Tech Data Corporation, F4Q09 (Qtr End 01/31/09) Earnings Call Transcript

Mar. 3.09 | About: Tech Data (TECD)

Tech Data Corporation (NASDAQ:TECD)

F4Q09 (Qtr End 01/31/09) Earnings Call

March 03, 2009, 9:00 am ET


Kristin Wiemer Bohnsack - Director, IR

Bob Dutkowsky - CEO

Jeff Howells - EVP and CFO

Néstor Cano - President, Europe


Brian Alexander - Raymond James

Min Park - Goldman Sachs

William Fearnley - Ftn Equity Capital Markets

Matthew Sheerin - Thomas Weisel Partners

Richard Kugele - Needham & Company

Joey - Citigroup


Good morning. Welcome to the Tech Data Corporation's Fourth Quarter and Fiscal Year-End 2009 Earnings Conference Call.

At this time, all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objection you may disconnect at this time.

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

Kristin Wiemer Bohnsack

Thank you. Good morning and welcome to Tech Data's fourth quarter and fiscal year 2009 earnings conference call. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; Néstor Cano, President, Europe; and Ken Lamneck, our President of the Americas.

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 October 31, 2008 Form 10-Q, which was filed on December 4 of '08.

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 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 eight of today's press release available at the Investor Relations section of our website or Appendix A to the Supplemental Schedules.

Beginning with the first slide, worldwide net sales were $5.7 billion, a decrease of 11.9% or $6.5 billion in the fourth quarter of fiscal 2008. The strengthening of the U.S. dollar against certain foreign currencies negatively impacted year-over-year fourth quarter net sales comparison by approximately 7 percentage points.

Fourth quarter net sales in the Americas were $2.3 billion or 41% of net sales representing decline of 14.1% year-over-year. Fourth quarter net sales in Europe were $3.4 billion or 59% of net sales representing a year-over-year decline of 10.3%. On a euro basis, net sales in Europe were relatively flat with the prior year. Sales related to the Scribona acquisition are estimated to have contributed approximately 5% on a euro basis during the fourth quarter.

Slide three to five summarizes our operating performance. Worldwide gross margins for the fourth quarter fiscal 2009 was 5.62% compared to 4.95% in the prior year. Solid execution on the company's inventory pricing and great management practices as well as the recovery of foreign currency exchange losses were contributing factors in the gross margin performance. The results were partially offset by competitive market condition particularly in the Americas region.

SG&A expenses for the fourth quarter were $222.7 million or 3.89% of net sales compared to $247.3 million or 3.81% of net sales in the fourth quarter of fiscal 2008. The decrease in SG&A expenses on a dollar basis was attributable to prudent cost management actions including adjustments to headcount reductions and payroll expense, as well as the decline of foreign currencies year-over-year and the associated translation impact.

As a percent of net sales, the increase in SG&A expenses was primarily due to a lower level of net sales year-over-year. Operating income for the fourth quarter was $98.5 million or 1.73% of net sales, this compared to non-GAAP operating income of $73.8 million or 1.14% of net sales in the same period last year.

On a regional basis, operating income for the fourth quarter in Americas was $38.1 million, or 1.63% of net sales compared to $42.7 million, or 1.56% of net sales in the same period of last year. In Europe, operating income was $63.6 million, or 1.89% of net sales compared to non-GAAP operating income of $33.7 million or 0.9% of net sales in the same period last year.

Both regions executed well in recovering a significant portion of foreign currency exchange losses through gross profit. Net interest expense was $6.5 million. Beginning in the first quarter fiscal 2010, we will adopt FASB staff position 14-1 accounting for convertible debt issuance. Pursuant to the rules, we anticipate recording additional $10 million or approximately $0.12 per share after-tax in interest expense in fiscal 2010. Keep in mind this interest charge is non-cash, it will not impact operating cash flow.

As previously disclosed, extreme foreign currency volatility particularly in the month of October created challenging environment and the company recorded a $23.5 million foreign currency exchange loss during the third quarter of fiscal 2009. During the fourth quarter of fiscal 2009, the company continued to experience foreign currency volatility to record a $5.5 million foreign currency exchange loss. For both the third and fourth quarters, the primary factor contributing to the foreign currency exchange loss was the use of certain portions of the company's inventories hedged against foreign currency exposure in accounts payable.

In addition, the foreign currency exchange loss includes the cost of forward contracts utilized to hedge the balance of the company's foreign currency exposures. Through disciplined pricing and inventory management practices a significant portion of the foreign currency exchange loss incurred due to the use of inventories at hedge was recovered through gross profit in both the third and fourth quarters as related inventory was sold. To the extent foreign currencies remain volatile, the end market conditions comparative, there could be no assurance as the amount of foreign currency exchange loss that can be realized through gross profit in the future.

The effective tax rate for Q4 was 31.7%. As noted in previous quarters in accordance with FIN 18 accounting announcements, quarterly effective tax rate may vary depending on the actual operating results in our various tax jurisdictions. We recorded a $0.5 million of minority interest during the quarter which represents our Brightstar Europe JV partner's share of income generated during the quarter.

Net income for the fourth quarter was $58.6 million or a record $1.17 per diluted share based on 50.1 million weighted average diluted shares outstanding. This compared to non-GAAP net income of $52.2 million or $0.96 per diluted share in the prior year fourth quarter based on $54.6 million weighted average diluted shares outstanding.

Turing now to the balance sheet, please refer to slide 6 and 7. Our accounts receivable totaled $2.3 billion, the allowance for bad debt was $55.6 million. DSO’s were 37 days, inventories totaled $1.7 billion, days of supply at the end of Q4 were 29 days. Accounts payable were $2.3 billion. Days payable outstanding at the end of Q4 were 39 days.

Total cash conversion cycle for the fourth quarter was at 27 days, an improvement of one day over the prior year. Cash provided by operations totaled $177 million for the fourth quarter and $279.8 million for fiscal 2009. The total debt was $419.7 million compared to $383.2 million at January 31, 2008.

The company continues enjoying excellent liquidity and financial flexibility with a cash position of $528 million at January 31, 2009. Net cash totaled $108.3 million at the end of the fourth quarter.

Total debt to total cap was 20%. Funds available for use under our credit facilities approximated $827 million at the end of the quarter. Our equity totaled $1.72 billion at the end of the quarter.

Other comprehensive income, the majority of which is currency translation, was $234.6 million at the end of the quarter compared to $254.4 million at the end of the third quarter, a decline of $19.8 million.

As of January 31, 2009, company had 50 million share outstanding resulting in a tangible book value of $34.10.Capital expenditures totaled $6.2 million in Q4 or a total of $33 million in fiscal year 2009. The current plan for fiscal year 2010 capital expenditures is approximately $25 million. Fourth quarter depreciation and amortization expense was $11.4 million.

On slide eight, turning to our product and customer classifications, company's year-to-date net sales by product segment were relatively consistent with the year-ago period. We estimate a peripherals account for 40% of net sales, systems 30% of net sales and networking 15% of net sales, softwares also 50% of net sales.

During the quarter, we reviewed our customer segmentation and made reclassification to align the segment on a more consisted worldwide basis. As a result, bars accounted for approximately 50% of net sales, direct marketers and retailers 30% of net sales, and corporate resellers 20% of net sales. If you compared against what we previously reported, you will see a shift among the category. But on a year-over-year basis, the percentages are consistent after reclassifying both the current and prior fiscal years.

As in past quarters, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide. In the fourth quarter, HP represented 28% of our net sales consistent with the prior year period. In terms of an outlook for the first quarter, we provided a few statements in our release.

Let me note that statements regarding the company's business outlook are based on current expectations in the company's internal plan. In light of the current macroeconomic environment and related softening in IT spending conditions combined with the strength of the US dollar against foreign currency. First quarter net sales for the period ending April 30, 2009 are anticipated to be down by as much as 20% year-over-year.

In addition, while the company has consistently managed its SG&A expenses inline with projected market demand. The anticipated decline in net sales is expected to negatively impact the company's year-over-year financial results. However, the company's financial position is expected to remain strong.

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

Bob Dutkowsky

Thank you, Jeff. Good morning, everyone. And thank you for joining us on Tech Data's fourth quarter and fiscal year 2009 conference call. Considering the challenges faced in companies today including an uncertain microeconomic environment, volatile foreign currencies, and deteriorating financial markets, I am pleased with our fourth quarter and full-year performance. In fact, fiscal year 2009 was a record sales year with over $24 billion in net sales.

Our team has made it the number one priority to differentiate and strengthen our company in the market. We are driving sales execution, delivering consistent customer and vendor partner support, and taking prudent cost reduction actions to align our company with projected market demand. The results of these actions were validated by the strength of our reported results.

Despite the overall sales decline, we gained share in selected markets and improved our gross margin and operating income performance. In addition to solid inventory pricing and freight management practices, our strong Q4 performance reflects the benefits of a significant recovery of foreign currency exchange losses through gross profits. Adjusted for the strength of the US dollar, total net sales declined approximately 5% year-over-year, while net income increased 16.7%.

We generated $177 million in operating cash flow during the quarter ending the fiscal year with a net cash position of $108 million. Our strong balance sheet is a wonderful asset to have in this difficult macro environment that we are operating in today.

Now, I would like to turn your attention to the regional highlights. Beginning with Europe, we continue to drive improvements in our business and we executed well considering the softening demand environment. In fact our net sale year-over-year were flat on euro basis in a market that clearly declined by double-digits. Our acquisition of Scribona completed during the second quarter of fiscal 2009 contributed approximately 5 percentage points to our sales performance in the quarter. Even if you discount the Scribona contribution, we still performed very well.

And our recovery in Germany continues where our team posted its third consecutive quarter of year-over-year double-digit growth on a euro basis. While the market is down overall, there are selected markets where we continue to make head way in developing and growing our SMB business. We work diligently to optimize our SMB sales and marketing strategy in Europe and our efforts have not gone unnoticed. In fact, our German operations recently earned the 2008 value added distributor award from IBM.

European operating income totaled a quarterly record of nearly $64 million or 1.89% of net sale. Solid execution on pricing, inventory and freight management practices helped our team drive a significant improvement in operating income including the recovery of foreign currency exchange losses through gross profit.

Our Brightstar Europe joint venture continue to gain traction in our selected markets, the UK and Spain. Our Q4 run-rate indicates that we have captured 20% of the available mobile distribution market in these two geographies. And in fact last week, we announced that we shipped our 1 millionth handset. The JV exceeded its plan for the second consecutive quarter and I am very pleased to report that the JV generated nearly $1 million in net income in the fourth quarter. This exceeds our forecast to breakeven by year-end.

We recently expanded the Brightstar JV footprint with a new office in the Northern region of Germany and we are already shipping handsets into the German market. In February our JV partner Brightstar Corporation was named the Microsoft Gold Certified Partner acknowledging their high level of expertise in mobility solutions and their success in driving the adoption of Windows mobile platform around the globe.

Our JV product portfolio includes a number of leading windows mobile platform phone vendors including LG mobile, Samsung, Sony Ericsson and Motorola, and this recent acknowledgment of their expertise is sure to further our expanding position in the market.

Turning to the Americas, I believe we executed well inside of an IT spending environment that continued to decline, particularly in the US and Canada.

Our net sales in the Americas declined 14% in the fourth quarter with the pace of decline accelerating in January. Given what several of our vendors have recently stated about the continued IT industry softness, our accelerated decline is mapping to the overall industry trend. Our Americas team worked diligently to manage expenses and balance their infrastructure with the environment. These efforts began several quarters ago and they continued throughout the year.

We also made specific adjustments to headcount and other expenses as we entered calendar year 2009 and forecast indicated that volume declines may accelerate. On the upside, we managed our pricing execution nicely and combined with our hedging and inventory management efforts, our Americas team also recovered a significant portion of foreign currency exchange losses recognized in the second-half of the year.

The bottom line results of all these efforts generated Americas operating margin of 1.63% in the fourth quarter, an improvement from our 1.56% in the prior year. Our Canadian operations are also experiencing the pressure of declining markets, but the team remains focused on serving customers and delivering the best product solutions. This was validated in February when our Canadian operations were recognized with its second consecutive best distributor award as voted by Canadian customer from e-Channel News.

There is no greater form of recognition for our field organization than to be recognized for excellence by your customers. I am very pleased to see our Canadian customers, and our customers around the world are rewarding our teams not only with recognition and awards but also with a greater share of their business.

As we look across our product segments in both Europe and the Americas, software and networking remained the strongest categories with peripherals and systems declining the most. Also worth noting is our growth in sales of televisions, digital displays and large LCD displays which continue to be strong sellers for Tech Data. In fact, just this morning we announced an expanding agreement with Sharp to distribute Sharp in AQUOS LCD TVs and Blu-ray Disc players in the US. With the strengthening of our digital display and television line card, we will capitalize on a growing opportunity in the consumer SMB, education and government markets.

In summary, our fiscal year 2010 will undoubtedly be challenging as all signs point to worsening marketing conditions. Our recent outlook from vendors, customers and other members of the IT ecosystem have forecasted sales declines from 5% to as much as 25% in the coming quarters.

As Jeff noted in his comments, we anticipate seeing as much as a 20% decline in sales year-over-year on a worldwide basis. While demand is soft, we will also be affected by the weakening of certain foreign currencies against the US dollar year-over-year. While we have consistently managed SG&A expenses in line with demand forecast, this anticipated top line decline will certainly have a negative impact on our bottom line financial results.

On a regional basis, after a consecutive series of strong quarters, our European operations are operating with solid momentum. We are leveraging our infrastructure and we are ready to capitalize on opportunities being created by the financial fragility of many players in our industry.

We expect our European operations fiscal 2010 performance will help offset some of the anticipated economy driven declines in our Americans operations. The magnitude and duration of the economic slowdown remain uncertain, but we believe our forward-looking strategies and our conservative sound financial management practices are differentiating and strengthening our company for long-term success. We have low customer concentration, great geographic and industry vertical diversification and a sold balance sheet.

We have taken prudent cost reduction actions throughout the year and we continue to improve our inventory and pricing management disciplines as evidenced by our results in the fourth quarter.

Furthermore, our long-term customer and vendor relationships coupled with our veteran management team will serve us well during these uncertain times. 35 years of serving the IT supply chain have provided Tech Data with the tools and the know-how to be successful during both prosperous and challenging times.

I believe great companies are made even stronger during tough times. In fact as many of you understand about the industry when IT spending contracts our variable cost route to market solution becomes an even more compelling value proposition to our vendors. Technology companies from around the world seek to partner with leading, knowledgeable distributors to deliver their products to the market while keeping cost down. We are using this challenging time to sharpen our execution on every front, tighten our relationships with our customers and vendors, and responsibly manage our business. In every business decision we make, we will balance revenue and market share achievement with delivering profitable returns back to our shareholders.

In closing, the entire team at Tech Data deserves praise for their dedication and execution, amidst a challenging environment, one that requires prudent and at times difficult decisions. I would like to take this opportunity to personally thank each and every one of my Tech Data colleagues for their dedication and hard work. Their commitment has and will continue to be fundamental to Tech Data’s long-term success.

With that we would love to open it up to your questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander - Raymond James

Thanks and good morning. On the gross margin, I know it’s difficult, but can you ballpark what gross margin would have been excluding the currency benefits you got in the quarter. It would seem like they were squarely above 5% even excluding the currency benefit, and if that’s true, it would be the first time I think since 2005 where that’s the case. So can you confirm that and more importantly rank the key factors that helped gross margin performance. You threw a lot of variables out there but how much of it or I guess, in the order of priority it was customer mix, pricing, freight, vendor incentives and any other variable, you think were important?

Jeff Howells

Brian, this is Jeff. We really can't tell you precisely what that gross margin would have been without, because we have to estimate it all, because, of course, we don't know where the market is.

I think if you took the far extreme, you could take the two quarters, combine it Q3 and Q4, and net out the FX loss for the six months and if you see that you will see that the net gross margin would have been just under 5% for the second half of the year, and that would have been a slight improvement 8, 9, 10 basis points above the prior year calculation.

So, clearly we didn’t recover our 100% of the FX loss because some of its cost and the expenses, because the cost differential in the forward points, and putting the contracts in place for the pieces of the inventory and the payrolls that aren’t naturally hedged. So, the only thing you can do is estimate it internally, estimate it with some facts and taking into the worst case if you will.

As far as the components maybe, Bob would want to add to it. I think around the world our freight management and our pricing was very strong in many countries and many regions, we still weren’t were able to realize what we believe would be the maximum or the appropriate level of back-in dollars, because goals set by certain manufacturers were still higher than market reality. And different countries, different regions had different success in negotiating reasonable goals and that continues into beginning of the new fiscal year.

So, the most challenging for the backend achievement and then I think the next challenging as we mentioned in our scripts, the competitive nature of the Americas environment particularly in the US where pricing has remained very competitive on a day in and day out basis.

Bob Dutkowsky

Brian, this is Bob. If I think about the quarter, the thing that I like the best about it was our ability to execute in really kind of uncharted waters, that the teams had not been faced with the degree and severity of the FX buffeting that we got in Q3 and then their ability to map out a plan and recover much of that FX opportunity in the quarter, really speaks to our ability to set our sights on a goal and execute. And to do all of that in a slippery economic environment as well, really speaks to the quality of the management team on the ground and their ability to execute with our vendors and our customers. So, to kind of prioritize and size the elements of the gross margin improvement, it’s a good exercise but really the exercise is our ability to execute in a tough environment and do it very well.

Brian Alexander - Raymond James

Great, and then just one follow-up. I know you guys don’t like to talk about specific vendors, but I thought it was interesting to hear that both Tech Data and Cisco called out Germany as a country that grew double-digits despite the horrible macro backdrop there. In your case, I know you have been executing better there for the past several quarters. But, were there any specific large deals that drove your performance in Germany that could be categorized as non-recurring that we should think of going forward?

Bob Dutkowsky

No, I think the German story for Tech Data is one, again, I mean the harp on it, but one of execution. We have set our sights and mapped out a plan of steady recovery in Germany and quite frankly the economic environment has slowed us down some, but the team continues to execute very-very well. There really aren’t any strange one-offs that are contributing to our success in Germany. It's just very-very solid execution and improvement in all fronts on the distribution model. We are managing our vendors efficiently, we are buying right, we are covering the right customers with an improved coverage model, and our management team has now had a handful of quarters now of stability to be able to really predict the business and drive it and you can see the results are beginning to take shape.

Brian Alexander - Raymond James

Great. Nice job. Thanks.


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

Min Park - Goldman Sachs

Great. Thank you. Just going back to the gross margin question, to what extent could you still see FX balancing your margins in the April quarter? I mean has all the FX losses been recovered, or do you think there is still some capacity left?

Jeff Howells

Min, this is Jeff. There is a just a very small amount that hasn’t been recovered and of course, that would be theoretically from the purchases in Q4 that still remained in inventory at the end of Q4. So, it's very small compared to what we saw rolling from Q3 to Q4.

Min Park - Goldman Sachs

Great. And then on your previous conference call, that wasn't very prudent to provide go forward target given the current economy and FX volatility. I am just kind of curious what’s changed and what are you seeing out there now that makes you a little bit more comfortable in providing an outlook, albeit it's still somewhat vague?

Jeff Howells

Well, I think the point that we provided was a directional point. If you take the interaction of that client in the market plus currency volatility, and as Bob said in his comments we have vendor saying the market is down between 5% and 25%. We just kind of, our various models and renditions from our high to our low revenue estimates, we keep triangulating between the market decline and currency around a 20% decline. So, we are just giving you sort of a parameter to work with.

Last call, we said we didn’t know whether the market was going to be flat down 5% or down 10%, and so it's kind of an update to the color that was given in our Q3 call. I think if you even look back to our Q1 call this past year, we started talking about looking at the market was softening. So it is not meant to be a pin-point estimate that we are going to be down exactly 20%, but it is clearly to just give you an idea that 20% decline on year-over-year basis is certainly likely in this market.

Bob Dutkowsky

Yes, and Min you can imagine, we try to offset the challenges of the economic environment with the successes we think we can realize with the actions that we are taking. Just two weeks ago we had about 15 of our biggest customers together for a day to kind of get a feeling for where they felt the market was headed. And you get a set of data points and then we counteract that with for example, the Sharp announcement we made this morning which is all really incremental revenue opportunity for Tech Data or the fact that we have now opened the Brightstar JV into Germany, that’s all incremental upside and it’s hard for us to predict how much value and how much revenue and profit that can contribute. But clearly those steps that we take or we constantly take to try to find new market opportunities, diversify technologies and to find new customers, we have to balance that off with the input we get from our customers and vendors about their outlooks into the markets.

Min Park - Goldman Sachs

That’s great, thank you. And then just one last question, your OpEx was down quite a bit year-over-year, could you just help us understand how much of it stems from custom discretionary spending versus currency translation benefits from foreign OpEx?

Jeff Howells

I would say the majority of it is the currency translation, the decline. I will say that we are managing our SG&A very closely in Europe in euros, but as we added Scribona and we continue to have this quarter flattish, we haven’t had as much reductions. In fact, net were up slightly in headcount. In the Americas, we are actually down in headcount. We have had the most reductions on a year-over-year basis in controlling expenses and controlling headcount and the payroll. And then clearly compared to the prior year, as a Corporation, we didn’t like most companies achieve our annual targets, we have set higher aspirations, we are very pleased in this tough environment, we have made $2.40 a share for the year, but our aspirations were higher. So clearly our worldwide compensation will be down for key executives.

Min Park - Goldman Sachs

Great. Thank you very much.


Our next question comes from Bill Fearnley with FTN Equity Capital Markets. Please proceed with your question.

William Fearnley - FTN Equity Capital Markets

Yes, good morning. On the gross margin line, did anything standout this quarter from a vendor rebate MDF perspective and you mentioned the new reality, Bob, do you have new goals yet with your major vendors, will you be able to renegotiate some of them?

Bob Dutkowsky

First question, nothing really stood as being extreme with any of the vendors. The challenge is to have the vendors acknowledge the realities of the market in the goaling process that we worked through with them. And as we have described in the past, we negotiate virtually every vendor back-end every quarter. And I think in many cases our input and data into the realities of the market are maybe a little bit in front of some of the vendors. And so that negotiation process attempts to bring the vendors to the real-time opportunities and actions that we see in the market. We are up and running for Q1 fiscal year 2010 we have goals in place and we are aggressively attacking them. Some vendors have recognized the realities of the market more aggressively than others.

William Fearnley - FTN Equity Capital Markets

Okay, and then a follow-up if I could on the pricing environment. In North America, you talked about it being particularly difficult. Any additional color here from a customer segment perspective, when you look at the retail, DMR, bar channels, where was it most acute, was it on the product side or was it on the customer side in North America?

Bob Dutkowsky

Yes, it was pretty much across the board, Bill. The market environment feels consistent in all segments right now. If there is any strength to be seen I still believe it’s in the SMB market where our value proposition, the combination of Tech Data and the value that the bar brings can realize as higher margin to an SMB customer than it tends to a larger national or retail business. And that's why you continue to hear us focus on SMB as a market opportunity that as Jeff said, where our SG&A increased over the calendar year was almost totally focused at SMB penetration. So that’s the spot where we think the opportunity still exists and that’s the spot where we continue to invest.

William Fearnley - FTN Equity Capital Markets

Okay. And if I could switch gears to Europe. On the competitive side, are you starting to see some of your smaller regional competitors struggling and do you think that is starting to turn into a tailwind for you from a competitive and a revenue standpoint in Europe?

Bob Dutkowsky

I will ask Néstor in Europe to answer that question for you Bill.

Néstor Cano

Hi this Néstor. And not everybody has the same type of availability, and also the credit limits are being difficult in the marketplace. and as the market deteriorates it becomes an advantage for the companies to have solid balance sheet and they have kind of work [organically]. We expect to see this helping out on growth rate compared with our competition.

William Fearnley - FTN Equity Capital Markets

Thanks guys.


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

Matthew Sheerin - Thomas Weisel Partners

Yes, thank you. I just wanted to talk a little more about the SG&A, it sounds like you have done some pruning, but still no plans for additional cost cutting despite the 20% down sales, year-over-year. I mean is that because you think that you want to be well positioned in both regions when business comes back or do you think we might be close to the bottom in terms of where sales shake out.

Bob Dutkowsky

We have had the strategy of. certainly over the last three or four quarters Matt, to try to match our cost structure as well as we can to what we see in the market. And yet we don’t want to go one headcount further then we need to because we believe that when the economy does turn around, IT spending will be one of the elements that lead the economy back. We want to be in the right position to take advantage of it. Now having said that, we started to ratchet back spending almost three quarters ago in both geographies, although we didn’t do large headcount reductions, in both geographies hiring has been virtually frozen over those three quarters, and so have been able to avoid adding a lot of people even though our revenues and profits were improving, we added them through productivity enhancements both at the sales level and in our logistics infrastructure.

Recall that we invested millions of dollars of SG&A to install a new warehouse management system in all of our logistics centers around the world. that project is now complete. And so the leverage and productivity that we were able to realize there allowed us to keep headcounts flat or declining even though our volumes continue to go up. So, we continue to try to balance cost, our cost and expense with the opportunity that we see. We are prepared to continue to make those adjustments as necessary to balance the opportunity and our cost structure.

Matthew Sheerin - Thomas Weisel Partners

Okay, thanks. And then just I know several people have asked about the gross margin and I guess the challenge is to, how do you model going forward when you have that big benefit. Last quarter, you talked about continued pricing pressure in North America. Here, you do seem to be disciplined. You got better mix going. Is it fair to say that you are striving for the 4.9 to 5.05 range over the next couple of quarters or are you willing to kind of give some of that back just to keep the volumes up?

Jeff Howells

Matt, I am not sure we can answer that, but clearly our view of the model has been that based upon our business and our geography, having a five from the number, would be a more challenging answer than otherwise. I am not saying we can't, but that would all say that the range you just gave which is somewhat in line. The average for the last two years is probably aspirationally in the range. And then, we will have to see what the market declines were, what markets have less declined and see how competitive it gets.

It will be a balancing act quarter-by-quarter as we, our vendors and the competitors see what market is available to us out there. But, you just gave a range which is what we have achieved over the last couple of years on an annualized basis. We don’t have any goal to continue to diminish that. We don’t have any change in our mix in the business. It would be the backend availability and our ability to achieve that from our vendors coupled with the competitive nature which will yield the final answer on that.

Matthew Sheerin - Thomas Weisel Partners

Okay. That’s helpful and then just, lastly, on the balance sheet, you’ve got a net cash position now. In theory, you should continue to generate some solid free cash over the next few quarters, what are the plans with the cash now?

Jeff Howells

The current plans, number one is to harvest it and be ultra conservative in this market. We don’t have any debt maturities in the near term, we hear about companies that do and our point would be very unfavorably treated as far as rate and availability. And secondly, we will continue to look for small fill-in acquisitions and those would be the two main, and then of course, we would always present to our Board the opportunity for continued stock buyback, and they would probably be in that order conservative, small acquisition opportunities and may be continue our stock buyback.

Bob Dutkowsky

And Matt, to validate that debt position, we did all three of those things over the course of the last year and continue to have that philosophy and strategy in play in both the Americas geography and in the European geography.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thank you.


Our next question comes from Rich Kugele with Needham & Company. Please proceed with your question.

Richard Kugele - Needham & Company

Thank you, good morning. Just a follow-up on that acquisition comment you just made, do you see the opportunities in Europe being greater than those in America or any comments on where maybe because if you go back to history, these times have led to roll-up opportunities that have gotten the large players to their size today. So, any additional color on where they might be and even what type of -- are you looking for the software networking type company that actually are growing in this environment, or do you try and perceive the market into other areas that could be growing in three years or something?

Bob Dutkowsky

Richard, it's the combination of the two strategies you just articulated. Clearly, strategy number one for us is to leverage our fixed cost infrastructure as effectively as we can. And so when we can roll-up market opportunity into our cost structure, it improves the yield of our infrastructure and our profitability. Last year we rolled Scribona up in the Nordics, we rolled Actavis up in Switzerland and both of those acquisitions have helped make those geographies more productive and more profitable and they can serve customers and vendors more effectively.

We also have our sight set on opportunities that diversify our business more effectively. It doesn’t only have to happen through acquisitions. Last year for example, we added VMware to our line card and it represented a multi-million dollar relationship in the year for us, pure incremental opportunity. We continue to look for other diversification opportunities that can improve the profitability of our company and use our fixed costs infrastructure more effectively.

Clearly, there are more opportunities like that in Europe because of the regional nature of the industry, lots of small regional distributors and there are fewer of those opportunities in the Americas. They exist but they are further and if you were to see, and we have active programs in both geographies to analyze and search out those opportunities and prioritize them to the best of our abilities.

Richard Kugele - Needham & Company

Okay. And then just lastly, when you speak with your vendors are you seeing any changes on their part their view of the channel, are they trying to extent more of the larger resellers direct versus through the channel or vice versa?

Bob Dutkowsky

No, first of all, Rich, I would say that every vendor has its own story, based on their products and their perceived optimum coverage model. The good news is I think most vendors today acknowledge that IT distribution is a lower cost variable cost relative to market model that they can deploy. And so when times get tough and they look to go to lower cost models, they turn to distribution and they see our value, they appreciate our ability to execute and to cover larger chunks of the market.

Now, I wouldn’t say that there is a wholesale move towards IT distribution. It really is a vendor-by-vendor dialog and that’s why we talk in both Jeff's comments and in my comments about the depth of the relationships we have with vendors. We were able to sit with them and understand their challenges and their perceived weakness in coverage and the cost and expense issues they have, and we are able to map out our value against their challenges. And when we do that we clearly deepen the strategic relationship we have with vendors. So, as I said in my comments, I believe during these difficult times there is an opportunity for Tech Data to strengthen its relationship and its position in the markets and we are actively engaged in both geographies with those strategic dialogs with our vendors.

Richard Kugele - Needham & Company

Okay. Thank you very much.


Our last question comes from the Richard Gardner with Citigroup. Please proceed with your question.

Joey - Citigroup

Yes, good morning this is Joey on behalf of Rich Gardner. I wanted to see if you can provide any color on the overall credit quality of your customers, maybe any specific metrics on AR ageing?

Bob Dutkowsky

Actually our team around the world did an excellent job throughout last fiscal year on credit management. Our losses, as I referenced and somewhat foreshadowed in the last call only went up slightly, a basis point here or two. So excellent job, we had no deterioration in the ageing around the world. We stay very close and on top of our customer relationships, so to-date credit exposure or losses has not been any kind of a negative for Tech Data.

Jeff Howells

And also back to Rich’s earlier question about the vendors. The vendors clearly in this type of economic environment, the vendors clearly recognize the value that our credit capacity brings to their market efforts. And so the need for the vendor Tech Data relationship to tighten becomes even more important in tough credit times.

Joey - Citigroup

Great, thank you.


We have a follow-up question from Brian Alexander with Raymond James. Please proceed with your questions.

Brian Alexander - Raymond James

Yes, just a follow-up on the inventory. It was down sequentially more than sales but I think it still a little bit elevated relative to the historical levels. Can you just Jeff, elaborate on why that’s the case and in what regions and product categories to the extent you can comment remain more elevated that others in just what your targeted inventory turns are, going forward, how could we get that down?

Jeff Howells

Yes, I think first of all we are very happy with the inventory, and two, we are happy with how much of that we own versus our vendors own. The increase in inventory was offset by the increase in accounts payable.

I think, if I look at one factor and there is always many factors Brian, it's just as Bob alluded in his comments, sales decline accelerated in January. And so, probably ended up with a little bit of extra inventory compared to the sales that we experienced in the month of January. So, on the positive side, our inventory is clean, the ageing is strong. It will sell-through quickly or already has in February. I think also when you are doing your analysis and comparison the numbers that we just reported, of course, compared to others includes the month of January. And not to overemphasize but from every vendor and their comments about their Q1 forecast, we know that the decline in the market accelerated as we entered the new calendar year. So, I think that shows the strength of our operation especially through the end of last calendar year. So, inventory is good, inventory is clean and we still anticipate having 26 to 28 days inventory on the shelf.

Brian Alexander - Raymond James

Great. And then just on Brightstar you guys have, it sounds that you have got some momentum there, you made money in quarter. How much is that joint venture being influenced by net books at this point both from growth and profitability share point?

Jeff Howells

Actually, technically on net books very little, however, the joint venture is selling small notebooks to various carriers. So the net books will probably be upside going forward, there are European opportunities to sell notebook and net books to carriers as they begin to subsidize that as an increment tool putting in their card in it. But it certainly helped, but I think the momentum on handsets as we indicated on the call, that we believe we had about 20% market share in Q4 in handsets alone in UK and Spain, pretty impressive performance considering it was a startup operation two years ago.

Brian Alexander - Raymond James

Great. Thanks guys.


This concludes Tech Data Corporation’s fourth quarter and fiscal year 2009 earnings conference call. A replay of the call will be available in about one hour at It will remain available until Tuesday, March 10 at 5:00 pm. Thank you for attending today’s conference call and have a great day.

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