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Sterling has fallen by as much as 12.5% against the dollar since February 2022. As most vendors still price in dollars, this either means price rises, or vendors having to sell more in sterling to repatriate the same amount of profit as they would have budgeted at the beginning of the year.
Many vendors set yearly targets in dollars because that’s their home currency. So if the dollar was worth just over £0.73 in February, a product that sold for £1,000 with a 10% profit margin would be repatriated as $1,362 and a profit of $362. The same product would return $1,216 and a profit of $216 at the end of July. That’s a sizeable fall in turnover and profit.
If a vendor planned to sell $40m of kit in the UK in 2022 with a profit of $4m, at July currency rates it would need to sell £32.9m of equipment instead of £29.36m at February rates. That’s a sales increase of nearly 11% just to stand still.
If you apply that to most US-based vendors trading in the UK, how likely is it all of them will achieve that level of increase at a time when things are looking difficult economically. If they fail to hit their increased target, that’s bad news for them and bad news for channel partners – vendors are relying on them to hit those higher targets.
Financial results tell a story
You can get an idea of the impact of the rising dollar in US vendor results. Microsoft chief financial officer (CFO) Amy Hood, for example, told an analyst conference call in July that revenue was “negatively impacted by $595m” for the fourth quarter “beyond our expectations shared in April”.
She added that currency changes had “decreased total company revenue by four points, two points unfavourable to expectations”. On the slightly positive side, they also decreased cost of general sales and operating expense growth “by two points, one point favourable to expectations”.
Looking ahead, she added: “Assuming current rates remain stable, we expect a roughly four-point impact to full-year revenue growth with headwinds in H1 greater than in H2. FX [foreign exchange] should also decrease COGS [cost of goods sold] and operating expense growth by two points.”
In the more immediate future, Hood estimated the strong dollar “could decrease total revenue growth by approximately five points and decrease total COGS and operating expense growth by approximately three points”.
IBM CFO Jim Kavanaugh revealed that currency translation had affected the company’s reported second-quarter revenue “by over six points of growth, or $900m – that’s over 200 million more than the spot rates would have suggested 90 days ago”.
At the end of May, commenting on HPE’s second-quarter results, CFO Tarek Robbiati stated: “Currency is also expected to now be a two-point headwind to revenue for the full year as opposed to the 50 basis points at the start of our fiscal year.”
In an analyst call in June for Oracle’s fourth-quarter results, CEO Safra Catz said the currency headwind had been 5% in the quarter, “considerably higher than the 2% to 3% it was during our last earnings call”. Looking ahead to the first quarter, she predicted currency would have “a 3% to 4% negative impact on total revenue” but warned that “actual currency impact may be different”.
In the same month, TD Synnex CFO Marshall Witt revealed devaluation of the euro accounted for approximately $500m of headwind versus the prior year, with an approximately $200m incremental headwind versus the company’s previous guidance. He added that revenue outlook for the third quarter would be adjusted for a currency impact of approximately $500m.
Even Apple, which announced record results for its third quarter at the end of July, mentioned the negative effect of currency across nearly all business areas in its call with analysts.
The channel perspective
From a channel point of view, there is an added difficulty for distributors because they often have to buy from vendors in dollars, so they could find themselves paying more for the equipment than previously but for the same level of profit in their native currency. The downward trend in the value of the pound against the US dollar makes it hard for distributors to keep a consistent level of pricing for any length of time without taking a big hit themselves.
It’s also difficult to raise prices in the UK to reflect the strength of the dollar because there is a cost of living crisis and concerns over a possible recession. With inflation the highest it’s been in 40 years, raising prices on IT equipment may only add fuel to the fire. Not forgetting the supply chain problems that are leading to delays in the delivery of equipment. If products are delayed for any great length of time, could the currency fluctuations during the period between placing the order and delivery affect the final pricing – and not in a good way?
Michael O’Hara, managing director at DataSolutions, accepts that the dollar will stay at the same level for the foreseeable future, at least until the end of the year. Currency is only one of a number of factors, however, including high inflation, rising interest rates, the huge rise in energy costs, the war in Ukraine, ongoing supply chain issues, Covid-19 and the shortage of tech talent.
On the positive side, he points out that the stronger dollar makes products more expensive but it also reduces the US vendor overheads in the UK and Europe because their payroll, rents, marketing activities, PR and travel are all cheaper than they were six months ago.
He believes vendors “will play their part because they understand the market position and the challenges the stronger dollar has, particularly in recessionary times”. Where necessary, for larger or more strategic deals, they will fix their pricing and absorb the FX fluctuations to help close these deals.
Rob Hicking, CFO at Jigsaw24, says vendors will be under pressure to increase prices in UK and European markets because they sell and price in dollars, but they need to try to strike a balance between competitive pricing and retaining margin. “Ultimately, market-leading vendors with the strongest propositions will be best placed to maintain margin,” he adds.
Margins are always tight in the channel so price increases are invariably pushed through to resellers and customers. “Ultimately, this is one of the dynamics pushing inflation more broadly in the UK in multiple sectors,” says Hicking. To keep a sustainable channel, partners will need to work with vendors to help understand the local challenges and opportunities – and respond accordingly.
For example, they might want to focus on volume as well as value, develop an understanding of market positioning and other (non-price) competitive advantages, and consider selling in dollars to match the buying currency, where customers and markets allow. He accepts that the latter measure is often only an option with larger, international businesses.
Clive Hailstone, managing director at Comstor UK&I, believes one of the best ways for vendors to mitigate the effect of the strengthening dollar “is to not expose themselves to any more risk”. Vendors can’t control the financial market and it’s not their job to play the money game. “Instead,” he says, “it’s about removing as much risk as they can and communicating changes as and when they occur. It’s crucial to be open and honest in these scenarios.”
Hailstone suggests that one way to do this is to focus more resource on software rather than hardware. “We’ve seen the impact that supply chain issues have had on businesses, which, combined with a strengthening dollar, is a recipe for disaster. By removing as many external risks as is feasible, vendors can continue to do what they’re good at and offer strong value-based solutions,” he says.
Difficulties in distribution
What about distributors, the companies caught in the middle of these currency headwinds? “It’s a distributor’s job to manage price changes and communicate them,” says Hailstone. “First things first, correct your contract price figures and any marketed content that is out of date. Then communicate any changes with your partners. Explain any differences and make sure they can, in turn, communicate those to end customers.”
Distributors are used to dealing with currency fluctuations, argues Greg Roche, UK finance director at Nuvias Group. “We invest in a currency management process, in terms of our resources, that puts us in the strongest position to minimise our partners’ exposure to volatility and to give them time to make concerted choices,” he says. “While we cannot prevent currency fluctuations and vendor-led price increases, we can create conditions that help our partners navigate these challenges.”
But is there a danger of distributors catching flak from partners and customers for something they can’t control because of their position in the middle of the go-to-market strategy? “Distribution is at the very centre of the channel, by definition – what is important is that we take an active rather than a passive role, and take action and plan to mitigate the pressure coming from adverse situations, working with partners to understand their requirements and provide the greatest level of pricing stability that we can,” says Roche.
O’Hara notes that it’s commonplace for distributors to hedge against currency movements when exchange rates move up and down, describing it as “a fundamental part” of their business. “We offer our partners pricing certainty so that they can pass that onto their end user customers,” he states. But he adds that DataSolutions’ quotes “are only valid for 15 days, after which they need to be re-quoted by ourselves”.
The company can offer a longer period, when requested by partners, where it will hold pricing, but this will be because it has allowed for currency movements in the quotes or has obtained “a reciprocal agreement from our vendors to hold their pricing (at the sterling cost requested) for an extended period”.
Christina Walker, global director of channel at Blancco, says distributors try to lock in foreign exchange rates or local pricing to mitigate currency fluctuations, but things can still be difficult. If a vendor raises a price point beyond a comfortable operating margin for the distributor, it will need to pass that price on.
“Right now, a lot of vendors are upping pricing due to market increase in COGS and rate fluctuations,” she says. “Most have a failsafe built in, but it’s a matter of what percentage increase will negatively impact the business beyond a set threshold and for how long.”
In any case, she remarks that in her experience, “even though most vendors generate an invoice on delivery, the original price is agreed beforehand. Unless the COGS increases by a specific percentage, the vendor will most likely bear that cost”.
Enough to delay purchasing decisions?
That’s probably true, to a certain extent, but it depends on how long they have to hold the price. With the outlook for the rest of the year not appearing to offer much prospect of relief for sterling or the euro against the dollar, could more expensive IT equipment prompt customers to delay purchasing decisions?
Clive Hailstone, Comstor UK&I
Roche doesn’t think so. “Customers are not really inclined to delay IT purchases for several reasons. Currencies could be subject to additional fluctuations, which could leave them in a worse position still,” he says. “Additionally, protecting their business networks from real and increasing cyber threat is not a luxury, but a necessity. Security and network integrity are priorities that business is not likely to delay.”
Hailstone echoes his view. “Currency fluctuation is not easily predictable,” he argues. “Putting off a purchase today in the hope that currency changes will swing your way tomorrow is a very risky approach. We’ve seen how global situations can dramatically change overnight, so it’s always better to make these types of purchasing decisions with as much information as possible. If any of us could precisely predict how the dollar was going to perform tomorrow or in a week’s time, we’d probably be in a different line of work.”
As the recent financial results from vendors and distributors show, the continued strength of the dollar against sterling and the euro is having a significant effect on their revenue and profit. The question now is whether the respective value of those currencies is settled for the foreseeable future. And just how far ahead can we try to predict the “foreseeable future” when it comes to currency?
The best thing vendors and channel partners can do is try to navigate currency headwinds as best they can with as little damage to themselves and their customers as possible.