Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Arleen Quinones - Director of Investor Relations & Shareholder Services

Robert M. Dutkowsky - Chief Executive Officer and Executive Director

Jeffery P. Howells - Chief Financial Officer, Executive Vice President and Director

Analysts

Matthew Markezin-Press - Barclays Capital, Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Osten Bernardez - Cross Research LLC

Tech Data (TECD) Q4 2013 Earnings Call March 4, 2013 9:00 AM ET

Operator

Good morning. Welcome to the Tech Data Corporation's Fiscal Year 2013 Fourth Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Arleen Quinones, Director of Investor Relations. Ma'am, you may begin.

Arleen Quinones

Thank you, Tiffany. Good morning, and welcome to Tech Data's Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. I'm joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; Nestor Cano, President, Europe; and Murray Wright, President, the Americas.

Before we begin, I would like to remind all listeners that today's earnings press release and certain matters discussed in today's call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the current -- company's current expectations and are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in our filings with the Securities and Exchange Commission.

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 Executive Officer, Bob Dutkowsky.

Robert M. Dutkowsky

Thank you, Arleen. Good morning, everyone, and thank you for joining us today. Our fourth quarter and fiscal 2013 results reflect both a dynamic and a challenging year for Tech Data. After a strong performance in fiscal 2012, we entered the year against the backdrop of continued economic uncertainty and a cautious IT spending environment. As the year progressed, we faced what arguably has been one of IT industry's most rapid product mix shifts, away from higher-margin products, such as servers, to lower margin products, such as tablets, mobile phones and software, resulting in a dramatic shift in our vendor concentration. Adding to the disruption, the implementation of certain modules of our SAP system in the U.S. caused us to lose some market share. All of this combined resulted in non-GAAP earnings for the quarter and the fiscal year that came in below our expectations and prior year.

Our worldwide Q4 sales came in ahead of plan. Our earnings fell short due to 3 primary factors. The first is a shift in the product mix, the higher sales of mobile phones, tablets and software. Because these are less complex sales of high-velocity products, they carry tight -- tighter gross margins. In a strong demand environment, these high-velocity products help absorb our fixed cost structure, resulting in good operating leverage. In a softer demand environment, like the one we experienced in Q4, it was more difficult to drive the desired operating leverage that significantly impacted our earnings in the quarter.

The second factor that impacted gross margin was our continued recovery in the U.S. to regain the momentum we lost from our SAP deployment in Q2. The team is making excellent progress winning back business. And as a proof point, our sales in the U.S. came in above plan in Q4. We're standing firm on our commitment to regain share by leading with service, not price. However, the year-over-year sales decline, combined with the shift in product mix, resulted in lower back-end rebate dollars from vendors, which had a negative effect on gross margins in Q4.

And finally, the third factor that contributed to our earnings shortfall in Q4 was SDG, our most recent European acquisition that closed November 1. The integration is going as planned. But the addition of SDG, while slightly accretive in Q4 -- to Q4 operating income, was dilutive to our margins, as well as to our earnings, after consideration of interest on the acquisition debt.

For the fiscal year, our worldwide adjusted sales grew 2%, slightly ahead of what we believe was a flat growth environment in our addressable markets. Our growth was fueled by the sale of almost 2 billion of tablets, double the amount sold the previous year. Our European Tech Data mobile business, which grew over 40% in euros, and software, which posted solid fiscal year growth. Growth in these products was partially offset by declines in historically richer-margin product, such as industry-standard servers, which put pressure on our gross margin and resulted in lower profitability and earnings for the fiscal year.

There were an unusually high number of reconciling items and adjustments in the quarterly and annual numbers, and Jeff will cover some of these in greater detail in his financial review. However, I want to stress that despite the macroeconomic industry and company-specific headwinds we faced in fiscal 2013 and our disappointment that we did not deliver the financial results we expected, I am proud of our team's accomplishment this past year. The achievements that, while not reflected in our fiscal '13 financials, we expect will drive improved performance in the future.

I'll now turn the call over to Jeff for a review of our financial results. And then I will provide some additional business highlights and our priorities for fiscal '14, and then we'll open it up to your questions. Jeff?

Jeffery P. Howells

Thank you, Bob. Good morning, everyone. I will cover our fourth quarter fiscal year performance and make a few comments on our outlook for Q1. Today, my comments will reference the supplemental schedules, which are available on our website, techdata.com/investor.

Beginning on Slide 5. Our worldwide sales for the fourth quarter of January 31, 2013, increased 5% year-over-year to $7.5 billion. The translation of foreign currency against U.S. dollar had a minimal impact on the year-over-year sales comparison.

In Q1 of fiscal '13, we prospectively revised our presentation of sales of vendor warranty services and certain fulfillment contracts that they are now reflected on agency basis as net fees as opposed to sales and cost of products sold. These items were -- contributed approximately $240 million in sales in Q4, negatively impacting the year-over-year sales comparison by approximately 3 percentage points. This change had no impact on gross profit dollars, operating income dollars, net income dollars or earnings per share for any period reported.

SDG, which we acquired on November 1, 2012, contributed approximately $623 million to sales in the quarter. Included in our prior year sales is approximately $20 million related to the in-country operations of Brazil and Colombia, which we exited at the end of fiscal 2012. Excluding all these factors, worldwide sales were essentially flat year-over-year, slightly ahead of our expectations.

Worldwide sales for the fiscal year ended January 31, 2013, were $25.4 billion, a decrease of 4% from the prior fiscal year. After adjusting for the change to our presentation of sales of vendor warranty services and certain fulfillment contracts, sales related to SDG, fiscal year 2012 sales related to Brazil and Colombia and the translation effect of foreign currencies, worldwide sales increased 2% for the fiscal year.

Looking on our regions, beginning on Slide 6. The Americas Q4 sales were $2.6 billion or 35% of worldwide sales, a decrease of 6% from the prior year. The change of presentation of vendor warranty services and certain fulfillment contracts reduced the Americas fourth quarter fiscal 2013 sales by approximately $102 million. Included in the Americas prior year sales is approximately $20 million related to in-country operations in Brazil and Colombia. Excluding these factors, as well as the translation effect of certain foreign currencies, Americas sales decreased approximately 2% from the prior period. The decrease was attributable to general market conditions and a loss of some market share in the U.S. following the implementation of certain SAP modules during the second quarter. However, sales were slightly ahead of our plan.

For the fiscal year, Americas sales were $9.8 billion, a decrease of 10% from the prior year. Due to the impact of the factors described previously, Americas sales declined 3% in fiscal year 2013.

Turning now to Europe on Slide 7 and 8. Fourth quarter sales were $4.9 billion or 65% of worldwide sales, an increase of 12% from the prior year in U.S. dollars and 13% increase in euros. The change of presentation of vendor warranty services and certain fulfillment contracts reduced Europe's Q4 fiscal 2013 sales by approximately $138 million or EUR 105 million. SDG contributed approximately $623 million or EUR 476 million to Q4 sales. Excluding the impact of these factors, Europe's net sales increased approximately 2% in euros and U.S. dollars after the translation effect of certain foreign currencies.

Organic sales in Europe, in both U.S. dollars and euros, reached the highest Q4 level in the region's history, with good year-over-year growth in the U.K., France and Italy, offsetting lower sales in the Nordics, Switzerland and Eastern Europe. From a product standpoint, both in the quarter was driven by higher sales in mobile phones, tablet and software.

For the fiscal year, sales in Europe decreased 1% in U.S. dollars and increased 7% in euros. Excluding the impact of the factors described previously, Europe's net sales increased 5% in euros and U.S. dollars after translation effect of certain foreign currencies.

Slide 9 shows worldwide gross margin from fourth quarter of 5.09% compared to 5.27% in the prior year quarter. The change of presentation of warranty services and certain fulfillment contracts increased gross margin by approximately 16 basis points.

For the fiscal year, worldwide gross margin is 5.16% compared to 5.26% in the prior year. The change of presentation of warranty services and certain fulfillment contracts increased the fiscal year gross margin by approximately 16 basis points. The decrease in our Q4 fiscal year gross margin is primarily attributable to a higher mix of lower-margin mobile phones, tablets and software, as well as the effects of the company's implementation of certain SAP modules in the U.S. during the second quarter.

Slide 10 shows SG&A expenses for Q4, which increased $23.5 million to $286 million or 3.84% of sales, attributable primarily to expenses related to SDG. The change of presentation of vendor warranty services and certain fulfillment contracts increased SG&A as a percentage of sales by approximately 12 basis points.

Slides 11 through 13 summarize our worldwide and regional operating income. Worldwide operating income for Q4 were $93.5 million or 1.25% of sales. Including the loss on disposals of subsidiaries related to Brazil and Colombia, non-GAAP operating income the prior year period was $112 million or 1.58% of net sales. The year-over-year decline is attributable primarily to lower gross margin due to the product mix and higher expenses, including amortization and acquisition costs related to SDG.

Operating income for the fiscal year were $303 million or 1.2% of sales compared to non-GAAP operating income of $356 million or 1.34% of sales in the prior fiscal year, which excludes the loss on disposal for Brazil and Colombia.

On regional basis, Americas Q4 operating income was $38 million or 1.48% of sales compared to non-GAAP operating income of $55 million or 2.01% of sales from the prior year quarter, excluding the loss on disposal for Brazil and Colombia. The change of presentation of vendor warranty services and certain fulfillment contracts increased Americas operating income as a percent of sales in the fourth quarter by approximately 5 basis points. Year-over-year decline is primarily attributable to higher mix of lower margin products and the continuing effects of our implementation of certain SAP modules in the U.S. during the second quarter.

Operating income in Europe for the fourth quarter were $59 million or 1.2% of sales compared to $60 million or 1.37% of sales in the prior year quarter. The change of presentation of warranty services and certain fulfillment contracts increased Europe's operating income as a percent of sales in Q4 fiscal '13 by approximately 3 basis points. Year-over-year decline is primarily attributable to higher mix of lower margin products, higher expenses related to SDG.

Interest expense for the quarter was $7.7 million, an increase of $1.5 million from the prior year quarter, primarily attributable to 3.75% senior notes issued in September of 2012. Our effective tax rate for the fourth quarter was 1%. Excluding the release of deferred tax valuation allowance in our European region, effective tax rate was 32%. For fiscal year '14, we expect an effective tax rate of approximately 30%, although it may vary on a quarterly basis.

Net income for Q4 was $82.5 million or 2.17 -- or $2.17 per diluted share based on 38.1 million weighted average diluted shares outstanding. This included a net benefit of approximately $26 million or $0.69 per diluted share for the release of deferred tax valuation allowance. Excluding this benefit, net income for Q4 was $57 million or $1.48 per diluted share.

For the fiscal year, net income was $215 million or $5.48 per diluted share based on 39.2 million weighted average diluted shares outstanding. Excluding the net benefit of approximately $26 million or $0.67 per diluted share, the release of deferred tax valuation allowance, non-GAAP net income for the fiscal year was $189 million or $4.81 per diluted share.

Now turning to some balance sheet highlights. Our cash position at the end of the quarter was $392 million. Allowance for bad debt was $60 million. Days sales outstanding were 40. Days of supply were 27 days. Days payable outstanding were 46 days. That brings our cash conversion cycle for the quarter to 21 days, an increase of one day from the prior year fourth quarter. Cash provided by operations during Q4 was $120 million and $158 million for fiscal year.

The total debt balance was $519 million compared to $105 million at January 31, 2012. Decrease is primarily due to our 3.75% senior notes, which were issued in September 2012 to fund our acquisition of SDG. We ended the quarter with a total debt-to-capital ratio of 21%. We had funds available for use in our credit facilities of approximately $643 million at the end of the quarter.

Accumulated other comprehensive income, which consists of currency translation net of applicable taxes, was $331 million at the end of Q4, a sequential increase of $51 million. At January 31, 2013, the company had 37.8 million shares outstanding or $380 million, plus goodwill and acquired intangibles, resulting in a tangible book value of $42.27 per share.

Capital expenditures were $8 million in Q4 and $36.6 million in fiscal year '13. The current plan for fiscal year 2014 capital expenditures is approximately $40 million. Depreciation and amortization expense in Q4 was $18.2 million, of which $4.3 million relates to the acquisition of SDG. We earned a return on invested capital on a trailing 12-month basis of 12%.

Slide 18 shows our customer and product mix. Customer mix for the 12-month ended January 31, 2013, remain relatively consistent from the previous period. On this slide, you'll also see our sales percentage by product categories, which we have modified in order to provide greater transparency and more relevant sales information on our specialty business.

Historically, we reported product mix using the CNET classifications of systems, networking, peripherals and software. Going forward, we'll report trailing 12-month sales percentages classified by our strategic focus areas of data center, mobility, software and consumer electronics as well as broadline. As we noted in our prior -- in our fiscal year '12 annual report and certain investor presentations, our previous methodology for reporting sales in this manager -- in this manner resulted in some overlap of products within these categories. Last year, we went through exhaustive exercise in terms of proper classification of products and to ensure consistent reporting between our 2 regions.

Slide 18 shows our fiscal year 2013 and 2012 product mix based on our new classifications with no overlap between categories. Broadline products, which includes tablets, represented 47% of sales in both years. Data center products are 21% in fiscal year '13 versus 23% in the prior year. Software was 19% versus 18% the prior year. Mobility was 8% of sales versus 6%. Consumer electronics was 5% versus 6% in fiscal year '12.

On Slide 19, for your information, is a reconciliation of our previous revised product mix for fiscal year '12, as well as a high-level list of the products included in each category. In Q4, we had 2 vendors that generated more than 10% of our sales on a trailing 12-month basis. HP represented 19% of our sales in the quarter compared to 22% in the prior year. And Apple represented 14% of our sales in the quarter compared to 11% in the prior period.

Turning to our business outlook. For the first quarter of fiscal 2014, on a reported basis, the company expects high single-digit year-over-year sales growth. On regional basis, the company expects flat year-over-year sales in the Americas and in Europe in euros, excluding SDG. We estimate the average U.S. dollar to euro exchange rate to be $1.28 to EUR 1 for fiscal year 2014.

I will now turn the call back over to Bob for additional comments.

Robert M. Dutkowsky

Thanks, Jeff. As I mentioned in my opening remarks, our fiscal '13 financial performance obscure the highly productive year for Tech Data. Amid uncertain market conditions, our worldwide team continued to build the company for the long term with major achievements, such as our deployment in the second quarter of the final core SAP modules in our U.S. operations. While a lack of fluency with the system and reporting tools caused some slip in our U.S. market share, the system worked well from day one. Over the past few months, we've invested in additional training to get our U.S. team comfortable with the new tools, and it's paying off. Our customer satisfaction scores are improving, and we improved our market share in the quarter, as demonstrated by the Q4 overachievement against plan.

Excluding our recent SDG acquisition, more than 90% of our sales are now on one common IT platform, a feat that took us 10 years to accomplish and was not easy and one that gets Tech Data significant competitive advantages by opening up greater supply chain opportunity, expanding our value-add services to our customers, onboarding new vendor and products faster and improving our ability to rapidly respond to changes in the market. Overall, it makes us a more flexible, adaptive and responsive company, which, over the long term, makes our team more productive while benefiting our vendor partners and customers and, ultimately, our shareholders.

In Europe, our team did an excellent job in fiscal '13, gaining share amid challenging marketing -- market conditions and further strengthened the business through the acquisition of SDG, which adds more than $2 billion to the annual sales, expands our European footprint with key suppliers and makes Tech Data the leading value distributor on the continent.

In fiscal '13, we also purchased our joint venture partner's 50% interest in our successful European mobility business, Tech Data Mobile. In fiscal '13, Tech Data Mobile grew to well over $2 billion in sales, making us one of Europe's leading mobile product distributors.

To fund the acquisition of SDG, in fiscal '13, we diversified our capital structure by issuing a 5-year $350 million bond with a 3.75% coupon, the first public straight debt offering in our company's history. And as a sign of our confidence in the company's long-term growth prospects and our commitment to creating shareholder value, we would return $185 million to shareholders through share purchases -- share repurchases, making our cumulative share repurchase to $1.1 billion since 2005.

Although our financial performance in Q4 and the fiscal year fell short of our expectations, I want to assure you that investments we made in fiscal '13, in businesses and in IT systems, in vendor relationships, in our people and in our own company, make us stronger today than we were just one year ago. And collectively, it positions the company for long-term market share gains, improved profitability and shareholder value creation.

As we begin fiscal year '14, I'm confident that we can address the vast majorities of the factors that cause our Q4 underperformance and that they will be resolved in the near term, although we anticipate our first quarter earnings to be down in both regions year-over-year due to the difficult compare created by our strong results in Q1 of fiscal '13.

In the U.S., we believe we've stemmed our market share loss and expect to continue to regain share each quarter and deliver improved profitability for the year. In Europe, we expect our share gains to continue as they did this past fiscal year, particularly with the addition of SDG, which we believe will perform as planned and contribute positively to the fiscal year's results.

What is not clear to us yet is how the change in product mix we experienced in fiscal '13 may fundamentally change our margin profile going further -- forward. Nonetheless, our goal remains intact: To grow our fiscal year operating and net income dollars.

As a technology distributor for nearly 39 years, we're accustomed to operating in a cyclical deflationary environment. We worked through these watershed events before and have responded by adapting our business to a new operating model, adjusting our cost structure while winning new business opportunities in order to improve profitability and returns to our shareholders.

History had shown that technology constantly evolves. Products change and vendors shift. But through it all, the -- through all the IT market evolutions, the one constant is the value proposition we offer both vendors and customers. Regardless of technology, vendors rely on us to provide them with the most efficient route to market, and our reseller customers look to us to provide product availability, technical support, multi-vendor solutions, superior logistics capability and credit.

Our comprehensive end-to-end portfolio of IT products now extends from the data center to the living room, positions us well to capitalize on technological sea changes. And our flexible business model enables us to successfully navigate the IT market landscape, focusing on short-term profitability improvements, as we resume progress towards longer-term goals.

Therefore, our priorities for the year ahead are clear. We will continue to improve our U.S. teams' productivity and efficiency, with the goals to regain share and improve profitability in the Americas region. We will integrate SDG into our IT systems and logistics facilities to achieve the full benefits of the acquisition beginning in fiscal 2015. We will continue to aggressively pursue growth opportunities in our higher-margin businesses, such as our recently announced expanded relationship with IBM to distribute their Power Systems and enterprise-class storage products in the U.S., as well as capturing new supply chain opportunities, such as a large supply chain deal we recently closed in Europe. And as always, we will continue to focus on reviewing every dollar spent in the corporation in order to align our cost structure with the new realities of the market.

I want to thank our customers and vendors for their partnership and continued support, and in particular, thanks my Tech Data colleagues for their hard work and dedication in Q4 and throughout the fiscal year.

And with that, we would be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ben Reitzes with Barclays.

Matthew Markezin-Press - Barclays Capital, Research Division

This is actually Matt on for Ben. I was wondering if you guys could help me look at the mobility margins, I guess, on a gross and operating basis, I guess, compared to the company average. Is that something you can quantify?

Jeffery P. Howells

Yes, this is Jeff. The mobility margins, primarily in our European region, and they are generally slightly under our European margin level on the gross basis, although it contributes nicely to the operating line. After that, we don't really break it down in any more detail on any of our product categories.

Matthew Markezin-Press - Barclays Capital, Research Division

Okay. And then I guess in terms of, I guess, changing seasonality, when you look at the higher mix of mobility, is that something that kind of spikes during the January quarter? Or is it going to become a little bit more uniformed throughout the year?

Jeffery P. Howells

Clearly, mobility products and tablets would have higher sales as you go into the second half of the year and, generally speaking, highest in the fourth quarter. But the run rate of our business is very strong in the first half of the business also, in both of those product categories. Theoretically, in a normalized year, you have incremental sales in Q3 and then building even further into Q4.

Operator

Your next question comes from the line of Brian Alexander with Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

So if I just look at gross margins, they would've been below 5% if we back out change in accounting. It's been, I think, 5 years since gross margins were below 5%. So with all the product mix impacts that you've talked about, I was just trying to isolate that, as a variable, how much of the gross margin weakness is due to product mix versus maybe lower-product margins holding mix constant? Especially as you did beat your North American sales forecast, I think, pretty handily. And I'm just wondering if maybe you were a bit more aggressive to regain some of the share you lost related to the SAP implementation.

Jeffery P. Howells

Yes. Brian, this is Jeff. I think there's several things interacting into the margins. One, the very rapid growth in tablet sales, reaching almost $2 billion this year versus $1 billion last year versus $300 million the prior year versus negligible 4 years ago. So it's quite a dramatic change in what we're selling. Then you add the mobility products, which for us continue to be good-margin products. Handsets and smartphones, they're slightly under our European average. But since the velocity and the volumes have ramped up over those 3 years, it has a mathematical impact in the reported gross margin, and that's the business that's here to stay. I mean, we -- the world has moved to tablets and smartphones and mobility products, and the good news is we've diversified into those product categories. I think on the overall basis, with the move to those products, in both regions, we had the less opportunity this year to earn incremental rebates by exceeding baseline sales goals with a variety of vendors, which ends up being very positive impact on gross and operating margins as you hit cliffs and earn those back-end dollars, probably more so in the Americas than Europe, as a result of the loss earlier in the year of some market share or, more or less, some growth opportunity in various vendor categories. So in this current year and through the fourth quarter, I think we hit our sales objectives, especially in the U.S. But if we look at and compare to what our vendors had hoped Tech Data Corporation can do compared to our competitors, we may still have fell -- fallen slightly short of that. The good news is I think that our margin has stabilized over the last few quarters at this 5.09%, 5.08%, 5.10%, improving over our Q3 margins. And then what normally happens over a cycle is the vendor allocations of goals come in line with history. So it depends vendor by vendor of how many quarters of history they look at to set the goals. I think we've been happy with the goals that were allocated to us in Q4. Honestly, we sold different products in Q4 than our original going into the quarter plan. So we anticipated a slightly different mix and the ability to earn some incremental back-end rebates enhancing our overall gross margins. All that being said, having delivered almost $7.5 billion of sales and good operating performance, I think we're happy that the market was there on the sales and managed the margin on the products that were presented to us or available to us to sell. And as we move through the new fiscal year, we will work to address the market. If the market is going to continue accelerating in tablet sales, we will adjust our model and make sure that that's how we run the business, cost the business and deliver improved performance. If the market shifts back and we have the opportunity to some higher-margin products or, for example, the server market accelerates again somewhere throughout this fiscal year, it's a different opportunity for us. So a lot of puts and takes, but I think we took good sales, meeting our expectations in Europe and exceeding our expectations here. And there's a lot of puts and takes and nuances in that.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Jeff, maybe just a follow-up, and you touched on this in your answer and I appreciate it. As you look at the operating margin and return on capital profile of some of these lower gross margin businesses, how comfortable are you that these sales are generating acceptable returns for the company? I wasn't sure based on your prepared remarks, and so I'm just wondering if you're reevaluating your commitment to some of these product areas or if you're perfectly comfortable that from a returns perspective, given the asset velocity, et cetera, that these are actually good businesses to be in?

Jeffery P. Howells

That's a great question, and they actually are good businesses. And so the answer is, yes, they are -- our growth areas are good businesses and good areas of profitability, return on capital deploy for the corporation. And quite frankly, some of the legacy vendor product lines and/or legacy vendors are probably more at risk from our analysis as to the profitability. And it'd be really important for us to work with them to make sure that either the entire product line or certain pieces of the product line meet our overall financial objectives. Now the growth areas are very good and clearly allow us to continue to produce the positive results, even with the change, even with the SAP final module implementation this current year, delivering profitability. And now this wasn't exactly in your question, but just to be absolutely clear, we talked about the SAP. We lost, at this point, a couple points of share or less. So we're doing fine in the Americas, as evidenced by our sales number. Our team is getting better. We're executing better. The sales are there. And now it's the mix that we will evolve over the next 4 quarters to address the market. Yet we can't change the market. What the market wants to buy is what we're here to sell them. And the good news is we diversified over the last 6 or 7 years so that we have all these product lines on our line card.

Robert M. Dutkowsky

Brian, this is Bob. I'd just add, the best example of that lower margin but positive strategic business for us is in the software space. There's oftentimes less opportunity for us to add value as we process licenses, but software makes a whole IT ecosystem go. From the data center, all the way to the consumer side, software is the fundamental component. And so as we've grown our software business, we have theoretically reduced our operating income, but become more strategic with our partners and our customers. And with the investments that we've made around initiatives like StreamOne, we believe we're the easiest distributor of software to work with in the market and, therefore, more attractive to our vendors and more attractive to our customers. So it's a great example where investments may tamp down profitability but make Tech Data more strategic.

Operator

Your next question comes from the line of Jim Suva with Citi Research.

Jim Suva - Citigroup Inc, Research Division

I have 2 questions. The first one is on the ERP or SAP costs for the implementation and the operational challenges. Is that now, for the most part, all behind the company? You mentioned over 90% of the sales are now on the new ERP system. I just want to know, sometimes that may or may not equate to challenges that's still rolling out and additional items or integration. And then I probably have a follow-up after you responded.

Robert M. Dutkowsky

Jim, this is Bob. I'll take that one. The SAP project that Tech Data and the completion of the rollout at 90% of our worldwide revenue is now one kind of platform. It has taken us almost 10 years. And so although the bulk of that project is behind us, and as I said in the prepared comments, we think that gives us a strong, competitive differentiation and advantage in the marketplace, we will continue to invest in IT systems that make us more productive, that allow us to offer more value to our customers and our vendors. The key is that we have the common platform across both geographies now in place. And so if there's an opportunity, for example, in the supply chain sales or value-added service opportunity in one geography, we can make that addition to the system and it will work across all of our platforms. So if a sales opportunity comes along in Europe, we can change the system and then take that value to the U.S. seamlessly. It makes us more competitive. It gives us a more common view for our vendors to see business opportunities with us. It's a strong, strong differentiator in the marketplace and one that, as I said earlier, a 10-year investment. And we believe we're well ahead of our competition on that front now.

Jim Suva - Citigroup Inc, Research Division

Sure. While I understand the benefits that -- the question I had more is on the risk of kinks and road bumps that you've had in the past. Are we now completely past all that risky area?

Robert M. Dutkowsky

Yes. You could see with the performance that we had in sales in the U.S, that we are functioning and operating across-the-board with all of the key sales opportunities that we could see. Everything from volume -- we sold tons of tablets with the system in the second half of the year, all the way up to complex opportunities in the data center, and we're clearly achieving results there as well. So now that the opportunity that we have is to go back out and show our customers and our vendors that Tech Data is able to serve the business that's out there, and we've been embarked on that for the last 6 months. And as we've said in our prepared comments, we're gaining back the share. But it's important that, as Jeff called out, we believe we lost a couple of points of share. And so this isn't a dramatic step backwards, but a slight step back. But those few points of share represents the kind of leverage that falls to the bottom line very quickly. So we're focused on gaining it back, and we know exactly what we need to do to get it back.

Jim Suva - Citigroup Inc, Research Division

And then my second and final question is on this mixed shift. Is there any reason to believe that the margins should go higher from here, such as internal operating efficiency that Tech Data can enhance upon? Or given that tablets and smartphones are becoming increasingly more popular and everyone expecting to become increasingly popular more in the future, should margins continue to face some headwinds in the next year or 2 to come?

Jeffery P. Howells

Yes, this is Jeff. Clearly, one of the objectives is to make sure we have the opportunity to sell products and have a little bit richer margins. However, our belief is what we're selling today will be a significant portion of what we sell over the next few quarters. Is it 1 or 3? Hard to tell. The world will change, and people will go back and start doing data center refreshes or adding storage and other components that will sell through our value-add pieces of our business. And as those areas see more growth in the overall marketplace, that will give us the ability to enhance our gross and operating income results. Off of this lower level of performance this year, we took the totality, we clearly do believe that with the incremental contribution of SDG as well as some organic improvement, as Bob said in his comments, we'll be able to continue to grow our operating income and net income for our shareholders. The pace, the composition will be a little different. I mean, I don't think we're going a dramatic change sequentially in any one of the components of our P&L and -- but we've manage through, I'm going to say, much more difficult times, transitions and episodes in the distribution community than the one we're experiencing right now.

Operator

Our last question comes from the line of Osten Bernardez with Cross Research.

Osten Bernardez - Cross Research LLC

To begin with, could you clarify for me when or how do you expect to absorb the added expense of the training in the U.S. related to the ERP implementation? I know you said that your -- if your -- that -- from an execution standpoint, you're basically -- you're coming out positively there. But do you expect to fully absorb that expense going forward? Or have you reduced the training and meet -- that you took on?

Jeffery P. Howells

The training, at this point, is really not an expense. Actually, it really hasn't been an expense. It's an element of productivity. When in Q2, prior to conversion, we bring people off-line, if you will, and they go through tens of thousands of hours of training in their normal work day, some incremental, some on an overtime basis. But it's basically, how many hours you're on the phone versus in training. And then that -- at this point in time, is a minimal amount of downtime. As people are assessed and given one-on-one training, there is clearly some downtime, but it's completely immaterial to the overall scheme of things. Our goal in Q4, and as we go into the first half this year, is to continue to focus on individual skills enhancement person by person. Yes, some staff that are as or more productive than ever were in our legacy systems and the U.S., and we have some that are still lagging in their skills and proficiency. But the majority are doing very well. So at this point, it's incremental steps. But it's not a material expense. It's becoming less of a productivity drag in their ability to be online, on the phone, on their computer to respond to both on e-mail and electronic orders coming in from their customers.

Robert M. Dutkowsky

We want to think of it as productivity hit as opposed to an SG&A hit.

Osten Bernardez - Cross Research LLC

Understood, understood. I appreciate that. And my follow-on question pertains to data center activity during the quarter, both in Europe and the Americas. Would you be able to provide any sort of color on the pace of activity that you saw during the January quarter?

Robert M. Dutkowsky

As we said, industry-standard servers clearly slowed in the quarter, but that doesn't lessen our focus on that segment. Some data center software products did grow and had solid performance in the quarter, and so we continue to stay focused in the data center and continue to recruit new vendor opportunities that give us a broader line card in that space. As you saw in the quarter, we added the IBM Power Systems and their enterprise-class storage products to our line card, which gives us an even more compelling value proposition to our customers. The customers -- many of our customers sell not only data center products but all the way down into the broadline offerings. Now those customers can make one phone call to Tech Data and buy everything from a high-end server and storage products, all the way down to broadline tablets, PCs, printers and all of that ecosystem. So our ability to serve our -- the demands of our customers continues to grow through our enhancement in our data center practice.

Osten Bernardez - Cross Research LLC

Got it, Bob. And lastly for me, the -- would you be able to comment on whether you've seen any change in competitiveness for your mobility business in Europe, given the recent consolidation there?

Robert M. Dutkowsky

I think the -- all of our businesses remain competitive, and that's not something that we shy away from. We appreciate the opportunity to compete every single day in the marketplace. Now I wouldn't categorize the mobility business in Europe any different than any of our other businesses.

Operator

Your last question comes from the line of Brian Alexander with Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Yes, maybe just a quick follow-up, Jeff. I think you touched on this in your prepared remarks, but I didn't catch all the specifics on how SDG impacted the quarter on the -- on an operating basis. And then if you can break out amortization and restructuring charges so we can kind of get to a -- kind of EPS effect for the quarter. And it sounds like you're not expecting any change in terms of expectations for how that business impacts profitability in fiscal '14. I just wanted to confirm that as well.

Jeffery P. Howells

Yes. SDG, the amortization on SDG is about $4.3 million a quarter on the good -- the acquired intangibles, and so that had an impact. From an operating perspective, it was slightly accretive, including all cost of acquisition. There really isn't a lot of integration other than planning onboarding, welcoming in the fourth quarter, but we just clearly have the tail end of acquisition costs. Again, it's slightly -- just a slight contribution on operating income level, but -- and that includes the amortization of $4.3 million. If you take the amortization out, you could have a different view of this contribution. But then they -- we subscribed all the interest on the debt we offered going to that acquisition. So carrying that debt of $350 million in the quarter, 3.75% coupon, just under 4% all-in costs, it did not add to our profitability for the quarter on a GAAP basis. Going forward, just to be clear, we'll be rolling SDG into our operations quarter-by-quarter, country-by-country, and that will be our task for the year. And kind of a -- it goes in concert with our SAP costs in an earlier question we have. Our SAP improvement budget this year will be primarily spent on an operating and capital basis to the integration of SDG and a couple of other projects or new opportunities that we've won, either in supply chain or other services. Those costs, next year, will morph into another improvement project to continually improve or change our business to the continuing evolution of to whom we're going to sell what and whether it's going to be on a net basis or a gross basis. So we don't really break it out or ask for relief, if you will, because we're going to spend a lot of those dollars in the future on making us a better and different company. And when you look at it in relation to over $1 billion of SG&A, it's quite immaterial. So what else didn't I close on your SDG question there, Brian?

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

I guess if we look at the operating margin of that business that you acquired, without the amortization costs, how would the profitability of that acquired business compare to your traditional European business?

Jeffery P. Howells

It will be dilutive in fiscal year '14, and it will be accretive -- our view is it will be accretive through European operating margins in fiscal year '15, because we will start getting the leverage of the acquired revenue as we exit fiscal year '14 and go into fiscal year '15.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

And that's excluding amortization costs?

Jeffery P. Howells

I'm including amortization, always talk GAAP. So that conversation is on a GAAP basis. It's a different story if you take out the amortization. It's clearly much more profitable.

Robert M. Dutkowsky

And, Brian, the steps that need to be taken are, as we've said today, we're still on the former owner's IT systems. We need to move over to our IT systems. And we're in their logistics centers, and we need to move over to our logistics centers. So the duplicate cost is we have the capacity and we're paying rent for IT and logistics right now, and we want to do that transition in a very logical progression, which we know we'll accomplish over the course of this year.

Operator

This concludes Tech Data Corporation's Fiscal Year 2013 Fourth Quarter Earnings Conference Call. A replay of the call will be available in about one hour at techdata.com. Thank you for attending today's conference call, and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tech Data Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts