Tech Data Misses Profitability Mark Due To Rebate Woes

Tech Data's failure to unlock rebates from big vendors in its Avnet Technology Solutions business contributed to a lower-than-expected earnings forecast and a dramatic after-hours stock price slide.

The Clearwater, Fla.-based distributor said weaker-than-expected sales around data center products caused the company to miss out on back-end rebates from a few very large vendors, according to Bob Dutkowsky, chairman and CEO. Even a relatively small sales shortfall can result in Tech Data not capturing a slice of the large, margin-rich rebates, Dutkowsky said.

"When a vendor shows a decline, it makes it a very difficult environment for a distributor to optimize the rebate potential that exists," Dutkowsky told Wall Street analysts Thursday. "We know we can execute better in this area, and we will."

[Related: Tech Data Unveils Managed Mobility Services To Drive Subscription-Based Sales For Channel Partners]

The new Tech Data is learning how to handle larger, more complex business associated with vendors where the distributor didn't previously have deep skills, Dutkowsky said. Although Tech Data had worked with these suppliers in the past, Dutkowsky said the volume and magnitude of the business have increased dramatically as a result of February's $2.6 billion acquisition of Avnet Technology Solutions.

As a result, Dutkowsky said Tech Data didn't have the history of managing these vendors at the volume, scale, and scope that the distributor needed to in its most recent quarter. This was Tech Data's first full quarter of results since the Avnet TS deal closed.

"We're learning to manage the challenges and complexities," Dutkowsky said.

IBM was the only vendor to account more than 10 percent of Avnet's consolidated billings in the company's 2014, 2015 and 2016 fiscal years, while Tech Data's largest vendors in recent quarters have been Apple, HP Inc., and Cisco. Dutkowsky declined to identify the specific vendors where Tech Data has experienced rebate troubles, and IBM didn't immediately respond to requests for comment.

The challenge of hitting rebate targets can be amplified when a vendor changes their coverage model or the absolute fundamentals of the program inside of a quarter, Dutkowsky said. For instance, Dutkowsky said having a supplier move channel partners from a vendor-oriented coverage model to a distributor-oriented coverage model or vice versa has an impact on the distributor's profitability.

Also, Dutkowsky said several of Tech Data's major vendors didn't see sales grow at the rate that they had anticipated in the most recent quarters. The rebate targets for distributors, though, are assigned based on the vendor's expected growth rate, Dutkowsky said.

"If a vendor grows slower, our ability to grow at least as fast as them is difficult, and the targets are typically built in stretch fashion," Dutkowsky said.

Tech Data enjoyed a strong sales performance in some lower-profitability products such as PC sales to large national accounts in the United States, Dutkowsky said, but got less performance out of its higher-profitability products.

"We still had our eyes on the rebate potential across all of these product categories," Dutkowsky said. "And then when we got to the end, we came up short on the rebates."

Dutkowsky said the rebate specifications tend to ebb and flow based on the performance of the vendors and the dynamics and growth the marketplace is experiencing. Rebate structures for some of Tech Data's 1,000 vendor partners will get better in the coming quarters, Dutkowsky said, while others will get more difficult.

"Even though the dynamics of a rebate might be difficult for a distributor to achieve right now, the momentum will flow back to a more achievable level," Dutkowsky said. "It moves back and forth."

Tech Data saw sales for the quarter ended July 31 climb to $8.88 billion, up 39.8 percent from $6.35 billion the year earlier. That smashed Seeking Alpha's projection of $8.75 billion.

Net income inched ahead to $47.5 million, or $1.24 per share, up 2.4 percent from $46.4 million, or $1.31 per share, last year. On a non-GAAP basis, net income jumped to $66.7 million, or $1.74 per share, up 33 percent from $50.3 million, or $1.42 per share, last year. However, that missed Seeking Alpha's non-GAAP earnings estimate of $2.06 per share in the most recent quarter.

Tech Data's stock price plummeted $21.59 (19.58%) in after-hours trading Thursday to $88.70 per share. That's the lowest Tech Data's stock has traded since April 18 of this year.

Revenue for the Americas soared to $4.2 billion, up 57 percent from $2.7 billion as strength around PCs, software subscriptions, cloud, and security outweighed declines in storage, tablet, and consumer product sales.

For the coming quarter, Tech Data expects non-GAAP earnings per share of $1.84 to $2.04 on sales of $9 billion to $9.35 billion. Analysts had been projecting earnings of $2.22 per share on sales of $8.66 billion.