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.
