Tech Data's shares crashed last night after its results disappointed Wall Street and it complained of missing vendor rebate targets. Here we round up four key takeaways from its Q2 numbers.
1) Results have forced a Wall Street rethink
Tech Data's decision to hoover up 'big four' rival Avnet Technology Solutions has clearly gone down a treat with the money men and women on Wall Street, with its share price rising 27 per cent for the year to date.
That was until last night, when its market value dropped 19 per cent as it missed its quarterly profit targets and disappointed Wall Street with its guidance.
This is Tech Data's first full quarter since it sealed the Avnet TS mega-merger in February, and the deal has made it even bigger than everyone expected, with Q2 revenues surging 40 per cent annually to $8.9bn (£6.9bn). Nice. Pro-forma growth in both Europe and the Americas was in the low single digits.
Avnet TS has also breathed fresh life into Tech Data's margins. Gross margins hit 5.8 per cent for the quarter, up from 4.98 per cent a year earlier, as the more enterprise-focused Avnet business made its margin-enriching presence felt.
So far, so good.
The snag: Tech Data's gross margins and earnings should have been even higher than this, and the fact it missed its numbers on this score clearly disappointed Wall Street.
It was careful to blame the shortfall on multiple factors, including execution issues, increased competition - particularly here in Europe - and a fall in rebates from some of its key vendor partners.
Despite this, Tech Data's shares are still up by about five per cent for the year to date as CEO Robert Dutkowsky argued that the giant is a "stronger and more complex company today than it was a year ago".
Tech Data is not yet hitting the mark with Avnet's key vendors
A "significant piece" of the shortfall was generated by Tech Data missing its vendor rebate targets, Dutkowsky revealed on a Q2 earnings call.
Although stopping short of naming names, Dutkowsky clearly fingered Avnet TS' biggest vendors when he said that the problem lies mainly with "a few very large vendors"… "and these are not vendors that we have had a long history of managing at the volume and scale and scope that we had to manage through this quarter".
During Q2, only Apple (12 per cent), HP Inc (11 per cent) and Cisco (11 per cent) generated over 10 per cent of Tech Data's sales, but it inherited a big relationship with IBM through the Avnet union.
Dutkowsky explained that a relatively small sales shortfall in technologies it carries in its newly enlarged datacentre arm can result in it missing margin-rich rebates, due to the project-based nature of the business.
A number of vendors on this side of its business changed their rebate programmes during the quarter, affecting its profitability, he indicated. To make matters worse, several major vendors didn't grow at the rate they planned during the quarter, Dutkowsky added, making it even harder to hit rebate targets that were assigned based on projected growth.
"We're learning to manage the challenges and the complexities and that's why we can say that that fits into that category of execution, and we know we can execute better in this area and we will," he said on the call, a transcript of which can be found here.
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