Tech Data said Thursday that a few of its largest technology vendors made recent channel program changes that will hurt the distributor's margins in the near term.
Tech Data CEO Robert Dutkowsky, speaking with CRN following the company's fourth-quarter earnings call Thursday, said the company will consider upping sales volume, reallocating vendor support resources and investing in additional vendor programs as needed in response. These program revisions, a reality of life in the IT channel, happen "all the time," he added.
The names of these particular vendor partners were not disclosed. According to a recent filing with the U.S. Securities and Exchange Commission, only three companies generated more than 10 percent of Tech Data's revenue for the nine months ended Oct. 31, 2017: Apple (14 percent), Cisco Systems (10 percent) and HP Inc. (10 percent).
"We and the channel as a whole will have to absorb the realities of what that program is," Dutskowsky said. "As many times as programs go down in value, there's another program that goes up in value. This time around, the ones that made changes are among our largest vendors. It has an over-weighted impact on the profitability of the company."
Earlier Thursday, Tech Data CFO Chuck Dannewitz told Wall Street analysts that the company is expecting "flat to low-single-digit" growth in its non-GAAP operating income for fiscal 2019. Tech Data stock was trading down $19.58 (or 18.18 percent) to $88.08 as of 2:50 pm ET.
Dutkowsky was careful to emphasize that these program changes were not Tech Data-specific, but rather involved the vendors' overall channel strategies. He noted that certain vendors will in some cases move slower-growing customer segments or products through distribution, while pushing other products more aggressively through their direct sales organizations.
"If the vendor wants us to put more attention to their products, they'll modify the program again," Dutkowsky said on the conference call. "These are living, breathing relationships that take place over the course of the year."
Dutkowsky said cloud technology remains one of the company's fastest-growing segments, with new orders increasing by strong double digits for the business in fiscal 2018. The hybrid cloud business in particular has ramped up alongside hyper-converged infrastructure offerings, he added, calling Tech Data's hyper-converged line card a true market differentiator.
Tech Data reported net sales of $11.09 billion for the fourth fiscal quarter ended Jan. 31, up 49 percent from last year's fourth-quarter mark of $7.43 billion – primarily due to the Avnet TS acquisition. That beak Seeking Alpha's estimates by $520 million. The Americas region accounted for $4.3 billion of that revenue, a 59 percent year-over-year increase.
Notebooks, desktops, networking products, network security and cloud software performed well, while sales in storage products, servers and tablets declined, the company said. Resellers serving the public sector and the SMB market showed strong growth, Dannewitz said, with the SMB business increasing by double digits.
The company reported $1.3 million in net income and earnings of 3 cents per diluted share, results largely affected by tax reform enacted through the U.S. Tax Cuts and Jobs Act. Tech Data said its effective tax rate was 29 percent, up from 25.2 percent during fourth-quarter 2017. Dannewitz said the company expects a 26 percent to 28 percent effective tax rate moving forward.
On a non-GAAP basis, Tech Data reported net income of $134.7 million, up 55 percent from the year-ago quarter, and earnings of $3.50 per diluted share. That beat Seeking Alpha's projections by 1 cent.
Dannewitz said that Tech Data has made "excellent progress" on its Avnet TS integration efforts, achieving $50 million in cost synergies for fiscal 2018 and expecting another $50 million to be realized in 2019.