Summary:
The world’s leading technology distributor Ingram Micro reported better-thanexpected
second-quarter 2016 results, with both the top and bottom lines surpassing
the Zacks Consensus Estimate. However, revenues decreased on a year-over-year
basis primarily due to foreign exchange fluctuations. Nonetheless, its focus on highmargin
markets and strategic acquisitions to increase market share are encouraging.
Ingram Micro has been signing distribution deals with a number of original equipment
manufacturers, thereby expanding the product portfolio. Furthermore, we remain fairly
optimistic about its strategic relationships with network giants such as Juniper
Networks, Cisco and IBM. Additionally, the company’s focus on cloud computing
products is expected to drive growth.
Reasons To Buy:
- Ingram Micro is one of the biggest players in the IT distribution business. The sheer size and business volume ensure bargaining power with product manufacturers and resellers. The company’s geographical diversity makes it a logical choice for manufacturers seeking to increase international exposure. Moreover, it helps the company to mitigate the risk of operating abroad and enables it to take advantage of high growth opportunities in emerging markets, apart from nurturing its channel relationships.
- Ingram Micro has been restructuring its business by reducing headcount in all its operational regions and consolidating its mobility and distribution warehouse operations. In the first phase of action, Ingram Micro consolidated all its German mobility and distribution warehouse operations into a single unit. It also merged the Belgian warehouse with its Netherlands operations. These restructuring initiatives also enabled the company to operate from lower cost locations in Europe. The resultant annual cost savings are expected to be nearly $100 million in 2016. With these business realignments in place, Ingram Micro expects to focus its business resources on high-margin growth opportunities, especially in cloud computing and data-center solutions that will not only generate additional revenues but also support margins.
- Ingram Micro’s exposure to the small and medium business (SMB) segment could prove to be a key growth driver. Being one of the largest segments of the IT market in terms of customers and total revenue, the SMB end-user segment generates higher gross margins for distributors as suppliers find it difficult to establish their presence in the market. Most of the current spending by SMBs is centered on cloud computing because this enables significant cost savings. This is increasing the demand for technology and helping distributors such as Ingram. Research firm TechNavio expects worldwide spending by SMBs to grow at a compounded annual growth rate of 5.54% during 2013–2018. It is expected that SMB IT spending will be predominantly in the areas of telecommunications equipment, packaged software and IT services. Additionally, adoption of cloud-based services will gain prominence during this time. Ingram’s focus on these segments is therefore likely to translate into strong growth.
- Strategic acquisitions have not only expanded Ingram Micro’s geographic reach but also broadened its product portfolio. Moreover, certain acquisitions have given the company a strong foothold in the mid-range enterprise market. Of the many acquisitions made by the company in the recent past, the most significant ones are NETXUSA and Ensim Corporation. In late Nov 2014, the company acquired Anovo, a Paris-based provider of after-sales support for phone and electronic devices. The next month, it bought majority stake in Armada, the largest value-added technology distributor in Turkey. During 2013, Ingram Micro took over SoftCom, CloudBlue and Shipwire which enhanced its products and services portfolio. These acquisitions have expanded the company’s presence in the high-margin products and services market that includes fee-for-service mobility device lifecycle solutions, traditional logistics solutions and cloud-based solutions. We believe these acquisitions will not only enhance the company’s offerings but also help it to garner additional revenues.
- It is essential for an IT distribution company to monitor its internal as well as channel inventories. Companies like Ingram have to maintain close relationships with their resellers while checking the inventory’s suitability for the purpose of satisfying customer demand. This helps to optimize the required investment in inventory. Ingram ensures that its catalog is updated with products most desired by its customers, and thereby improves inventory management, realizes higher-margin opportunities, and develops merchandising and pricing strategies that produce enhanced business results.
- Ingram Micro launched the Cloud Marketplace on a global platform through which channel partners and professionals can avail the required cloud services. First launched in North America, the Cloud Marketplace received huge response prompting its global launch. The Ingram Micro Cloud Marketplace has more than 200 cloud-based solutions from over 70 vendors, which include Salesforce.com, VMware and AVG Technologies. The company has added several cloud service providers such as Charter, Logix and Softlayer to expand its cloud-based offerings. Ingram Micro’s initiative comes at an opportune moment as cost benefits of cloud computing are compelling companies to engage in massive information technology restructuring and upgrades. According to a study by IHS Inc., spending on cloud-based services should surge almost three times and reach $235 billion in 2017 from $78.2 billion in 2011. We expect this to work in favor of distributors like Ingram Micro.
Risks:
- The persistent decline in PC shipments remains a major concern for Ingram’s future prospect as it generates significant revenues from PC sales. According to Gartner’s latest report, PC shipments (including premium ultra-mobiles) in second-quarter 2016 fell 5.2% year over year to 64.3 million units. The appreciating U.S. dollar, consumer segment’s lack of interest in new PCs as they are opting for inexpensive mobile devices, and delay in fully deploying Windows 10 operating systems by enterprises, were the main reason behind this dismal performance. However, Gartner expects slight recovery in second-half of 2016. This is so because the firm believes that the industry may witness a faster commercial transition of Windows 10 toward the end of this year. Nonetheless, we are unsure if this will bring any massive change for PC manufacturers or the companies which largely depend on the PC industry. Further, due to PC cannibalization, Ingram Micro has been focusing on reaching distribution contracts with many Smartphones and tablet manufacturers. However, in this segment, the company not only faces intense competition from large players but also from local distributors as well as online retailers which have restrained it from gaining any substantial market share.
- The recent forecast for worldwide IT spending by Gartner raises concerns about Ingram Micro’s near-term performance. The research firm expects worldwide IT spending to remain flat year over year in 2016 at $3.41 trillion, due to currency fluctuations triggered by Brexit. Notably, 2015 witnessed the largest U.S. dollar drop in IT spending, since the research firm started tracking expenses. Last year, the worldwide IT spending declined almost 5.8% year over year. Gartner also predicts that 2014 worldwide IT spending levels of about $3.74 billion won’t be surpassed until 2019. All this makes us skeptical about the company’s nearterm prospects.
- The IT distribution industry is mature with numerous players. While demand is expected to remain stable over the next few years, we believe that industry growth will decline to a slower, more sustainable level. This situation will make it increasingly difficult for Ingram Micro to maintain or grow market share, meaningfully increase sales growth or expand gross margins except through acquisitions.
- The IT distribution business is highly competitive and the company faces tough competition from major distributors, such as Arrow Electronics, Avnet, Tech Data and Synnex Corporation. Pricing among the large IT distributors appears to be rational but competitors are always introducing new pricing strategies, adversely affecting gross margins across the industry. Moreover, strategies adopted by rivals could put pressure on Ingram Micro.
- The company’s business is subject to seasonality and obsolescence. Ingram Micro experiences particularly weak demand in the European region during the summer season resulting in lower revenue generation. Moreover, change in spending patterns during the festive season leads to allocation of funds to other consumer products that affects its business during this period. Ingram is particularly susceptible to rapid changes in the technology sector stemming from changing preferences and requirements. When customers shift to new products or platforms, it is necessary to build an inventory of new products and retire inventories of old products. This could at times result in inventories of old products that the company is unable to sell, thus impacting cash conversion. On the other hand, if it does not keep adequate stock of products, it may not be in a position to serve customers and might therefore, have to forego sales.
- Around 58% of 2015 revenues came from businesses outside the United States. Current economic conditions have strengthened the dollar versus a number of global currencies. This will suppress growth in terms of the U.S. dollar from markets that have weaker currencies. Although we believe local or constant currency basis is better for sales analysis, the headline growth number may decline as a result. Macro uncertainty persisting in Europe has reduced IT spending to an extent, which has resulted in year-over-year decline in revenue contribution from the region.
