Revenues grew by four per cent in Q4 for Tech Data to $10.5bn, while operating income increased by nine per cent.
The US distributor missed revenue estimates, sending stocks falling 8.8 per cent overnight.
We pick out CEO Rich Hume’s key statements from his earnings call with investors, as he opens up on stripping back Tech Data’s portfolio and continued struggles in Europe.
Hume open to divesting parts of Tech Data’s portfolio
Tech Data will be more aggressive in cutting out areas of its portfolio that yield low returns, said Hume.
Without going into specifics, the CEO even suggested that Tech Data could resort to divesting segments of its portfolio in order to deliver higher profitability and shareholders higher returns.
“We have always been very focused on our portfolio and managing the health of our portfolio, but as we move forward, we are going to be more deliberate in terms of calling out those things that do not provide a good return for our company or our shareholders,” said Hume in an earnings call transcribed by Seeking Alpha.
“Typically when we work on these things there are one of three reactions. The first reaction is: we work with the vendor community and we get a better set of margin opportunities for ourselves. The second would be that we could increase our prices, and perhaps lose a little bit of business but overall have a better financial return. The third is that if we don’t find a way forward then we ultimately divest some segments of our business.”
One analyst commented that stripping back its portfolio is a U-turn against Tech Data’s original ambition of creating an end-to-end proposition via its acquisition of Avnet Technology Solutions.
Hume responded that Tech Data will not scrap entire business segments, but rather exit vendor relationships that deliver low returns.
“We will likely participate in most of the segments, if not all the segments we are in today. There are particular relationships within those segments that deliver a lower overall return than others, so the end-to-end idea of our value proposition is absolutely in fact.
“And I think that when you take a look at the capabilities that we deliver in that end-to-end portfolio, they will continue well into the future. I would just suggest that you think about it in the context of the overall portfolio. The things that provide little or no return are the things we are going after and we are going to use that cash to really fuel our future in terms of where there is more growth within the market.”
Low single-digit revenue growth for fiscal 2020
Tech Data is expecting to finish its current fiscal year with low single-digit revenue growth.
“Depending on which industry analysts you are following, for the coming year the market is going to be somewhere between a three to five per cent [growth] market,” said Hume.
“Long term, I think you can look at our history and expect Tech Data to have the same type of performance relative to the market that you have seen in the past. There will be a period here where we work the portfolio, and again, we will offset some of that growth, but we are very confident in the operating plan we have for fiscal ’20 and we are feeling really good about our future.”
Slowdown in Europe expected to continue
Tech Data’s European president Patrick Zammit pointed to a general slowdown of business in Europe when he spoke to CPI last month.
Revenues were flat in Europe in Tech Data’s Q4 ending 31 January 2019, while sales in the Americas ballooned by 10 per cent, and APAC revenues increased by eight per cent.
“When I look at the regions globally it feels as if Europe is slowing a little bit overall and I think that the Americas are still reasonably healthy from what I have been able to discern or read. That’s the way I see it currently from a geographic perspective.
“Then I think that when you take a look at the guides from the PC-concentrated vendors relative to last year, they are growing, but the growth is lower than it was in the calendar 2018. So I think that reflects the same sort of alignments, if you will, on a year-to-year basis as the PC vendors are calling out.”
Vendors have ‘done a good job’ with mitigating Intel chip crisis
Hume claims that vendors are pointing to Intel’s processor shortage as having a negative impact on revenues, but claims they have done a good job of managing the crisis and reducing the impact on the channel.
He also claimed that Tech Data is expecting to continue benefitting from Windows refresh cycles thanks to support for Windows 7 coming to an end next January.
“My opinion is there will there be a surge in the back end of the year relative to that. I don’t have that crystal ball, but I believe that it’s more of a continuation of a transition. So I would not anticipate a big burst in the back half of the year,” said Hume.