Tech Data Misses on Q1 Earnings, Shares Fall - Analyst Blog

Tech Data Corp. TECD reported unimpressive first-quarter fiscal 2015 results. Despite rising 9.7% from the year-ago quarter, earnings of 72 cents per share missed the Zacks Consensus Estimate by 18 cents. Share price declined 4.3% ($2.68) to close at $60.26 on May 29, 2014.

Quarter Details

Tech Data's revenues improved 9.4% from the year-ago quarter to $6.73 billion. Favorable foreign currency contributed 3.0% to the year-over-year revenue growth. The Americas (36.8% of revenues) and Europe (63.2% of revenues) increased 8.0% and 10.3% year over year, respectively.

The year-over-year growth in the Americas was primarily driven by strong growth in the U.S. and Canada. The U.S. results were positively affected by robust performance from small and medium size business and strong growth in the education, federal and healthcare segments.

Product-wise, robust sales of Advanced Infrastructure Solutions as well as personal computers and tablets drove the results in the Americas.

Europe's strong revenue growth was driven by sales increase across the major regional segments, which increased on a year-over-year basis. Benelux, Germany, Iberia and Italy posted double-digit sales improvement during the quarter. Sales in the United Kingdom declined in the quarter.

Since Nov 2013, Tech Data started distributing Apple's AAPL iPhone and related accessories, which also drove sales in the region. Apple was its second largest customer contributing 12.0% of first-quarter sales just behind Hewlett-Packard HPQ. H-P accounted for 22.0% of sales in the reported quarter.

Gross margin contracted 20 basis points (bps) from the year-ago quarter, driven by unfavorable product mix.    

Selling, general & administrative (SG&A) expenses increased 2.9% year over year to $284.2 million in the reported quarter. As a percentage of revenues, SG&A expenses declined 30 bps due to strong operating leverage in both the Americas and Europe.

Operating profit improved 10.6% year over year to $51.2 million. Operating margin remained almost flat on a year-over-year basis at 0.8%. Geographically, operating profit in the Americas decreased 3.5% from the year-ago quarter, while European operating profit plunged 39.6%.

GAAP net income was $13.5 million compared with $17.8 million in the year-ago quarter. Adjusting acquisition-related amortization of intangibles ($7.4 million) and restatement-related expenses ($12.2 million) net income on a non-GAAP basis was $27.7 million. Non-GAAP net income was higher than $25.1 million reported in the year-ago quarter.

GAAP earnings of 35 cents per share declined from 47 cents reported in the year-ago quarter. Including adjustments related to one-time items, non-GAAP earnings were 72 cents per share.

Tech Data had approximately $675.6 million in cash and cash equivalent, up from $570.1 million reported in the previous quarter. Total debt was $404.0 million compared with $397.6 million at the end of the last quarter.

Outlook

Tech Data expects improved profitability for fiscal 2015. However, much of the improvement is expected to come in the later half due to seasonal effects from Europe.

For the second quarter of fiscal 2015, management expects sales to grow in low-to-mid single-digit range on a year-over-year basis in both the Americas and Europe. Management expects gross margin percentage to be in line with the recent levels.

Non-GAAP effective tax rate is expected in the range of 35.0% to 37.0%. For fiscal 2015, Tech Data expects non-GAAP effective tax rate in the range of 31.0% to 33.0%.

Capital expenditure is forecasted to be approximately $40.0 million for the fiscal year.

Our Take

We believe that company's growing exposure to volatile European markets remains a concern. Moreover, Tech Data's back-end loaded guidance will remain a headwind in the near term.

Nevertheless, Tech Data will benefit from pent-up demand for personal computers in the rest of 2014. Tech Data's partnership with Google (GOOGL) to distribute Chromebook and VMware will drive its top-line growth. Further, the company's improving execution (particularly in Europe), superior customer service and improving market share in the Americas are the major positives.

Currently, Tech Data has a Zacks Rank #3 (Hold).

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