Tech Data Stock Dives As Weak Enterprise Demand Drags Sales Down

Poor North American enterprise demand and a more mobility-heavy sales mix resulted in slumping sales and profits for Tech Data in the third quarter.

The Clearwater, Fla.-based distributor saw net income dip 0.2 percent for the quarter ended Oct. 31, from $45.3 million in the third quarter of 2014 to $45.2 million, or $1.28 per share on a non-GAAP basis. This was an all-time, third-quarter earnings-per-share high, but fell well short of Seeking Alpha expectations of $1.42 per share.

Sales sunk 4.9 percent, from $6.76 billion in last year's third quarter to $6.43 billion in this year's, missing Seeking Alpha's projection of $6.53 billion.

[Related: Tech Data CEO On STG's Profitability, The HP Split And Why The Server 2003 Refresh Is A Dud]

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"At the higher end of the [business size] curve, growth is not that good," Tech Data CEO Bob Dutkowsky said during the earnings call Tuesday. "[But] weakness at the enterprise level doesn't hurt us as much as other vendors."

Wall Street was disappointed with the figures, sending Tech Data's stock price down 12.3 percent, to $66.42 per share. Earnings were released before the market opened Tuesday.

Tech Data has ramped up its mobility practice -- particularly in Europe -- to respond to strong demand, which has taken a bite out of the distributor's gross margins, according to CFO Chuck Dannewitz.

But mobility also has lower associated sales, general and administrative (SG&A) expenses associated with it, Dannewitz said, making it a solid capital investment.

Robust mobility growth in Europe also allowed Apple to, for the first time, surpass HP as Tech Data's largest vendor partner, accounting for 20 percent of its overall business, while HP accounts for just 19 percent. That's a major shift from two years ago, when HP accounted for 23 percent of Tech Data's overall business and Apple accounted for just 11 percent.

Apple should remain a dominant player for Tech Data even if iPhone sales level off next year, as many analysts are projecting, Dutkowsky said. Only one-third of Tech Data's Apple business is related to the iPhone, Dutkowsky said, with the remaining two-thirds coming from the desktop and laptop space as well as products such as Apple TV or the Apple Watch.

"This is not just an iPhone phenomenon being manufactured around Apple," Dutkowsky said.

Cisco was also for the first time disclosed as a major vendor partner of Tech Data, with the networking giant accounting for 10 percent of overall sales in the most recent quarter.

Cloud adoption among Tech Data customers is finally starting to accelerate after delivering several quarters of slow and steady growth, Dutkowsky said: Tech Data's cloud revenue has exceeded $200 million over the past year, making it equivalent to the size of Ingram Micro's cloud business, despite Tech Data's being more than $18 billion smaller than the Santa Ana, Calif.-based distribution giant.

Tech Data expects it cloud business to grow by nearly $100 million in the next year as the distributor is well-positioned to both educate channel partners and sell software, converged infrastructure, hybrid and "as-a-service" offerings, according to the company.

"Tech Data will sell much more on-premise technology in the next few quarters than cloud solutions, but we're prepared to sell both," Dutkowsky said.

Revenue for the Americas dropped 3 percent, to $2.6 billion, because of soft enterprise demand and weakness in the Canadian market stemming from the nation's dependency on oil revenue, the company said. Storage, security, consumer electronics and PCs all fared well in the most recent quarter, Dannewitz said, along with the public sector and SMB end-user markets.

"The North American market is moderating, and yet there are still good pockets of opportunity," Dutkowsky said.

European sales, meanwhile, dropped 6 percent, to $3.9 billion, but were actually up 6 percent after factoring out changes in currency exchange rates. The distributor saw strong growth in mobility, notebooks, storage and networking, with Germany, Italy, Portugal and Spain delivering double-digit growth.

For the coming quarter, Tech Data expects sales of between $7.05 billion and $7.25 billion, with both Europe and the Americas delivering mid-single-digit growth on a constant-currency basis.

"I'm pleased with our execution and our momentum going forward," Dutkowsky said.

PUBLISHED NOV. 24, 2015