Tech Data Reports Mixed 1Q

Tech Data Corp. ( TECD - Analyst Report ) reported fiscal first quarter 2013 earnings of $1.24 per share, which surpassed the Zacks Consensus Estimate of $1.17 and increased 20.4% year over year.

Quarter Details

Total revenue in the quarter decreased 6.9% year on year to $5.89 billion and missed the Zacks Consensus Estimate of $6.18 billion. Unfavorable foreign currency negatively impacted the top line by 4.0%. Also, revised representation of sales of vendor warranty services and certain fulfillment contracts had a 3.0% negative impact on the quarter’s result.

Net sales in North America and Latin America (representing 42.0% of total sales) dipped 6.0% to $2.5 billion. Excluding Brazil and Columbia and modification in presentation of vendor warranty services and certain fulfillment contracts, sales edged up 2% in the quarter. Net sales in Europe (representing 58.0% of total sales) dropped 7.0% to $3.4 billion. Excluding modification in presentation of vendor warranty services and certain fulfillment contracts, sales inched 1.0% higher.

Gross profit decreased 4.0% year over year to $320.2 million. Gross margin was 5.4% compared with 5.2% in the prior-year quarter. Gross margin expanded primarily due to modification in presentation of vendor warranty services and certain fulfillment contracts.

Selling, general & administrative (SG&A) expenses in the reported quarter were $239.3 million, down 7.1% year over year. This yearly decrease was due to weakness in the euro and proceeds from legal settlement worth $3.7 million.

Reported operating income increased 6.7% year over year to $80.9 million. Operating margin increased from 1.20% reported in last year to 1.37% on the back of lower operating expenses.

At quarter end, the company had approximately $447.0 million in cash compared with $505.2 million in the previous quarter. Total debt at the end of the quarter was $88.7 million versus $105.8 million in the prior quarter. Cash provided by operations during the quarter totaled $8.0 million. During the quarter, Tech Data purchased approximately 783,000 shares for $42.0 million.

Outlook

Tech Data expects sales to remain flat sequentially for America and Europe in local currencies during the second quarter of 2013.

Recommendation

Tech Data, which distributes products manufactured by Apple Inc. ( AAPL - Analyst Report ) and Hewlett-Packard Co. ( HPQ - Analyst Report ) , expects IT spending to remain sluggish in fiscal 2013. We believe that Tech Data faces a number of headwinds in the near term, including a volatile European market (approximately 58.0% of revenue), lack of visibility in government spending in the U.S. and the negative effects of the floods in Thailand, which is expected to hurt PC shipments in 2012.

However, we believe that the company's profitability will be driven by higher HDD pricing in the near term. Tech Data's strategy of shifting resources from lower-performing regions to higher-growth regions and cost reductions are expected to drive the long-term growth.

Thus, we maintain our long-term Neutral recommendation on the stock. Currently, the stock holds a Zacks #4 Rank, implying a short-term ‘Sell’ rating.