A Little Less Talk, a Little More Action at Tech Data
No
more excuses. Now that IT product distributor Tech Data says it’s done
with its Europe, Middle East, and Africa restructuring, it’s time to
get back to business and squeeze some more blood from those bone-dry
stones.
If
you’re not familiar with the company, let me point out that it operates
in an extremely low-margin business. Tech Data and rivals like Ingram
Micro and SYNNEX routinely run on gross margins below 6%, and net
margins very close to that red line. Any change in pricing power,
operating efficiency, or tax rates can have a tremendous impact on the
bottom line, given that increasing the net take by one percentage point
is likely to double the dollar amount.
That’s why the completion of
that two-year restructuring project is so important: Not only does the
company get to reap the operational benefits of this belt-tightening
move now, but it also no longer has to pay for the process. This
quarter, $8.9 million was earmarked for the EMEA changes, bringing the
total restructuring cost to almost $55 million over the past six
quarters. That’s a heavy load for a company that made a net profit of
$32.6 million over the past year, including the restructuring cost but
excluding a $155 million goodwill impairment charge in the previous
quarter.Computer system builders like Dell and Hewlett-Packard are
often held up as paragons of virtue when it comes to making profits out
of massive revenues and sliver-thin margins, but those guys have
significant server hardware and support services departments, which
bring margins up from the 4% or so where their PC segments usually
dwell. A fairer comparison would be Gateway, which doesn’t have the
luxury of falling back on those cash cows when times get hard, and
currently sports a 6% gross margin.An investment in businesses like
Ingram Micro, Gateway, or Tech Data, then, is a vote of confidence in
the management team. Tech Data pushed $21 billion worth of high-tech
commodities through its systems over the past year. But a hardware
distributor doesn’t get to skim much off the top of each order, and the
challenge is to make the operation run with as little friction as
possible. Again, any small improvement stands to bring in huge
benefits.