Tech Data Corporation F2Q10 (Qtr End 31/07/09) Earnings Call Transcript

Aug.20.09 | About: Tech Data (TECD)

Tech Data Corporation (NASDAQ:TECD)

F2Q10 Earnings Call

August 20, 2010; 9:00 am ET


Bob Dutkowsky - Chief Executive Officer

Jeff Howells - Executive Vice President & Chief Financial Officer

Ken Lamneck - President of the Americas

Kristin Wiemer - Director of Investor Relation


Brian Alexander - Raymond James

Richard Gardner - Citigroup

Matt Sheerin - Thomas Weisel Partners

Bill Fearnley - FTN Equity Capital

Craig Hettenbach - Goldman Sachs

Ananda Baruah - Brean Murray

Rich Kugele - Needham & Co.


Good morning, welcome to Tech Data’s Corporation fiscal 2010 second quarter 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)

Now I’ll turn the meeting over to Kristin Wiemer, Director of Investor Relations.

Kristin Wiemer

Thank you. Good afternoon, and welcome to Tech Data’s second quarter fiscal 2010 earnings conference call. I’m joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; and Ken Lamneck, 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 provision 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 SEC, specifically located in Part I, Item 1A of the company’s April 30, 2009 Form 10-Q which was filed on June 9, 2009. 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’ll now turn the call over to Tech Data’s Chief Financial Officer, Jeff Howells. Jeff.

Jeff Howells

Thank you, Kristen. Many of my comments today will reference the supplemental schedules which are available on the Investor Relations section of our website at Beginning with the first slide, worldwide net sales were $5.2 billion, a decrease of 15.9% from the $6.2 billion in the prior year second quarter.

The strength in the U.S. dollar against certain foreign currencies negatively impacted the year-over-year second quarter net sales comparison of approximately six percentage points. Second quarter net sales in the Americas were $2.4 billion, or 46% of net sales representing a decline of 14.5% year-over-year. The Americas net sales decline was primarily attributable to the challenging economic environment and the related slowdown in IT spending.

Net sales in Europe totaled $2.8 billion, or 54% of net sales representing a decrease of 17.1% in dollars, but only a 7% decrease on a euro basis over the prior year second quarter. Excluding the impact of Europe’s net sales, we are also affected by the challenging economic environment, however partially offset by market share gains.

Slides three and four summarize our operating performance. Worldwide gross margin for the second quarter was 5.19%, compared to 4.85% in the prior year. The year-over-year increase in gross margin was primarily attributable to solid execution of the company’s inventory pricing and freight management practices.

SG&A expenses for the second quarter were $215.2 million or 4.15% of net sales, compared to $257 million or 4.17% of net sales in the prior year second quarter. The $41.8 million decrease in SG&A expenses was primarily attributable to prudent cost management actions, including adjustments to headcount and the related reductions in payroll related expenses, lower credit costs and the translation impact associated with the strengthening of the U.S. dollar against certain foreign currencies year-over-year.

Operating income for the second quarter was $53.7 million or 1.04% of net sales. This compared to operating income of $42.2 million or 0.68% of net sales in the same period last year. On a regional basis, operating income for the second quarter in the Americas was $34 million or 1.42% of net sales compared to $39.5 million or 1.41% of net sales in the same period last year.

In Europe, our operating income was $22.5 million or 0.81% of net sales, compared to an operating income of $5.7 million or 0.17% of net sales. Our net interest expense was $6.7 million, compared to $7.6 million in the prior year. Both periods include approximately $2.5 million in non-cash interest expense, related to the adoption of FSP14-1, which as we discussed in our last call was adopted at the beginning of our fiscal 2010 year.

The company’s effective tax rate for the second quarter was 25.7%, compared to 36% in the prior year period. The year-over-year decrease in the effective tax rate was primarily attributable to improved operating performance in the European region. As noted previous quarters, in accordance with FIN 18 accounting pronouncement, quarterly effective tax rates may vary significantly depending on the actual results in our various tax jurisdictions.

Net income attributable to shareholders of Tech Data for the second quarter was $35.2 million or $0.70 per diluted share, based on 50.5 million weighted average diluted shares outstanding. This compared to $22.1 million or $0.42 per diluted share, in the prior year second quarter, based on 52.4 million weighted average diluted shares outstanding.

Turning now to the balance sheet, please refer to slide five and six. Accounts receivable totaled $2.3 billion; the allowance for bad debt was $56.1 million. Our DSO was at 41 days, inventory totaled $1.5 billion, yielding days of supply at the end of Q2 of 28 days. Accounts payable were $2.4 billion, days payable outstanding at the end of Q2 were 44 days.

The total cash conversion cycle for the second quarter was 25 days, compared to 30 days in the prior year second quarter. Cash provided by operations during the second quarter totaled $410.2 million. Total debt was $377.1 million, compared to $319.1 million at January 31. The company continues to enjoy excellent liquidity and financial flexibility with a cash position of $1.1 billion at July 31. Our net cash totaled almost $690 million at the end of the second quarter.

Total debt to cap was 16%, funds available for use in our credit facilities approximately $875 million at the end of the quarter, equity totaled just under $2 billion. Our return on capital employed reached 11.2% in the quarter. Other comprehensive income which consists of currency translation, net of applicable income taxes, was $400 million at the end of the quarter, compared to $275 million in the first quarter of fiscal 2010.

As of July 31, the company had 50.3 million shares outstanding, resulting in a tangible book value of $39.04. Capital expenditures totaled $5.2 million in Q2 and the current plan for fiscal 2010, capital expenditures remains at $33 million. The second quarter depreciation and amortization expense was $11.5 million.

On slide seven, you can see our product and customer classifications. The company’s net sales by product segment remained relatively consistent with prior periods, as a percentage of sales we estimate peripherals to be 40%, systems 30%, networking 15% and software 15%.

Looking at the customer segments; as recently reclassified for consistency, the second quarter breakdown as a percentage of net sales remains relatively consistent with VARs being 50% of our business, direct marketers and retailer 30%, corporate resellers 20%. As in the past quarters, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide. In the second quarter, HP represented 28% of net sales.

In terms of an outlook for the third quarter we provided a few statements in our release. Let me note that statements made regarding the company’s business outlook are based on current expectations and the company’s internal plan.

Due to the current economic environment and related decline IT spending, combined with the potential strengthening of the U.S. dollar against certain foreign currencies, net sales for the third quarter ending October 31, 2009 are anticipated to decline year-over-year, but with some moderation compared to the decline in the first half of the fiscal year.

In addition we believe that demand in the Americas region is exhibiting recent signs of stability while the demand in Europe may decline further, which could impact operating results sequentially.

I’ll 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 second quarter fiscal 2010 conference call. We believe that our second quarter results are further validation of our strategy in action, marking the third consecutive quarter of results that exceeded our expectations.

While the economic environment has remained challenging, our disciplined sales execution and our highly focused cost and inventory management practices have enabled Tech Data to achieve market share gains while improving operating income.

An outstanding effort on our working capital management, combined with our operating income performance, resulted in a double digit of 11.2% for the quarter compared to 5.5% in the prior year quarter.

In Q2, we generated over $400 million of cash from operations and at quarter end, our available cash totaled over $1 billion. Less outstanding debt, we have a net cash position of nearly $690 million, one of the strongest financial positions in Tech Data’s history.

Our healthy financial position and market strength are allowing us to invest in opportunities that advance our position in the marketplace. These actions include targeted tuck in acquisitions, new and expanded vendor relationships, as well as enhanced customer engagement initiatives. So, let’s look at our performance by region.

Starting with the Americas, we were pleased to see a marked improvement in the region’s operating performance during the second quarter. As a Jeff noted, sales declined 14.5% year-over-year, but sequentially we realized net sales growth of 8.6%. Our attention to managing expenses and improving execution on sales as well as managing the many components of our gross margin improved the America’s operating margin by 28 basis points sequentially over the first quarter.

New vendor addition, as well as new product expansion with existing vendors, are strengthening the breadth of our offerings and are helping to foster incremental accretive margin business even in a soft demand environment. Our Canadian operations have been more challenged by the current market conditions, but the team is reacting fast and adjusting costs to appropriately match their market.

Like much of the world, IT demand in Latin America has also been down, and this market remains very competitive, but we were pleased to deliver a second quarter performance ahead of our internal plan. In June, we expanded our presence in Latin America region, with the opening of a new sales office in Monterey. By increasing our coverage in Mexico, we can better support our vendors and focus additional resources on expanding our SMB customer base in this important region.

In the US, we’ve taken a very focused approach to executing on our strategy, to diversify our business and to innovate the ways we do business. For example, last quarter I mentioned our three PL initiatives which have been successful in adding incremental business while leveraging our existing infrastructure.

Our customer engagement programs include nationwide events, conferences and the deployment of specialized business units, are also proving successful in bringing together resellers and vendors to profitably capitalize on end user needs.

Our Tech Edge team for example, which is comprised of public sector specialists is working with resellers to capitalize on the opportunities available due to more than $75 billion in planned federal IT spending. We also recently announced new and expanded vendor partnerships with companies specializing in mobile computing, security and virtualization, including leading technology companies like Novel and Samsung.

Manufacturers continue to realize the valuable of Tech Data’s variable cost distribution model and how we can help them affordably deliver their solutions to the market. In Tech Data, our customers and our vendors have a distribution partner they can depend on and we believe that the IT ecosystems increased confidence in us, is evident in our solid second quarter results.

Our AIS division performed well once again as our strength in creating data center solutions delivered results. Since the launch of AIS nearly 2.5 years ago, we’ve continued to make impressive strides in developing our product and services solutions. Our AIS portfolio has grown to include 25 of the world’s leading providers of data center hardware and software offerings.

We see opportunities in government, health care and the higher education sectors for AIS class solutions. As these industries look to streamline, conserve power and make their operations more green. In fact we recently worked with one of our VARs to create a solution for university, tasked with modernizing their IT operations to drive better efficiencies and improve service.

Our AIS division designed the optimal solution using VMware to consolidate the universities data center. This allowed the university to save energy and valuable real estate, as well as streamline the management of their x86 environment. This is yet another example of the significant value Tech Data delivers to the channels every day.

Now, let’s turn our attention to our European operations. We were once again very pleased with our performance in Europe, particularly in light of the market environment. We continued to improve the way we do business, driving new customer winds and better profitability.

The European economy’s IT spending remain very challenging, but our market leading position and our unyielding focus on execution have allowed us to outperform the market in recent quarters.

In the second quarter, we generated 81 basis points of operating margin, compared to just 17 basis points in the prior year. As we look at our regional performance, our operating income improved year-over-year in every region except the east, which has been impacted the most by the soft economy.

In fact, we exceeded our second quarter internal operating income plan in four out of the seven regions, with two of the other three regions performing very close to the plan. Our European team has worked very hard to improve Tech Data’s position. This turnaround has been difficult and they’ve deserved significant accolades for their accomplishments to-date.

As we continue to gain momentum in Europe, wise investments are playing an important part in our strategy to strengthen our business for long term success. Like the strategic acquisitions we announced in May, you will recall three tuck-ins in three different countries. We continue to invest in areas that strengthened our expertise and make Tech Data a more valuable partner to our customers and vendors.

During the second quarter, we executed another tuck-in acquisition, with the purchase of certain assets of Ireland’s sole Autodesk distributor Cadco. This acquisition furthers our reach into the highly specialized CAD distribution market, one which has been a very nice business for Tech Data Europe.

In today’s environment, the credit worthiness of our customer portfolio remains an important concern for us, as well as for our shareholders. While they are going to be customer losses in the tough economic environment like the one we’re currently experiencing, I can confidently say our customer credit worthiness in the Americas and in Europe remains solid and we’re very pleased with how we’ve conservatively managed our credit costs.

In fact, as Jeff noted in his comments, some of the decline in our second quarter SG&A year-over-year was attributable to lower credit costs. Providing credit is a major component of the value we deliver to our customers. Our financial strength and focused execution have allowed us to continue to responsibly support our customers and provide them with appropriate credit to sustain their business.

As a proof point to our value in the IT ecosystem, BusinessWeek published its 2009 Info Tech 100 in June, which ranks the world’s best performing technology companies and for the first time, Tech Data was honored as a BusinessWeek Info Tech 100 award winner.

We ranked 69 on this prestigious list, “which showcased companies that managed to thrive even in the face of a bruising global recession”. This honor ranks Tech Data among some of the world’s technology leaders, including Oracle, IBM, Cisco, Apple and HP. Additionally, Tech Data was recently awarded the distinction of Worldwide Distributor of the year by Cisco.

We were also recognized as Cisco’s Services Innovator of the year. These awards are a resounding endorsement of our ability to excel in the marketplace. We have proven through strong execution and innovation that we can help our vendor partners take their business to the next level.

Being named the Top Worldwide Distributor by a vendor with Cisco’s leadership position is a significant vote of confidence in our business model and in the results we deliver.

Now, looking onto our third quarter outlook we believe the economic environment remains somewhat mixed. We have seen some recent stabilization in the Americas, but in Europe current signs show they may be continued softening. The IT distribution business by its nature is ultra competitive and when spending slows, competitive conditions heighten.

We believe, we proven over the last three quarters that our strategy, our focused execution and our disciplined sales and cost management practices are serving us well, yielding gains in selected markets and a solid operating margin performance.

In November, we’ll celebrate Tech Data’s 35th anniversary. In those 35 years, we’ve successfully weathered the highs and lows of economic cycles and the associated swings in IT spending. We have a strong experienced team and I’m extremely proud of their performance and of the results they’re delivering during these challenging times.

In summary, as evidenced by our second quarter accomplishments, I believe our strong execution, our innovative resourcefulness and the further diversification of our vendor and customer portfolios continue to strengthen Tech Data’s position.

Alongside new market share gains, we drove improvement in operating income and delivered double digit [Inaudible] in the first half of the year, putting us on a good trajectory to deliver solid results in the second half.

With that, we will open it up to any of your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

Just want to pick up on the cash balance, as you highlighted $700 million roughly, about 40% of your market cap at least before the open, your working capital came down quite a bit in days, not just in dollars, your 25 day trade cycle down about five days sequentially.

So a couple of questions, could you talk about whether you think the current trade cycle is sustainable and how investors should be thinking about priorities for cash? Are we passed the conservation stage, Jeff and might you be looking to get more aggressive on the acquisition front with demand more stable? Thanks.

Jeff Howells

Brian, first of all on the 25 days, we are very proud of that. I think while we will strive to do the best we can. I think still a range and more the 26 to 28 would be very acceptable, and we will do everything we can to go to a low end versus a high end, but we need to make the right business decisions, especially on stocking inventory levels to meet demand.

As far as the conserving cash, I think we and the rest of the world are moving away from the thought that we need to be ultra conservative, but we’re still looking at the appropriate uses. Just because we’ve generated cash, we’re going to use it wisely and put it to work for the long term of our shareholders.

What does that mean? We’ll review all of the alternatives. I don’t believe it means we become more aggressive in our acquisition strategy. I think we have been very aggressive in our acquisition analysis.

We’ve looked at many, many companies in our existing region, and that is our focus. Our existing regions, and as you know we’ve disclosed four small transactions that we’ve completed in Europe, and in addition to that, we have filled in with incremental sales force and other ways to grow with the business in those countries in Europe.

So we’ll keep looking. We’re not going to be wreck less, if you will with the cash we’ve accumulated and we’re going to try to put it to work to get the best returns.

Brian Alexander - Raymond James

Just a follow-up, Bob, you mentioned credit costs are down year-over-year, which is very surprising, is to me in this environment. Was last year just unusually high given the state of the credit markets or have you perhaps relied less on third party credit insurance given the rising cost there, and therefore maybe you’re assuming more risk on your own balance sheet? I just wanted to understand that comment a little bit more.

Bob Dutkowsky

First of all year-over-year credit costs are not up. So we’ve had a nice run here. Even in this difficult environment of managing the risk appropriately with our customers and here we are in one of the worst recessions, we’ve experienced in a long time and we continue to offer our customers the same amount, the same basic net amount of credit as we did in the good times several years ago.

So I attribute it to just really solid execution on the part of both of our credit management teams, and having a good working relationship with our customers. So that we’re in open dialogue with them around the health of their business, and we can wisely offer them credit and that execution, I think is one of the examples in my prepared comments where I mention several times about the company’s strength in execution. One of those areas where we’re executing very well is credit management.

Brian Alexander - Raymond James

I guess what I’m getting at, have you changed your philosophy around using third party credit insurance and maybe you’re absorbing more of the risk on your balance sheet, is what I was trying to understand.

Bob Dutkowsky

Brian, there has been some reduction in coverage in Europe for our credit portfolio and that’s our main coverage. We only have some catastrophic coverage in North America. So theoretically yes, there could be some more risk on our portfolio, but our experience has actually improved on a year-over-year basis in the first half of the year, compared to last year and actually last year was quite strong.

So I think its bottom line, its good business with good customers, knowing who they are, knowing who their end users are and servicing the market prudently. I’m not trying to go after business that has a higher risk, so our provisions are strong, and our receivables, while of course when you’re dealing with over 100,000, 125,000 different customers, certainly anything can happen, but so far we’ve had excellent experience and it has not segregated our results.


Your next question comes from Richard Gardner - Citigroup.

Richard Gardner - Citigroup

I wanted to ask you about the America’s operating margin. You mentioned that you saw recovery there, because were you managing the various components of gross margin well, but was hoping to get a little bit more detail on whether this is primarily an improvement in the industry pricing conditions or what you’ve said have been aggressive for the last couple quarters or whether it has been rebate VARs for reset. A little more color on what prompted the improvement there sequentially. Thanks.

Bob Dutkowsky

Rich, I will try to break it down a little bit, but I think as we stated in our release, it’s basically all the key components of managing the gross margin. The mix of customers, the mix of products, going after the right business and actually pricing ourselves out of the wrong business, managing freight, not only the cost of freight.

How much of the freight we reclaimed from the business transactions, getting our customers to aggregate orders, do larger orders, so that the cost of freight is minimized or them helping and paying for that, as last year, we revamped some of our freight policies and they have helped us quite a bit.

I think to a lesser extent, because it there has been some improvement in the ability to achieve goals that are set by vendors, versus when the market fell very quickly last year, in Q3 and Q4, so that has been a little of it. At the end of the day, we’re a basis point business and if we have eight different components of our gross margin, I think we’ve seen improvement in almost every one of those components.

A few basis points here, a few basis points there, which has helped us and then finally, the Americas performance was also helped by the SG&A controlled, the SG&A management and leveraging our costs with the incremental sequential volume we had in Q2 over Q1 in the Americas. The great credit experience we talked about, all those added to getting the operating margin back to exceeding 1.4%.

Richard Gardner - Citigroup

You seemed very cautious on Europe and yet, taking a look at the revenue results in Europe, for the quarter just reported, it looks like Europe was seasonal or maybe even a little bit better than seasonal, recognizing that there is some acquisitions in there.

So, I guess the question is would you characterize Europe, that the trends in Europe as seasonal throughout the quarter and one of your competitors has talked about Europe actually being a little bit better than normal seasonal in June. I was wondering if you could confirm or deny that from your experience.

Bob Dutkowsky

Rich, I think the question of seasonal is hard to monitor right now, because last year’s season is the beginning of the economic conditions that brought revenue down. It also challenged us from an FX Management perspective. I think from what we have seen from our vendors and others reporting, their belief is, as we have said and seen, there is recent stability seen in the Americas, yet there maybe continued softness in Europe.

So we are planning for that potential for some continued softness. Now, clearly, our results in Europe, being down 10% in local currency, indicate that we are being rewarded with the incremental share by our execution and we’re also doing it with very prudent pricing, so we are doing well.

Our team over there, as Bob indicated, in all seven of our regions is executing very well. We’ve had dramatic improvement in our results in the Nordics in Germany, as we expected. However, the exact timing of that improvement was hard for us to put on a piece of paper with clarity and certainty.

So I think we all ought to go into the second half of the year with some caution in Europe. As does your team have the momentum and the ability to achieve results that are above market on the top line. We see no reason why that may not continue, but we also want to be careful because, as we also said in various comments this morning, as the world becomes competitive, we’re going to take good business, we’re going to take the appropriate business that we can work with our customers and vendors and make money on.

So there is a lot of different components of what may add up to a Q3 result in Europe. We think we’re on track to do what we need to do, but we just think it would be prudent to think a little more cautiously about Europe for the Q3 period. As you know, Europe is asleep until they comeback in September, and then from about mid September forward, the business really accelerates on an historical basis through the stocking period for retail, in October and then the Q4 ramp and we’re preparing for that.


Your next question comes from Matt Sheerin - Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

Just getting back to the strong sequential growth that you saw in the Americas in the July quarter, I know you talked about stability, but it looks like it was even better than seasonal. I know that you had some new product ramps, particularly on the consumer side. Could you just dig a little bit more deeply into where the growth came from, specifically, on new products and vendor, as well as your reseller customers, what were they seeing during the quarter?

Bob Dutkowsky

You’re right, Matt, that we have very nice sequential growth, Q1 to Q2. It was driven by growth literally across the board. All of our segments performed well. Some segments performed better than other, but that was partly our decision to exit less profitable business. So that’s why you saw the improvement in operating income and margin.

From a product perspective, your observation about us adding new products to our line card, in fact those products didn’t deliver nice revenue, and nice profitability. In particular, we had very good success with TVs and flat panels and some of the initiatives that we’ve launched with several vendors in that arena have really worked out well for us and for them and for our customers.

As you would suspect, if customers weren’t replacing hardware, there’s opportunities for services, and supplies and those businesses did well for us again. So it was a combination of good balanced performance across our customer segments. Good balanced performance across our geographies and then the infusion of new products. Mix all that together and execute it all correctly and you see the kind of performance we had in the Americas.

Matt Sheerin - Thomas Weisel Partners

Looking to the October quarter, is there still incremental business that you’re going to see from these new programs?

Bob Dutkowsky

No, I think a lot of those programs literally started late last year, and then when we secured the business or secured the new vendor relationship, those revenue streams and profit streams are beginning to ramp up and a lot of them had hit their stride in Q2. So I don’t want to say that it is run rate business for us now, because we need to continue to execute on the partnerships, but they’re beginning to exhibit their impact on our business in Q2 and should continue beyond that.

Matt Sheerin - Thomas Weisel Partners

Then just my second question, back to the whole issue of your comments here in Europe, and your discussion about the competitive pressures. Obviously, Ingram Micro has been publicly stating that they are looking to win back share in Europe, and your comments, Bob, earlier about competitive environment alluded to that, but could you be more specific about what your strategy is going forward? How you balance revenue and market share, versus gross margin and operating margin?

Ken Lamneck

Matt, we balanced those components of execution for 35 years as a company. My sense is that the markets that we’re playing in are no more competitive today than they were last year at this time, or the year before at this time.

Every piece of the business is competitive and if you cover the customer correctly, you have the right products on the shelf, you price them right, you have reliable supply and execution, and then you can win the business.

In this quarter, and the last couple of quarters as well, we’ve been able to show that with those components running correctly, you can gain market share and improve operating income at the same time; and that’s our strategy and we’re sticking to it.


Your next question comes from Bill Fearnley - FTN Equity Capital.

Bill Fearnley - FTN Equity Capital

On the Dell relationship, any updates or additional color you can give on the relationship there at this quarter and what you see here for the near term?

Ken Lamneck

The Dell relationship is underway in the Americas and I would say that it’s ramping up as we suspected it would. The Dell VARs have done business with Dell directly for 20 years and so for them to change the way they think of supplying product is a big step for them, but we’re executing against our plan. We’re pleased with the progress we’ve made to-date.

Bill Fearnley - FTN Equity Capital

Any near term assortment expansion anticipated?

Ken Lamneck

We always love to expand our relationships with our vendors. To Matt’s question earlier, a lot of the success that we’ve had and been able to realize over the last few quarters has been due to diversifying our product portfolio mix with new and existing vendors. So we’re always on the lookout for new products and new opportunities we can bring to the market.

Bill Fearnley - FTN Equity Capital

Then, if I could shift gears to revenue and inventories. A lot of tech watchers are saying that part of the improvement in tech spending is the restocking across the supply chain. For those end customers that you see them pulled inventory, was restocking a factor here in the second quarter on the revenue side for you?

Ken Lamneck

Bill, no, this isn’t a stocking period. In fact, in the Americas, we sell very little to anybody that is stocking. In Europe, that would be generally in the third quarter, as we’re stocking to some of our retail customers, our bricks-and-mortar customers over there. So I would say we would have absolutely no evidence that is a reason for any of the sell through off of our shelves.

I think actually, if we think about inventory, I think one of the things that is helping us in the marketplace is it appears there is a reasonable balance of inventory. There are some spot shortages, and there’s no significant overage of inventory out there, which creates a healthier environment for us and our vendors to be able to realize the value in their products.

Bill Fearnley - FTN Equity Capital

One last question, any additional gives and takes on the key product category, like within systems, the gives and takes, the peripherals, and the networking and software category. Sometimes you guys give some of the moving parts within those sectors and that’s all I have for today. Thanks.

Ken Lamneck

I’ll take a shot at that, Bill. I think in the system side, obviously netbooks have moved more aggressively, and desktops have fallen off. In the peripheral side, the printer business has been relatively slow, but conversely, the supply business has been good. We’ve had good performance in our software business as well. So those are kind of the highlights and I would say the lowlights of the quarter from a product perspective.


Your next question comes from Craig Hettenbach - Goldman Sachs

Craig Hettenbach - Goldman Sachs

On the large cash balance and M&A potential. You mentioned are you not going to be ultra conservative yet not aggressive as well at this point. Can you just talk about valuations in the market place and how that factors into your strategy there?

Bob Dutkowsky

Yes, I will try to go first on that one, I think we’ve taken a very balanced approach to M&A over the last couple of years and although we haven’t sit down and listed them all out, we probably have bought upwards of about a dozen companies in the last few years. I can assure you in every case, where our conservative nature comes in is the in the negotiation of the price and what we pay for those assets.

So we have our eyes on a broad array of acquisitions that could help Tech Data continue on the track that it is on, but we simply won’t overpay for any of them and so it takes two to Tango to make a deal and we’re out there looking, we’re aggressive on that front, but we also have a model that we will continue to stick to in terms of what we’ll pay and what return we expect.

Craig Hettenbach - Goldman Sachs

Then if I could just follow up on Europe any other details by country within Europe that might be performing a little bit better or lagging the rest of Europe?

Bob Dutkowsky

As Jeff said, the Nordics and Germany, which have historically been two of our softer regions, have really improved their performance dramatically and so I would say those two are the highlights in terms of improvements, but we’ve seen steady improvement in virtually all of our regions. The improvement in [Inaudible] that Europe is generating, the improvement in operating income is not just one or two countries or one or two regions it is across all of the continents.

You would expect that kind of performance to yield, because remember with the company made pan-European investments several years ago, we structured ourselves to be efficient pan-European. We put in a pan-European IT system; we built a pan-European management infrastructure.

So therefore you would expect that the economy cooperates all of our organization should move forward at a relatively good space. So, we’re very happy with the fact that each of our regions, short of the east, which we called out and we think that’s mostly economically driven, all of our regions have really performed well and have contributed to the improvement.

Craig Hettenbach - Goldman Sachs

Can you talk about any particular linearity trends through the quarter in July?

Jeff Howells

I think the only trend that would be interesting is that the tail appeared to have a little more stability. In other words, as we went through July, especially in Americas, we felt that it was a little more stable where mid quarter; we didn’t see as much stability. In

Europe, I think that’s true on a relative basis, but you have to remember that as we go into July, that stability is still down because you’re sequentially going into a softer period with July and August. So, probably to summarize the quarter, it ended on a reasonable note. It wasn’t ending on a down note. It was on a more positive note than the beginning of the quarter.


Your next question comes from Ananda Baruah - Brean Murray.

Ananda Baruah - Brean Murray

Just wanted to touch base on the comments around continued softness in Europe, I just want to understand I guess the appropriate context, guys, in which you wanted to sort of take that away. Are you saying sort of from a sequential basis, you think that things are getting more competitive, and so we could see incremental softening sort of in the coming quarter, versus the current quarter just reported or are you sort of just saying look, we’ve been seeing year-over-year declines and we expect the year-over-year declines to continue.

Ken Lamneck

Yes, I think it’s more of the latter than the former. Clearly, if you step back from the economic actions that have taken place over the last year or year and a half, it seemed to us that the Americas slowed down first, and the European environment continued to be relatively robust.

Now, we’re seeing the European environment slowdown, like the Americas did, starting last summer. To what Jeff was trying to articulate is that we don’t know where we are in that cycle. We feel like the Americas have stabilized, but we don’t sense that stabilization that has happened in Europe yet.

So we think that there could be some downside still in the European economy, and then you have to factor in our strength and execution that we’re delivering in Europe now and the customers are rewarding us with business. We’re trying to factor that in as well as the sequentially of Q3 and we’re saying, we think we potentially see some continued softness in Europe, but I don’t attribute much of that softness to lack of competitiveness on Tech Data’s part.

Ananda Baruah - Brean Murray

I guess, is there any way to peel back sort of the expectation for possible continued softness from the increase? I guess on a secular basis, from the increase in competitiveness that could be taking place over there?

Jeff Howells

I think that would be very hard to answer that question. I would just say really we can’t answer that. I don’t think we are concerned about the increasing competitiveness over there, as compared to the market. Our team could execute. They just have in several down quarters and I think our tone also has to come off the fact that we’re still growing 10% in local currency in Q3 last year. So I mean, we had a very strong top line in Q3 last year, and then we went to sort of flattish on a year-over-year basis as we moved into Q4.

So I think we have to keep it in a relatively context, look back at the quarterly results last year on the top line, and so including acquisition, our growth accelerated moving from Q2 to Q3 last year, and then we hit an environment where growth turned negative. So there is a lot of relatively analysis that we just caution you that there is nothing that you can just easily spread sheet. It takes a little bit of deeper thought and for us.

We just do bottoms up analysis, country by country, customer and vendor by vendor. A key word in our comments about the Q3 is it may continue to soften. We don’t know for sure. We may have better opportunities than we separate, but in full and fair disclosure, we just think we all ought to understand that Europe generally lags whatever you see in the Americas to a certain extent.


Your next question comes from Rich Kugele - Needham & Co.

Rich Kugele - Needham & Co.

I just want to focus on earnings power. Can you get into a little bit of detail about the possible improvements you think your business model can generate in both European and North American operating margins? I mean obviously, you’ve made a tremendous amount of progressing, particularly in Europe, but we shouldn’t straight line that kind of, you know, growth rate.

So I’m just wondering if you feel that your cost structure today, the share that you have is sufficient to get to some type of level, pick the year on a better economy, or any thoughts on what the potential business model looks today, post all your restructuring and your process improvement efforts.

Jeff Howells

I think we’re demonstrating what that model is. We’ve taken quite a bit of costs out of the model. We’ve talked about in the last couple of quarters some of the impacts on our Americas operating performance and as you see, we returned to the north of 140 operating income this quarter. We’ll do everything we can to sustain that.

We’ll do everything we can to see if we can inch that up and then I’ll also add the caution of, we have to see what the market will do, and what the competition will do. We’re looking for good business and hopefully we have the right cost structure to take good business and earn that appropriate amount.

In Europe, if you model out the year, especially with thought that we would have improved operating performance in Q3 and strong operating performance in Q4, remember Q4 last year was probably slightly over the top, if you will. As far as the performance our team did there.

We’re on track to achieve in that first step in our goal of the 1% operating income. Will we achieve it this fiscal year? We’re not going to be able to commit to that today, but clearly, we’re getting closer than we have been and we’re probably, based upon the results of the first two quarters, making strides that are even above our expectations to get there in this down economy.

So we’re moving very nicely and then the other leg of the stool is our return on capital employed. We indicated that our first hurdle was to get to a 10% on capital employed. For the first half of this year, we’ve achieved that. In this recent quarter, a little over 11%, and that combined with the results we had in the first half give us double digit return on capital employed.

So we’re hitting those milestones and one might consider a very tough economy. So I think that it really validates as Bob has said, our strategy, our execution, our product line diversification. If we were just trying to go out there and fight to sell again this year, what we sold last year to the same customers in the same manner, in the same form, with the same products from our vendors, we wouldn’t be performing as well as we are.

We’ve added new products to the line card here in the Americas, and in Europe, we’ve done some of the same, but we’ve also done the fill-in acquisitions and we’ve seen the maturity of our Scribona acquisition in the Nordic region and we’ve seen the turn around of our German operation.

So we’re on track to all of the objectives that we’ve laid out over the last couple of years, since we completed our restructuring in Europe in October of ‘06. It seems like a long time ago, but we’re getting there and then we have to build on that, and that’s the beauty of the leveraging acquisitions we’re doing, and using that word, specifically meaning we’re looking for ways to leverage our cost structure in Europe, adding an AutoCAD distributor in Europe, adding a mid range distributor in Spain, adding a more broad lined distributor in Portugal. All of these things are leveraging our infrastructure.

Even though for example, Nordics is a tough economy. The consolidation of Tech Data with the Scribona organization has really proven to be the right thing to serve our customers and our vendors. As we said over the last couple of call, not only is it working well and integrated seamlessly from day one, hour one of the acquisition. We had vendors come to us and say “Now you are the player in the Nordics, here is incremental product lines, please help us grow our business.”

So it just a lot of things that are working right now and we intend to keep our eye on those, and not go and get into any fray over revenue. We’re fine being a little bit smaller and a little bit better than having some statistic, but to be clear, we are the number one in Europe, in size, in performance, and opportunity.


Your final question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

I just want to ask a follow-up and more of a big picture question. When you look across the distribution landscape, industry gross margins have actually increased during this downturn, which I think we would all find unusual. Realizing each company has their own strategy and tactics to improve gross margins.

How sustainable do you think this is when we actually see growth in the industry again? I guess what I’m getting at, is something structurally different in the industry to allow for better profitability for all players and do you think you can improve from these levels longer term and in more robust growth environment?

Bob Dutkowsky

I think it’s safe to assume, Brian that we can use the platform of performance that we have in this difficult environment and when the economy turns around and IT spending returns to its kind of average performance, that we’re in a very good position when that happens. We’ve used this downtime to really hone in our coverage model and the efficiencies of our sales organization.

As we’ve said, we strengthened our line card with strategic vendors and added new vendors that bring more breadth and different products that have different gross margin profiles and we worked very hard on our cost structure to make ourselves as efficient as we can be in this tough market. When things turn back around and they will, Tech Data is in a very good position to take advantage of the updraft.


This concludes Tech Data Corporation’s fiscal 2010 second quarter earnings conference call. A replay of the call will be available in about one hour at It will remain available until Thursday, August 27 at 5:00 pm. Thank you for attending today’s conference call and have a great day.

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