Depot blamed the CompuCom weakness on “lower project-related revenue within existing accounts, whereby some projects were delayed, reduced in scope or failed to materialize as expected.”

The figures are particularly disappointing considering the managed IT services market is growing roughly 9 percent annual, according to multiple research reports.

To jumpstart CompuCom, Office Depot says it is “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 under new leadership to more effectively identify new opportunities to increase penetration of existing customers and accelerate cross-selling opportunities.”

We’re checking to see if the plan will impact headcount at CompuCom and the broader Office Depot.

Among the additional areas ChannelE2E is watching: An FBI probe into CompuCom’s relationship with WalMart, in which CompuCom employees may have illegally probed WalMart email to pursue contract wins. Office Depot did not mention the FBI probe in the earnings release.

Office Depot and CompuCom: The Deal Background

Office Depot acquired CompuCom for $1 billion — or roughly 10X annual EBITDA — in 2017 to offer IT solutions, consulting and managed IT services to SMB customers.

Big box retailers have a mixed track record in the managed IT services market. Both Staples and Best Buy acquired MSPs more than a decade ago, only to sell off those assets after discovering greater-than-expected challenges in the MSP sector.

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5 Comments

Comments

    chris:

    A new Business Acceleration Program, approved by Office Depot’s board on May 6, includes “elimination of certain positions and leveraging the use of technology in its facilities and offices,” a company statement says.

    Gee, that’s a funny definition of “off shore” and moving work to Guatemala!

    Joe Panettieri:

    Hi Chris: We haven’t independently confirmed the claims in your comment. But we certainly see the irony of Business Acceleration essentially paired with layoffs and cost cuts.

    I do think Office Depot deserves credit for striving to shift its business model amid all the market changes around them. But the company likely overpaid for CompuCom (deal valuation: 10X EBITDA) as we stated at the time of the deal. Combining two businesses — each facing major transformation challenges — does not suddenly deliver one strong, growing business…
    -jp

    Ron:

    Office Depot continues to cut operating costs by eliminating Human Resources. This strategy does not address the actual issues that are causing Office Depot to lose revenue. This type of management is short sighted and shows there is little care about a long term strategy for Office Depot to thrive

    Aeryn:

    @Ron – “This strategy does not address the actual issues that are causing Office Depot to lose revenue. ”
    What would you say are the “actual issues” causing Office Depot’s loss of revenue?

    Peter Radizeski:

    They gave up on the channel after just 2 years, which isn’t a lot of time to create a successful program, enroll partners and acquire sales. Especially when the value prop and products shifted so much in those 2 years.

    It is incredibly hard to shift a business model – in the public eye too (ask dell or Cbeyond). It is hard to keep the current revenue flowing in order to finance the change you want. They might have taken on too many changes at once.

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