Report: IT Distribution Grows in Q3

Demand for notebooks, desktops and networking equipment helped fuel growth in IT distribution shipments during the third quarter of 2006, and one economist feels that growth will continue if interest rates and fuel prices remain steady, according to a new report.

IT distribution grew to 6.4 percent in this year's third quarter, according to Raymond James and Associates, a research firm based in St. Petersburg, Fla.

That number was an improvement from the same period in 2005 as well as an improvement of the 4.9 percent rate of growth in IT shipments during the past six months of 2006, according to the Raymond James survey, released on Sept. 26.

The report found that commercial channel sales in the United States, a currency lift in Europe and double digit growth in Asia helped overcome a slowdown in PC shipments.

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IT distributors found a strong demand for notebooks, desktops and networking and communication products. There was less demand for servers, printers and storage, the survey found.

Click here to read more about how some experts expect the channel will perform for the rest of 2006.

Despite what some see as a possible recession, a Raymond James economist wrote in the survey that economic growth in the third quarter remained modest, although there is some concern that slower growth and labor costs could begin to slow the economy in 2007.

The report found that a possible reason for this growth could be the easing of energy prices and interest rates, coupled with strong corporate cash flow, which led businesses to buy more IT products in the third quarter.

"Corporate profitability remains strong—a large, positive factor in the outlook for capital spending," Scott Brown, a senior economist with Raymond James, wrote in the report.

However, "investors are worried that slower economic growth and rising labor costs may eat into profit margins heading into 2007. Corporate cash flows remain brisk, bank lending to businesses is unfettered and credit spreads are still relatively narrow by historical standards."

The North American market saw the greatest improvement with 7.5 percent growth in IT shipments in 2006 compared to 2005. Europe saw a 1.4 percent growth compared to last year and Asia had the largest gains with 10.3 percent growth.

"The pickup that this report identifies in IT-related hardware shipments bodes well for most technology-related suppliers," Brian Alexander, the lead analyst, wrote in the report's conclusion.

Inside the channel, the Raymond James survey found that sales by the largest resellers should increase 3.8 percent from the 2005 third quarter to the 2006 third quarter.

Sales also increased 7.3 percent from the second quarter of 2006.

In the small and midsize business space, the analyst found that growth had slowed from 7 percent in 2005 to 2 percent in 2006. However, SMB shipments are expected to increase by almost 3 percent from the second quarter to the third quarter.

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"The divergence in the outlook for the SMB space (as addressed by direct marketers) and that of U.S. distributors (who supply the tens of thousands of small VARs) suggests a recovery in market share by VARs at the expense of direct marketers," the analysts wrote. "Roughly half of U.S. distributor shipments are on behalf of VARs."

To the surprise of Raymond James' analysts, desktop demand proved robust in the third quarter. Apple and Acer saw their distribution channels improve at the expense of Lenovo, which experienced a decline.

The survey also found that EMS (electronics manufacturing services) shipments were expected rise 20 percent year-over-year.