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.
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.
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.