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Tech Data Corporation (NASDAQ:TECD)

F3Q09 (Qtr End 10/31/08) Earnings Call

November 25, 2008 9:00 am ET

Executives

Bob Dutkowsky - CEO

Jeff Howells - CFO

Kristin Wiemer Bohnsack - IR

Analysts

Brian Alexander - Raymond James

Matt Sheerin - Thomas Weisel Partners

Min Park - Goldman Sachs

Ananda Baruah - Banc of America Securities

Bill Fearnley - FTN Midwest

Richard Gardner - Citigroup

Rich Kugele - Needham

Operator

Good morning. Welcome to Technology Data Corporation's fiscal 2009 third quarter Earnings Call.

(Operator Instructions).

Now, I will turn the meeting over to Mrs. Wiemer, Director of Investor Relations. Ma'am you may begin

Kristin Wiemer Bohnsack

Thank you. Good morning. Welcome to Tech Data's third quarter fiscal 2009 earnings conference call. I am joined this morning by Bob Dutkowsky, CEO, Jeff Howells, Executive Vice President and Chief Financial Officer, Nestor Cano, President, Europe and Ken Lamneck, our President of the America's.

Before we begin today's call, I would like to remind the audience that certain matters discussed this morning may contain forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Please be cautioned that such forward-looking statements are based on the company's current expectations that involve a number of risks and uncertainties, and actual results could differ materially from such expectations. Risks, uncertainties and other factors affecting the company's business are contained in our filings with the Securities and Exchange Commission, specifically located in part II, Item 1A of the company's July 31, 2008 Form 10-Q, which was filed on September 3rd.

Please be advised that the statements made during today's call should be considered to represent the expectations of Management, as of the date of this call. The company undertakes no duty to update any forward-looking statements to actual results or changes in expectations.

In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the company.

I will now turn the call over to Tech Data's Chief Financial Officer, Jeff Howells.

Jeff Howells

Thank you, Kristin. Many of my comments will reference the supplemental schedules which are available on the Investor Relations' section of our website at www.techdata.com. Also during today's call, we will discuss certain non-GAAP financial measures for the prior year period. You may obtain additional information on these non-GAAP measures and reconciliation to GAAP on page seven of today's press release available at the Investor Relations section of our or Appendix A of the Supplemental Schedules.

Beginning with the first slide, worldwide net sales were $6.1 billion, an increase of 3.6% from $5.9 billion in the first quarter of fiscal 2008. Our sales outlook for the quarter was $6.3 billion to $6.5 billion. The principle difference between the company's outlook and our actual net sales was the depreciation of certain foreign currencies primarily the euro.

Third quarter net sales in the America's were $2.8 billion or 45% of net sales, representing a decline of 3.9% year-over-year. Third quarter net sales in Europe were $3.3 billion or 55% of net sales, representing year-over-year growth of 10.6% or growth of 9.7% on a euro basis. If we exclude the estimated sales related to the Scribona acquisition, year-over-year organic growth in Europe was approximately 4% on the euro basis during the third quarter.

Slides three to six summarize our operating performance. Worldwide gross margin for the third quarter of fiscal 2009 was 4.86% compared to 4.79% in the prior year third quarter. The company's disciplined inventory and sales management practices, as well as the positive impact from the foreign currency fluctuations have been contributing factors in sustaining a relative stable gross margin performance, partially offset by competitive market conditions, particularly in the Americas region.

SG&A expenses for the third quarter were $238.9 million, or 3.9% of net sales, compared to $224.2 million or 3.78% of net sales in the third quarter of fiscal 2008. The year-over-year increase in SG&A expenses was attributable to a general increase in operating expenses to support sales growth in Europe, the company's acquisition of certain assets Nordic based Scribona AB during the second quarter of fiscal 2009, and continued investments in various strategic initiatives.

Operating income for the third quarter was $59.1 million or 0.96% of net sales, this compared to operating income of $59.5 million or 1.01% of net sales in the same period last year.

On a regional basis operating income for the third quarter in the America's was $38.8 million or 1.41% of net sales, compared to $44.2 million or 1.54% of net sales in the same period last year and 1.41% in the second quarter of fiscal 2009. In Europe, operating income was $23.4 million or 0.69% of net sales, compared to $17.8 million or 0.58% of net sales in the same period last year.

Net interest expense was $6.6 million. We incurred a net foreign currency exchange loss of $23.5 million, approximately three-quarters of which was associated with the European region. The effective tax rate for Q3 was 37.3%.

As noted in previous quarters, in accordance FIN 18 accounting pronouncement, the quarterly effective tax rates may vary significantly depending on the actual operating results and our various tax jurisdictions.

A significant portion of the foreign currency exchange loss did not provide a tax benefit in the quarter. Taking that to consideration, as well as other tax adjustments in the quarter, more normalized tax rate would be closer to 30% in Q3.

We recorded a $238,000 minority interest during the quarter, which represents our Brightstar Europe JV partner's share of losses incurred during the third quarter. This compared to a minority interest losses of $864,000 last year.

Net income for the third quarter was $18.4 million or $0.37 per diluted share based on 50.4 million weighted average diluted shares outstanding. This compared to net income of $40.9 million or $0.73 per diluted share in the prior year third quarter based on 55.7 million weighted average diluted shares outstanding.

While the impact of foreign currency changes is generally not significant to the company's operating results, extreme currency volatility during the third quarter, particularly in the month of October, created a challenging environment. The primary factor contributing to the foreign currency exchange loss was the use of certain portions of the inventory as a hedge against foreign currency exposures in accounts payable.

The basis for using a portion of the inventory of the hedge, the sales prices achieved in these products move both up and down with the related foreign currency. Under this theory, increases in gross profit could offset the related accounts payable value decline.

During the third quarter, the company recovered a portion of the foreign currency exchange loss through gross profit and expects to recover additional amounts in subsequent periods as the related inventory is sold. To the extent foreign currencies remain volatile and market conditions competitive, there can be no assurance as to the amount that could be realized through gross profit.

To give you an example of just how dramatic the rate movement was during the quarter, the US dollar appreciated 22% against the euro and British pound, 17% against the Canadian dollar and 38% against the Brazilian real.

Let's walk through a practical example on slide seven. A Euro-based subsidiary purchases inventory in US dollars. We record inventory of $100 and accounts payable of $100. US dollar strengthens against the euro from 1.5 to 1.25.

We incurred AP transaction loss of EUR13, which is recorded in our foreign currency exchange loss account when the payment is made or if unpaid when mark-to-market at quarter end. We have the opportunity to realize an equivalent gain in gross profit theoretically when the inventory is sold. If the inventory is not sold in the quarter, the potential gross profit gain is deferred as inventory cannot be marked up above cost.

This example, while rather simple, is just to give you an idea of how and when some of the accounting entries are recorded. There could be no assurance that the potential gross profit gain we will get will equal the AP transaction loss recorded as a foreign currency exchange loss. As you can see, the volatility of the currency exchange rates can greatly impact the company's reported results.

Now turning to the balance sheet, please refer to slides eight and nine. Our accounts receivable total $2.63 billion at the end of the quarter and our allowance for bad debt was $59.2 million. Our day sales outstanding were 39. Our inventory totaled $2 billion. Our days of supply at the end of Q3 were 31 days. Our accounts payable was $2.7 billion. Yielding days payable outstanding at the end of Q3 was 43 days.

The total cash conversion cycle for the third quarter was 27 days, an improvement of three days over the prior year. Cash used in operations during the third quarter of fiscal 2009 totaled $37.1 million. Our total debt was $430.2 million compared to $383.2 million at January 31, 2008.

The company continues enjoying excellent liquidity and financial flexibility with a cash position of $385.2 million on October 31. Net debt totaled $45 million at the end of the third quarter. Total debt to total capital was 20%. Funds available for use on our credit facilities approximated $785 million at the end of the quarter. Also of note, in October we renewed our receivables securitization program with a $300 million capacity.

During the third quarter of fiscal 2009, the company repurchased approximately 500,000 shares of common stock at a cost of $16.9 million in conjunction with the company's $100 million share repurchase program initiated in June 2008. Our equity totaled $1.68 billion at the end of the quarter.

Other comprehensive income, the majority of which is currency translation, was $254.4 million at the end of the quarter compared to $537.9 million at the end of the second quart quarter, a decline of $283.5 million. As of October 31, 2008, the company had 50 million shares outstanding resulting in a tangible book value of $33.26.

Capital expenditures totaled $8.3 million in Q3 and the current plan remains for expenditures of approximately $40 million in the fiscal year. Third quarter depreciation and amortization expense was $12.1 million.

Turning to slide 10, our product and customer classifications, the company's year-to-date net sales by product segment were relatively consistent with the year ago period. We estimate peripherals account for 30% of net sales, systems approximately 30% of net sales, networking approximately 15% of net sales, and software approximately 15% of net sales.

The year-to-date net sales by customer segment was also consistent with the prior year. Bars accounted for approximately 60% of net sales, direct marketers and retailers 25%, and corporate retailers 15%. As in past quarters, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide. In the third quarter HP represented 30% of our net sales compared to 29% in the prior year period.

With regard to the business outlook, and one of the challenges surrounding the current macroeconomic environment, combined with volatility in certain foreign currencies, the company does not believe it would be prudent to continue providing net sales or tax rate guidance.

I will now turn the call over to Bob Dutkowsky for his comments.

Bob Dutkowsky

Thank you, Jeff. Good morning, everyone. Thank you for joining us on Tech Data's third quarter fiscal 2009 conference call. Since we spoke in August, much has obviously changed in the global economy. The global financial infrastructure, comprising some of the world's most powerful banks, has failed, putting pressure on the credit markets and raising new concerns as to what lies ahead for the economy and IT spending.

Complicating the environment has been the rapid devaluation of certain foreign currencies against the dollar. The ability of our company to execute and react to market changes was tested on many fronts during Q3. Considering this challenging environment, we were pleased with our overall execution during the quarter, as validated by our sales and operating income performance in both the Americas and Europe.

As Jeff detailed in his comments, the unprecedented volatility of certain foreign currencies, sometimes moving several percentage points in a day, dampened our overall financial performance. We managed the volatility successfully in several regions during the quarter, and have revisited our procedures in others. We are closely monitoring our hedging strategies, and while currencies will undoubtedly have some impact going forward, we believe the actions we have taken will optimize our processes and thus reduce our overall exposure.

Now let's turn our attention to our regional performance. In Europe, we achieved our sales outlook on a euro basis, growing sales nearly 11% and generating operating income of $23.4 million or 69 basis points. Five of our seven European regions grew sales nicely in the quarter, with Germany posting its second quarter in a row of double-digit sales growth.

Jeff noted that our European topline, excluding Scribona, grew approximately 4%. We continue to improve our execution in Europe, growing our business and gaining market share. With a stronger foothold in place, we are focused more than ever on the market opportunity and the needs of our customers and vendor partners.

The completion of our Pan-European SAP implementation in late 2006, continues to deliver operating leverage throughout Europe and provides, what we believe is a competitive advantage in the marketplace. Albeit small steps, our Brightstar Europe JV model is growing, particularly in the UK, where Brightstar Europe is now the number one Samsung distributor. Year-to-date for the physical year sales are ahead of plan by more than 20%. The operation is expected to approach break even in the fourth quarter.

As an example of the diversification we are enjoying via the JV, Brightstar Europe recently signed an agreement to provide end-to-end warehousing and supply chain services to virtual mobile network operator Lebara in the UK. Lebara provides a line of SIM cards to major retail stores, mid-range chains and independent retailers throughout the UK. Our Brightstar JV allows Lebara to capitalize on Tech Data's logistics capabilities, fulfilling orders swiftly, accurately and cost effectively.

In the Americas, we performed well, considering the overall IT and economic environment. Net sales declined about 4%, as we held our operating margins steady with the second quarter at 1.41%. We consider this to be a good performance in light of the softening demand in the quarter and the competitive pricing environment.

Looking across our customer segments, sales to corporate resellers declined the fastest in the quarter, which is what we expect to see in a tighter spending environment. Unlike larger enterprises that are generally serviced by large resellers, FMBs served by our bars tend to be more nimble in managing their business, and can often find opportunity and growth, even in a weak economy.

We continue to invest any IT systems that enhance our overall value proposition for our customers. For example, early in the fourth quarter we completed our SAP warehouse management implementation in North America, which is yielding efficiencies throughout our eight logistics centers. We have accelerated the rollout of enhanced service offerings for our resellers.

Earlier this month, we introduced new capabilities for MyLeadTracker, formerly called MyOpportunityTracker, our premiere lead generating e-business service that helps resellers track opportunities for software license renewals, hardware warranties and service level agreements. This IT-based tool helps drive additional sales for Tech Data and for our resellers.

We have also launched an enhanced version of our automated software license key resend tool called MyLicenseTracker, which allows our resellers to obtain lost license keys automatically, thus saving our resellers valuable time and helping them to optimize their day-to-day operations.

Finally, looking at our SG&A, we continue to balance our worldwide headcount with the current market conditions by tightly monitoring hiring levels in conjunction with our sales and productivity forecast.

Now, I would like to spend a few minutes addressing several questions that have been expressed by many of our analysts and investors over the last few months. Let's begin with the capital markets and how we stand in terms of liquidity.

The financial health of our company and our access to funds remains very strong. Our diversified portfolio of capital resources provides the flexibility we need to fund our near to long-term business needs as well as support our ability to provide billions of dollars of credit to our customers.

Looking at a quick snapshot of our capital resources, we have over $1.3 billion in borrowing capacity, including $900 million of committed funding. At the end of the third quarter, we had $385 million in cash on the balance sheet and $785 million available on our credit facilities to manage our business.

Included in our committed funding is a $300 million receivables securitization program, which we renewed in October. We were very pleased to renew this facility ahead of schedule. It not only reinforced our financial help, but also was a clear indication that our banking partners have confidence in our long-term business prospects.

Many of our investors have also been inquiring about the creditworthiness of our customer portfolio and whether or not there is a potential for increase in default and related rises in bad debt expense. In Tech Data's 35 years in business, the company has always maintained a conservative posture in our evaluation of customers and the extension of credit. This goes hand-in-hand with our philosophy to conduct business responsibly and profitably.

Credit is a key part of our value proposition and we remain committed to delivering this value to our customers, but we have intensified our scrutiny in those customer accounts that show signs of financial weakness. Some uptick in bad debt expense is expected in the current environment as financial conditions change for certain resellers and their end user customers.

However, we do not currently see major fallout of accounts on the horizon. Recall that about two thirds of our customer base is concentrated in the SNB space and they are distributed across virtually every industry sector.

While some industries are struggling, there are others that continue to realize growth. We believe our years of experience through a myriad of IT spending downturns, technology sea changes and growth cycles combined with our credit tools and talent will serve us well as we manage our worldwide credit exposure.

Last, everyone is concerned with the overall IT demand picture and how much visibility we have into our customer's business. There is no question that IT demand is slowing, but whether we will operate our business over the next few quarters in a flat market, one that is down 5% or maybe even down 10%, is difficult to assess.

In addition to constant dialogue with our customers and vendor partners, we looked at firms like IDC and Gartner for their perspective on IT spending trends. Both firms have reduced their worldwide forecast for 2009 from about 6% growth to somewhere in the range of 2% to 3% year-over-year. If we were to back out selected markets and technologies we currently do not compete in, it appears the IT market growth would be closer to flat in 2009.

Breaking that down further by product or geography, you would see that some areas are declining while others like software are still expected to show nice growth. Our challenge is to reallocate our resources into the higher growth segments, while reducing our focus on segments where growth and profitability are declining. The third quarter represented another quarter where we successfully balanced investing for the future with the realities of our market.

In summary, our targeted investments over the last few years have definitely strengthened our market position. We have invested in staff and armed them with tools to optimize our sales coverage and effectiveness. We have also completed several tuck-in acquisitions that are leveraging our existing structure and we have invested in various IT applications that are improving the efficiency of our logistic centers, our financial systems and other sales and back office functions. These targeted investments are reinforcing our value proposition in the marketplace and resulting in even stronger relationships with our customers and vendor partners.

The business fundamentals and financial strength of Tech Data remains solid. We believe that these strengths, along with our disciplined approach to containing cost and managing our working capital will serve us well in the current environment and better position us for the long-term market opportunity.

With that, I would like to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander - Raymond James

Thank you. I will start with the currency loss in the quarter. Jeff, it sounds like the loss was largely driven by the timing of the FX movement versus any unsound hedging practices or other executions driven errors around hedging, I just wanted to clarify that, because I think Bob mentioned that you are reviewing hedging policies in some regions. I am not clear as to whether this is something that could have been prevented or if this is really just a timing issue?

Jeff Howells

Brian, I think it is a little bit of both. Primarily, the hedging policy remains sound. It is a good practice. We had many regions that had relatively flawless execution, utilizing the policy. In others, we had less than flawless. I will give you an example, if you take the example that I used in the opening comment, when we use inventories as natural hedge against payables, there has to be the assumption that we are able to move that pricing up and realize the gross margin if we have a change in the exchange rates, and of course, that could go both directions.

In this case the rapid volatility in the month of October, especially, there were two types of instances where we may not have executed as well. One is we take care of our customers and that would be, we had a quote out on a table and we honored that quote, and that quote may have resulted in us not realizing the benefit of the currency. So we quoted in US dollars. Two days later the quote was accepted and we are going to ship that product. Or it may be product that is fulfilling a rollout.

The other instances would be the sheer hourly change in the exchange rate. Where we could enter into transactions, plan the inventory during the day and look to hedge the inventory against the payable the following day and literally it could have moved several percent from midday one day to the time we could place the hedge the following day. I think it is accurate to say, although, I do not have it in front of me that in the history of the euro, October was the most volatile month, ever. In fact there were two days in October that were wild swings. So, my point is, we can not prevent a couple of those instances. One word, we honored some quotations and we will continue to honor some quotations, and two just the sheer rapid movement would cause us some losses that we can not recover.

Now, as far as the first one, we are working to change our terms and conditions so that we can revalue our quotes on a more timely basis. I think the basic premise works, and the basic theory works, and our team, especially in Europe and Latin America have redoubled their efforts to make sure that the timeliness of hedging, the timeliness of adjusting the cost in a system is as quick as possible.

Just looking at our regions well over half of them have virtually no net impact on their business. However, giving you one example in the Nordics, where the team up there is managing literally a handful of currencies, it is a very dynamic market that really impacts us.

The final note would be we probably buy more inventory in nonfunctional currencies than some of our competitors. So what that means is a higher percentage of our purchases would be in other than the local currency, because of our very prominent position with some key vendors that in many cases conduct all their business in US dollars around the world.

Brian Alexander - Raymond James

Thanks for that. You mentioned, Jeff, that part of the FX loss was offset in gross margins. So is there any way to tell us what gross margin would have been excluding that benefit? If you could talk about the regional profitability, it looks like Europe probably benefited more than the Americas in terms of the offset. So I assume Europe would have still been profitable, but what would have been the impact on the European and Americas Op income if we exclude the benefit?

Jeff Howells

Yes, it is not a quantifiable benefit that is auditable. The reason being, there are so many variables on what we ultimately price an item of inventory to our customers, that to precisely allocate how much was related to original costs we have landed it, how much was related to the change in the FX rate, how much was related to the opportunity to price either positively or negatively? We certainly have internal estimates, but they are not such that we would say would be, as I use the term, auditable.

For example, if you took the entire FX in the given quarter, we would still remain profitable throughout Europe on an operating basis. So we are very certain we have a reasonable amount of deferred gain in our inventory that is not recorded. So net-net we have pretty good results considering the rapid, rapid volatility of that currency in October, both in Europe as well as, as I mentioned, in Latin America, the real against the dollar.

Brian Alexander - Raymond James

A final follow-up then, given that we are 25 days into November and your average inventory cycle is about 25 to 28 days, can you say whether the affected inventory has been sold through at this point at prices that would allow you to recover most or all of that loss?

Bob Dutkowsky

First of all, all of the losses will not be recovered because, one, there is transaction costs of the hedges, two, there were the examples that I gave where we honored pricing even though we would take a potential loss on the transaction or transactions because we look at the long-term with our customer relationships, and then a timing that I indicated where the volatility on a day or in the 24, 48-hour business, that portion of the FX transaction losses would not be recoverable realistically or theoretically.

I think the only thing I would say at this point in time there will continue to be, based upon the volatility, some FX transaction losses. Based upon what we are seeing today, we are recovering incremental what we call front-end margin in Europe. The quantification of the offset in where it is because some of the inventory we have sold in the first 20 days of this month came in this month, some is still on the shelf from prior months. So we have not tracked item-by-item selling at the volume and velocity that we do.

I would say, to-date, we are very pleased with what we see our team doing and the sense of urgency as far as how they are doing adjusting their systemic pricing and quotation on a day-by-day basis.

Brian Alexander - Raymond James

Okay. Thanks.

Bob Dutkowsky

Brian, I will just beat it to death one step further regarding my comment on analyzing the processes. You know the management philosophy of this company is anytime we lose anything or see the opportunity to gain anything in the marketplace we are going to study it to make sure that we can either minimize it to its maximum extent or optimize it to its maximum extent.

So when we saw this issue growing, of course, we went in and analyzed the processes front to back to make sure they were the best that they could be, and that our people and our staffs knew how to execute to the best that we could do. So it is just a normal management and operating process for us to take a closer look at a process like this.

Brian Alexander - Raymond James

Thanks, Bob.

Operator

Our next question comes from Matt Sheerin with Thomas Weisel Partners. Please proceed with your question.

Matt Sheerin - Thomas Weisel Partners

Yes, thanks. I just wanted to talk about the demand trends that you are seeing. I appreciate the fact that you are not giving guidance because of the lack of visibility and the volatility that you spoke of. Could you talk about some trends that you saw in the quarter, particularly what are patterns in October going into November. We have seen from competitors and suppliers that demand levels have dropped off across the world. Are you expecting to see less than seasonal trends in both Europe and North America?

Jeff Howells

I will start with that. This is Jeff. First of all, leaving October going into November is always a very difficult pattern to predict, because in the history of our company, November has not been one of the stronger months of the year.

That varies by country. As a broad, general statement, in the old days it used to be because of conducts and everyone waiting, and when that reason went away, there is some a built-in pattern that November, especially in the first half of the month, is not the strongest.

All that being said, our internal forecasts have and will take into consideration what we hear from our vendor partners and we see from our competitors' results as indication that IT spending is slowing, the extent or the magnitude of which we really can not accurately indicate. In the last two quarters in the Americas we have been down 3% to 4% and we have had a few percent of organic growth in Europe.

The best guess would be some change to that, the magnitude of which we really can not identify. We are just going to manage through it day-by-day.

Matt Sheerin - Thomas Weisel Partners

Okay, fine. Looking at your inventories and you talked a lot about some FX effects, your inventory on a day basis was up and actual dollars was up. Typically, it is up because you are building some inventory for a stronger quarter, but could you just talk about the inventory trend specifically and as it relates to the FX?

Jeff Howells

Yes, I think if you will see the way we built inventory last year from Q2 to Q3 and how we built it this year from Q2 to Q3, it is relatively in the same ballpark.

I will add to that a couple comments. Product from our manufacturers remains readily available with very few shortages. So certainly we are able to get it. Not having it on the shelf in this period of uncertainty guarantees that we will not get that sales opportunity. So we want to make sure we have that inventory on the shelf. Third, other than the risk of FX volatility, FX is not a reason why we have a different quantity of the inventory or different number of days on our balance sheet.

Bob Dutkowsky

Remember, Matt, the inventory reported is a snapshot. During the course of the 90 days of the quarter the inventory moves with the demand and with our ability to compete in the marketplace. One of the things we have done consciously is to try to take up the inventory levels of some fast-moving items to ensure that if there is opportunity out there, we are the ones that are going to be able to fulfill it. So in the last day of the quarter when you take the snapshot we may have a little bit of one item on the shelves a little bit more than normal, but we believe over the course of the quarter we will be able to sell through that very effectively.

Matt Sheerin - Thomas Weisel Partners

Okay. Great. Just my last question on the expense side; the expenses were down almost $20 million from the July quarter. Looks like you have got some good cost controls there, but again, related to the foreign currency, because a lot of your business and expenses are in Europe, how much was that impacted?

Bob Dutkowsky

Matt, I do not think I could recite that exactly, but I would not doubt the three quarters of that dollar reduction was probably just currencies, certainly, a significant amount of it. The slight uptick in SG&A as a percentage of sales relates to us staffing up for Q4. We are growing the business in Europe. We are, and have been completing, what I would call the two-year initiatives that we launched last year, but we think SG&A is in very good shape and we are really controlling our headcount allocations around the world and very cautiously approving any back fills.

Matt Sheerin - Thomas Weisel Partners

Okay. Thank you.

Operator

Our next question comes from Min Park with Goldman Sachs. Please proceed with your question.

Min Park - Goldman Sachs

Thank you very much. Just starting off with, if we look at your topline growth, you actually saw a currency benefit this quarter, yet your SG&A also benefited from your currency moves as well, which is just that you actually had a very front loaded quarter. So I wonder if you can give us a bit more color on the linearity exiting October and was that quarter particularly weak, or that month particularly weak exiting?

Jeff Howells

Min, this is Jeff. I am not sure I understand your correlation between the currency and some ability to derive the monthly trends in our revenue.

Min Park - Goldman Sachs

You actually saw a currency benefit for the quarter on the topline. We know that currency was weak as we progressed through the quarter. Then you actually a benefit on the SG&A from currency, which we assume is just more flattish as we go through the quarters, so that disconnects, Jeff that you saw more of your revenue in the front from part of the quarter, I just wonder if you could give us a little more color on just overall linearity?

Jeff Howells

I am only going to default to, I am not clear on your logic, but it is not accurate. So, meaning that is not what we saw. That may be a mathematical correlation that I do not comprehend, but that is not really what happened. Other than that, we would not give month by month, but I would say we needed all three months in both of our regions in this quarter. All three months had their variations in the different geographies and regions that we operate. Based upon both historical trends and the fact that overall there is some slowing any IT.

Quite frankly, if I look at October, we had some countries with great Octobers and we had some with softer Octobers. So the nice thing about our revenue portfolio is the diverse countries. Also I will end with saying, especially in Europe, some of our countries that are battling more difficult economic times did quite well and produced good revenue and good revenue growth and that took all three months.

Min Park - Goldman Sachs

Great. Just a quick follow-up. Just on the pricing environment, we recognize that is probably always aggressive, but on the margin is it getting tougher? Or are you seeing some relief from the first half of the year?

Bob Dutkowsky

I would say it feels similar to what it felt like through the first half of the year. We called out earlier in the year that it was competitive, particularly on large deals. I would say if a large deal comes available in the Americas it will be a price battle to win it, but generally speaking, it feels about like it felt through the first half of the year.

Min Park - Goldman Sachs

Great. Thank you.

Bob Dutkowsky

Min, obviously, if we are chasing a smaller pie, every opportunity is going to have more scrutiny and more competitive efforts wrapped around it by our vendors and by our competitors in the channels. So it is a natural extension of the market conditions. Smaller market equals more price competition.

Min Park - Goldman Sachs

Great. Thank you very much.

Operator

Our next question comes from Ananda Baruah. Please proceed with your question.

Ananda Baruah - Banc of America Securities

Thank you for taking the question. Could you just go over what you are seeing in the different verticals retail versus small medium business and maybe government in the US and Europe? Are you seeing any shift in any of the trends there? As far as Europe goes, are you seeing any countries soften to the extent that Spain and UK have been over the last several quarters?

Bob Dutkowsky

We do not really break the results down by verticals, but it is safe to say that I think the higher end enterprise account sector primarily serviced by the direct marketers has been the most challenged. I think that the retail side of the business obviously supporting the consumer is under duress, and where most of our business comes from, the SNB space, we still see growth opportunities.

We have smaller VARs that service, for example, the government sector that are tightly entrenched in bid opportunities, and there are opportunities that are going to carry on for a long period of time and those VARs are competing there and well positioned. We continue to see opportunity in healthcare. We see opportunity in state and local government. We obviously see the financial sector as being down.

In terms of Europe, as Jeff said earlier, some of the countries that are on the more difficult economic list are countries where we had strong performance in the quarter, both from a revenue performance and profitability. So I am not sure that there is an exact correlation with what you read in the papers about the European markets and Tech Data's abilities to execute and grow.

As I said in my comments, the SNB VARs are entrepreneurial and they can find their way to pockets of growth and profit, and that is primarily the market segment we support in all of our geographies. So SNB continues to be a place where there is potential for strength and the area that we are targeting our support structure and our go-to-market model around.

Ananda Baruah - Banc of America Securities

Bob, just on Scribona, how did the Scribona do relative to the rest of Europe and relative to your expectations for the quarter?

Jeff Howells

This is Jeff. I think actually Scribona in our Nordics operation did quite well. However, I will note that that is probably one of the most difficult geographies in Europe at this point in time due to the economic conditions. So, as we said, back of the envelope if we grew 9.7% in euros in Europe we grow about 4% without the Scribona acquisition. It is hard to clearly delineate what is and what is not Scribona.

So that region would be under our sales objective compared to other regions. Our strong belief is it is not execution, it is not the integration, it is not the value of the Scribona acquisition, it is that market up there. It is a small market. You can not make it up like you can make another market. So we still are very clear that it was the right thing to do, it was done well and that market will turn. It is a difficult market to operate in right now.

Ananda Baruah - Banc of America Securities

Okay, thanks. What has been the impact as far as you can tell from the actions you have taken on freight?

Bob Dutkowsky

It is been different by country. Our ability to execute on the plans as we described to our customers really depends both on who is in the leadership position in that market and then how well you can execute against the plan. So, to-date, we have been able to execute fairly well. We believe in the long run it is in the best interest of the industry to stay the course on passing more of the cost of freight into the channel. We have worked hard on that and we are going to continue to work at it.

Ananda Baruah - Banc of America Securities

Okay. Thank you.

Operator

Our next question comes from Bill Fearnley with FTN Midwest. Please proceed with your question.

Bill Fearnley - FTN Midwest

Yes, thanks. If I could take a slightly different character on the gross margin line, Jeff, anything stand out this quarter from the vendor rebate perspective? Last quarter you had mentioned some of the sales goals were too high in your view. Do you have new sales goals from your major OEMs and were you able to renegotiate some of them so that it is more beneficial for you here in the most recent quarter in the near term as well?

Bob Dutkowsky

Bill, I think the answer to that is, we had progress with some, and some remain very difficult goals to achieve. So, throughout our regions, we did not attain all of our goals, and that could have been something that would have allowed us to be or have better results. We just have to adjust our business accordingly. To the extent that over time, our team is able to negotiate better goals, it is a potential upside in the future for us. I hate to say the words upside, because those are always hard to pinpoint.

Bottom-line is, objectives did not come in rational and reasonable with all vendors. I think it will be over several quarters that hopefully they will come in line with reasonable expectations, because we are here to get that product out to reseller to the community. Our sales people are compensated based upon the all-end, the front end, the back end, and everything it costs us to get those orders out the door. So we insent them to move the vendor to the most profitable vendor relationships we have.

Bill Fearnley - FTN Midwest

Thanks. Then if I could shift gears back to revenue, last quarter you had talked about some major deals you had walked away from, any major deals that you walked away from this quarter? You talked about the pricing environment in some of your geos, is there anything worth calling out this quart officer?

Bob Dutkowsky

I would say that certainly in the normal course of business, we are selective about which business opportunities we compete for. That is a statement that is accurate in every geography, in every country that we do business in. So your questions go hand in hand, if the pricing that the customer demands for us to be able to win the business is not at the level that we are interested in, then we do not compete for those.

We have also set pricing at levels on some products that we send the customer in the market a message that we are not interested in selling below those prices. So yes, those efforts to drive up our gross margins clearly have an impact on the topline. I think it is safe to say that that is an accurate statement in every geography we do business in.

Bill Fearnley - FTN Midwest

Yes, but you last quarter had called out and the quantity was $100 million in revenues. I understand what you are trying to do on a daily basis, but were there any major deals similar to the effect that you had last quarter, where you said, look, this is a particularly large deal that we are not going to play on? Or is it more of an effect on the day-to-day business?

Jeff Howells

Bill, this is Jeff. Let me clarify that. Last quarter we said that in the Americas we were unable to retain and had walked away from approximately $200 million of revenue on a couple of large customer bids. I do not think we have seen anything of that magnitude in Q3, but, one must remember, and what we hopefully conveyed, was that was recurring quarterly revenue. So that same $200 million would be theoretically out of our run rate of what we just reported in the Americas for Q3. Until that piece of business is rebid, and we decide whether or we are given the opportunity to win a portion of it back, that is out of our run rate.

Bill Fearnley - FTN Midwest

That is what I was trying to get to. Thank you.

Operator

Our next question comes from Richard Gardner. Please proceed with the question.

Richard Gardner - Citigroup

Hi. Thank you. Bob, I just had a follow-up on the AR Aging or trade credit issue. I understand your argument the S&P focus for the company provides you with more diversification. I think a skeptic would argue that smaller companies are more likely to have problems paying their bills during a down turn than larger companies would. I was wondering in that vein if you could talk about your recent experience with AR Aging? Maybe some of the specific steps that you are taking to limit bad debt expense during the down turn? Then maybe some sense of quantification on how bad things could get. Are we talking tens of millions of dollars in increase in bad debt reserves? Or could we be talking about hundreds of millions of dollars?

Jeff Howells

Rich, this is Jeff. I will take that question. First of all, I think, our view is that with 100,000 active customers, if we divide that risk portfolio around that risk, that we have the ability to control our bad debt exposure by the diversity of the portfolio. So clearly we could have one of two things. We could have one or more major customers go out of business, and that would be major, you would see it in the head lanes, bad debt exposure.

For example, recent failure of retail organization in the US, there are enterprises that lost money on that potentially. Our name was not in that list. We had zero exposure. So that is one way that in this uncertain economy we could have a major loss with a major entity that we have significant exposure, significant meaning $5 million to $15 million of credit extended to them.

The other is the small SNB marketplace. Clearly, we know that our bad debt is going to tick up because of failures in the marketplace. What we saw in the fiscal '02, '03 era was a slight uptick following the dotcom bust and 9/11. What happened there in many of the cases is we had strong resellers that went out of business because their end user failed to pay them, and then it was a Domino effect after that.

Certainly that could happen in this day and age, and that is why our consistent credit policies of primarily extending, I will say here in the Americas 30-day terms, a short cycle on that receivable versus others that may extend 45 or 60 day terms should benefit us. We can watch it closely.

We have very good tools to share information with the distributor community through the National Association of Credit Managers to monitor how the resellers are paying us as well as all other competitors, because I could be very happy that our aging is not deteriorating. If the reseller is not paying every other distributor, it is a signal that I am going to be next or we could be in trouble.

So that is a huge tool that we utilize here to make sure that we are not complacent about our receivable portfolio. It is really important to know how the reseller is treating the distribution community. We have tools in place for the last 20-plus years that allow the entire distribution community to monitor that.

As far as have we seen any deterioration and have we seen any increase in losses? Yes, I am going to literally say a 1% deterioration in the over 30 days, really nothing that can be nothing more than a snapshot, and in basis point increases in bad debt loss. We are not complacent. As Bob said, we are looking at our resellers, we are looking at our payment trends, we are watching closely.

We are, on a comparable basis, serving as a distribution community fewer resellers today than we did five years ago. Those resellers consolidated and are stronger and are better. We are not naive. We just can not quantify and we are not overly concerned that we are going to have a massive change in our bad debt or our receivable performance. So it is just something that we have to monitor.

We have good people, we have good tools and we have good history. History may not be a perfect indicator of the future, but I mean we have weathered the storm of uncertainty, economic downturn before and we have managed our way through it.

Credit issuance, credit management is half or more of our business. Half of it is providing just in time delivery of product, half of it is managing net receivable portfolio, and we think we do a good job of it.

Bob Dutkowsky

Richard, in tough times like this, our available credit makes us an even more valuable partner to our customers. So, theoretically, if the little small community bank can not loan to borrow money, they have to come to us to be able to stay in business. So they will share even more information with us about the plans and projects and the things that they are working on which exposes us to even more market opportunities. So we use our strength and credit to tighten up our relationships with our customers and drive our business.

Richard Gardner - Citigroup

Okay. Very helpful. Thank you.

Operator

Our last question comes from Rich Kugele with Needham. Please proceed with your question.

Rich Kugele - Needham

Thank you. Could you give us an example of what type of inventory you would actually be able to use as a hedge? I am sure we will get that question of what type of products you actually consider a good hedge other currency. Then, secondly, in terms of demand, is there just generally less quoting activity going on, or is it that the quotes that are out there, they are all asking for big price concessions?

Bob Dutkowsky

I will take the demand question first. Clearly, if sending is slowing, then the request for quotations and opportunities is less. It does not mean that the profile of the demand is different. There are small opportunities, there are medium sized opportunities, there are large opportunities.

What the typical VAR will say to us is they are having a harder time closing the deal at their customer in their customer's office, whether it is small, medium or large. The decision cycles extending out on the opportunities. Tech Data IT is a perfect example. Here, we are number 105 on the Fortune 500 list and we are scrutinizing all IT purchases much more carefully today than we were a year ago at this time. We are extending out our decision cycles.

It does not mean that the projects are not strategic or great opportunities, but we are being more careful about where we spend. Our VARs see that exact opportunity or that exact dynamic in every one of the deals that they are working on. So the competitiveness of every deal goes up and that is reflected in price challenges and delivery challenges and configuration challenges, and we think we are well positioned today to serve the market as those challenges unfold.

Jeff Howells

Rich, instead of giving a specific vendor, what I will say is, certain of our vendors and many of you on the call might follow these vendors, conduct their business entirely in US dollars around the world. Networking vendors in many cases do that. So, we buy inventory in US dollars. The world quotes off of a US dollar denominated price list, and then the transaction is completed in the various local countries around the world in that local currency.

So, in that case, in many instances, we would consider that inventory and that vendor relationship one where we could use as a natural hedge. It may not be an effective natural hedge if those products are sold with delayed quotations. In other words, you quoted today, but it pay take the reseller another week to close the deal and you do not have price adjustments in that quotation, or if a reseller needs a multi-week or month rollout of that product where they need to quote and get a PO in the local currency, and it is against that US dollar denominated price list, but the question would be what do we do over that period of that rollout of a week, two weeks, or two months in honoring that quotation. Those are the things that I think are changing in the marketplace, and our tweaking of our policy of whether it is a natural hedge, whether a different portion of the inventory is a natural hedge or is there a different transaction we need to enter into with either the reseller to the vendor to protect the company and our margin opportunity on those products.

The rapid volatility is something that we have quite frankly not experienced in our foreign currencies. We have seen change, but we have seen it on a gradual and continuous slope. We have not seen it move three to five points in three days. When you are dealing with a business with 5% all in gross margin, a 3 to 5 point change in a currency or evaluation as you know can have a material impact.

Rich Kugele - Needham

If you looked at your entire hedging strategy, what percentage is tied to inventory type hedging versus actual financial transaction hedging with other currencies?

Jeff Howells

I will not quote that number. What I give you an idea of what we are dealing with, well over a third of our purchases are in non-functional currency in Europe, for example. So, the team is dealing with a lot of different currencies and a country-by-country methodology. It is not the same of two countries side-by-side. Because, depending on customers set in one country, they may be able to effectively use a natural hedge of inventory where the country right next door depending on their customer set would not.

I will give you one final example. If we are going to sell, I will say hard drives to a retailer that is going to print a flyer. From the time we agree to serve that vendor for that retailer, for that flyer, and then by the time that flyer goes out and it is printed and the demand builds, there can be quite a change in that foreign currency exchange rate. Yet the hard drive may be something that we are actually purchasing in US dollars.

So, it varies and I think the proof in our philosophy and methodology is near flawless execution in some countries anywhere from our friends in France to our friends in Canada. Then some countries that had more trouble executing in the quarter. So, it is something that we are very focused on, as Bob said. The times have changed, and October was a significant change that highlighted the volatility of the currency and the impact on our vendor pricing arrangements.

Rich Kugele - Needham

Okay. Thank you very much.

Operator

This concludes Tech Data's fiscal 2009 third quarter earnings conference call. A replay of the call will be available in about one hour at techdata.com. It will remain available until Tuesday, December 2nd at 5:00 PM. Thank you for attending today’s conference call and have a great day.

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Source: Tech Data Corporation F3Q09 (Qtr End 10/31/08) Earnings Call Transcript
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