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Tech Data Stock Crashes 20 Percent Amid Hardware Rebate Pressures

Tech Data (TECD) shares are down about 20 percent today (Friday, Sept. 1, 2017) after the distributor delivered weaker-than-expected profits for fiscal Q2 2018. Much of the earnings miss involved hardware vendor rebate program challenges in North America, CEO Robert Dutkowsky said during an earnings call.

“Several of our major vendors have announced their results and sales didn’t grow at the rates that they plan,” said Dutkowsky. That reality triggered a chain reaction that stretched from weak hardware sales to the associated vendor rebate programs and Tech Data’s underlying profits, he explained.

“The rebate targets that were assigned are based on growth rates that they expect,” Dutkowsky said. “So, when a vendor grows slower, by definition, our ability to grow at least as fast as them is difficult, and the targets are typically built in stretch fashion. So, when a vendor shows a decline, that — it makes it very difficult environment for a distributor to optimize the rebate potentials that exist. And we saw some of — all of those dynamics in the rebate performance of Tech Data in the quarter.”

Tech Data’s Financial Results: Q2 2018

Tech Data’s Q2 2018 revenues were $8.88 billion, about $130 million ahead of Wall Street’s expectations. But earnings per share — at $1.72 — were roughly 32 cents per share below analyst expectations, SeekingAlpha said.

In a prepared statement, Dutkowsky insisted that the recent Avnet Technology Solutions acquisition is performing well. He stated:

“Our fiscal 2018 first-half results clearly show the enhanced earnings and cash-generating power of the new Tech Data. In Q2, worldwide sales exceeded plan and our teams maintained disciplined cost controls; however, we did not deliver the earnings we expected in the quarter. Tech Data is a stronger company today than it was a year ago. With the addition of Technology Solutions, we now have a richer portfolio of advanced technology vendors and customers, along with deeper skills to serve them. At the same time, we continue to accelerate the expansion of our capabilities in next-generation technologies. Our integration is progressing as planned and we are on track to deliver our synergy and debt reduction targets.”

Tech Data and Technology Solutions

Tech Data’s buyout of Avnet’s Technology Solutions business, valued at about $2.6 billion, was finalized in February 2017. The deal gives Tech Data scale in data center-oriented solutions like hyperconverged infrastructure (HCI), servers, networking and storage. However, distributors are under pressure as cloud services continue to chip away at traditional hardware sales.

Tech Data and many of its rivals have built out cloud-centric businesses, but those businesses are relatively small compared to traditional hardware sales.

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5 Comments

Comments

    Michelle De Hertogh:

    Continues to show how hard it is to evolve from a hardware-based business.

    Howard M. Cohen:

    How big is a business? Are you comparing TD’s top line revenue on products vs. services, or bottom-line profitability? With everyone operating at whisker-thin product managers I find it hard to believe that products still “dwarf” services in profit contribution.

      Jeff Goldstein:

      Hi Howard, should Product Managers be Profit Margins?

    Howard M. Cohen:

    I meant product margins…

    Joe Panettieri:

    Michelle, Howard: Thanks for your comments. Lots of private emails in my inbox about this story, too. Some folks point to hardware market shrinkage. Others point to Tech Data allegedly mismanaging some of the acquired Technology Solutions assets and associated rebate models.

    I don’t have answers. But I do have two additional observations…

    1. Hit and Miss: It’s rather interesting to see Tech Data’s top-line revenues BEATING expectations but profits falling so far below expectations.

    2. Early Warning?: With such a big earnings miss, I don’t understand why Tech Data didn’t pre-announce the earnings shortfall days or weeks ahead of actual earnings announcement.
    -jp

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