Pomeroy Computer Resources: Bridging the Services Gap

Classic reseller swims upstream with its services push.

At a time when the New Economy is looking a lot like the old one, veteran computer reseller Pomeroy Computer Resources is trying to bridge the gap between the two. The Hebron, Ky., company is expanding its Internet services offerings to boost margins, while it continues to serve up its traditional hardware and software products.

"Rather than sell bits and pieces of hardware, we want to provide the Internet network and infrastructure as well as the computing environment," says CFO Dino Lucarelli. "We will design the network, configure it and establish communication portals at the outset, then lay the connectivity, populate the desktops and maintain an on-site help desk." An increase in its services business also means higher sales of hardware, such as routers, that are used for these networks, Lucarelli says.

The strategy appears to be working, albeit slowly. In the fiscal year ended Jan. 5, revenues from services were $139.4 million, accounting for 15 percent of total revenues, up from $103.8 million or 13.7 percent of revenues in fiscal 1999, and $72.5 million or 11.6 percent in fiscal 1998. At the same time, however, gross margins fell in fiscal 2000 compared with the previous year.

Lucarelli attributes the recent drop to falling demand for services as well as to offering free service up front in order to attract long-term projects, which he calls an "investment in clients."

In response to the slowdown, the company has cut about 100 staffers and hasnt replaced others who have left through normal attrition.

Pomeroys service offerings are conducted through Pomeroy Select Integration Solutions, a wholly owned subsidiary, which is headed by president and COO Stephen Pomeroy, the son of founder David Pomeroy II. Market conditions put on hold a spin-off via an IPO.

The company has expanded its service offerings largely through acquisitions financed with a $140 million credit facility from Deutsche Financial, which was renewed recently.

It kick-started its growth effort with the acquisition of Access Technologies in 1998, followed by two others in 1999.

Last year, Pomeroy bought three companies, including Linc Corp., a Birmingham, Ala, concern. The Linc acquisition recently led to Pomeroy receiving gold certification with Cisco Systems.

In January, Pomeroy signed a letter of intent to buy Osage Systems Group, a bankrupt e-business solutions provider.

As for customers, corporations dominate, providing about 80 percent of Pomeroys revenues. Most are small and midsize companies concentrated in banking, insurance and health care. State and local governments, including educational facilities, account for the rest of Pomerys customers. In all, the companys reach stretches to 31 offices in 16 states.

Looking ahead, Pomeroy will consider acquisitions as opportunities arise, and looks to enhance its technology partnerships. It is currently a regional partner for Sun Microsystems and is working on moving up to the national level, says Lucarelli.

In addition, Pomeroy hopes to boost traditional hardware services by digging deeper into the server business, which it views as a significant growth area.

One place Pomeroy faces a major challenge is Wall Street. No national or regional brokerage covers Pomeroy, most likely because trading volume in its stock is too low, about 40,000 shares a day.

"Unfortunately, weve had a run of bad luck," says Lucarelli, referring to the lack of analyst coverage.

Maybe Pomeroy can turn that around. Unlike many small tech companies, this one has profits.

Rap Sheet

Company: Pomeroy Computer Resources
Symbol: PMRY
Web: www.pomeroy.com
Specialty: Reseller of hardware and software; services provider for Internet infrastructure, help desk and desktop management
Strengths: Long-standing customer relationships; expanded Internet-based services offering; strong balance sheet, enhanced by a $140 million credit facility to fund additional acquisitions as opportunities arise
Challenges: Increase margins in the face of a slowing demand for PC sales and Internet infrastructure and consulting services; attract coverage from Wall Street analysts in order to increase investor interest in the companys stock
HQ: Hebron, Ky.
Founded: 1981
Employment Info: www.pomeroy.com/jobindex.asp
Key Partners: Cisco, Compaq, Hewlett-Packard, IBM
Key Customers: Humana, Nationwide Insurance, Principal Financial Group, Square D, WorldCom