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Information technology (IT) products distributor, Tech Data Corp. (TECD - Analyst Report) reported a disappointing second quarter of 2013. Earnings of 88 cents per share were well short of the Zacks Consensus Estimate of $1.18. However, revenue was slightly better than the consensus mark of $5.86 billion.

Quarter Details

Total revenue declined 7.6% year over year to $5.96 billion. Foreign currency fluctuations negatively impacted revenue by 8% in the reported quarter. Moreover, 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 40.0% of total sales) plunged 11.0% to $2.40 billion. Net sales in Europe (representing 60.0% of total sales) decreased 5.0% to $4.4 billion.

Gross profit decreased 11.6% year over year to $301.2 million. Gross margin was 5.05% compared with 5.28% in the prior-year quarter. The year-over-year decline was primarily due to unfavorable product mix, customer mix and competitive pricing conditions in certain markets during the quarter.

Selling, general & administrative (SG&A) expenses decreased 7.7% year over year to $242.0 million in the reported quarter. This year-over-year decline was due to weakness in the euro and cost improvements resulting from business shutdown in Brazil and Colombia.

However, operating income plunged 24.8% year over year to $59.3 million, primarily due to lower revenue base. Operating margin was 0.99% compared with 1.22% reported in the year-ago quarter.

Geographically, operating income in the Americas was $29.5 million versus $47.6 million in the year-ago quarter. Operating margin in the region was 1.23% compared with 1.77% in the year-ago quarter. Operating income in Europe was $33.6 million or 0.94% of net sales versus $33.9 million or 0.90% of net sales in the year-ago quarter.

Net income was $34.5 million or 88 cents per share compared with $50.1 million or $1.10 per share in the prior-year quarter.

At quarter end, Tech Data had approximately $277.6 million in cash compared with $447.0 million in the previous quarter. Total debt at the end of the quarter was $91.6 million versus $88.7 million in the prior quarter. Cash provided by operations during the quarter totaled $4.0 million. During the quarter, Tech Data purchased approximately 2.9 million shares for $143.0 million.

Outlook

For the upcoming third quarter, Tech Data expects year-over-year sales growth of mid-single-digits in Europe (in €). In Americas, sales are expected to decline mid-single digits annually, primarily due to the revised representation of sales of vendor warranty services and certain fulfilment contracts and the shutdown of the Brazil and Colombia operations. Tech Data expects gross and operating margins to increase sequentially.

Recommendation

We believe that Tech Data’s strategy of shifting resources from lower-performing regions to higher-growth regions, cost reductions (shutting down business in the loss-making Brazilian and Colombian units) and accretive acquisitions (14 acquisitions added $1.5 billion in sales over the last four years) will drive growth over the long term.

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 60.0% of revenue) as well as lack of visibility in government spending in the U.S. Sluggish PC shipments are also expected to hurt Tech data’s top-line growth. Tech Data derives approximately 15% – 20% of revenue from PC distribution.

We, thus, maintain our long-term Neutral recommendation on the stock. Currently, the stock has a Zacks #4 Rank, implying a short-term Sell rating.

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