Despite Q3 Net Slide, Tech Data Says Credit Still Available to Solution Providers

IT distributor Tech Data's net income took a serious hit in the third quarter, even as revenues climbed by 3.6 percent year over year.

Tech Data CEO Robert M. Dutkowsky tells Channel Insider that the net income drop of 55 percent was due to negative economic conditions and "extreme" currency volatility, particularly during the month of October.

"The currency fluctuations that happened over the last quarter—in the history of the euro you've not seen as dramatic a swing as there was in this past quarter," Dutkowsky says. "A lot of that happened in two days in October that were the most severe days in the history of the euro."

However, Dutkowsky points out that in spite of deeply challenging macroeconomic conditions and extreme currency fluctuations, "We had a very good quarter as a company. We grew revenues. We did a good job of maintaining operating income."

Tech Data reported net income of $18.4 million or 37 cents per share for its third quarter, compared with $40.9 million or 73 cents per share for the same period a year ago. The company says results included a foreign exchange currency loss of $23.5 million, compared with a gain of $2.4 million during the same period a year ago.

Tech Data's net revenue totaled $6.14 billion for the third quarter compared with $5.92 billion during the same period a year ago. Still, the net revenue came in lower than the company's estimates issued in August of $6.3 billion to $6.5 billion. Dutkowsky says the difference between the forecast and the actual revenue could also be attributed to volatile foreign currency exchange rates.

As an example of the effect of exchange rate volatility, Dutkowsky points to a hypothetical sale of hard drives, in which Tech Data quotes a price to a reseller and that reseller advertises that price to customers, but then the exchange rates change.

"We can't go back to reseller and say we've got to change the pricing on that," Dutkowsky says. "So we'd honor prices and we'd lose money on that."

In spite of the volatility in the quarter, executives at Tech Data say the company remains committed to providing credit to its resellers, and has not noticed any significant increase in bad debt.

"There's some confusion because people hear the banking infrastructure is imploding, and they think all credit offerings must be in trouble," Dutkowsky says. "That's not the case with Tech Data's credit to customers. We continue to carefully offer credit to customers that are solid credit risks and that will pay it back. That is not to say that there won't be customers that go out of business and don't pay us back. But we plan for that."

"We know our bad debt is going to pick up due to failures in the market place," Tech Data Chief Financial Officer Jeffery Howells told analysts during an earnings call. "During the dot-com bust and 9/11, we had strong solution providers who went out of business because their end users failed to pay them. That's why our consistent credit policies of extending 30 day terms—a short cycle on those receivables—should benefit us."

That said, Howells notes that Tech Data is keeping a close eye on how resellers are repaying distributors across the industry.

"Have we seen any deteriorations? Maybe 1 percent deterioration in the last 30 days in accounts receivable aging," Howells says. "We are not complacent. We are watching closely. We are serving fewer resellers today than we did five years ago. But those resellers today are stronger and better. We are not overly concerned that we will have a massive change in our bad debt or receivable performance."

Dutkowsky tells Channel Insider that through three quarters of 2008 so far the performance of Tech Data's credit business looks consistent with previous years.

"We are watching it very carefully and we continue to manage our credit infrastructure very aggressively," he says.