Tech Data's share price shot up by 19.6 per cent after the market closed on Thursday night following a broadly positive financial Q2.
GAAP operating income climbed by 13 per cent year on year to $124.7m, on revenues which increased two per cent to $9.09bn.
Its Americas and Asia regions posted buoyant growth at seven per cent and 14 per cent respectively, but Europe was again the weak link for Tech Data with a two per cent revenue decline.
We pick out the top four takeaways from CEO Rich Hume on the distributor's earnings call.
CEO credits Avnet TS business for growth
Its blockbuster acquisition of Avnet TS in 2016 has largely contributed to Tech Data's glowing financial numbers this year, it claims.
Rich Hume conceded that economic and market conditions are much tougher than last year, but Tech Data's move on Avnet TS has helped it continue to grow.
"I think that the TS acquisition was a major step in building a wide and broad foundation for our portfolio which serves us well in a market like today," he said.
"Candidly, I think having the breadth and depth of our portfolio allows our sales teams to move to where the demand is a bit more robust.
"I think when things flow in the market, the benefit of having such a broad portfolio really benefits us. And when I reflect on that, I think about the decisions that we've made when we had done the [Avnet] TS acquisition, and that just strengthened the overall frame of our portfolio and really serves us well in markets like this."
Tech Data finally finished integrating the Avnet TS business in August last year after Avnet assets in Germany merged under the Tech Data GmbH entity.
It's been a year since Tech Data imposed an $80m-a-year cost saving programme
After a Q2 last year, when Tech Data took a huge hit to gross profit margins, it implemented a cost cutting programme (dubbed the Global Business Optimisation Programme) to save $70m to $80m a year over the next two years.
At the time it said around half of those savings will be set aside to reinvest in the business - including targeted M&A - while the other half will go towards its bottom line.
Hume said Tech Data is on track to hit its $70m to $80m target by the end of its fiscal 2021.
He added that the distributor has continued to cut vendors from its line up as part of its "portfolio optimisation" efforts.
When pressed by one analyst, Hume revealed that Tech Data lost around $300m in revenues as a direct consequence of the portfolio optimisation programme.
"The impact for Q2 as compared to last year was pretty consistent with the amount that we noted in Q1 so that's around $300 million of revenue related to the optimisation programme," he said.
But the programme helped Tech Data achieve a seven per cent gross profit increase across the group to $562m, an expansion of 25 basis points to 6.18 per cent.
Cautious forecast for rest of the year
Hume stopped short of saying that Tech Data could repeat the bumper Q3 and Q4 of last year. For the second half of this year, Tech Data will face a tough year on year compare, new tariffs emerging from tensions between the US and China, and softer economies in several of Tech Data's markets.
Tech Data's Q3 forecast is only anticipating net sales of $9.2bn to $9.5bn, compared with $9.3bn in the same quarter last year.
"We believe the guidance that we've provided is consistent with the way we built our guidance in the past," said Hume.
"Go back and take a look at our Q3 and Q4 last year. I'll give my opinion; we had a phenomenal Q3 and Q4. The operating income growth were, for memory, nearing 20 per cent or 20 per cent overall. I remember last Q4 thinking, wow, this is really quite impressive. So we have the backdrop in Q3 and Q4 of harder compares relative to last year, and at the same time, a bit of a softer market.
"We have less and less visibility… there is, by definition of the timeline, more and more risk. So it really is hard to project what's going to happen based on some of the trade and regulation things going on [and] based on the fact that it appears that more economies around the world are softening. That was the reason for our cautious tone overall."
Tech Data clears out inventory affected by US-China trade tensions
The distributor revealed that it has reduced its inventory levels ahead of impending trade tariffs between the US and China.
CFO Charles Dannewitz said Tech Data has reduced its inventory of products that could be impacted by the trade tariffs by 50 per cent over the last three months.
As a result of the inventory reduction, only two per cent of Tech Data's total inventory could be affected by higher tariffs, Hume added, down from four per cent in Q1.
"Certainly there is lots of uncertainty as we move forward. But I think the reduction of the overall inventory was at a rate relative to our expectation," Hume said.
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