Soft Mobility, Data Center Demand Drag Q2 Sales Down For Tech Data

Spending delays around mobile devices and non-essential data center products, along with eroding margins due to increased competitiveness, hampered Tech Data's second-quarter sales, the distributor's CEO said Thursday.

"When the market gets smaller, every deal gets more competitive," Bob Dutkowsky said during an earnings call. "When there's confusion in the macro-environment, IT spending slows down."

The Clearwater, Fla.-based company saw sales for the quarter ending July 31 fall 3 percent from $6.58 billion last year to $6.35 billion. That fell well short of Seeking Alpha's estimate of $6.64 billion.

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Meanwhile, net income plummeted 39.3 percent from $76.4 million, or $2.09 per share, last year to $46.4 million, or $1.31 per share, this year. On a non-GAAP basis, net income fell 4.2 percent from $52.5 million to $50.3 million, or $1.42 per share, just missing Seeking Alpha estimates of $1.43.

Wall Street was disappointed with the results, sending Tech Data's stock price down 9.5 percent to $72.69 per share. Earnings were released before the market opened Thursday.

An overall softening of demand across the IT market prompted end users to defer spending around storage and servers, dragging down the overall data center figures, according to Dutkowsky. But demand for more essential data center functions such as networking remained strong, he said, since end users needed network access for new employees or to continue driving spending around e-commerce.

Although some data center vendors such as Nimble and NetApp enjoyed strong quarters, Dutkowsky said Tech Data's data center results were hampered by less strong performances from major providers of data center technology, such as IBM, EMC and Hewlett Packard Enterprise.

In the mobility space, Dutkowsky said demand was weak as customers delayed purchases in favor of waiting on new, unannounced products. Tech Data is able to "get out of the chute" relatively quickly when new mobility products are announced since, he said, the distributor is a preferred route to market in the European mobility space.

"If products are announced, we will be able to take advantage of that," Dutkowsky said.

Mobile and consumer electronics website BGR, among others, has reported that Apple will release a new iPhone 7 and iPhone 7 Plus next month. Apple is Tech Data's largest vendor partner, accounting for 17 percent of the distributor's overall sales.

Dutkowsky is more optimistic about the PC market, especially following HP Inc.'s announcement Wednesday that PC sales in the Americas grew for the first time in five quarters.

"It looks like the PC has begun to grow slightly again," Dutkowsky said.

Tech Data should be away to outgrow the rest of the market if there's a slight bump in PC demand, Dutkowsky said, since the company's strong workforce skills, coverage model and IT systems make it the "most efficient IT distributor for volume products." PC sales are all about efficiency and execution, Dutkowsky said.

The distributor also saw an increased number of situations last quarter in which the available business didn't meet acceptable profitability levels, Dutkowsky said. Tech Data has been very careful to not engage in business in which the company doesn't like the margin picture, Dutkowsky said. Having said that, Dutkowsky said distributors typically differentiate themselves through services, support and execution.

"Price is pretty far down the list in terms of why customers decide to buy from one distributor versus another," Dutkowsky said.

Other major vendors for Tech Data include HP Inc., which accounted for 14 percent of the distributor's sales in the most recent quarter, according to Chief Financial Officer Chuck Dannewitz, and Cisco, which accounted for 11 percent.

Revenue for the Americas fell 3 percent to $2.7 billion as strength around desktops, notebooks, tablets, networking and security offerings was offset by soft storage, server, software and consumer electronics sales.

European sales, meanwhile, tumbled 4 percent to $3.7 billion as growth in enterprise software, notebook and tablet sales was offset by declining demand for mobility, data center and desktop software products.

For the coming quarter, Tech Data expects sales in the range of $6.25 billion to $6.45 billion, with both Europe and the Americas delivering flat to low-single-digit growth after factoring out changes in foreign currency exchange rates. Thomson Reuters had projected $6.55 billion.

The distributor is also projecting non-GAAP earnings per share of $1.20 to $1.30, well short of the Thomson Reuters estimate of $1.39.