Tech Data keeps credit on track

Tech Data has reported its third-quarter earnings – and with all that market volatility going on out there, I was actually interested in seeing those charts and graphs and pie charts.

Tech Data, it seems, is pretty much on track, though that’s not to say the distie is unaffected by current market conditions. Overall it had a good third quarter, ahead of where it was this time last year.

Perhaps this is because, as Tech Data execs said on a conference call about the company’s third-quarter earnings, VARs typically sell to smaller businesses that are more entrepreneurial, whereas IT spending tends to slow down first in enterprise environments.

While credit continues to be a concern in the channel, Tech Data isn’t overly concerned, since so far the distie is on track with its credit plan (it provides credit for 100,000 customers around the world, and the issuance of credit makes up half of its business). However, this type of economic environment means that weaker VARs are more likely to fall by the wayside, while disties continue to provide credit to stronger VARs that are less of a credit risk. Aside from that, however, it’s pretty much business as usual for Tech Data when it comes to credit.

This is not to say the distie has managed to avoid the volatility of the market altogether. Net sales for the third quarter were US$6.1 billion, an increase of 3.6 per cent from US$5.9 billion last year. But extreme foreign currency volatility – especially during the fun month of October – created what Tech Data calls a “challenging environment.”

Think of the fluctuation of the loonie. Was it only last year that the loonie soared above the U.S. dollar? Now, not only has it tanked, it’s bouncing around on a day-to-day basis, up, down and all over the place. For multinationals, this currency fluctuation wrecks havoc on their bottom line.

If a VAR in Europe, for example, bought a product from a distributor in U.S. dollars, and then the U.S. dollar strengthened against the euro, there would be a foreign currency exchange loss when the payment is made (since potential gross profit gain is recognized on the sale of inventory).

For Tech Data, third-quarter net income totaled US$18.4 million, compared to US$40.9 million over the same quarter last year, and these results include a net foreign currency exchange loss of US$23.5 million (almost three-quarters of that came from Europe).

Tech Data says it recovered a portion of the foreign currency exchange loss through gross profit and expects to recover additional amounts as inventory is sold. But the volatility of the market continues, so it’s impossible to predict how much the distie will be able to recover.

Obviously, other disties are in the same boat. But overall, this isn’t bad news – ultimately, Tech Data is still on track, which it attributes to disciplined inventory and sales management practices.

Because eventually, when the economy recovers, we need to have a channel that’s still in tact and on track.

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Jim Love, Chief Content Officer, IT World Canada

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Vawn Himmelsbach
Vawn Himmelsbach
Is a Toronto-based journalist and regular contributor to IT World Canada's publications.

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