Tech Data Misses 3Q Mark, Says Credit To VARs Not A Problem

Extremely volatile changes in foreign currency and the economic slowdown negatively impacted Tech Data's third-quarter earnings performance, but they shouldn't affect Tech Data's ability to keep providing credit to VARs, according to CEO Bob Dutkowsky.

Tech Data reported a 3.6 percent increase in sales, to $6.14 billion, compared with $5.92 billion in the year-ago quarter. Net Income fell to $18.4 million, or 37 cents per share, from $40.9 million, or 73 cents per share. The results include a $23.5 million net foreign exchange currency loss, which compares with a $2.4 million currency exchange gain for the third quarter last year.

Analysts were expecting earnings of 63 cents per share on sales of $6.17 billion.

"Clearly, if IT spending is slowing, requests for quotations and opportunities are less," said CEO Bob Dutkowsky on a conference call with analysts. "What the typical VAR is saying to us is they are having a harder time closing the deal in the customer's office, whether it's a small, medium or large business. The decision cycle is extending out on the opportunities."

Tech Data's IT department is a perfect example, Dutkowsky said. The Clearwater, Fla.-based distributor is also scrutinizing IT purchases more carefully than a year ago.

"That doesn't mean projects aren't strategic or great opportunities, but we are being more careful in how we spend," Dutkowsky said. "VARs see that in every opportunity they're working on. That's reflected in price challenges, deliverability challenges and configuration challenges."

The currency exchange was especially volatile in October, according to the company. About three-quarters of the $23.5 million foreign currency exchange loss recorded in the third quarter of fiscal 2009 was associated with the European region.

The primary factor in the foreign currency exchange loss was the use of some inventory as a hedge against foreign currency exposures in accounts payable, according to Tech Data. The distributor recovered a portion of the loss through gross profit and expects to recover additional amounts going forward as the related inventory is sold, but further volatility could impact that, according to the company.

Sales in the Americas fell 3.9 percent to $2.8 billion and accounted for 45 percent of total sales. Sales in Europe increased 10.6 percent to $3.3 billion.

Several Wall Street analysts questioned Tech Data's ability to continue to offer credit to solution providers as the company's growth slows and macroeconomic pressures mount. Dutkowsky and Executive Vice President and CFO Jeff Howells maintained that Tech Data has a strong financial base that will allow it to continue to offer credit, even if the company becomes a little more conservative.

"We have weathered this storm of economic uncertainty before. Credit management is half or more of our business. We think we do a good job on it," Dutkowsky said.

Tech Data believes its available credit makes the distributor even more valuable to solution providers.

"If a little small bank can't loan a VAR money, they have to come to us. They'll share more with us on plans and projects, which exposes us to more market opportunities," Dutkowsky said. "We use our strength in credit to tighten up relationships with our customers."

On the conference call, Dutkowsky said Tech Data has "intensified our scrutiny" of examining solution providers' credit, but he does not expect to see a major fallout of customer accounts.

"Two-thirds of our customers are in the SMB space and they're distributed across virtually every sector. Some industries are struggling while others continue to see growth," Dutkowsky said.

Dutkowsky said Tech Data also has executed "fairly well" on its decision to pass freight charges on to customers.

"We believe in the long run it's in the best interest of the industry to pass more costs of freight into the channel. We have worked hard on that and continue to work on that," Dutkowsky said.

In its second fiscal quarter, Tech Data executives said they walked away from about $200 million in revenue on a couple of large customer bids. The company didn't see anything of that magnitude in the third quarter, but its revenue run rate was still impacted by the 2Q deals, Howells said.

Like many other companies recently, Tech Data declined to offer detailed fourth-quarter guidance due to macroeconomic challenges.

"Everyone is concerned about the overall IT demand picture. In terms of how much visibility we have into our customers' demand, there's no question demand is slowing, but whether we will operate in a flat, market down 5 percent or down 10 percent is difficult to assess," Dutkowsky said on the conference call.

Shares of Tech Data fell to $15.88, down 59 cents, or 3.6 percent, in Tuesday morning trading. Like many stocks, Tech Data's shares have fallen precipitously over the last few months. The company hit a 52-week low last Friday at $14.15 after trading at more than $35 in August.

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