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Tech Data Corp. (NASDAQ:TECD)

F3Q10 Earnings Call

November 23, 2009 8:00 am ET

Executives

Kristin Wiemer - Director of Investor Relation

Bob Dutkowsky - Chief Executive Officer

Jeff Howells - Executive Vice President & Chief Financial Officer

Ken Lamneck - President of the Americas

Nestor Cano – President of Europe

Analysts

Matt Sheerin - Thomas Weisel Partners

Brian Alexander - Raymond James

Richard Gardner - Citigroup

Bill Fearnley - FTN Equity Capital

Ananda Baruah - Brean Murray

Rich Kugele - Needham & Co.

Craig Hettenbach - Goldman Sachs

Operator

Welcome to Tech Data’s Corporation fiscal 2010 third quarter earnings conference call. (Operator Instructions) Now I will turn the meeting over to Kristin Wiemer, Director of Investor Relations. Ma’am, you may begin.

Kristin Wiemer

Thank you. Good afternoon, and welcome to Tech Data’s third quarter fiscal 2010 earnings conference call. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; Nestor Cano, President of Europe, and Ken Lamneck, President of the Americas.

Before we begin today’s call I would like to remind our listeners 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 today’s press release and 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 Financial Officer, Jeff Howells. Jeff Howells?

Jeff Howells

Thank you, Kristen. Many of my comments will reference the supplemental schedules which are available on the Investor Relations section of our website at www.techdata.com.

Beginning with the first slide, worldwide net sales for the third quarter ended October 31, 2009 were $5.6 billion, a decrease of 8.1% from $6.1 billion in the prior year third quarter reflecting some moderation in the overall decline in IT spending. The strengthening of certain foreign currencies against the US dollar positively impacted the year-over-year third quarter net sales comparison by approximately 2 percentage points.

Sequentially net sales increased by 8.8% including a positive FX impact of 3%. Third quarter net sales in the Americas were $2.4 billion or 44% of worldwide net sales, representing a decrease of 10.9% over the prior year third quarter. Net sales in Europe totaled $3.2 billion or 56% of worldwide net sales, representing a decrease of 5.7% over the prior year third quarter in dollars and a 9% decrease on a Euro basis. The decline in net sales in both regions is attributable to the softened demand environment.

Slides three and four summarize our operating performance. Worldwide gross margins in the third quarter was 5.26% compared to 4.86% in the prior year. The year-over-year increase in gross margin was primarily attributable to solid execution in the company’s inventory, pricing and freight management practices.

SG&A expenses were $230.5 million or 4.09% of net sales compared to $238.9 million or 3.9% of net sales in the prior year third quarter. On a dollar basis the $8.4 million decrease in SG&A expenses was primarily attributable to prudent cost management actions including adjustments to headcount and the related reductions in payroll expenses, partially offset by the translation impact associated with the strengthening of certain foreign currencies against the US dollar year-over-year. As a percent of net sales, the increase in SG&A was primarily attributable to the lower level of net sales.

Operating income for the third quarter was $66 million or 1.17% of net sales. This compares to operating income of $59.1 million or 0.96% of net sales in the same period last year. On a regional basis, operating income for the third quarter in the Americas was $39.3 million or 1.6% of net sales compared with $38.8 million or 1.41% of net sales for the same period last year. In Europe, operating income was $29.7 million or 0.93% of net sales compared to operating income of $23.4 million or 0.69% of net sales in the prior year third quarter.

Net interest expense was $5.8 million compared to $9.2 million in the prior year. Both periods include approximately $2.5 million in non-cash interest expense relating to the new accounting treatment for convertible debt instruments which was adopted at the beginning of our fiscal 2010 year. The company’s effective tax rate for the third quarter was 27.3% compared to 37.4% 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 in previous quarters in accordance with the FIN 18 accounting pronouncement, the quarterly effective tax rate may vary significantly depending on the actual operating results in our various tax jurisdictions.

Net income attributable to shareholders of Tech Data for the third quarter was $43.1 million or $0.84 per diluted share based on 51.2 million weighted average diluted shares outstanding. This compared to $16.8 million or $0.33 per diluted share in the prior year third quarter based on 50.4 million weighted average diluted shares outstanding. The increase in diluted share count is attributable to the increase in stock price and option exercises during the quarter. As a reminder, the prior year third quarter included a $23.5 million foreign currency exchange loss related to extreme foreign currency volatility and the use of certain portions of inventory as a hedge against foreign currency exposures in accounts payable.

As we noted in our third and fourth quarter call, the company recovered a significant portion of the currency exchange loss through gross profit. In comparison, the company recorded $1 million in foreign currency exchange losses in the third quarter of fiscal 2010.

Turning to the balance sheet, please refer to slides five and six. Accounts receivable totaled $2.7 billion. The allowance for bad debt was $58.7 million. DSO were 44 days compared to 49 days in the prior year third quarter. The increase is due to a strong sales performance towards the end of the quarter and the company’s decision to not utilize our receivable sales facilities in the current year. Inventories totaled $1.7 billion. Days of supply at the end of the quarter were 29 days. Accounts payable were $2.9 billion. Day’s payable outstanding at the end of Q3 were 50 days.

Total cash conversion cycle for the third quarter was 23 days compared to 27 days in the prior year third quarter. Cash provided by operations during the third quarter totaled $62.6 million. Total debt was $450.5 million compared to $390.1 million at January 31, 2009. The company continues to enjoy excellent liquidity and financial flexibility with a cash position of $1.2 billion at October 31, 2009. Net cash totaled $785.4 million at the end of the third quarter.

Total debt to total cap was 18%. Funds available for use under our credit facility is approximately $916 million at the end of the quarter. Our equity totaled just over $2 billion. Return on capital employed reached 14.5% in the quarter and 11.1% year-to-date. Other comprehensive income which consists of currency translation net of applicable income taxes was $431.8 million at the end of the quarter compared to $399.7 million in the second quarter of fiscal 2010, an increase of $42.1 million.

As of October 31, 2009 the company had 50.9 million shares outstanding and $17.6 million of goodwill resulting in a tangible book value of $40.53 attributable to shareholders of Tech Data. Capital expenditures totaled $7.5 million in Q3 and $16.3 million year-to-date. The current plan for the fiscal year is for capital expenditures to total approximately $30 million. Third quarter depreciation and amortization expense was $11.7 million.

On slide seven, looking at product and customer [codification], the company’s net sales by product segment remained relatively consistent with the prior period. As a percentage of net sales we estimate peripherals 40%, systems 30%, networking 15%, software 15%. Looking at our customer segments, the third quarter breakdown as a percentage of net sales remains relatively consistent with prior periods. VAR’s 50%, direct marketers and retailers 30%, corporate retailers 20%.

As in past quarters, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide. In the third quarter HP represented 28% of our net sales compared to 30% in the prior year third quarter.

In terms of outlook for the fourth quarter we have provided a few comments in our release. Let me note that statements regarding the company’s business outlook are based on current expectations and the company’s internal plans. Assuming the recent signs of improving IT demand continue, combined with the strength of foreign currency against the US dollar, net sales for the fourth quarter ending January 31, 2010 are anticipated to increase in the low to mid single digit range year-over-year.

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

Bob Dutkowsky

Thank you Jeff. Good morning everyone and thank you for joining us on Tech Data’s third quarter fiscal 2010 conference call. Tech Data continued to execute very well in this dynamic and challenging environment, exceeding our expectations for the fourth consecutive quarter. Our performance validates the power of our business model and the strength of our team as well as our relationships with our customers and vendors. Our continued efforts to diversify and expand Tech Data’s IT solution portfolio, combined with our disciplined pricing, cost control and working capital management practices delivered outstanding results in the quarter.

We further leveraged our infrastructure and thus improved our operating margin performance. All of these actions resulted in record third quarter earnings per share of $0.84. In addition, cash at the end of the quarter exceeded $1.2 billion and after debt our net cash totaled an impressive $785 million.

Taking a look at our nine month performance, our disciplined execution during the year is clearly evidenced in our results. Even amid a sales decline of 14% we have driven an 18% increase in operating income and an 83% increase in net income, all the while delivering double digit return on capital employed.

We also saw our market capitalization more than double in the first nine months of the fiscal year. It is safe to say that Tech Data is having a good year in a tough environment. My thanks go out to each and every one of my colleagues around the world for their great work.

Now let’s turn our attention to the performance of our regional organizations. In Europe, while net sales remained down year-over-year due to the softness in IT spending, we grew sales 9.1% sequentially on a Euro basis. We saw some signs of tightening softness and increased competition in certain regions during the third quarter but our disciplined execution and focus on customer and vendor profitability drove a 24 basis point operating margin improvement year-over-year.

The acquisitions we completed in the first three quarters of the year have been seamlessly integrated into Tech Data’s existing European operations. These prudent investments are playing an important part of our strategy to further diversify our business by adding new products and customers, thus strengthening our company for long-term success. We are also very pleased with the considerable progress the entire European team has made in driving improved return on capital employed and improved cash base. Their efforts are clearly evident in our third quarter results.

Our Brightstar Europe joint venture continues to make steady strides in solidifying its presence in Europe. Despite industry reports citing softness in handset sales, Brightstar Europe over-achieved its forecast for mobile device sales in the quarter. We recently added Nokia to our product portfolio in Germany and continue to exceed our expectations for the recently opened operation. The Brightstar JV has also begun selling into several other countries outside of our three central Brightstar office locations. We remain very pleased with the results of the Brightstar JV and the expanding strategic role it is playing in the diversification of our European business.

In the Americas, our net sales decline year-over-year is showing signs of moderation. This additional leverage combined with our disciplined execution in sales, pricing and inventory management led to a solid improvement in operating margin both year-over-year and sequentially. While all product segments remain down year-over-year there are certain areas that continue to perform well including televisions and flat panel displays which we anticipate will be very strong in the fourth quarter.

Since its launch in October, we have seen good interest in Windows 7 but like many of our industry peers we do not expect a significant impact in calendar year 2009 as it relates to sales of Windows 7 either directly or through new system purchases. If overall IT demand picks up as we enter 2010, and the long awaited PC refresh begins, we expect to see more widespread deployment of the Windows 7 platform.

Another bright spot in the quarter was the performance of our advanced infrastructure solutions division, or AIS, which delivered solid results. Our investments in expanding our expertise in hardware and software data center solutions are gaining further traction in the marketplace. As a result, AIS grew net sales 5% year-over-year led by software and storage solutions. The innovative value proposition of our AIS division coupled with our successful mid-range business in Europe continues to differentiate us amongst our broad line competitors. Our investments in the data center arena are resonating with our vendors and customers in both geographies and continue contributing to our improved results.

More than ever our customers and vendors are turning to Tech Data to assist them in growing their businesses in specific verticals and segments. Earlier this month we announced the launch of our healthcare specialized business unit to help VARs capitalize on the rising demand for IT solutions in the healthcare industry. Forecasts show the healthcare vertical to be a key driver for technology spend in 2010 as government funded healthcare organizations increase budgets and incentives targeted at the modernization of medical record systems.

We have also recently launched an innovative marketing engagement program for vendors called Tech Med. Tech Med is designed to provide marketing resources and programs targeted at resellers interested in the healthcare industry. Tech Med resources will help evaluate grant opportunities as well as provide access to Tech Data’s 6,000 square foot IT solutions center where our customers can interact with Tech Data and vendor specialists to experience our healthcare solutions in action.

We recently opened a Symantec solutions center within our demonstration facility to focus on security and data protection products. This facility will offer real world demonstrations of Symantec solutions by recommending end-user IT environments using the latest servers, storage, networking technology and virtualization solutions. We are partnering with our VARs to build their businesses and focus on providing greater value and support to their customers as well as enabling us to grow our business and forge tighter relationships with our vendors. The Symantec solution center is an innovative example of how we are accomplishing these goals.

Another exciting initiative during November was our launch of Open Tech to provide a channel for open source, independent software vendors or ISVs to sell their solutions to resellers. This innovative solution is leading-edge in the channel and a great way for Tech Data to connect vendors and resellers and to add incremental business from an emerging technology segment.

During the third quarter we hosted our annual vendor partner summit in the United States and in Europe. Both events were extremely successful, each with record attendance. Every year vendor executives attend our summit events to learn what is new in Tech Data’s marketing programs for the coming year and how these programs and services can help them connect with more resellers. This year’s event drew more than 600 vendor representatives. Attendees had the opportunity to learn about the significant advancement Tech Data has made in data mining, business analytics, e-business tools, customer engagement programs and marketing initiatives.

In addition, earlier this month we celebrated the 10th anniversary of TechSelect, once again with record attendance. Tech Select is the channel’s premier SMB reseller community in North America. The event brought together over 400 resellers, vendor and Tech Data representatives and continues to be an excellent forum for promotion best practices in the industry and to educate our VAR customers on leading-edge products, solutions and techniques to help grow their business.

In summary, our third quarter marked another period of disciplined execution, one that drove improved profitability and ROCI in the soft IT demand market. In addition, while inconsistent across the industry it is clear that overall IT spending is beginning to show signs of improving outlook for the first time in four quarters.

Just last week we celebrated Tech Data’s 35th anniversary. Those 35 years of serving the IT distribution channel we have weathered many economic cycles and the peaks and valleys in IT spending, all the while continuing to make investments that strengthen our business for long-term success. Our performance this year has been a testament to that strength and Tech Data is in a very enviable position as IT demand and spending improves.

As Jeff noted in his comments for the fourth quarter we anticipate improving IT demand for the first time in over a year. We have been very pleased with our ability to stabilize and expand gross margins and to drive operational excellence throughout our business. Our scale and Pan European infrastructure provides us a distinct advantage in the European marketplace and we believe we are on a good trajectory to achieve the 1% annualized operating margin in Europe we have been striving for.

Assuming IT spending continues to show signs of improvement, we also expect we can return to the 1.5% annualized target in the Americas. The magnitude and timing of an economic recovery as well as our investment decision will influence the achievement of these goals but we believe we have proven over the last four quarters that our strategy, our focused execution and our disciplined sales and cost management practices are delivering the desired results.

We have a strong, experienced team and I am proud of their performance and of the results they have delivered this year. I have great confidence in their ability to lead us into the next phase of this dynamic environment and continue to deliver strong operating results. With that, operator, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Matt Sheerin - Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

My first question is regarding the gross margin which rebounded pretty nicely in the October quarter. I know you had talked about potential gross margin erosion as you try to protect your share. Could you just talk about how have you maintained the gross margin and whether you expect to maintain it at these levels? And how you weigh revenue growth versus protecting the margins?

Jeff Howells

Actually we didn’t speak excessively about protecting our margin. I think most of the analysts were spending a lot of time. We said we were going to remain disciplined, focused and stick by our thoughts of vendor profitability, customer profitability and market share goals. Those continue to be the way the team around the world ran the business in Q3 as they did in prior quarters. I think the evidence is there is enough business to go around. We had competitors that grew in the same ballpark as we did and in the same geographies, yet did not produce the same operating results as we were able to produce.

We are picking and choosing our business. We are picking and choosing which vendors we want to grow with. We are picking and choosing which vendors we need to de-emphasize and the same on the customer side. Finally, our cost management and cost control around the world has been excellent over the last several quarters and our teams have made the right decisions where to invest incrementally and incremental staff to take business. Also where the business is softer to back down on some of our either payroll expense or incremental expenses until the market might return in that one geography.

So the consistency and the execution is one of the key stories of this quarter compounded by the results in prior couple of quarters.

Matt Sheerin - Thomas Weisel Partners

As a follow-up I know that you have talked about strength and relative year-over-year growth in higher margin businesses, more service oriented businesses. Do you expect that to continue or as you get the volumes and the IT spending comes back would you expect just as the volume hardware business comes back that could put some pressure on margins?

Jeff Howells

Clearly there are always pressure on margin and it is picking and choosing which opportunities you take and capitalize on. I don’t think we believe there will be any incremental new, different story as a result of the marketplace picking up. I think as we have seen every one of our competitors and vendor partners are sharing in the available opportunity out there. Even in this what might have been considered one of the more competitive quarters based upon comments made by others our team executed very well so we anticipate that continuing to execute.

Clearly that doesn’t mean margin can’t move around five basis points here and there. Ten basis points. Anything could materialize as we look at the opportunities ahead of us and also as we look at which components of the product portfolio we want to emphasize. If we grow higher end AIS mid range type solutions, that gross margin is going to be completely different than the margin generated by growing traditional software and software licensing which has potentially a lower gross margin but a reasonable operating margin and a very acceptable ROCI.

So it will depend upon that mix as we see the opportunities going forward to generate our operating income goals and whether we decide to mix that with higher or lower gross margin products but the primary goal is to try and balance and achieve our annualized operating income targets.

Bob Dutkowsky

One other view of that. As we tried to say in our prepared comments, I think the company is very, very well positioned to take advantage of when IT spending does recover. The stability of our leadership team, the strength of our execution, the now maturity of our infrastructure, the relationships we have with our vendors and our customers, all of those are in very good shape right now so when IT spending does pick back up we are poised and ready to take advantage of the opportunity.

Matt Sheerin - Thomas Weisel Partners

Lastly, on the cash, which obviously has built up very nicely here you have done some strategic acquisitions in the last year or so. Now with the restructuring behind you are you focusing a little bit more aggressively on acquisitions? What is your overall plan for the cash?

Bob Dutkowsky

We have made I think a smart series of acquisitions so far this year targeting particular geographies, particular vendor product lines and skill sets that we need to be able to expand our business. Those acquisitions, as we said, were primarily in the European region and have been successfully integrated into our business model. So I think it is safe to say we have a play book on how to acquire companies, integrate them into our structure quickly and create value for our vendors and our customers. We are prepared now with the dry powder on our balance sheet to continue to explore those opportunities.

There is no lack of good opportunities out there. It is just a question of which ones we go after and how we prioritize them.

Operator

The next question comes from the line of Brian Alexander - Raymond James.

Brian Alexander - Raymond James

On the revenue outlook, if we look at what is implied for revenue on a sequential basis it would suggest about 6% growth, maybe closer to 4% if you back out the weaker dollar. If you look back historically Q4 sequentially is typically better than that? It is typically up maybe high single, low double digits depending on the year and you are talking about an improved environment in Europe which is the catalyst for growth in the fourth quarter. It is a bigger piece of your business now than it has been historically. What is driving the outlook which is a little bit below seasonal? Is this a pricing environment from the competitors? Is there a particular region you are concerned about or are you just trying to be conservative?

Jeff Howells

I don’t think we are trying to be overly conservative. Relatively conservative. I think it is the shift in the portfolio mix we are looking for. You would have to look back several years to get a comparable scenario. Certainly last year wasn’t comparable. Then there was some situations in the prior year that would make that not as comparable.

Generally speaking, as we go sequentially from Q3 to Q4 the Americas revenue declines in the aggregate because of the number of selling days. That wouldn’t be unexpected this year. In Europe in local currency it generally increase sequentially. Over the last 2-3 years if you recall we have moderated and reduced some of the retail business that we choose to take. If you are looking back 2 or 3 or 4 years from now and considering that the normal trend you would have to take that sequential revenue growth out of Q3 to Q4 and you would have to focus more on year-over-year but yet last year’s decline makes that also a little hard to triangulate.

There are many, many factors but I would say the most significant might be if you are using historical trends our desire to focus on correct business and also our moderation and our retail focus in Europe.

Brian Alexander - Raymond James

A follow-up on the balance sheet on payables which has been a source of cash it is up about eight days over the last couple of quarters. Given your interest expense hasn’t really changed in any quarter this year at roughly $6.5 million a quarter, I am assuming the payables is simply a timing issue; the increase there, and there hasn’t been any structural change in your payables terms with suppliers. Is that true and if not what do you consider to be a normalized level of payable days?

Jeff Howells

The other way of looking at that is our team is able to maintain a very appropriate balance in receivables, inventory and payables throughout each and every one of these quarters absent heroics at the end of a given quarter. So that is why you would see some of the consistency in the interest expense. Remember $2.5 million this year is non-cash interest expense and so our balance sheet management every day of the quarter has been excellent. Especially some improvements our team in Europe have been able to demonstrate through a very focused working capital management program that we launched early this year.

All that being said, I think the cash days coming in at the level they are is probably slightly better than what we would have for an overall goal going forward and we would be very cautious in balancing the inventory in the customer and vendor terms to make sure we take advantage of all the business opportunities out there, The team did a great job. If we had a couple more days cash invested in the business on average we would have no problem with that, especially considering that rates have come down so low on our borrowing and our investing. So we are very pleased with our working capital management.

Operator

The next question comes from the line of Richard Gardner – Citigroup.

Richard Gardner - Citigroup

First of all, I was just hoping you could elaborate on the comment regarding strong sales performance at the end of the quarter. Was that primarily a European comment or was it a U.S. comment and is there any additional detail there in terms of products and customers? Then I have a follow-up.

Bob Dutkowsky

I think the pick up there happened towards the latter part of October. October finished as a strong month in both geographies. The spread across products and segments was very balanced as well; still off from last year but kind of a solid balanced performance. No real highlights or low lights from a products perspective in the October timeframe.

Richard Gardner - Citigroup

Based on your guidance we can infer you have seen that strength continue so far into the January quarter?

Bob Dutkowsky

Yes, as we said we think the IT spending particularly in the Americas has stabilized and may be picking up slightly. Europe is a little bit more spotty. There are some regions where things appear to be stabilizing and moving forward. There are other regions that I don’t think have reached a bottom yet. Therein when you factor that in all together is how we came up with our guidance for the quarter and we think that if the markets continue on the track they are on right now and our execution continues to be strong then there good opportunity for us to have another good quarter.

Richard Gardner - Citigroup

On operating margins, you reiterated some targets earlier in the call. I think 1% annualized in Europe and 1.5% in the Americas. If I take a look at Europe your non-GAAP operating margin has been up year-over-year every single quarter so far this year. Even if we were to assume that you are down year-over-year in the fourth quarter off a tough comp it looks like you are on track to exceed that 1% target this year. The same goes for the US. You are pretty close to that 1.5% target this year. The question is, is there room for further margin improvement next year or should we think about top line being the primary driver of earnings growth and operating leverage next year?

Bob Dutkowsky

Good question. I think first of all you have to turn back the clock a few years to see how far our European team has come in the business model they have built and the performance they are now generating. A few years ago when I arrived at the company the operating income was I think I recall a quarter in Europe was like 13 basis points. So to move from there to now approach 1% on a repeatable fashion on an annualized basis points. So to move from there to now approaching 1% in a repeatable fashion on an annualized basis I think is a tremendous statement of the work that our European team has done.

The same comments can be made about the Americas versus the European business which has been one of improvement and recovery the Americas business has been one of amazing stability over a long period of time. The gating factors for us to get to 1% and 1.5% annualized and then go further than that really are what is the top line opportunity and then what investments do we choose to make as a company to strategically position ourselves for longer term success. Those levers are available for us to pull all the time. What we are trying to say to you is we want to make smart improvement investments in the long-term health of the business and still be around that 1% or 1.5% annualized for our two geographies. The balancing act there is the important part, not necessarily the final whether it lands at 95 basis points or 105 basis points. We have the flexibility to move that number based on the top line opportunity and the investments we make.

Richard Gardner - Citigroup

From a top line perspective the goal is to grow at a premium to the growth in your end markets. Any more detail there I guess since you mentioned investments in top line growth?

Bob Dutkowsky

It is safe to say there is enough business in the market, even in this depressed environment, for companies like Tech Data and our competitors to have solid quarters. What this quarter and the year so far has shown from the Tech Data perspective is we can get the appropriate amount of good business that allows us to deliver good return to our shareholders, expand our operating margins and improve our operating income and do that with a ROCI that more than covers our cost of capital.

In other words there is enough business there but we are being selective about the business we take. We are prepared to let the business that doesn’t meet those operating and financial metrics, we are prepared to let that business go. We can do that and still put together a good operating performance like we just showed you.

Operator

The next question comes from the line of Bill Fearnley - FTN Equity Capital.

Bill Fearnley - FTN Equity Capital

On the customer product segment, any more color on the gives and takes within the customer segment in terms of the VARs, DMRs, retailers. Any additional color on the sales that would be helpful there?

Bob Dutkowsky

No, it is just that the numbers have landed about where they have been historically. I think each segment is awakening to the new IT spending environment at about the same rate from what we can see. There are no high flyers in that environment in other words.

Bill Fearnley - FTN Equity Capital

Any update or additional color on the Dell relationship at this point?

Bob Dutkowsky

We have had this reselling relationship with Dell now for about three quarters and we continue to answer the demand that our customers have in the marketplace for Dell products.

Bill Fearnley - FTN Equity Capital

How is the trajectory versus how you thought it would be though, with Dell specifically?

Bob Dutkowsky

We don’t comment specifically on vendors but we view the opportunity as one that is defined by our customers. We are prepared and positioned to address the demand that our customers have in the marketplace.

Bill Fearnley - FTN Equity Capital

Going macro, when you look at the competitive environment, any change that you see that give you more confidence and is your confidence in the competitive environment reflected in your guidance or your view for calendar 2010? So any major changes in the competitive environment? Were you may be gaining share due to the weakness of particular competitors in a particular region?

Bob Dutkowsky

When we look forward into 2010 and 1% and 1.5% annualized you have to factor in all of the various levers that management has to pull and one of those factors we take a look at is competition and the strength of our competition in every geography and our ability to out-execute our competition and geographies. If there is anything, it is safe to say that this is an ultra competitive market we are in. Our competitors are prepared to compete for the business that I out there and we all know who we are and where the opportunities are and who executes the best that wins the business. Which organization has the stable team in place with the infrastructure that is prepared to meet the demands and service the vendors.

I think it is safe to say that the performance we have had so far this year states that Tech Data is very much in the mix from a competitive point of view and we can hold our own against any competitor in any geography.

Operator

The next question comes from the line of ow HowHow Ananda Baruah - Brean Murray.

Ananda Baruah - Brean Murray

Could you talk a little bit about who the core customer base is for AIS and what the revenue mix is there? Any kind of product services and where the line card stands and directions you might be looking to take that business in the 12 months or so?

Bob Dutkowsky

AIS is targeted at not only our traditional VARs who are moving into more of the data center solution oriented products but also other customers, some of them are new customers to Tech Data that see our value proposition and our ability to deliver product in a timely fashion and our credit capacity as an attractive opportunity. It is important to note that although AIS has clear momentum here in the Americas we have a mirror image business over in Europe that is called our mid range business, marketed around our Azlan brand that has been a successful mid range marketing and sales organization for several years now. So when you couple together AIS and our mid range business in Europe, Tech Data has a very strong and growing footprint in the data center.

The products we are focused on there are the traditional data center products; servers, storage, networking infrastructure, as well as kind of leading-edge moving products like virtualization. We have not only a robust line card across those product segments but we also have added skills internally in both Europe and the Americas that help our VARs take those products to the market.

So AIS and the mid range business in Europe is the combination of a strong line card, an interesting market opportunity, a dynamic that is unfolding in the data center and unique skills inside Tech Data that support market opportunity.

Ananda Baruah - Brean Murray

Aside from just generalized spending, continuing to stabilize and pick up as you look out through 2010, could you maybe in order of magnitude rank what you put as the most meaningful, new secular opportunities you are pursuing to drive the top line?

Bob Dutkowsky

I guess I would answer that this way, you heard us in our prepared comments we talked about our focus on healthcare and the healthcare industry. I think that is a statement we see that verticalization is an important opportunity for Tech Data and to bring more vertical solutions and a vertical go to market model to the table. You heard us talk about the open source initiative, as an example. I think that speaks to our focus on emerging technologies and opportunities that will continue to create new market opportunities for Tech Data. As well as kind of the pedestrian business we have been in for years and years and years.

Is there going to be an IT PC refresh sometime next year? If there is we are prepared to take advantage of that with a strong line card. Then there are other emerging markets and technologies for Tech Data. Not that they are new but they are new areas that we have become focused on like Digital signage and TV. We mentioned they had strong performance in Q3 and we expect continued strong performance in Q4. Those are new diversification opportunities for Tech Data and their results are showing up in our overall numbers.

Operator

The next question comes from the line of Rich Kugele - Needham & Co.

Rich Kugele - Needham & Co.

Can you comment on the level of older Vista inventory you might have? Has that already sold all the way through? Any comments on your overall PC inventory?

Bob Dutkowsky

Our inventory is in fine shape, as Jeff said. The beauty of the Tech Data model is if the customer wants Vista we have it on the shelf. If the customer wants Windows 7 we have it on the shelf. So as the products take off and the potential for a PC refresh begins to happen we are poised and ready to take advantage of that.

Rich Kugele - Needham & Co.

In that vein, because it has been so long since we have had a corporate PC refresh, I am just interested in how your product mix might change in that scenario. It doesn’t really matter what time next year it happens. Would you expect to see your system sales change as a percent of the total or do you think it would all be within the broader context of an improved IT spending environment and everything would go up?

Bob Dutkowsky

My assumption is that the mix could change slightly but generally speaking all ships rise with the tide there. If IT spending picked up in a dramatic fashion other segments would move as well. So again the beauty of our model is whatever direction the market decides it wants to go the breadth of our product offerings allow us to serve the market whatever direction it takes. We are not beholden to one particular platform, one solution or one architecture. We have multiple solutions in our line card and we are prepared to address the demands of the market in a way that very few companies are prepared to do as the IT spending picks back up. That is part of the reason for our optimism. As we look out into the longer term we are in a really good position when IT spending recovers.

Rich Kugele - Needham & Co.

The inventory everyone has been managing their levels so tightly. If we do see an improved IT spending environment next year do you anticipate having to deploy more capital there or do you think you have been able to shrink the supply chain enough in terms of lead times where you can get everything even in a refresh environment?

Bob Dutkowsky

I think inventory is one area where we optimize and maintain at a 27-29 days and that is the average. There are some product categories and some vendors where we would stock less and there are some that we would stock slightly more. In fact, just as an example last year in Q4 we took an incremental stocking position with one particular vendor and ended the quarter with equal or fewer days if memory serves me correctly just because the incremental sell through that incremental stocking position created. So it is really variable but in the aggregate I do not believe we would start stocking up.

Operator

The next question comes from the line of Craig Hettenbach - Goldman Sachs.

Craig Hettenbach - Goldman Sachs

On the color around the improvement in IT spending can you provide any anecdotes from your VARs or just conversations you have been having through the quarter as it relates to improvement in sentiment in spending?

Bob Dutkowsky

The best way to answer that would be the feedback we just received from our customers at Tech Select where we had about 400 customers together in one room and so it is not one particular customer seeing upside. It is more of a tone that you get from a big group like that. The mood of the mob there was there is a feeling there was more opportunity in the market today than there was several quarters ago.

That doesn’t say that business will necessarily convert into opportunities in a more timely fashion but the pipeline and the opportunity view was really fairly robust. So therefore when we look at that and get that kind of feedback from our customers and then we couple that with the feedback we get from our vendor partners, it gives us the direction that says IT spending is in fact beginning to move in the right direction. I hope you are not interpreting that we are declaring victory and the recession is over and IT spending has returned to the good old days. Less than it was before it returned kind of back to 2008 levels probably. The beauty is what we have proven over the last few quarters is that in that smaller market opportunity we can continue to execute well and create good return on investment for our shareholders.

Craig Hettenbach - Goldman Sachs

On the balance sheet and cash, any thoughts around stock buyback?

Jeff Howells

I think the M&A analysis and continuing to look at opportunities is number one. As always that would follow by consideration at the board level of stock buyback. Nothing on the table currently.

Operator

The next question comes from the line of Matt Sheerin - Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

Just a follow-up on the tax rate. I know it was down this quarter because of mix. Any guidance for the fourth quarter?

Jeff Howells

I think if you infer the average of the three quarters is the approximate run rate we are shooting for the annualized, I’m sorry Q4 and annualized.

Operator

This concludes Tech Data Corporation’s fiscal 2010 third quarter earnings conference call. A replay of the call will be available in about one hour at Techdata.com. It will remain available until Monday, November 30, 2009 at 5:00 p.m. ET. Thank you for attending today’s conference call and have a great day.

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Source: Tech Data Corp. F3Q10 (Qtr End 10/31/09) Earnings Call Transcript
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