Tech Data Management Discusses Q3 2014 Results - Earnings Call Transcript

Feb.25.14 | About: Tech Data (TECD)


Q3 2014 Earnings Call

February 25, 2014 8:30 am ET


Arleen Quinones - Vice President of Investor Relations

Robert M. Dutkowsky - Chief Executive Officer and Executive Director

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


Nikhil Kumar - Stifel, Nicolaus & Company, Incorporated, Research Division

Ryan Jones - Barclays Capital, Research Division

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

Ananda Baruah - Brean Capital LLC, Research Division

Osten Bernardez - Cross Research LLC

Richard Kugele - Needham & Company, LLC, Research Division


Good morning. Welcome to the Tech Data Corporation's Fiscal Year 2014 Third Quarter and 9-Month Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Arleen Quinones, Vice President of Investor Relations. Ma'am, you may begin.

Arleen Quinones

Thank you, Jesse. Good morning, and welcome to Tech Data's investor conference call and webcast to review our financial results for the first 3 quarters of fiscal 2014. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; and Jeff Howells, Executive Vice President and Chief Financial Officer.

We have prepared supplemental schedules to go along with today's call. The schedules can be found on Tech Data's Investor Relations website located at Please note that all year-over-year comparison views the restated financial information that can be found in our quarterly reports on Form 10-Q filed this morning and our annual report on Form 10-K filed February 5, 2014.

Before we begin, I would like to remind all listeners that today's earnings press release and certain matters discussed in today's call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations and are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in our filings with the Securities and Exchange Commission, specifically, our most recent report on Form 10-Q and Form 10-K, which identify important risk factors that could cause material -- that could cause actual results to differ materially from those contained in the forward-looking statements.

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.

Also, throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures, in which we exclude from our GAAP financial results certain items including amortization of acquired intangibles, restatement expenses and LCD settlements. A detailed reconciliation between results reported in accordance with GAAP and non-GAAP financial measures can be found in the press release and appendix of the slide presentation. In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the company.

I will now turn the call over to Tech Data's Chief Executive Officer, Bob Dutkowsky.

Robert M. Dutkowsky

Thank you, Arleen. Good morning, everyone, and thank you for joining us today. It's great to be speaking with you again to discuss our financial results and to bring you up-to-date on Tech Data. I'm very pleased to report that today, we filed our quarterly reports for fiscal 2014 through Q3. This is an important milestone for our company, and I want to take the opportunity to express our sincere thanks to the investment community, as well as to our customers and vendor partners, for their patience during the last few quarters.

The completion of our restatement and the filing of the quarterly reports marks the end of a thorough investigation of certain of Tech Data's accounting practices in Europe conducted by its Audit Committee and the review of the company's financial statements by management. Importantly, the cumulative adjustments to operating and net income over the restated period, excluding an unrelated VAT assessment charge and other unrelated adjustments, are consistent with what we disclosed in March.

We believe the measures outlined in the 10-K will remediate the material weaknesses identified and will strengthen our internal financial controls, our organization and our people.

Let me assure you that the Audit Committee, our Board, the executive leadership team, are absolutely committed to improving and further institutionalizing rigorous internal financial controls and oversight. We believe the 10-K fully explains the issues that we discovered, and we're pleased to have the opportunity on this call to discuss the current and future performance of our business.

I remind you that the financial results we'll be discussing today are for the first 9 months of our fiscal year '14, from February 1 through October 31, 2013. These financial results reflect the impact of 3 major operational and economic challenges we faced during the year.

The first was getting our U.S. business back on track after deploying the remaining SAP modules in Q2 of fiscal 2013. The second was integrating a series of acquisitions in Europe, including a number of SDG entities. And the third were weak economic conditions in certain European countries, as well as an overall weak IT spending environment through the first 3 quarters of the fiscal year. All this was against the backdrop of an evolving product mix, the first 2 we planned for and discussed with you on our last investor call more than 350 days ago.

In terms of the European economic condition, although we have seen some stabilization in Q4, the weakness through the first 9 months in certain countries did not always match up with our forecast. As a result of all of this, through Q3, our company did not execute at the levels of efficiency I would have expected. These are not excuses for our performance, but explain the reality of what the organization faced during the year. However, Q3, and yet to be finalized Q4 results, indicate the more current trajectory of our business, with sequential improvement in operating margins and mid-single digit year-over-year sales growth in both regions in local currency in Q4.

On a regional basis, the Americas made good progress regaining market share and gaining back customer confidence, as indicated by 9% year-over-year growth in the last 2 quarters versus the 7% decline in Q1. But our profitability declined due to a shift in product mix and a competitive environment, as well as higher costs as we invested to recover market share with superior service.

In Europe, we operated in a number of muted IT markets and weak economies throughout the fiscal year. And our deliberate focus on maintaining gross margins resulted in higher gross margins but lower incremental volume, primarily at our broadline business.

Higher operating expenses attributable to SDG, combined with a decline in our legacy business, prevented our European region from achieving leverage and obtaining our planned levels of profitability. As a result, through Q3, sales and earnings on a GAAP and non-GAAP basis fell short of the prior year.

I will now turn the call over to Jeff, who will provide an overview of our financial results. I'll close the call with a business update, and then we'll open it up for your questions.

Jeffery P. Howells

Thank you, Bob. Good morning, everyone. I'd like to begin this morning by thanking our entire finance and accounting team for working so diligently over the last several months to complete our filings. We are pleased to be able to share our performance with you this morning. Many of my comments this morning will reference the supplemental schedules available on our website.

Beginning with Slide 4. Worldwide net sales were $6.4 billion in the third quarter of fiscal 2014, an increase of 6% from the third quarter of fiscal '13. SDG, which we acquired on November 1, 2012, contributed approximately $560 million of net sales in the quarter, positively impacting our year-over-year net sales comparison by approximately 9 percentage points. The strengthening of certain foreign currencies against the U.S. dollar also positively impacted the year-over-year net sales comparison by approximately 3 percentage points. Excluding the impacts of both SDG and foreign currencies, worldwide net sales decreased by approximately 7% from the prior year quarter.

For the 9 months ended October 31, 2013, worldwide net sales were $18.8 billion, an increase of 5% from the prior year period. SDG contributed approximately $1.6 billion of net sales, positively impacting the year-over-year net sales comparison by approximately 9 percentage points. The strengthening of certain foreign currencies against the U.S. dollar also positively impacted the year-over-year net sales comparison by approximately 2 percentage points. Excluding the impact of both SDG and foreign currencies, worldwide net sales for the 9-month period decreased by approximately 5% from the prior year period.

Looking at sales by region on Slide 5, the Americas net sales increased 9% during the third quarter of fiscal 2014, $2.6 billion. For the first 9 months of fiscal year 2014, the Americas net sales were $7.5 billion or 40% of worldwide sales, an increase of 4% from the prior year. The improvement is primarily due to a partial recovery in the market share we lost at the implementation of the sales inventory and credit management modules of SAP within our U.S. operations during the second quarter of the previous year.

Turning now to Europe on Slide #6 and 7. Net sales during the third quarter increased by 4% to $3.8 billion, but decreased 2% on a euro basis. SDG contributed approximately $560 million or approximately EUR 416 million to our third quarter fiscal 2014 net sales.

Excluding SDG, the region's net sales decreased approximately 12% in U.S. dollars and approximately 16% in euros from the prior year quarter, due primarily to weak market conditions in certain countries, as well as a decline in market share in several countries, resulting from a focus on gross margin percentage.

For the 9-month period, net sales in Europe were $11.3 billion or 60% of worldwide sales, an increase of 6% from the prior year period in U.S. dollars and a 3% increase in euros. SDG contributed approximately $1.6 billion or EUR 1.2 billion in net sales to the 9-month period. Excluding SDG, the European's region net sales increased approximately 9% in U.S. dollars and approximately 11% in euros from the prior year period attributable to the aforementioned reasons.

Turning now to our gross margin performance on Slide 8. Worldwide gross margin during the third quarter was 5.12%, an increase of 5 basis points from 5.07% in the prior year third quarter. The improvement is due to better execution in Europe, partially offset by a shift in product mix and a competitive environment in the Americas.

For the first 9 months, worldwide gross margin decreased to 5.12% compared to 5.2% in the prior year 9-month period. The decline in gross margin for the first 9 months is primarily attributable to a shift in product mix and a competitive environment in the Americas and higher inventory costs in Europe, primarily in the first quarter of fiscal 2014.

Moving on to Slide 9. Non-GAAP SG&A expenses, which exclude acquisition-related intangibles amortization of $7.4 million, or $262.7 million, 4.12% of net sales in the third quarter, compared to $239.3 million or 3.96% of net sales in the prior year quarter.

On a year-to-date basis, non-GAAP SG&A expenses, excluding $21.8 million of acquisition-related intangible amortization expense, increased 13% to $806.7 million or 4.28% of net sales. The increase in non-GAAP SG&A, as a percentage of net sales, is primarily attributable to the impact of SDG and a lack of leverage resulting from lower sales in the legacy business in Europe.

For the third quarter of fiscal 2014, we incurred expenses in the amount of $15 million related to the restatement, and we recognize a benefit of $22.9 million related to the receipt of an LCD flat-panel litigation settlement. For the 9-month period, we incurred restatement expenses of $29 million. These items appear on a separate line item in our income statement and have been excluded from our non-GAAP results.

Slides 10 through 12 summarize our worldwide and regional operating income for the third quarter and 9-month period. Worldwide non-GAAP operating income for the third quarter was $63.4 million or 0.99% of net sales, compared to $66.8 million or 1.11% [ph] of net sales in the prior year period. For the 9-month period, worldwide non-GAAP operating income was $157.7 million or 0.884% of net sales, compared to $216.1 million or 1.21% of net sales in the prior year period.

On a regional basis, third quarter non-GAAP operating income was -- the Americas third quarter non-GAAP operating income was $33.7 million or 1.31% of net sales, compared to non-GAAP operating income of $32.6 million or 1.38% of net sales in the prior year period. For the first 9 months, non-GAAP operating income in the Americas region was $97.7 million or 1.3% of net sales, compared to non-GAAP operating income of $112.3 million or 1.55% of net sales in the prior year period. The year-over-year decrease is primarily attributable to product mix and the drive to recover profitable market share with better service.

In our European region, non-GAAP operating income for the third quarter was $31.3 million or 0.82% of net sales, compared to non-GAAP operating income of $37.7 million or 1.03% of net sales from the prior year period.

On a year-to-date basis, Europe's non-GAAP operating income was $66.9 million or 0.59% of net sales, compared to $114 million or 1.07% of net sales from the prior year period. The year-over-year decline is primarily due to incremental SDG expenses and the aforementioned lack of leverage resulting from lower sales in the legacy business in Europe.

Interest expense for the first 3 quarters of fiscal '14 was $19.5 million compared to $10.9 million in the prior year period. The increase in interest expense is due primarily to the $350 million, 3.75% senior notes we issued in September of 2012.

Our effective tax rate was 35.1% for the third quarter of fiscal '14 compared to 24.3% in the prior year period. For the first 9 months of fiscal '14, the effective tax rate was 37.5% compared to 28% for the same period of the prior year. The increase in the effective rate is primarily the result of a relative mix of earnings and losses within the tax jurisdictions in which we operate.

Non-GAAP net income for the third quarter of fiscal '14 was $39.6 million or $1.04 per diluted share, based on 38.2 million weighted average diluted shares outstanding. Our year-to-date non-GAAP net income was $92.6 million or $2.42 per diluted share, based on 38.2 million weighted average diluted shares outstanding.

Turning now to some balance sheet highlights, starting on Slide 14. Our cash position on October 31, 2013, was $471 million. Days sales outstanding were 44 days. Days of supply were 34 days. Days payable outstanding were 54 days. This brings our cash conversion cycle for the third quarter to 24 days, a decrease of 1 day from the prior year third quarter.

Net cash provided by operations was $266 million during the first 9 months of fiscal 2014, compared to $18.1 million during the prior year period. The increase in cash from operations can be primarily attributable to the timing of both cash receipts from our customers and payments to our vendors. Our total debt balance at the end of the third quarter was $400 million, and we ended the quarter with a total debt to total capital ratio of 17%. Funds available for use under our credit facilities were approximately $769.7 million at the end of the quarter.

Accumulated other comprehensive income, which consists of currency translation net of applicable taxes, was $332 million at the end of Q3. On October 31, 2013, the company had 38.1 million shares outstanding and $393 million of goodwill and acquired intangibles, resulting in a book value of $52.38 per share, and a tangible book value of $42.06 per share. Capital expenditures were $6 million in Q3 and $21 million year-to-date. For fiscal year 2014, we expect capital expenditures of approximately $29 million. Depreciation and amortization expense for the first 9 months of fiscal '14 was $54.4 million, and we earned a return on invested capital on a trailing 12-month basis of 8.8%.

Slide 17 shows our customer and product mix. Looking at our customer segments for the first 12 month -- for the 12 months ended October 31, 2013, we estimate the breakdown as a percentage of net sales to be VARs, 52%; direct marketers and retailers, 27%; and corporate resellers, 21%. For the trailing 12-month period, we estimate broadline products represented 46% of our net sales; data center products, 23%; software, 18%; mobility, 8%; and consumer electronics, 5%.

In Q3, we had 2 vendors that represented more than 10% of our net sales. HP represented 21% of our sales during the first 9 months of fiscal '14, while Apple represented 11% of our sales year-to-date.

Turning to the fourth quarter. As a general practice, we do not provide earnings guidance. But given the timing of this call, we have provided high-level preliminary results for the fourth quarter ended January 31, 2014. However, we caution investors that these results are not final and are subject to change based upon the results of management reviews and our external audit.

For the fourth quarter ended January 31, 2014, we expect consolidated net sales of approximately $8 billion, with mid-single-digit year-over-year growth in each region on a local currency basis; non-GAAP operating income, before stock compensation expense and excluding restatement expenses and LCD settlements, in the range of $110 million to $120 million; non-GAAP effective tax rate of 28% to 32%; and we expect non-GAAP earnings per diluted share in the range of $1.85 to $2.05.

We expect to announce our fourth quarter and fiscal year 2014 results concurrent with the filing of our annual report on Form 10-K for the fiscal year ended January 31, 2014.

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

Robert M. Dutkowsky

Thanks, Jeff. Despite the challenges we have faced, I'm pleased to report that we have made good progress on a number of strategic initiatives this past year, initiatives that give us competitive advantage, strengthen our value proposition with customers and vendors, and position us for long-term success.

When we last spoke to you, we outlined our key focus areas for fiscal 2014. At that time, we indicated that our first priority was to improve the productivity and efficiency of our U.S. team, with the goals of regaining market share and improving profitability in the Americas region. I'm pleased to report that throughout fiscal '14, we continue to make progress gaining back the few points of market share we lost in fiscal '13, when we implemented the remaining SAP modules in the U.S.

While the Americas region's profitability reflects the shift in product mix, our U.S. team's fluency with our systems and reporting tools has improved significantly. In particular, our ability to configure complex orders, primarily in our U.S.-based Advanced Infrastructure Solutions business, has improved to levels that exceeded our performance using legacy IT systems.

As a proof point to our progress, for the first 3 quarters of fiscal '14, our AIS division grew above the market at 18% year-over-year, delivering strong growth in storage, networking and virtualization.

Another sign that validates our improved performance in this area, earlier this month, Cisco recognized our excellence and quality execution by naming Tech Data its Enterprise Networking Distributor of the Year at their 2014 Americas Distribution Forum. Along with improved productivity, our U.S. customer satisfaction scores are back up to the levels we averaged just 6 to 8 quarters before we implemented the remaining SAP modules. And we've achieved key customer wins, including a hotly contested software deal with one of our largest U.S. customers, all clear signs that our U.S. business is heading in the right direction.

The recent appointment of Joe Quaglia as President of the Americas region will keep this momentum going. Joe joined us in 2006 and most recently served as Senior Vice President of Marketing of our U.S. operations, as well as President of our TDMobility unit. He has a proven track record of success in both sales and marketing leadership positions and has built a stellar reputation along our customers, vendors and employees. I'm confident he will continue to drive best-in-class execution, while capitalizing on new opportunities to capture market share and expand the region's profitability.

We've made a number of other organizational changes to drive improved transparency, control and compliance throughout our operations and more closely align our 2 regions.

Chuck Dannewitz has been appointed Senior Vice President and Chief Financial Officer of the Americas; and Alain Amsellem has been appointed Senior Vice President and Chief Financial Officer, Europe. We also recently named Jean-Paul Durand as our Chief Ethics and Compliance Officer, a newly created position that will be responsible for driving high ethical standards and compliance across our operations. JP will report to our General Counsel, as well as to the Audit Committee of our Board of Directors, and will oversee an ethics and compliance organization that will further ensure that our values and code of conduct are understood and adhered to throughout the company.

In the Americas, we also made several structural changes that provide better consistency of our vendor partners throughout our worldwide operations. To lead these new, more focused teams, Brian Davis has been appointed Senior Vice President of Marketing; and Chuck Bartlett has been promoted to Senior Vice President of our Advanced Infrastructure Solutions division. We're pleased to welcome Brian back to Tech Data to lead the operations and strategic direction of our core product categories, including client systems, peripherals, software, cloud services, as well as our award-winning TDAgency. In his new role, Chuck will lead the company's value-added products and solution categories, including server, storage, networking, unified communications, video, virtualization and convergent infrastructure.

We also appointed Rod Millar to the new position of Senior Vice President, Tech Data Mobile solutions, our recently announced worldwide mobile business unit. Rod has been instrumental in the growth and development of our European mobile division and will now lead the strategic direction, operation and go-to-market execution of both Tech Data Mobile in Europe, as well as our TDMobility offering in the U.S.

Our next priority was to integrate SDG into our IT systems and logistics facilities in the U.K., France and the Netherlands to achieve the full benefits of the acquisition, beginning in fiscal 2015. I'm pleased to say that we have successfully integrated the IT systems of the vast majority of the SDG entities into our SAP platform and now have well above 90% of our worldwide sales on one ERP system.

The process of deploying SAP in a number of SDG entities in the 3 countries has been challenging, but it was necessary for the long-term success of Tech Data. And while we have made good progress integrating SDG, like most of Europe, SDG sales were below our expectations, reflecting a weak European data center market.

Another area of focus for us was to aggressively pursue growth opportunities in our higher-margin businesses and capturing new supply chain opportunities. Services and, specifically, integrated supply chain services, are a key component of our diversification strategy and one that we're excited about because it leverages the strengths of our core business, our strong vendor and reseller relationships and the breadth of our coverage model. And it plays to one of our competitive advantages, namely, our enterprise-wide SAP technology platform.

These distinctive advantages enable us to go beyond a traditional 3PL services of transportation, warehousing, order management and e-commerce, and layer in specialized services. These higher-touch services, such as forecasting and planning, analytics and business intelligence, and sales support, can be scaled and customized to create end-to-end integrated supply chain solutions that redefine the value we provide to our vendor partners and further strengthen these relationships.

The proof is in the number of high-profile contracts we achieved in fiscal '14. For example, we won an engagement with Phones 4u, one of Europe's leading specialist mobile retailer based in the U.K. Since July, our Tech Data Mobile business has managed the end-to-end supply chain operations for more than 700 Phones 4u store, from warehousing, forward and reverse logistics activities to fulfillment services for their web and telesales operations.

Since going live in the summer, we have shipped 5.5 million units for Phones 4u, including phones, SIM cards and mobile accessories. Our ability to meet the demand and supply chain requirements of a major nationwide retailer is a testament to Tech Data Mobile's infrastructure, its deep capabilities, and it validates our ability to deliver the highest levels of service to this demanding customer.

And earlier this month, our dedicated integrated supply chain team in the U.S. began performing inventory management, logistics, order management, business intelligence and cross-docking services for a major electronics manufacturer. This strategic partnership validates our capabilities in the services sector and demonstrates this vendor's confidence in Tech Data's high levels of performance, agility and ability to execute for their customers.

Like those wins, we have a number of other large supply chain contracts in various stages of deployment in both regions that demonstrate our broad range of value and service capabilities and our commitment. Many of these opportunities would have been out of reach to us just a few years ago. And our ability to pursue and capture these new supply chain opportunities is due in part to having our business on one worldwide IT platform.

In the future, we'll continue to grow our services business, as we look to offer new product lines and add new services to our increasingly diverse portfolio of capabilities.

Our remaining focus areas, what we -- what well-run distributors are known for and what has made us successful in different business cycles, that is aligning our cost structures with the realities of the market.

During the first 3 quarters of fiscal 2014, our desire to maintain or reclaim share with better service in order to return the Americas region to an acceptable level of profitability, coupled with incremental SDG cost and a weak -- and weak economic conditions in certain European countries, prevented us for managing our cost structure as effectively as we normally do. As you heard from Jeff, our primary Q4 results -- excuse me, our preliminary Q4 results show mid-single-digit growth in both geographies and better leverage of our cost structure.

But make no mistake, with the past year now behind us, we have resumed our intense review of every dollar spent to better align our costs with our evolving portfolio of offerings and to the ever-changing market realities.

We have faced a number of challenges in the past year. These challenges have tested us and humbled us. But as I've said before, I believe great companies are made even stronger during tough times. As a distributor of technology products for the past 40 years, we have weathered our share of economic downturns, business cycles and technology shifts. And through each, we have responded by adopting our operating model accordingly. We know what needs to be done, and we have the people, the leadership and the support of our board to get it done. The changes I've highlighted, along with others we are implementing, will make us a stronger and better company. We'll have a more optimized customer focused, value-added-based operating structure, with stronger controls and processes and more transparency.

What remains unchanged are our shared values of integrity and respect, teamwork, partnership, passion for winning and ownership, the foundation principles that have made Tech Data successful for the past 40 years, providing value to our customers, vendor partners and shareholders.

As we enter a new fiscal year, we're exciting to once again focus on our strategy of execution, diversification and innovation. We'll exercise the capability of the infrastructure we have put in place to build a better Tech Data and to seek out the right opportunities to profitably grow our business and return value to our customers, partners and shareholders.

In fiscal '15, we expect to selectively grow sales at or above IT market rates, and we'll work to balance our resources to achieve our aspiration of improving our profitability in fiscal year '15 and beyond. However, with more than 60% of our sales generated in Europe, we anticipate the earnings improvement to come in the second half of fiscal year '15.

I'd like to express my sincere thanks to our customers and vendors for their partnership, and to our shareholders for their patience and support over the past 11 months.

Finally, thanks to my Tech Data colleagues for their hard work and dedication through this period. In particular, I'd like to acknowledge and extend my gratitude to the members of our finance and legal teams, who have worked tirelessly to see this process drew to completion. I could assure you their efforts during this period have done nothing short of remarkable, and I'm very proud of all that they have accomplished.

I'll now turn the call over to the operator, and we'll open it up for your questions.

Question-and-Answer Session


[Operator Instructions] Our first question is coming from the line of Matt Sheerin with Stifel.

Nikhil Kumar - Stifel, Nicolaus & Company, Incorporated, Research Division

This is Nik Kumar for Matt Sheerin. Just wanted to get color on SG&A. I mean, do you think like -- are you comfortable with the current level of SG&A? Or do you think maybe you're looking to your lower cost structure, given the lower volumes?

Jeffery P. Howells

This is Jeff, I will answer that. As we said in our prepared remarks, our SG&A increase, in dollars, primarily relates to our acquisition of SDG, as you could see in the fourth quarter of last year and it continued for 3 quarters of this fiscal year. As a percentage of sales, it is higher due to the decrease in our legacy business in Europe primarily, as well as our efforts in both geographies to really focus on customer service. So our goal going forward is to return to our deep analysis of our SG&A and make the decisions wherever they may be based upon the economies, the demand and our ability to grow our business profitably and make the adjustments as we fit. So that will be a task that we have begun in the current fiscal year '15. And -- but we have not made any determinations of exactly what we're going to do where at this point in time.


Our next question is coming from the line of Ben Reitzes with Barclays.

Ryan Jones - Barclays Capital, Research Division

It's actually Ryan in for Ben. I was just wondering if you could comment about the pricing environment in the U.S. and Europe. I mean, you spoke a lot about market share shifts. But how much has pricing been the driver there? And what's your view on pricing for the January quarter and for the next year?

Jeffery P. Howells

This is Jeff again. I think the pricing environment is fine. As we indicated in our prepared comments, when there's uncertain economic times, when some of our vendors are having declining sales, especially in the first 3 quarters of the year, as there are shifts in product from, for example, desktops to tablets, there are shifts in the available profit margin available. It's competitive, but it's normal business, it's the world we and our vendors operate in, but there's really nothing unusual in our minds out there.

Robert M. Dutkowsky

I'd just add, this is Bob, if you ask the VARs what are the rank order importance in their decision cycle on what distributors they buy from, price is just one of several categories. And so the thing that we've really been focused on is to deliver superior service. And superior service typically means a little bit more SG&A, which you can see reflected in our results. But it also, I think, the customer satisfaction statistics that I gave in my prepared comments validate that that's what the VAR really wants. And so, by returning to our levels of service that our customers expect, they're validating not only through their rankings of Tech Data, but also they're validating by moving some of their business stuff. So service is really critical from our perspective.

Ryan Jones - Barclays Capital, Research Division

And one other question I had was on European margins. It seems like they've really recovered nicely in the third quarter, but 1Q and 2Q looked very challenged. Can you just walk us through the quarter-to-quarter movements in margin in Europe and give us some kind of view on where they can get back to, and maybe some sort of timeframe on recovery there?

Jeffery P. Howells

Yes, this is Jeff. I think the -- once you dive into our quarterly results, you'll see that the margins, operating margins really relate in Europe to the sales that we were able to select in our results there. When you take out the incremental SDG revenue and see a decline in our revenue in our traditional or legacy business. So that -- we lost the leverage in our operating structure from those sales. And the reason that we lost that leverage is the markets did not materialize as we had originally expected and as we anticipated throughout the year. Just one example is the South rebounding. So sales are up finally on a year-over-year basis in Spain and in our Iberia regions, where, in various quarters, there were shortfalls in our traditional business in countries like Germany or the U.K. Some of that is our selection of what business we're going after, both in the VAR base, as well as the larger corporate reseller or retail segments of the business. And when you make decisions on what business to go for in certain countries, those decisions have more than a day of ramifications. For example, you did determine whether you're interested in serving a given customer on a given product line in a given country, and that decision may last for 1, 2 or 4 quarters before the customer puts that business back out for bid again. So there are lot of intricacies as to why the operating performance is lower in the first half. But I think, based upon our sales in Q3 and our preliminary results for Q4, the second half of the year gives us a better opportunity to have leverage. Also, as Bob indicated in the comments, because now Tech Data Corporation has over 60% of their revenue coming out of Europe, and especially in the fourth quarter, where sales in Europe have historically grown and the strongest quarter and sales opportunity is Q4, a lot of the leverage comes out of Q4 or the second half of the year versus the first half of the year. That doesn't mean we're just going to be complacent on our overall cost structure and try and balance it. But we're now sitting in a position where many are forecasting a recovery in the European economy. Throughout Europe, we're analyzing that country-by-country to determine how likely that is to happen, and the ramifications on our cost structure; continue as is, make adjustments or other alternatives.


Our next question is coming from the line of Brian Alexander with Raymond James.

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

Jeff, just a follow-up on Europe. How much did the issues around the restatement actually affect your ability to execute in Europe over the last few quarters? I mean, sales down in the teens on an organic local currency basis in the middle of the year would suggest some pretty significant market share losses. How much of that might have been due to distractions of the investigation process? Has there been any elevated level of turnover, involuntary turnover, given the duration of the investigation? It sounds like you selectively pursued revenue, as you just discussed. But I'm just wondering how much of the market share loss might have been out of your control?

Jeffery P. Howells

Yes. I mean, I think the 2 primary reasons, as we indicated in our prepared remarks, were the economies vary by country different than our original forecast. And we entered the year with, and continued through the year with a very strong focus on gross margin percentage or the quality of the sales because on November 1, '12, we had closed on the acquisition of SDG. And in the normal course of an acquisition, there's a change in the focus. And when you model an acquisition, you model 1 plus 1 equals what? Does 1 plus 1 equal 2? Does 1 plus 1 equal 2 plus? Does 1 plus 1 equal less than 2? And our focus was on a very successful, positive transition of the SDG revenue into Tech Data Corporation, as well as servicing the STC [ph] contract, which was originally 5 and now, it's a 6-year commitment to purchase through Tech Data Corporation. So those were our primary focus. Then we had the impacts of the economies where there were differences than we originally anticipated. And when you're focused on gross margin and the economy is providing less revenue opportunity to us and our vendor partners and our resellers, then you end up with a shortfall in revenue that we had. So we believe those are the primary reasons. The restatement efforts were focused in the back-office, finance staff versus the forward-facing. There could have been something, but it really probably paled in comparison to just the market dynamics in Europe and our decision for quality on the revenue side.

Robert M. Dutkowsky

Brian, this is Bob. I'd only add, we're excited about the opportunity that sits in front of us now to put all of our attention back into the marketplace. At any given moment in time, a company tries to balance very carefully its internal focus versus its external focus. And when Tech Data does its best is when it's got a lot of its energy focused externally, on its customers and vendor partners. And we're, as we look forward, we see an opportunity to re-energize our external focus, and we're excited about that.

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

Great. Just a couple of follow-ups on the accounting issues to make sure we're clear. Was any of the improper accounting for vendor rebates, did any of that result in inaccurate reporting to your vendors? Or were these improprieties all really related to internal accounting issues and manual journal entries? I'm just trying to assess the potential implications on your vendor relationships from what just transpired.

Jeffery P. Howells

There were no implications with our vendors. It was all related to how Tech Data accounted for those vendor relationships.

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

Got it. And just finally, on the fourth quarter outlook, which looks much better than the first 3 quarters, Bob, up mid-single digits year-over-year in both regions from a revenue perspective. And I think your guidance would suggest operating margins are also up year-over-year on a consolidated level. Should we assume margins are up in both regions? And I guess, how should we interpret this fourth quarter performance versus the first 3? It looks like a pretty dramatic snapback. And I'm just wondering how much we should extrapolate the fourth quarter performance into fiscal '15?

Robert M. Dutkowsky

As Jeff mentioned, with 60% of our revenues now being European-based, historically, the fourth quarter in Europe is its strongest quarter. And so that -- you're starting to see the impact of the way that the company is now built and the profile and portfolio of sales and profit with that 60% impact from Europe. Clearly, Brian, the -- if you look at the Q3 results, they started to move back into the right direction, and then Q4 is a continuation. So we kind of think of the year as the first half semester of the year and then the second semester of the year. And the second semester was -- is clearly headed in the right direction. So we're excited about the -- our ability. And now that the integration of SDG is behind us, it's a contribution to the company. We're excited about, as I said, our renewed external focus. And then we are excited about some of these new initiatives that I described in my prepared comments that will have longer-term impacts on the performance of the company.


Our next question is coming from the line of Ananda Baruah with Brean Capital.

Ananda Baruah - Brean Capital LLC, Research Division

Bob, just a couple, if I could. Could you give us a sense of -- I mean, I guess, there's a lot of good information on what you've done the last 12 months and sort of what you guys have been focused on. You mentioned sort of the enthusiasm of being able to sort of focus externally going forward now. Can you give us just sort of a snapshot update of sort of, strategically, where you guys will be focused going forward? Has anything changed over the last 12 months in that regard? You mentioned some of the new services and service initiatives. And I guess, how big do you think that revenue stream, those types of revenue streams, can become going forward? To what degree is that now really a priority for the company above and beyond what you've sort of how you described with regard to regaining market share? And then maybe, how has the mix changed, if at all, over the last 12 months of the business? You seem to be pretty well-positioned from a growth perspective 12 months ago.

Robert M. Dutkowsky

Yes. It's interesting, you asked a whole series of questions there. But as we were preparing for this call, it struck us that -- you have to think back to the IT market 11 months ago and think about the sea changes that had happened over that period of time, whether it be the move towards the mainstreaming of cloud computing, clearly, the continued focus on mobility. But the changing focus on mobility away from handsets to mobile management and device management, the actions that have happened in the data center around converged infrastructures and as-a-service offerings, and also the actions and the strengths and weaknesses and the ebbs and flows of our vendor partners. And think back to a year ago how a few of our key vendors were performing versus how they're performing today. There's been tremendous change that's happened over that period of time since you last heard from Tech Data. And I can assure you that we have worked very hard to stay in step with those changes. And we tried in our prepared comments to just give you a few views of how our organization has changed, the actions that our management team has been focused and the actions that we're delivering in our customers' offices on behalf of their customers to add value. We've kept up with the major changes that you all have seen happen over the last year. And we believe we're really well-positioned in the key areas of those changes, whether it be the emergence of the architectures in the data center, whether it be the move towards more private and public cloud offerings through our StreamOne set of initiatives, the changes that we made in our mobility practice around the world, and on and on and on. We think we've done a really good job to keep up-to-date. And that's why, as we look forward, we're as excited as we are about our ability and our opportunity that sits in front of us. The company has worked hard to be prepared for these kinds of changes, whether it be the strength of our vendor partnership or the definition of the value we add to our customers, and we're really excited about what sits in front of us.

Ananda Baruah - Brean Capital LLC, Research Division

That's really helpful. Do you -- Bob, it sounds like you feel like you're well-positioned already. Is that a correct assessment in that you feel like you are already positioned as you need to be? And obviously, with a lot of emerging trends, there's still room. There's going to be sort of in the next couple of years to continue to strengthen that positioning. But it sounds to me like you feel like you're really comfortable with where you are given the stage of these technology transitions...

Robert M. Dutkowsky

Yes, I think it's safe to say that we've invested and we're comfortable. There's clearly more that we can do in virtually every one of those big, new emerging kind of opportunities, whether it's mobile management, whether it's the cloud, whether it's value-added services. But we have initiatives underway on every one of those fronts that we think are important. And now, the challenge for us is to make sure that we get the leverage back from those investments and that they're built to be as efficient and effective as they possibly can be. As we enter into those initiatives, we're less efficient. And then, over time, as we work and practice in those areas, our efficiency improves. And I would say, it's safe to say, we haven't seen the efficiency in some of those areas. As Jeff described, we're looking at every one of those areas as we go forward to make sure we're as focused, as lean and as efficient in each of those as we can possibly be.

Ananda Baruah - Brean Capital LLC, Research Division

That's very helpful. And then just last one from me. With Europe now 60% of the revenue mix, does that -- do you anticipate it remaining, I guess, sort of at those levels? Do you think it gets bigger? And I guess, strategically, how does that or does it sort of have you think about things differently than you have previously?

Jeffery P. Howells

This is Jeff. I think it's going to end up being 60% plus. Of course, it depends on the strength of the dollar against the euro and any leveling of that, which forecasts for the coming year are the dollar wouldn't be quite as strong against the euro. So you've got to manage the business in euros and we report it in dollars. But the important thing is that we are the most diversified distributor in Europe and we cover all of the key areas. So we're the biggest broadline distributor. We're the largest advanced infrastructure solutions selling the higher-end products in Europe. We're one of the largest mobility distributors in Europe. So -- and then software, of course, is a key part of our business also, small piece is consumer electronics. So the real beauty there, Ananda, is the fact that those markets and the demand in those markets varies quarter-to-quarter, year-to-year, season-to-season, however you want to compare it. But if the market moves with some slowdown in servers and robust tablets, maybe as what we saw over the last 9 months, we're there to serve it. Whereas the differences in mobility and handsets, as different handsets come to market in covering the market very nicely with the diversity in our vendor base, as well as having devices in most of our European countries now. And that gives us some insulation. So we're set up to leverage our infrastructure, the IT and logistics and management infrastructure that we put in place in Europe. This year, as we just reported, there was a decline in our legacy business for a variety of reasons. And -- but it gives us the opportunity to reevaluate country-by-country, what's the demand, what's our mix of our business and what's our associated cost level. So you need that kind of volume in Europe to support the business. Being small in a given country in Europe is very expensive and very difficult to make money. So I think we're glad we're the size that we are. As you know, we did a number of acquisitions over a 7-year period. Clearly, I think we're -- we don't need to acquire anything in the foreseeable future in Europe. And on the flip side, the Americas, now being stabilized and operating very efficiently on SAP, gives us those other opportunities. So there's the supply chain initiatives. You asked Bob about the revenue opportunity. Those, like others in our industry, are fee-based opportunities. So you see it in the work of Tech Data, but it comes through in the gross margin that is different than reporting the revenue on those associated product movements. So that's a change in our business. But the diversification is good. But it will, as I said in my prepared remarks, it will give us more of a second half profitability in Tech Data Corporation than the first half because of the strong leverage in that European business and the historical, every year, without a doubt, Q4 being the strongest in Europe, Q3 being very good, the first 2 quarters being softer in Europe.


Our next question is coming from the line of Osten Bernardez with Cross Research.

Osten Bernardez - Cross Research LLC

So I guess just to start, could you remind us where you are with respect to your ERP rollout? You mentioned 90 -- you had 90% of your sales covered on one system. What other platforms are needed going forward?

Robert M. Dutkowsky

Well, just to remind you, we started with the SAP rollout in Europe back, I'm going to say, a dozen years or so ago, and basically completed the core of Europe about 7 years ago. And then we began the deployment of the final applications in the U.S. about 2 years ago and completed that about 1 year ago. Just round numbers. And so, as we said, in excess of 90% of our business is now being processed and handled through one core common system, which gives us tremendous efficiencies, but also allows us to implement new and exciting features like supply chain value-add services one time and be able to deploy those across all of our footprint. So the strength of our deployment of our SAP system really is, we believe, today and for the future, a competitive advantage. There are still some pieces of our footprint left to be built into the SAP solution. And we -- those last 10%, if you want to think of it that way, it's on a business case basis. There's a cost analysis to implement SAP. We know what the cost is. We know what the disruption that it causes when we implement it, and then we're making those judgments as we go forward. But to be an enterprise of our scale and scope, the $25-plus billion in sales, to have 90% of that on one system is a unique position in the IT space and in the IT distribution space, and we think it's an advantage for us.

Jeffery P. Howells

And just remember, when we acquired SDG, we said we had 90% of our worldwide revenue on SAP. And now, as we are sitting here today, we've acquired SDG, which had, let's say, $1 billion, over $1.6 billion in revenue, and we have 90% of our worldwide revenue on SAP. So our team has done a very nice job of putting more revenue on the system during tough economic times in Europe. And so there's probably no one else comparable to us that's accomplished that.

Osten Bernardez - Cross Research LLC

That's helpful. And then switching gears a little bit. For the first -- for the 9 months added, if you're taking a look at your TD Mobility basis, could you give us some color in terms of how that business has performed from a sales and margin perspective? And could you also address whether your North American mobility strategy of helping out VARs build out their own mobility business is performing to your expectations?

Robert M. Dutkowsky

Yes, I'll go first. And that's part of the reason why we asked Rod Millar to manage our worldwide mobility business because he helped us successfully build the TD Mobile team in Europe. If you recall back when we formed the joint venture with Brightstar, Rod was the first employee of the joint venture. And he was the executive that grew that business from EUR 0 to the multi-billion dollar-euro business that it is today. So Rod's leadership has now applied over our whole global footprint for mobility. Having said that, the markets are very, very different. And the opportunity in the Americas that we see is one of helping the VARs manage the mobility practice for their customers, whether that be supplying handsets to activations, to mobile security and mobile management. There's a broad array of offerings there that the U.S. TDMobility practice is focused on. And it leverages our strength with our relationships with our key vendors. It leverages our strengths within our relationships with our VAR customers, and it uses very efficiently the infrastructure that Tech Data already has in place in terms of sales and coverage and technical support and logistics. So the TDMobility practice, under Rod's leadership, is really beginning to take form and take shape, reflective of the U.S. markets, which is again, different than the business he built in Europe.

Osten Bernardez - Cross Research LLC

But in Europe, how did it do over the past year or over the past 9 months on a year-over-year basis? And how do I think about the profitability of that business? How has that changed in the past year?

Jeffery P. Howells

Yes, first of all, we don't give a breakdown of the profitability by our segments. It was 8% of our revenue. Primarily, that revenue comes out of Europe. I will say that the flavor of our business probably resembles what is going on out there. Certainly, some of the vendors that were in our historic portfolio had significant declines in their sales. And those other vendors that, through the third quarter, that we had in our portfolio did not accelerate like they had in the prior year. But our sales were fine in our European business, and they are still small in our U.S. business, but growing. When we announce Q4, we'll see what percentage of our sales are in the mobility piece of our business. Q4 is generally a very strong quarter for mobility through retail in Europe. But it -- the mobility is probably impacted by the European economies, but not as much as our traditional broadline products.

Osten Bernardez - Cross Research LLC

Got it. And then lastly for me. Could you just provide some color in terms of SDG's performance since you've acquired them? It looks like they've grown pretty considerably on a constant currency basis relative to where they were when you acquired them, already providing, it looks like $1.6 billion in revenue for the first 9 months versus your expectations before the acquisition?

Jeffery P. Howells

Yes, I think if you look at it on -- we've owned them for 1 year now. And if you look at it on a euro basis, they're just slightly under where we had anticipated, and that's due to the decline in the economy and some of the decline in their higher-end businesses like a muted server market. In a dollar basis, they're slightly ahead of where we anticipated on sales line or right in line with because of the strength of the U.S. dollar. So all things considered and the fact that, as I mentioned, we converted all of their operations and integrated their operations throughout the fiscal year and are just recently completing the final IT integrations, it's pretty good, when you consider that our traditional broadline business had the decline that we reported. So still a lot to do there. And the SDG team is very good, very strong, and the supplier agreement is working out very well for the company.


[Operator Instructions] Our next question is coming from the line of Rich Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

A couple of questions, but just quickly on the geography. I know it's already been asked about your comfort with the mix. But now that this asset has been fully integrated in Europe SDG and you have a plan to go and continue to improve the profitability there, are there opportunities to go and enhance the AIS business here in the U.S. and the Americas? Is that an area that you would be looking at acquisition-wise to further enhance? Or is the focus here in the Americas even more so on mobility still?

Robert M. Dutkowsky

No. Rich, this is Bob. The AIS business, its growth strategy is around adding new products from existing vendors and adding new vendors to our mix. As the landscape of the data center continues to change, vendor partners that we already have strong partnerships with, like HP and Cisco and IBM and EMC, are the ones that are redefining the data center. And so, as they invest R&D dollars into these new architectures, we're evolving along with them and taking their new and exciting products to market with them. That doesn't call out an acquisition. What it does call out is that we need to continue to add skilled people to our team. And so some of the investments that we alluded to on our prepared comments were specific skilled individuals in both the AIS business in the Americas and the Azlan business in Europe that have the skill to be able to implement those new architectures and technologies. The -- our vendor partners are thrilled that Tech Data is one of their partners in this space. I mentioned that Cisco recognized us as their Enterprise Network Partner of the Year in the Americas. That implies architectures and technologies that Cisco invents and delivers and Tech Data value through our skills in the offices of our customers. And that's all executing well. So I think that speaks to the model, and our strategy is to continue to invest in that model.

Richard Kugele - Needham & Company, LLC, Research Division

Okay, that's clear. And just lastly, Jeff, in terms of -- it's been obviously a while since you bought back shares. You finished your authorization. Obviously, you probably couldn't buy back during the restatement process. But now that all this is kind of behind you, is this something you are going to revisit with any potential cash flow? Any stance on your debt position? Or you want to just continue to invest in the business?

Jeffery P. Howells

I think the answer is that we don't have any decision at this point in time. Clearly, we want to get through our current year audit, issue our 10-K, evaluate our cost structure, evaluate the start of the economy around the world, the IT spend, and all of that would go into our analysis as we proceed through the fiscal year to determine what we decide to do with the cash flow of the corporation.


Thank you. Ladies and gentlemen, this concludes Tech Data Corporation's Fiscal Year 2014 Third Quarter and 9-Month Earnings Conference Call. A replay of the call will be available in about 1 hour at Thank you for attending today's conference call, and have a great day.

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