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The IT products distributor Tech Data Corp. (TECD) announced encouraging results for the third quarter of fiscal 2011, beating the Zacks Consensus Estimate of 95 cents per share with a surprise of 12.6%. Both revenue and earnings per share (EPS) were a record in the quarter attributed to strong demand for technology products in both the Americas and Europe.

Net income for the reported quarter was $50.5 million, compared with $43.1 million in the year-ago quarter. EPS was $1.07, compared with 84 cents in the year-ago quarter. Effective February 1, 2010, Tech Data reclassified certain foreign currency exchange gains or losses within the cost of sales from Other (income) expense.

Revenues

Total revenue for the reported quarter was $6.16 billion, an increase of 9.2% from $5.64 billion in the prior-year quarter. This was above the Zacks Consensus Estimate of $5.77 billion. However, results were hit by a stronger U.S. dollar that negatively impacted sales by 5 percentage points in the quarter. Sequentially, revenues increased 12.6%.

North America and Latin America (representing 44% of total sales) increased 9.7% to $2.70 billion and European sales (representing 56% of total sales) increased 8.9% to $3.46 billion. The increase in net sales in both regions was due to strengthening demand as well as the inclusion of sales of five European companies acquired in fiscal 2011.

Most recently, Brightstar Europe (a joint venture between Tech Data and Brightstar) acquired Triade Holding, a privately held portfolio of value added distributors of consumer electronics, mobility and IT products in Benelux and Denmark. The deal will be accretive to fiscal year 2011 earnings.

Operating Performance

A prudent execution of Tech Data's inventory pricing and freight management practices along with higher revenues resulted in a quarterly gross margin of 5.3%, compared with 5.2% in the prior-year quarter.

Selling, General & Administrative (SG&A) expenses in the reported quarter were $243.2 million (4.0% of total sales), compared with $230.5 million (4.1% of total sales) in the year-ago quarter. As a percentage of net sales, the decrease in SG&A was primarily due to higher sales. On a dollar basis, SG&A expenses upped 5.5% year over year, primarily due to the inclusion of operating expenses of five European companies acquired in fiscal 2011 as well as increased costs to support growth, partially offset by the impact of weak foreign currencies.

Overall operating income grew 24.4% year over year to $81.0 million, or 1.3% of net sales, compared with an operating income of $65.1 million, or 1.2% of net sales in the year-ago quarter.

Geographically, operating income in the Americas was $46.1 million, or 1.7% of net sales, compared with $39.4 million, or 1.6% of net sales in the year-ago quarter. Operating income in Europe was $37.1 million, or 1.1% of net sales, compared with $28.7 million, or 0.9% of net sales.

Balance Sheet & Cash Flow

During the reported quarter, Tech Data used $105.0 million of cash from operations versus $196.0 million generated in the previous quarter. At quarter-end, the company had approximately $706.5 million of cash, compared with $940.1 million of cash in the previous quarter.

Total long-term debt at the end of the quarter was $392.4 million versus $342.6 million in the previous quarter. Tech Data had a net cash position of $314.1 million as of October 31, 2010 versus a net cash position of $520.0 million as of July 31, 2010.

Outlook

Tech Data expects recent demand trends to continue in the fourth quarter of 2011. Revenues are expected to surpass the seasonal pattern. The current Zacks Consensus Estimate for the fourth quarter is pegged at $1.31 per share in earnings.

With strong earnings momentum, diversified customer base, increased acquisition, diverse product portfolio, significant operating efficiency and share repurchases, we remain positive on the company’s long-term growth.

However, the drag in worldwide IT spending and a stronger U.S. dollar could negatively impact sales in the coming quarters. Intense competition and a weak industry pricing also remain areas of concern.

In the run up to the earnings release, analysts’ expectations were mixed as 1 of the 9 analysts providing estimates raised his estimate while another analyst lowered his estimate for the third quarter.

The shares trade at a premium to industry leader, Ingram Micro (IM - Analyst Report). Thus, our long-term Neutral rating indicates that the stock would perform in line with the broader market. Currently, the stock has a Zacks #3 Rank, and a short-term Hold rating.

Source: Tech Data Reports Strong Q3, Expects Trend to Continue