Tablets a double-edged sword for Tech Data
Distributor sold $2bn worth of tablets last year but shift in product mix hit its profits
The margin quandary the tablet boom presents the channel has been laid bare in distribution giant Tech Data's latest results.
The world's second-largest distributor - parent of UK brand Computer 2000 - shifted $2bn (£660m) worth of tablets in its fiscal year to 31 January 2013, compared with $1bn a year previously and $300m the year before that.
But although Tech Data's Q4 sales came in ahead of plan, its profits fell short of both its expectations and last year's total, with tablets partly to blame.
SDG - the UK-based distributor Tech Data acquired on 1 November - and the after-effects of a recent SAP deployment in the US were also blamed as Q4 non-GAAP earnings fell 17 per cent year on year to $93.5m.
Speaking on a Q4 earnings call, a transcript of which can be found here, chief executive Robert Dutkowsky said the distributor last year faced "one of the IT industry's most rapid product mix shifts".
He was referring to the fact that Tech Data sold fewer higher-margin products, such as servers, and more lower-margin products such as tablets and software "which resulted in a dramatic shift in our vendor concentration". Mobile phone sales were also up, with its European Tech Data mobile business booming 40 per cent in euros.
"Growth in these products was partially offset by declines in historically richer-margin product, such as industry-standard servers, which put pressure on our gross margin and resulted in lower profitability and earnings for the fiscal year," Dutkowsky (pictured) explained.
The boom in Tech Data's tablet sales is due not only to the explosive growth the market is enjoying (Q4 shipments rose 75 per cent year on year to 52.5 million according to IDC) but also the fact that tablet vendors are also known to be increasingly favouring distribution as a route to market.
And this gave Tech Data's top line a nice bump. For the fiscal year, the distributor's total sales fell four per cent to $25.4bn. Without tablets, that would have been an eye-watering 11 per cent drop.
But, as Dutkowsky pointed out, tablets carry tight gross margins. When demand is strong, these high-velocity products carry good operating leverage, he explained, but when demand softens, such as in Q3, "it was more difficult to drive the desired operating leverage that significantly impacted our earnings in the quarter".
SDG contribution
SDG weighed in with $623m Q4 sales in Europe, which saw total revenue power up 12 per cent to $4.9bn. Organic sales in Europe reached the highest Q4 level in the region's history, with "good year-over-year growth" in the UK, Tech Data said.
Dutkowsky said the integration of SDG is going as planned, but the addition was dilutive to margins and profits in Q4, after consideration of interest on the acquisition debt.
"We will integrate SDG into our IT systems and logistics facilities to achieve the full benefits of the acquisition beginning in fiscal 2015," he stated.
Dutkowsky added that he was "proud of his team's accomplishment this past year", claiming the distributor's efforts will drive a better performance next year.
"As we begin fiscal year 2014, I am confident that we can address the vast majorities of the factors that cause our Q4 underperformance and that they will be resolved in the near term, although we anticipate our first-quarter earnings to be down in both regions year over year due to the difficult compare created by our strong results in Q1 of fiscal 2013," he said.