Tech Data's CEO reveals the six factors affecting its European business

Rich Hume and CFO Charles Dannewitz talk through the challenges Tech Data is facing on this side of the Atlantic

Tech Data revealed a revenue decline when reporting its quarterly numbers, with the blame placed firmly at the feet of its European region.

The firm's other two geographies - Asia and the Americas - both saw revenue increase, with Europe the problem child.

But investors appear to be unfazed, with Tech Data's share price climbing more than six per cent since Wednesday afternoon. Despite the sales decline Tech Data has boosted its profits, even in Europe.

European profit rose four per cent in non-GAAP terms, while profit as a percentage of revenue was up 12 basis points.

On an earnings call, transcribed by Seeking Alpha, CEO Rich Hume (pictured) and CFO Charles Dannewitz highlighted six areas that are affecting Tech Data's European business, or may do so in the future.

Currency fluctuations

Taking currency complications out of the equation shows a more positive outlook of Tech Data's European business.

Sales fell eight per cent to $4.3bn (£3.4bn), but in constant currencies sales were up one per cent.

Dannewitz said that this revenue increase was driven by five areas: cloud, networking, security, mobility and servers.

The Americas and Asia-Pacific regions saw constant currency revenue growth of six per cent and 19 per cent respectively.

Brexit

Brexit was mentioned by Hume at the beginning of the earnings call, with the CEO praising execs for navigating uncertain waters - although the specifics of Brexit disruption were not really explored.

"Our worldwide teams executed well in the quarter despite the backdrop of concerns around Brexit, global trade relations, and semiconductor shortages, among others," he said.

"While many of these macroeconomic concerns remain, it is clear that the requirement for businesses of all sizes is to digitally transform this, transcending the noise."

Chip shortage

The chip shortage is more of a global issue than a European one, but nonetheless Hume highlighted supply constraints as an issue that kept a sizeable amount of revenue out of reach for Tech Data.

"First of all I want to say that I believe my anecdotal view is that the industry is managing the shortage pretty well," he said.

"I would tell you that the impact on our first quarter was probably consistent with our expectation and maybe even a little bit lower.

"We assess or estimate that on a global basis it was about $100m of top line that if there weren't shortages we would have probably captured."

Hume added that, from conversations with vendors, he expects the supply constrains to begin to ease shortly, but with an "overhang" still forecast in the current quarter (Q2).

US-China tariffs

Every tech CEO reporting results is now having to address the issue of trade tariffs, with Tech Data no exception.

One analyst on the earnings call asked how the tariffs affect Europe specifically, with Hume explaining that the responsibility lies with the manufacturers.

"Generally this is something where the tip of the arrow, if you will, is our vendors," he said. "Vendors usually have the responsibility of landing the product in local jurisdiction and then we actually acquire from there.

"If vendors decide that they have to consider taking price increases associated with incurred incremental costs, then as they raise their prices as a generalisation we do an evaluation and typically we follow those price increases simultaneously.

"So from an overall tariff perspective as we had seen with round one etc, our business is fairly seamless in being able to manage that.

"And as it goes from potentially 10 per cent to 25 per cent, etc, I think that our judgment would be that if there were an impact, that would be the overall macro-level economy slowing down, as opposed to any transactional exposures that we might have in our business."

Huawei hoo-ha

In the same question, Hume was asked to address concerns over Huawei stock. Donald Trump recently declared a state of emergency over "foreign telecoms providers" and issued an executive order banning US businesses from trading with certain suppliers - although it is generally accepted that Huawei is the target.

Much like the US government, Hume did not refer to Huawei specifically, claiming that Tech Data only picks out specific vendors if they make up over 10 per cent of the distributor's business. The question from the analyst, however, referred to the distribution of smartphones in Europe.

"In Chuck's (Tech Data CFO) comments he had stated that from an overall operating income derived from sales perspective, as the trade regulation ebbs and flows we don't have an exposure on an annual basis," he explained.

"That being said, we could be exposed with the inventory that we carry. We do have inventory and we will follow the laws of the US, and as they ebb and flow and determine where they want to go with that in the future, we certainly will comply.

"At the same time, we have a responsibility to respect our vendor relationships and we certainly are doing that as well."

CFO Dannewitz stressed that this inventory is not material to worldwide financial results and represented around four per cent of Tech Data's worldwide inventory.

PC softness

Dannewitz said that after a "super strong" year in the PC market last year, 2019 has been merely "solid", particularly in Europe.

He attributed this to macroeconomic issues.

"[The PC market is] more solid in our business in North America than Europe and I do believe that there are some underlying macroeconomic trends in Europe that might be influencing the demand a bit," he said.

"We all know about Brexit [and] we all know that Germany has a very low growth rate, or flat growth rate, right now.

"So this is speculative and anecdotal but I think that the European demand being less robust than the Americas is associated with those economic factors."