InterX plc (or click here to download PDF version)
Overview
InterX plc is a leading integrated provider of information, products, services and solutions to the IT supply channel. InterX has three subsidiaries, Ideal Hardware, Ideal Unisolve and IT Network. During the six months through to 29 January, revenues amounted to £148m compared to £110m for the same period a year ago, an increase of 34%. However, gross profits only rose by 16%, due to competitive market conditions in the IT distribution business, as well as having to accept lower margins by acting as an appointed distributor for Compaq. Pre-tax profits fell by 38.7% to £3.01m due to related costs for staring up the IT Network.
Ideal Hardware
Ideal Hardware was first established in 1987 with the aim of providing a distribution service for data storage products and related peripherals, and accounts for the majority of InterX’s revenue. Ideal Hardware (and Ideal Unisolve) recently received the Certified integration Programme (CIP) accreditation from Compaq, one of only fourteen companies to receive this award world-wide. With this accreditation, sales of Compaq’s products accounted for nearly half of the increase in turnover from the UK, although margins have suffered. Ideal has also been attempting to penetrate the European market, and to gain market share has been accepting substantially lower margins. However, Ideal has increased investment in the recruitment and training of its UK sales force during the first half, in an attempt to exploit winning the accreditation from Compaq and also to educate its sales-force to place more emphasis on higher margin sales opportunities.
Ideal Unisolve
Ideal Unisolve began trading in January 1999, and has also been accredited with the CIP from Compaq for its high-end server and storage solutions. Unisolve was established to provide the group with the ability to service the ever-increasing technical and consultancy demands inherent within the high-end enterprise storage market. Its businesses include providing consultancy, technical support, configuration and installation as well as providing services to manufacturers and suppliers who wish to augment their offerings to the IT channel (including final assembly and build-to-order services, packaging and assembly for branded sales, and pre-sales advice). Although Unisolve has yet to generate any significant revenues, management claims that it is achieving its internal goals, adding value to the InterX brand. In the competitive distribution sector, InterX is differentiating itself from its competitors by offering services to help customers in making more informed decisions, as well as being a means to retain existing customers.
IT Network
InterX announced in January that it will launch its IT Network sometime during the summer of this year, with the goal of helping IT professionals make more informed decisions. The IT Network will be internet-based, and will essentially be a powerful product-comparison database containing every major IT product on the market. Although the IT Network will not be significantly revenue generative, it will provide InterX’s suppliers and customers a place to congregate, and will hope to create a more informed and loyal customer base. The web-site should be fully operational by the summer of this year, and feature over 20,000 products, rising to 200,000 over the next year.
Opinion
Although margins are falling at InterX, conditions are getting harder in the distribution business, in particular in the face of direct-model vendors. However, InterX is still managing to increase revenues significantly, with the accreditation from Compaq likely to have a significant effect from this point forward, despite having to accept lower margins. We believe that eCommerce (consumer to business over the internet) and eBusiness (business to business over the internet) will continue to drive demand for IT equipment, in particular data storage devices. It should be remembered that eCommerce and eBusiness is still in its infancy, with eCommerce accounting for $8bn in 1998, compared to total conventional retail sales of $2.7tn in 1998. However, eCommerce is expected to grow at around 35+%pa for the next 3years to at least $35bn. As corporations begin to realise the potential benefits of the internet, both in terms of revenue generation and efficiency gains, there will be significantly greater demand for IT hardware, especially data storage products, as more information has to be stored. As such InterX is ideally placed to benefit from this internet wave. Margins should also begin to rise slowly once the Unisolve and IT Network divisions get into full swing. With InterX currently trading on 15.6x historical earnings, InterX is still cheap, given its prospects. A buy.
Report date: 29/05/99
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