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Tech Data Takes the Next Step Toward Recovery


The distributor is one of the best barometers of industry health.

Monitoring all aspects of the technology supply chain is always a good practice. However, all too frequently many investors ignore distributors as if they're in another business or something. In reality, distributors are among the best barometers of health (or lack thereof) because of their exposure to a very broad base of customers and suppliers. That, coupled with razor-thin margins, creates an existential need to stay on top of the slightest ripple in demand.

Tech Data (TECD) is usually a good read on the state of the world given its fiscal year end (i.e. January). Consequently, we get a look that's one month later into the cycle.

The company's results last night were well above street consensus for both revenue and earnings even after excluding a $0.10 per share gain from the reversal of a tax valuation allowance. Foreign exchange hit its European operations but both Europe and the US produced top-line growth on a constant currency basis.

The conference call was a continuation of many we've heard over the last six to seven weeks. There was almost a sigh of relief from management after recognizing they've survived what may have been the worst economic storm of their careers. Their comments echoed others who saw the first positive growth in their top line in a year or more.

Like many, Tech Data saw fairly balanced growth in the quarter. As you'd expect, televisions and other flat-panel displays were strong in the period. However, so were a variety of commercial-oriented product areas such as software (virtualization in particular), servers, and storage. Some networking products and printers were characterized as being in short supply and the company could have sold more had they had the inventory. Tech Data's Advanced Information Solutions (AIS) group, the business unit that focuses exclusively on US data center sales, saw its revenue up 24% from the year-ago period.

Despite improvements, the market remains extremely competitive. Pricing is aggressive and management acknowledged there are deals in which it will not participate that are taking place below cost. The determination to maintain price discipline led to the "disappointment" for some analysts and pressure on the stock in the aftermarket.

The outlook for the company's fiscal first quarter (ending April) was for mid-single digit year-year revenue growth. That compares with the Street consensus of +9.9% ($5.48 billion). Management noted that it's not going to chase profitless deals for the sake of goosing the top line. I think too, like many in the supply chain, this downturn was so difficult, they elect to remain cautious until there are more data points to support a stronger outlook.

Unless I missed it, I didn't hear any comments about inventory builds or double-ordering (a favorite bear argument) last night. But that's not to say we don't watch out for it because it does happen.

For now, Tech Data's results are just another step on the road to recovery.
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No positions in stocks mentioned.
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