Office Depot has taken a hard look at its CompuCom IT services division -- which it acquired in 2018 -- and reached the following conclusion: It's time to reduce "certain unprofitable sales activities" to improve profits.
The latest results show that CompuCom remains a business in transition -- but the IT services unit has improved its profit margins.
Indeed, CompuCom's revenue was $237 million in Q4 2019 -- down a steep 16 percent from Q4 2018, the company said this morning. That sounds bad -- especially when you consider the overall MSP (managed IT services provider) market remains in growth mode.
But take a closer look at the figures, and you'll see that CompuCom's operating income was $9 million in Q4 2019, nearly double the $5 million from Q4 2018, the company said this morning. That's certainly good news -- considering the business unit has generally struggled and occasionally stumbled under Office Depot's ownership since 2018.
Office Depot Acquires CompuCom: The Timeline & Challenges
Office Depot acquired CompuCom in 2017 for $1 billion -- or a lofty 10 times EBITDA. At the time, ChannelE2E warned that the struggling retail giant likely overpaid for the IT services provider. Fast forward to present day, and ChannelE2E still believes Office Depot paid far too much for the IT services asset -- especially since CompuCom is not a growth business, and was not a growth business ahead of the deal.
The timeline since the buyout reveals a bumpy road for the buyer and the seller, including:
- November 2018: CompuCom buyout shows some signs of progress -- but that was short-lived.
- April 2019: Office Depot and CompuCom issue revenue shortfall warning.
- May 2019: Office Depot confirms layoffs amid CompuCom business weakness.
- June 2019: Office Depot reveals CompuCom leadership shakeup.
Fast forward to present day, and Office Depot once again insists it's on the right track with CompuCom's business strategy and management.
Putting Profits Ahead of Revenue Growth
Explaining the business division's Q4 revenue shrinkage and margin growth, Office Depot CEO Gerry Smith said today:
“CompuCom’s success is a key component of our transformation and we are very encouraged by the early signs of progress. We’ve improved profitability and are gaining traction as evidenced by new customer wins in the quarter. CompuCom’s refocused strategy of connecting people, technology, and the edge, places greater emphasis on its core offerings and expands its value proposition. Although we have much more work to accomplish, CompuCom is on the right path to capture profitable growth in the expanding digital workforce arena."
The overall Office Depot business continues to face challenges. For its latest quarter, earnings generally beat expectations but top-line revenues fell 6 percent to $2.51 billion and missed Wall Street's expectations by about $110 million, SeekingAlpha says.
Still, Office Depot's stock rose about 5 percent in pre-market trading because Wall Street applauded the company's Q1 revenue guidance.