Year After the Peak

A Mountain of Tech Gear
Weighs on Nasdaq Results

By KEN BROWN
Staff Reporter of THE WALL STREET JOURNAL

SANDY, Utah -- A pile of about 30 Dell laptop computers fills a corner of the basement of Jeff Archuleta's house in suburban Salt Lake City. In the warehouse-size garage, there is a stack of 12 Compaq servers, while high-end Hewlett-Packard printers sit on shelves next to Cisco Systems routers and Silicon Graphics workstations.

Computer monitors sit in a heap on his dining-room floor, and more gear fills a warehouse and a tractor-trailer parked out back. About $1.8 million of Sun Microsystems computers have passed through these doors in the past few months.

Appearances to the contrary, Mr. Archuleta isn't a fence. His closely held firm, Arch Consulting Group, has embraced the booming business of buying and selling the unplugged tech equipment from failed Internet companies. Those Dell laptops, some still with the user's nametag attached, once helped put Pets.com on the Web.

Anyone wondering when the massive glut of technology inventory will be digested should visit Mr. Archuleta's nondescript home, located in the shadows of the mountains where the 2002 Winter Olympic skiing events will take place. No one knows how much tech equipment is sitting in warehouses like this one. But these mounds of deeply discounted printers and bargain-price routers can't be helping companies such as Sun Microsystems Inc., and Hewlett-Packard Co., both of Palo Alto, Calif., and Cisco Systems Inc., San Jose, Calif., as they, and the companies supplying them with semiconductor chips and disk drives, try to empty their own stuffed warehouses.

"There's such an abundance of Sun and Compaq and Cisco at these dot-coms, it's going to hurt them," Mr. Archuleta says.

A year after the tech-heavy Nasdaq Composite Index hit its high, many technology companies are struggling with declining sales growth. How soon they regain their footing will help determine when they -- and their beaten-down stocks -- recover lost ground. Sun, Cisco, H-P and Dell Computer Corp., Round Rock, Texas, are all off at least 60% from their 52-week highs.

There always has been a market for used computer equipment, but most of such equipment was coming off lease so it was generally a few years old, far from the cutting edge. By contrast, much of the inventory Mr. Archuleta handles these days is nearly new. He says 30% to 40% of the equipment he just acquired from the European operations of toy-retailer eToys, among the latest Internet casualties, is still in the box. Depending on the age and type of equipment, the tech gear sells for anywhere from 30 cents to 70 cents on the dollar.

To be sure, no one believes the market for used equipment is anything but a small part of the overall tech market. The companies that make the equipment play down any effect on their sales. "We have seen some of this, [but] it is certainly not on my top-10 list right now," says Masood Jabbar, executive vice president for global sales at Sun Microsystems.

The reality, however, is that demand for tech equipment is slowing, partly because dot-coms aren't buying as they used to, and, instead, the same stuff they bought just a year or so ago is now hitting the market again. The impact on the Suns of the world seems to be marginal, "but the margins are what makes a good quarter or a bad quarter," says David Marchick, vice president of strategic development for Bid4Assets Inc. (http://www.bid4assets.com/), Silver Spring, Md., an Arch competitor.

William Coleman, chief executive officer of e-business-software company BEA Systems Inc., San Jose, Calif., and a former Sun Microsystems executive, says last fall he was wondering why sales were slowing down so fast for the equipment companies. "But then I started asking around and what was becoming apparent was there was a lot of stuff coming back from the second-hand market," he adds. Chuck Phillips, a Morgan Stanley software analyst, notes that "with the number of people who mentioned it to me at large companies, it has to have more than just a passing impact," adding that recently he also has run into more than a few big buyers of such second-hand tech equipment.

Arch Consulting (http://www.archconsulting.com/), is one of hundreds of small middlemen that make up the asset-recovery business. Most of these companies focus on industrial items. But during the past few months, the business of selling used tech equipment from companies gone bust has mushroomed. That growth has gone largely unnoticed as people focused on dot-com liquidators such as Overstock.com (http://www.overstock.com/), located in Salt Lake City near Arch, which buy up the product inventories -- the jewelry and cowboy hats -- from failed companies and hawk it to the general public.

With 10 employees and a network of customers built up through years of selling and servicing tech equipment, Mr. Archuleta recently sold two H-P mainframe computers that retail for $259,000 each and a $450,000 phone system by Nortel Networks Corp., Brampton, Ontario., not to mention hundreds of PCs, printers and Internet routers to clients including Automatic Data Processing Inc., the big payroll processor, and AOL Time Warner Inc.

Mr. Archuleta already has done $750,000 in sales this year, compared with $1 million for all of 2000. He is talking to 15 to 20 failing companies a week now and is being more selective in his buying. "There are more than we can deal with, more than anyone can deal with," he says. The heavy supply, he says, is ratcheting down prices, just as tech companies already are suffering from shrinking margins. "I've noticed the Cisco stuff really dropped," he adds, noting that a fairly new router, which handles a company's Internet traffic, might have fetched $1,300 to $1,400 a few months ago but now is selling for $700 to $800. "They still sell, they just sell cheaper."

A Cisco official says these sales are having no impact on the company's business, and that only a relatively small amount of Cisco's sales went to dot-com companies.

Mr. Archuleta's experience with Pets.com shows the business is not without risk or stress. The Internet company, which ceased operations last November, had been taking offers on some equipment but hadn't struck any deals. "What Pets wanted was someone who would come in and take the whole lot," Mr. Archuleta says.

Negotiations were tense. "They didn't trust us at all," he says, adding Pets.com wanted all the money up front. Finally, in mid-December, Mr. Archuleta agreed to take the equipment for just under $1 million. Former Pets.com officials couldn't be reached for comment.

Meanwhile, back in Utah, Mr. Archuleta's staff, working on folding tables in the cramped basement, hit the phones to call potential customers to quickly unload the Pets.com equipment. While his wife home-schooled their five children two floors above, Mr. Archuleta's firm unloaded about 80% of the gear in just two months.

Technology companies including Cisco and Dell say they aren't being hurt by used equipment, and they add that in many cases the used gear is bought by companies that couldn't afford new stuff. Sun's Mr. Jabbar adds that Sun itself has bought back equipment from failures such as Internet retailer Boo.com to help meet strong customer demand for used Sun equipment.

But no one disputes the inventory problem. Take, for example, the telecom-equipment sector, where inventories rose to $21.2 billion at the end of last year from $12.8 billion at the end of 1999, according to Credit Suisse First Boston. PC makers such as Apple Computer Inc., Cupertino, Calif., and Compaq Computer Corp., Houston, server companies such as Sun Microsystems and cell-phone makers including Motorola Inc., Schaumburg, Ill., and Finland's Nokia Corp. all recently have cited inventory pileups. For tech companies, rising inventories are particularly painful because they not only mean sales have slowed and prices are likely to come down, but the equipment has lost value quickly as newer, better technology comes on the scene.

Bid4Assets' Mr. Marchick says his company has been asked to bid on assets totaling $100 million from a failed company that provided high-speed Internet access using DSL technology. "When those go on the secondary market, it will satisfy demand that might otherwise be spent on assets in the original market, new equipment," says Mr. Marchick, a former Clinton administration trade official who helped negotiate the North American Free Trade Agreement and trade deals with Japan and China.

He says his typical customer is another Internet player. His company, which auctioned tech equipment from Internet failures Value America, Urban Box Office and Gemkey.com, recently bought, for its own use, four servers from a failed dot-com for $16,000. "They were literally three months old, just out of the box, new they would have cost $64,000," Mr. Marchick says.

Bid4Assets, which will auction almost anything, including industrial equipment, has had its technology business grow from nonexistent in the fall to becoming the most profitable part of its operations. "In October we were talking to one or two companies a week, now we're talking to 20 or 30," Mr. Marchick says. "In one week last month, we sold five companies, and we probably sold three or four hundred servers, hundreds of computers and then all the peripherals, printers, monitors."

Write to Ken Brown at ken.brown@wsj.com