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Information technology (IT) products distributor, Tech Data Corp. (TECD - Analyst Report) reported dismal third quarter 2013 results with earnings of $1.21 per share missing the Zacks Consensus Estimate of $1.33. Reported revenue also missed the consensus mark of $6.21 billion.

Quarter Details

Total revenue declined 8.4% year over year to $6.04 billion. Foreign currency fluctuations negatively impacted revenue by 5% 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 39.0% of total sales) plunged 15.0% to $2.37 billion. Net sales in Europe (representing 61.0% of total sales) decreased 4.0% to $3.67 billion.

Gross profit decreased 10.6% year over year to $308.3 million. Gross margin was 5.10% compared with 5.23% 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 6.5% year over year to $238.7 million in the reported quarter. This year-over-year decline was due to weakness in euro and cost improvements resulting from business shutdown in Brazil and Colombia.

However, operating income plunged 22.4% year over year to $69.5 million, primarily due to lower revenue base. Operating margin was 1.15% compared with 1.36% reported in the year-ago quarter.

Geographically, operating income in the Americas was $33.7 million versus $52.6 million in the year-ago quarter. Operating margin in the region was 1.43% compared with 1.89% in the year-ago quarter. Operating income in Europe was $39.4 million or 1.07% of net sales versus $39.7 million or 1.04% of net sales in the year-ago quarter.

Net income was $45.9 million or $1.21 per share compared with $53.5 million or $1.26 per share in the prior-year quarter.

At quarter end, Tech Data had approximately $515.8 million in cash compared with $277.6 million in the previous quarter. Cash provided by operations during the quarter totaled $33.1 million.

Outlook

For the fourth quarter, Tech Data expects year-over-year sales growth in the range of low-single-digit. Gross and operating margins are expected to increase on a sequential basis. Tech Data expects year-over-year sales growth of low-single-digits in Europe (in €). In Americas, sales are expected to decrease in the low-double digit range.

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 #3 Rank, implying a short-term Hold rating.

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