Revenues were up 10 per cent to $8.9bn (£6.86bn) for Tech Data in Q2, but the market was unimpressed by the shape of the distribution giant's latest figures.
Analysts used the earnings call to put probing questions to CEO Rich Hume concerning Tech Data's long-term profitability following the completion of its blockbuster acquisition of Avnet Technology Solutions (TS).
We pick out four key takeaways from Tech Data's Q2 results.
Tech Data's share price takes a big hit as profit margins tank
The Florida-based distributor's share price tumbled dramatically by 17 per cent in after-hours trading on Wednesday night and Thursday morning following the publication of Tech Data's financial results.
At first glance, one would be forgiven for wondering why its latest figures prompted such a reaction from the stock market - revenues were up 10 per cent globally to $8.9bn, including a 13 per cent jump in Europe to $4.5bn, while GAAP operating income grew by seven per cent to $110.4m.
Dig a little deeper and a different picture emerges. In Europe, operating margins were just 0.64 per cent of overall sales. Global gross profits grew by just two per cent to $527m, causing gross margins to sink from 6.37 per cent to 5.93 per cent.
Speaking to analysts on an earnings call transcribed by Seeking Alpha, Rich Hume admitted that the margin-rich Avnet TS business - which Tech Data has spent the last 18 months integrating - was markedly outpaced by its Endpoint business segment.
He attributed declining profit margins to this imbalanced business mix in favour of its lower-margin PC and laptop sales, coupled with lacklustre software maintenance sales which came in flat for the quarter.
The CEO again pointed to particularly fierce competition in Europe as a major contributor to margin pressures.
"Obviously there is a better financial opportunity in Advanced Solutions versus Endpoint, but Endpoint is where the demand has been quite robust right now," he said.
"Europe in particular has been a challenging market. Again, when we take a look at both of our businesses, both are growing overall, but the Advanced pieces are not growing quite as fast as the Endpoint piece is and that's what's causing the mix issue."
Responding to another analyst, Hume added: "I think that we would absolutely like to have more growth within our Advanced business and that would help our margin profile for sure. You should be assured that the management is focused on driving more towards higher value, both internal to the Endpoint as well as in between Endpoint and Advanced. So when you take a look at the way our investments are lined up for the future, they are all aligned with moving to higher value. So that's what we're intending to accomplish as we move through time."
Tech Data imposes cost-cutting scheme to save $80m a year
Margin pressure has been an ongoing concern for Tech Data. The distributor had previously flagged declining profits, blaming vendor programme changes, a "challenging environment" in some countries as well as necessary investments in its infrastructure.
Tech Data has now implemented a cost-cutting programme in order to create a more "cost-efficient" organisation and reinvest to "accelerate the company's strategic priorities".
The programme - named the Global Business Optimisation Programme (GBO) - will seek to improve Tech Data's go-to-market models globally, digitise processes and drive "increased centralisation and standardisation" throughout Tech Data.
The goal is to create annual savings of between $70m and $80m over the next 18 months to two years. Around half of these savings will be set aside to reinvest in the business - which could include M&A - while the second half will go towards its bottom line.
Hume said he expects the majority of savings from the programme to come in FY2020, with the remainder coming in FY2021.
"The reason it spans over this period is, digitising our business and taking advantage of that digitisation and automation, as some of our projects are a bit longer in cycle. That being said, we do anticipate the predominance of 60 per cent or thereabout, if not a little bit more, of those savings to happen in the FY2020 timeframe.
"As it relates to Europe, certainly we're focused on making sure that we're repositioning that model such that it will be successful moving into the future. So you can assume that we've got our eyes on that business as we go through this programme".
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