Tech Data Corp (TECD) will be selling selected Microsoft (MSFT) products through Electronic Software Delivery (“ESD”) as the two agreed to extend their partnership. Resellers can easily download several Microsoft products, including Microsoft Office suite, through Tech Data’s online portal ActivateHere.
ActivateHere will not only help in the secured and efficient delivery of the software electronically, but it will also lower resellers’ cost burden, as it will eliminate the need of physical storage. The process will enable end users to instantly activate their Microsoft products, which will boost business efficiency. This will bolster customer base of the resellers, which will ultimately help Tech Data to earn higher revenues going forward.
Moreover, we believe that a timely delivery of the products will boost Tech Data’s creditability in ensuring a better customer satisfaction. This will expand its customer base over the long term. Lately, Tech Data has been diversifying its operations to get a better traction in the small to mid-size business (“SMB”) segment. We believe that the extended partnership will help it to further penetrate this segment going forward.
Currently, Tech Data has partnerships with all three major companies of the PC industry - Apple (AAPL), Hewlett-Packard (HPQ) and Microsoft. Although sluggish PC shipments are expected to hurt Tech Data in the coming quarters, we believe that its diversified business model will help it to offset any significant weakness going forward. Tech Data derives approximately 15% – 20% of revenue from PC distribution.
Moreover, we believe that Tech Data’s strategy of shifting resources from lower-performing regions to higher-growth regions, cost reductions (shutting down businesses in the loss-making Brazilian and Colombian units) and accretive acquisitions (14 acquisitions added $1.5 billion in sales over the last four years) will drive growth over the long term.
However, Tech Data expects IT spending to remain sluggish in fiscal 2013. We believe that Tech Data faces a number of headwinds in the near term, including a volatile European market (approximately 60.0% of revenue) as well as lack of visibility in government spending in the U.S.
Thus, we maintain our long-term Neutral recommendation on the stock. Currently, the stock has a Zacks #3 Rank (Hold).
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