Distribution: Competition Cools Comeback

After a successful 2004 that saw impressive worldwide gains, increased profitability and double-digit sales growth for a slew of companies, many believed and hoped the trend would continue in 2005. But with some recent earnings announcements, it seems distribution's comeback has cooled off.

Several executives at the "Big Three" broadline distributors--Ingram Micro, Synnex and Tech Data--have cited aggressive pricing pressure and heavy competition, especially in North America, as negative factors on their financial performance.

The trouble began recently when Synnex announced it would fall short of its guidance of $1.39 billion to $1.44 billion in revenue for the first quarter and earnings of 31 cents to 33 cents a share. The revised guidance, which was revenue between $1.34 billion and $1.35 billion and earnings of 31 cents to 32 cents per share, sent Synnex's stock price down nearly 20 percent. The distributor later reported first quarter sales of $1.35 billion and earnings of 27 cents a share, an 11 percent year-over-year decline.

Of all the major IT distributors, Synnex was probably the last one expected to issue such a warning. Since going public, the upstart broadline distributor has gone right at its top two competitors with low pricing, while enjoying 30 percent growth in sales through its first several quarters. However, that same pricing pressure appears to have struck at Synnex itself.

"We did see increasing competitiveness in the IT channel in the later stages of the first quarter, along with a mild reduction in demand vs. our expectations," said Bob Huang, CEO and president of Synnex, during the company's guidance update call recently.

Next came Tech Data's fourth-quarter earnings announcement. On the positive side, both the distributor's sales and earnings beat Wall Street's consensus expectation for the quarter, and its revenue in the Americas increased 16 percent year-over-year, while operating income reached its highest level in 16 quarters. But the bad news for Tech Data was its less-than-stellar guidance for the first quarter of fiscal 2005. For the first quarter ending April 30, Tech Data said it expects sales in the range of $4.95 billion to $5.10 billion, with income between $34 million and $37 million, or 57 cents to 62 cents a share. The Wall Street consensus for the first quarter was revenue of $5.11 billion and earnings of 67 cents per share.

During the call, chairman and CEO Steven Raymund attributed the forecast to aggressive pricing pressure in the distribution market. "Pricing is as competitive as ever," he told investors and analysts, adding that every order was being "hotly contested" by the competition.

Things haven't been that much better for Ingram Micro, which was downgraded in March by Wall Street firms Thomas Weisel, which lowered its rating from Outperform to Peer Perform, and Robert W. Baird, which lowered its rating from Outperform to Neutral.

True to Raymund's words, competition between the broadline trio has been intense in North America. Such developments have led to aggressive pricing and heated market share gains and losses, along with some behind-the-scenes finger-pointing and allegations of price wars. In an interview with VARBusiness following the earnings call, Tech Data CFO Jeff Howells said the company is "pricing competitively but not recklessly.

"We're not trying to start a price war with our competitors," Howells said.

If a price war is indeed brewing among the top broadline distributors, time will tell how much it will hurt the trio--and perhaps help solution providers.