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Tech Data Corporation (NASDAQ:TECD)

F4Q 2014 Earnings Conference Call

April 09, 2014 9:00 AM ET

Executives

Arleen Quinones – VP, IR and Shareholder Services

Robert M. Dutkowsky – CEO

Jeffery P. Howells – EVP and CFO

Analysts

Brian Alexander – Raymond James & Associates, Inc.

Ryan Jones – Barclays Capital

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Osten Bernardez – Cross Research LLC

David Ryzhik – Brean Capital LLC

Operator

Good morning. Welcome to Tech Data Corporation’s Fiscal Year 2014 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator Instructions) 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 earnings conference call and webcast to review our financial results for the fourth quarter and fiscal year 2014. I’m 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 www.techdata.com/investor.

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 Annual Report on Form 10-K, which identify important risk factors 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 related expenses, deferred tax valuation allowance adjustments, LCD litigation settlements, and VAT assessments, including associated interest expense.

For the fourth quarter of fiscal 2014, we incurred expenses in the amount of $24.8 million related to the restatement. We recognized the benefit of $12.6 million related to the receipt of an LCD flat panel litigation settlement, and recorded an income tax benefit of $45.3 million for the reversal of the deferred tax valuation allowance.

For fiscal 2014, we incurred expenses in the amount of $53.8 million related to the restatement. We recognized the benefit of $35.5 million related to the receipt of LCD flat panel litigation settlement and recorded the tax benefit for the reversal of the deferred tax valuation allowance of $45.3 million. These items appear on a separate line item on our income statement and have been excluded from our non-GAAP results.

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. I’m pleased to report a strong finish to our fiscal year ended January 31, 2014. Solid execution in both regions bolstered by a regained market share in the U.S. along with new product additions and a more stable IT demand environment in Europe contributed to a record quarter.

Worldwide sales grew to almost $8 billion, the highest quarterly sales in our company’s history. This top line performance drove excellent operating leverage and delivered record quarterly non-GAAP operating income, net income, and earnings per share.

Our fiscal 2014 full-year results reflected our efforts to regain selected market share in the U.S. to integrate a series of acquisitions in Europe while facing weak economic conditions in certain European countries and an evolving product mix throughout the business. These dynamics led to sales and earnings for the fiscal year that fell short of our expectations. However, our Q4 performance highlights the increased seasonality of our business, as well as the resiliency of our operating model and our team’s ability to deliver strong results in a rapidly evolving IT landscape.

While the current product mix impacts our margins, many of the other headwinds we faced in the fiscal 2014 are now behind us. And we are pleased with the momentum of our business as we enter fiscal year 2015. I will now turn the call over to Jeff who will provide an overview of our financial results and our outlook for Q1. I’ll close the call with the business update and then we’ll open it up to your questions. Jeff?

Jeffery P. Howells

Thank you, Bob. Good morning everyone. Many of my comments this morning will reference the supplemental schedules available on our website.

Beginning with Slide 4. Fourth quarter worldwide net sales increased 7% year-over-year and 25% sequentially to almost $8 billion in line with the preliminary results announced on February 25 and driven by stronger demand, new product additions, and solid execution by our teams in both regions. The strengthening of certain foreign currencies against U.S. dollar positively impacted the year-over-year net sales comparison by approximately 2 percentage points and approximately 1 percentage point sequentially.

As a reminder, the acquisition of SDG was completed in November of 2012, so Q4 results for both fiscal 2014 and fiscal 2013 include SDG. For the fiscal year ended January 31, 2014 worldwide net sales increased 6% to a record $26.8 billion. SDG contributed approximately $2.3 billion to fiscal 2014 net sales. Excluding net sales from SDG from both fiscal 2014 and fiscal 2013 as well as the positive impact from the strengthening of certain foreign exchange currencies against the U.S. dollar, consolidated net sales decreased approximately 3% from the prior fiscal year.

Turning now to sales by region, beginning on Slide 5. In the Americas fourth quarter net sales were $2.7 billion, an increase of 4% from the prior year with solid growth in the U.S. fueled by the strength in SMB and healthcare and double-digit growth in Canada in local currency. By products the region’s growth was driven by strong sales of broadline products, namely PCs and tablets and good performance in our Advanced Infrastructure Solutions or AIS division.

For fiscal 2014, the Americas net sales grew 4% from the prior year to $10.2 billion. The improvement was driven primarily by a partial recovery in market share beginning in the second quarter of fiscal 2014. That was lost after the implementation of the final modules of SAP within our U.S. operations during the second quarter of the previous fiscal year.

Turning now to Europe on Slide 6 and 7. Our European regions fourth quarter net sales came in at $5.3 billion, an increase of 9% in U.S. dollar and 5% in euros. The majority of our trade regions posted year-over-year growth with Benelux, Nordics, Iberia and Italy posting double-digit sales improvement. You may recall that in November we announced the launch of a pilot program to distribute the iPhone and related accessories to resellers in Western Europe. This highly successful program contributed strong sales and mobility products across the region in the quarter.

Our European broadline business also performed well in Q4 with continued growth in tablets as well as strong growth in PCs. For the fiscal year net sales in Europe were $16.6 billion, an increase of 7% in U.S. dollars and up 4% increase in euros. Excluding SDG sales from both fiscal year periods, net sales in our legacy European operations decreased approximately 4% in U.S. dollar and approximately 7% in euros from the prior fiscal year. The decline is primarily attributable to weak economic conditions in certain countries, as well as a decline in market share in several countries due to competitive pressures and a focus on gross margin percentage partially offset by the strong fourth quarter sales.

Turning now to our gross margin performance on Slide 8, worldwide gross margin during the fourth quarter was 4.99% compared to 4.98% in the prior year quarter. For the fiscal year, worldwide gross margin decreased 5.08% compared to 5.14% in the prior fiscal year.

The decline in gross margin for the fiscal year is primarily due to product mix changes resulting from strong sales on mobile phones and tablets and a competitive environment particularly in the Americas. In fiscal 2014, tablet sales grew 25% to $2.5 billion and mobile devices grew 17% to $2.4 billion. The less complex nature of these products result in tighter gross margins, but in a strong demand environment like the one we experienced during Q4, these products help absorb our fixed cost structure resulting in good operating leverage and strong earnings.

Since we anticipate this product mix and recent gross margin profile to continue during fiscal 2015, we will meticulously review our resources to ensure that we align our cost structure with the realities of the market. However, please note that the seasonality of our business has become more pronounced as Europe is now a larger percentage of our overall business.

We can expect that the higher demand in the second half of the fiscal year particularly in the fourth quarter will continue to create more operating leverage than in the first half of fiscal year.

With that please turn to Slide 9 for a review of our SG&A expense. Non-GAAP SG&A expenses for the fourth quarter, which excluded acquisition related intangibles and amortization expense of $7.3 million, or $280.7 million or 3.52% of net sales, compared to $276.8 million, or 3.72% of net sales in the prior year quarter. The year-over-year improvement of 20 basis points as a percent of net sales is primarily attributable to strong operating leverage in both regions resulting from the improved sales in the quarter.

For the fiscal year, non-GAAP SG&A expenses excluding $29.1 million of acquisition related intangibles and amortization expense increased 9.5% to $1.1 billion, or 4.05% of net sales, compared to $1 billion, or 3.92% of net sales. The year-over-year increase as a percentage of net sales is primarily attributable to the impact of SDG and lower operating leverage in the legacy business in Europe during the first three quarters of fiscal 2014.

Slides 10 through 12 summarize our worldwide regional operating income for the fourth quarter and fiscal year. Worldwide non-GAAP operating income for the fourth quarter increased 25% to $117.3 million. Non-GAAP operating margin came in at 1.47%, an improvement of 20 basis points in the prior year quarter, highlighting once again the strong operating leverage the business was able to achieve in Q4 from the strong sales performance in both regions.

For the fiscal year, worldwide non-GAAP operating income was $274.9 million, or 1.03% of net sales, compared to $310.3 million, or 1.22% of net sales in the prior year period. On a regional basis, the Americas fourth quarter non-GAAP operating income was $36.3 million, or 1.35% of net sales a decrease in the previous fourth quarter of $1.5 million, or 11 basis points as a percent of net sales.

For the fiscal year, non-GAAP operating income in the Americas region was $134 million, or 1.32% of net sales, compared to previous year’s non-GAAP operating income of $150.1 million, or 1.53% of net sales. The year-over-year decrease is primarily attributable to product mix and a drive to recover profitable market share with better service.

In Europe non-GAAP operating income for the fourth quarter increased 38% year-over-year to $82.9 million. Operating margin was 1.57% and improvement of 34 basis points from the prior year quarter. The year-over-year improvement is due primarily to a strong European demand in Q4 from mobile phones, PCs and tablets.

For the fiscal year Europe’s non-GAAP operating income was $149.8 million, or 0.90% of net sales. This is lower by $24 million or 22 basis points as a percent of net sales from the prior year, primarily due to incremental SDG expenses and the aforementioned lack of leverage resulting from a decline in sales in the legacy business in Europe in fiscal 2014.

Interest expense for fiscal 2014 was $26.6 million, a decrease of $3.5 million from the prior fiscal year. The decline is attributable to $11.5 million of interest expense recorded in Q4 of fiscal 2013 related to a bad assessment in one of our Spanish subsidiaries. Partially offset by higher interest expense from the $350 million, 3.75% senior notes we issued in September 2012.

Excluding our non-GAAP adjustments, including the reversal of a deferred tax valuation allowance amount of $45.3 million. Our non-GAAP effective tax rate in the fourth quarter was 28.7% compared to 31.7% in the prior year fourth quarter. As we’ve noted in previous quarters, quarterly effective tax rates made very significantly depending on the actual operating results in our various tax jurisdictions.

For fiscal 2014, the non-GAAP effective tax rate was 31.5% compared to 28.9% in the prior year. The increase in effective tax rate is primarily the result of a relative mix of earnings and losses within the tax jurisdictions in which we operate.

Turning to net income EPS on Slide 13. Non-GAAP net income for the fourth quarter of fiscal 2014 was $80.4 million, or $2.10 per diluted share, based on $38.3 million weighted average diluted shares outstanding. Our fiscal year non-GAAP net income was $173 million, or $4.52 per diluted share, based on $38.2 million weighted average diluted shares outstanding.

Turning now to some balance sheet and other highlights, starting on Slide 14. Our cash conversion cycle for the fourth quarter improved by 2 days to 19 days from the previous year and primarily due to improved receivables management during the quarter. Net cash provided by operations in the fourth quarter was $113 million and for fiscal 2014 was $379 million, compared to $124 million in the prior fiscal year.

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. We exit the quarter with a cash position of $570 million. Our total debt balance at the end of the Q4 was $398 million, and we ended the fiscal year with a total debt to capital ratio of 16%. Funds available for use under our credit facilities were approximately $848 million at the end of the quarter.

Accumulated other comprehensive income, which consists of currency translation net of applicable taxes was $325 million at the end of Q4. At January 31, 2014, the company had $2.1 billion of equity and 38.1 million shares outstanding resulting in a book value of approximately $55 per share. We had $396 million of goodwill on acquired intangibles, resulting in tangible book value of approximately $45 per share. Capital expenditures were $7.9 million in Q4 and $28.9 million during the fiscal year. For fiscal year 2015, we expect capital expenditures of approximately $42 million.

Depreciation and amortization expense for the fourth quarter was $18.5 million and for the fiscal year it was $73 million. We earned return on invested capital on a non-GAAP basis for the trailing 12-month period of 10%.

Now, looking at our customer and product mix for the 12 months ended January 31, 2014, on Slide 17, we estimate the breakdown of our customer segments as a percentage of net sales to be VAR 51%, direct marketers and retailers 28%, and corporate resellers 21%.

In terms of product mix, we estimate broadline products represented 46% of net sales, data center products 23%, software 18%, mobility 9%, and consumer electronics 4%. In fiscal year 2014, we had two vendors that represented more than 10% of our net sales. HP represented 21% of our net sales during fiscal 2014, while Apple represented 13% of our fiscal year sales.

Turning now to our business outlook. During the first three quarters of fiscal 2014, we operated in a weaker European demand environment and we anticipated going into the year, although demand levels improved in the fourth quarter.

As we look to fiscal 2015, we are cautiously optimistic that recent demand trends will continue. However, as I indicated earlier in our earnings call in February, moving forward we anticipate higher operating leverage in the second half of the fiscal year due to the size of our European operations and the quarterly revenue of the company being highly correlated with European seasonality.

We anticipate this will result in significantly greater leverage in earnings power on a non-GAAP basis during the second half of our fiscal year versus the first half particularly in the fourth quarter. For the first quarter of fiscal 2015, we expect mid single-digit year-over-year growth – sales growth in the Americas and low single-digit growth in Europe in euros. And we expect the gross margin percentage to be in line with recent levels.

Also for the quarter, we estimate our non-GAAP effective tax rate of 38% to 40% and we expect the U.S. dollar to euro currency exchange rate to be $1.37 to €1. For fiscal year 2015, we expect a non-GAAP effective tax rate to be 31% to 33%.

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

Robert M. Dutkowsky

Thanks, Jeff. Our strong fourth quarter performance validates that we have the right strategy and have made the right investments to leverage our infrastructure to meet the demands of an ever-changing IT market landscape.

Over the past few years, we’ve made targeted investments in the data center, the software ecosystem, mobility, consumer electronics, and integrated supply chain services that position us squarely in the epicenter of emerging trends and technology such as cloud computing, mobile security, Big Data, and the internet of things.

Our value proposition lies in helping our vendor partners bring innovative products and services to market that support these emerging trends and enabling our reseller customers to capitalize on these solutions. The prime example of this is our recently announced exclusive distribution agreement in North America with Good Technology, a leader in mobile security.

Exponential growth in enterprise mobility is driving businesses to seek end-to-end security and privacy platforms.

Through this agreement we will provide our reseller partners with good technology suite of industry-leading security and management capabilities. Tech Data will enable good technologies to solve their end user customer challenges, while helping to accelerate the adoption of secure enterprise mobility into new markets. This is a perfect example of our value proposition in action. Which when coupled with our strategic focus on execution, diversification and innovation position Tech Data for success over the long-term.

The first pillar of our strategy is excellence in execution. Never has our execution been tested and validated as rigorously as in fiscal 2014, while integrating SDG amid weak economic conditions in certain European countries. Our success at migrating $2 billion of sales into our SAP platform throughout various SDG entities in three countries is a true testament to our team’s excellence in execution.

Now with more than 90% of our worldwide revenue on one ERP system, we have a tremendous competitive advantage in the marketplace. Namely, to provide the high levels of services our customers demand and respond quickly to changes in the constantly evolving IT ecosystem. Our worldwide SAP platform also helps us accelerate our strategy to diversify into higher growth more specialized areas included integrated supply chain services enabling us to bring a more robust level of value added services to the marketplace.

Proof of this lies in big contract wins we’ve had over the past year, including our recently announced agreement with Google to manage the end-to-end supply chain operations and distributions throughout Europe of the Chromecast media streaming device. Enabled by our state-of-the-art IT and logistics infrastructure Tech Data mobile solutions will provide Google with a complete suite of fulfillment services including forecasting, procurement and supply chain reporting allowing Google retail specialist to commercially manage all European sales through a single Tech Data operational interface.

Few distributors possess the proven supply chain capabilities to manage a large scale contract such as this, but this win like the Phones for You agreement we highlighted on our call in February proves Tech Data has the broad reach, robust infrastructure and exports resources necessary to provide efficient and complete supply chain solutions to the world’s preeminent technology vendors.

The final element of our strategy is innovation, and Tech Data innovation is built around our use of IT systems, automation and intelligent tools which make our people more productive, that connect our vendors and our customers more efficiently and effectively and to drive new products and services into the marketplace. An example of this is our TDCloud business unit powered by our award winning StreamOne IT platform.

TDCloud has evolved over the past two years from just a cloud development and education program to an end-to-end turnkey cloud business with a complete ecosystem of over 40 meticulously selected vendors. By partnering with our traditional vendors such as Cisco, VMware, Microsoft, IBM, Symantec and Trend Micro, we have developed a comprehensive portfolio of cloud offerings.

And to round out our portfolio, we’ve added more in the cloud powerhouses such as Amazon Web Services, Intermedia, Sooner and Carbonite among others to the StreamOne platform. With its deep domain knowledge, our cloud team was able to provide multivendor solutions, presale support and financial solutions to the channel. Additionally, through education and enablement, our cloud team to help transform our reseller customers into managed cloud service providers.

Our cloud strategy is designed to effectively and immediately enable our resellers during an otherwise difficult transition from their legacy businesses to the cloud without the need to make sufficient investments on their part in the U.S. more than 10% of our reseller community has already enabled – have already been enabled in this way and have successfully transacted public cloud offerings.

We will continue to invest in the systems, people and vendors that enable Tech Data and our partners to capitalize on the cloud as adoption increases and the cloud becomes a stable of IT sourcing.

And finally, as further validation of our global teams’ execution and diversification into the data center, last month we were honored to be named Cisco’s Global Distributor of the Year and its U.S. Distributor of the Year. These awards recognized Tech Data’s excellence, quality in execution and outstanding business performance in 2013.

Cisco awards are testament to the hardworking commitment of our teams throughout the world to deliver value to our vendor partners and to our customers in the most complex of business environments. As we enter into a new fiscal year, we will continue to drive our strategy of execution, diversification, and innovation, while continuing to add new capabilities to our increasingly diverse set of skills.

We are partnered with the largest and most innovative IT vendors in the world. And we have solid and deep relationships with a diverse breadth of customers that we sell a broad array of IT solutions. Our capital structure along with our geographic and product diversification provides us with flexibility to maneuver in the marketplace and we have a seasoned and experienced leadership team that’s driving the business.

The challenges of fiscal 2014 has made Tech Data a significantly stronger company today than we were a year ago. We remain committed to continue the positive momentum into the future. As we look to the year ahead, our priorities are to focus on the marketplace and to harmonize the investments we’ve made diversifying our business, enhancing our IT systems, and optimizing our organizational structure, so that we can execute at the highest levels for our vendor partners and our customers.

Our strong fiscal 2014 second half performance clearly demonstrates the power of our business model when we connect with the market and we picked the spot in which to compete. We believe our dual focus on the marketplace and operations will enable us to achieve our financial objectives of growing sales by gaining share in selected product areas, improving earnings in local currency, generating positive cash flow and returning of – and earning a return on invested capital above our benchmark weighted average cost of capital.

And we believe this focus will be a springboard to improve profitability well beyond fiscal year 2015. I would like to express my sincere thanks to our customers and vendors for their partnership and to our shareholders for their support during fiscal 2014.

Finally, I would like to thank all of my Tech Data colleagues for their dedication and hard work this past year. Their commitment has been and we will continue to be fundamentals to Tech Data’s long-term success.

With that, we’ll now open the call up to your questions. Operator?

Question-and-Answer Session

Operator

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

Brian Alexander – Raymond James & Associates, Inc.

All right. Thanks, good morning. Jeff maybe just elaborate on the comments about adjusting the cost structure that you mentioned earlier, is that more of a fine tuning or are you considering more holistic changes and is that something that you can do as early as the first half of the year, given that you may not want to take those actions in the busier second half. I’m just trying to get a sense for the timing and magnitude of what you address?

Jeffery P. Howells

Yes. Brian I think the terminology fine tuning is the most accurate. As you can see our cost structure and the leverage we get out of the business in the second half, especially Q4 is very good and now we have to look at how we can adjust our cost structure to have better operating efficiency in the first half. Some of that is [verbalizing] [ph] it, some of it is just the continued integration of the acquisitions we’ve done especially or primarily in Europe over the last five or six years and what that means is as leases expire or warehouses leases expire, we integrate those facilities and reduce our operating cost and then look at where the peaks and valleys of our business are as far as that the head count requirements, make sure we are staffing where the market is moving, where the diversification is moving and automating more of the traditional or broadline business in our operations. So I would call it just the fine tuning and that will be continuous in fiscal 2015 and 2016.

Brian Alexander – Raymond James & Associates, Inc.

And then just a quick follow-up on the gross margin, maybe just to clarify when you say consistent with recent trends is that more what you saw in Q3 or in Q4, or is that more what you saw in Q1 a year ago, I wasn’t sure if you are adjusting for seasonality, I think Q1 last year was a little bit higher than the most recent quarters. And then just related to gross margin, when you adjust for product mix it seems like that’s really what’s driving the gross margin down to the 5% level, but when you adjust for product mix can you comment on whether gross margins are stable, or are they raising, or are they falling and given all the logistics wins that you guys have announced over the last few months, when might we start to see those actually lift the gross margins for the company?

Jeffery P. Howells

That’s a big question, but clearly when we state recent four quarters ago as a lifetime ago in this business so it’s the most recent quarters where it’s been averaging closer to the 5%. When we make that kind of a comment we don’t know whether the composite margin will be slightly under or slightly above the 5%, but the higher margin that we achieved in the prior two years, in the first fiscal quarter is not what we are currently planning because of the change in the product mix.

As we all know depending on what the demand levels are for certain products that could vary, but with the size of our mobility practice, the size of the volume of tablets, the commodity products that’s the more likely margin composition. As far as some of your other points or comments about supply chain opportunities, yes, as those become more mature, our hope is that they will add to and/or supplement the margin. And when I say supplement, we would just assume continue to grow our software business, software business being handled electronically through the tools that we have developed as a tighter gross margin, but it adds to our return on invested capital.

So we are committed to trying to blend the right product mix and optimize each and every opportunity, but each and every opportunity doesn’t mean that it will bring the average up. The real driver is what can we do to grow our operating income dollars or euros as we move through each and every quarter. Other elements of your question, I think I covered, but if you don’t think so, please…

Brian Alexander – Raymond James & Associates, Inc.

I think the only other part was when you mix adjust for products is the underlying gross margin trend, is it rising or is it stable?

Jeffery P. Howells

Well, I think the – it’s the average of the last three quarters and on a worldwide basis, and as you know we had two different kind of operating models this past year. We gave up some market share in Europe, because of the tough economy, while we were really focused on maintaining the best operating or gross margin percentage that we possibly could. And then in the Americas we had more of an impact of the effort to regain market share, but the profitable piece of the market share and the market was very competitive.

Now the market didn’t become more competitive as we tried to say in our February call, the market competitively took some share from us in the prior fiscal year and that pricing then was established market price for that product, for that combination of products with that particular customer and you can win it back with service, but that’s what you end up achieving on that product.

So an example if it was an incremental sale to a competitor and they were able to leverage that opportunity, when we win that opportunity back with our higher availability service and quality the price is the price and we accept or don’t accept that opportunity and we try to do that as selectively as possible using the best tools available to us, which are our activity-based costing tools.

Brian Alexander – Raymond James & Associates, Inc.

Okay, thank you very much.

Operator

Thank you. The next question is coming from the line of Ryan Jones with Barclays. Please proceed with your question.

Ryan Jones – Barclays Capital, Inc.

Hi, good morning. Last quarter you said that you had expected earnings improvement to come in the second half of the fiscal year, and since now 60% of the sales are from Europe it sounds like with your comments today that you should see relatively faster operating leverage in the back half compared to the first half. I just wanted to check with you to see if this has changed in your view for potentially faster earnings in the first half versus your comments I think about a month or two ago?

Jeffery P. Howells

All right, and actually I repeated that same comments in the closing couple paragraphs of my opening comments today that’s exactly what we believed in our February call and exactly what we are saying today, that the leverage in the business is second half because of the seasonality of the business being impacted by our European operations and the strong leverage we get in the second half primarily in Q4 versus as we cycle through Q4 into Q1 and Q2 European sales sequentially go down year after year after year and since over 60% of our operations are now in Europe we have that cost that is under-absorbed in the first half of the year, over-absorbed in the second half of the year. It impacts our operating profitability and it also impacts the tax rates. The tax rates are much higher in the first half of the year and then lower in the second half of the year on a GAAP and a non-GAAP basis because of the accounting pronouncements that say you can’t take into consideration what you think you are going to do in the future, you have to calculate your tax rate based upon the – what your quarter is in a layman’s terms and where we produce less or potentially even a loss in a given country then – but then have very strong profits in the latter half especially Q4 of the year.

So our P&L is truly impacted by the combination of Europe and accounting pronouncements from the top line to the bottom line.

Ryan Jones – Barclays Capital, Inc.

So that the tax rate going forward from here will be – the structure of it being very high in the first half and then declining in the back half that would be fair to model going forward?

Jeffery P. Howells

Yes.

Ryan Jones – Barclays Capital, Inc.

Okay.

Jeffery P. Howells

Similar to what we have seen most recently and again it truly relates to that operating leverage component of where you are making money and when.

Ryan Jones – Barclays Capital, Inc.

Okay. And then I wondered another comment you had made was that PCs were particularly strong during the January quarter, and I was wondering if you could comment on how you see that business right now, do you think there is sustainability through the XP support expiration and how big is PCs as a percent of total company sales?

Robert M. Dutkowsky

Ryan, this is Bob, I’ll take a shot at that. I think the – we saw good strength in the PC space in the quarter that we just announced, some of that was, I believe was just pent-up demand that had to be caught up and fulfilled that was created over the slowness of the PC market over the first three quarters of the year. Part of it clearly was the expiration of XP, and that’s created some opportunity.

Hard to quantify how much of it was that, and I think the PC has gotten reenergized to a certain extent both PCs, laptops, and notebooks. And we’ve been able to benefit from that reenergization in each of those categories. So we’ve taken advantage of the market and the opportunity that exists there.

Jeffery P. Howells

Yeah, and while we try to report in line with our segments of broadline, data center et cetera, the desktops, notebooks, and tablets are over half of the broadline category.

Ryan Jones – Barclays Capital, Inc.

Thanks. I appreciate it.

Operator

Thank you. Our next question is coming from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Yes, good morning. Just a question regarding your comments about the pilot program with Apple, could you elaborate on that and do you see that turning into a permanent relationship?

Jeffery P. Howells

Matt, this is Jeff, I’ll start, it was a pilot program. We think we did a very good job executing on their behalf. The pilot has been extended and we’re hopeful that it will be a permanent part of the European landscape, and we’d love to have opportunities elsewhere also. So just like every other vendor relationship, the – it takes our continued execution and we’re going to be focused on it.

Robert M. Dutkowsky

But through the beginning stages of the pilot, it worked well for us and it worked well for Apple, and as Jeff said, it was recently extended.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And is that primarily, does that all flow through the top line or is there consignment relationship tied to that?

Robert M. Dutkowsky

No, it’s recognized as revenue.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And then just on the operating margins in North America you talked about a lot about the seasonality in Europe and obviously the back half leverage there. Looking at North America you talked about the puts and takes particularly the price environment which looks it’s not changing although it looks like revenue starting to grow in the right direction. So my question is, are we – is that also expected to be back-end loaded and you’re at 1.35% EBIT margin last quarter well below where you were – you’re over 2% couple of years ago, is that kind of target that you are looking at long-term or is the business changed that much where maybe that’s not achievable at this point?

Jeffery P. Howells

Yes, I think the business has changed dramatically over the last two years. And almost $5 billion of our worldwide revenue now comes from just two product categories; tablets and mobile phones. That clearly was not near that math two and a half, three years ago. And we think back two and a half to four years ago when there was a surge in sales and in servers, for example, compared to tablets there is a different economics.

So, I think this is the near-term reality, and we can – our goal is to continue to select the right sales and grow our operating income. The percentages will not be in line with trends of a couple of years ago. But I think if you look at the math and look at the return on invested capital of Tech Data Corporation, our cost of capital is under 9%, our return on capital employed with these levels of profitability are 10%. I think we stack up very nicely on when compared to the competition on return on capital regardless on what the percentages are.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Got you. Okay, fair enough. Thanks a lot, Jeff.

Operator

Thank you. The next question is coming from the line of Osten Bernardez with Cross Research. Please proceed with your question.

Osten Bernardez – Cross Research LLC

Hi, good morning, and thanks for taking my questions. I guess quick question to touch back on SG&A given the shifts and mix of your sales. It looks the best way to be thinking about how you allocate some of your resources going forward and how would you or how do you plan to sort of make some of those resources more variable given some of the regulatory constraints in Europe?

Robert M. Dutkowsky

Yes, I think the answer is, we look at our business by geography and we look at it against what we call business units, the business units or the business units that we describe and report the revenue as a percentage of our business, so the broadline, the data center et cetera.

So we analyzed it both directions and determined in conjunction with our teams, our staff, and our vendor partners, where we believe the market is going, and we have to be adequately resourced to serve, because we know in this industry high product availability, high levels of quality of service are the differentiator, because quite frankly we’re all pretty good in this business.

And so we analyzed it in a very detailed level. We do not believe that we have any widespread deep allocation or changes necessary, but we do have tweaking that we have to do. We are not quantifying tweaking on in excess of $1 billion of SG&A on an annualized basis. But the best way to look at is, we try to automate the simple and then staff the more complex to improve the service levels and reallocate the staff and the dollars in that way as we can continue to make certain pieces of our business more efficient by using technology and then the more Advanced Infrastructure Solutions business or our AIS line business in Europe. We look at what incremental staffing do we need to provide the right technical support and the right sales and the back-end of that effort also.

So it’s a very detailed process and tying the knot on one final comment you made, we’re also very aware of the cost of changing employees, and that’s why we want to use the very finite analysis to wherever possible, always grow back into our staffing levels. We saw a decline in our market share over a year ago in U.S. when we converted to SAP, that’s completely behind us, and now we have the opportunity to continue to regain the select market share that we want.

In Europe there was a decline in the overall economy that we had not predicted. And based upon with the recent trend in Q4, we believe that European economy could be stronger this year in sense we are the largest broadline distributor. We are the largest value distributor, and we’re probably the second largest mobility distributor in Europe. We have the opportunity to capitalize on a stronger economy.

Osten Bernardez – Cross Research LLC

Yes, thanks for that Jeff. And then following question with respect to Canada what drove the double-digit growth that you saw there during the quarter?

Jeffery P. Howells

I think it’s some service and some wins that our team had out there in the marketplace with key customers.

Osten Bernardez – Cross Research LLC

And how sustainable is that I guess going forward?

Jeffery P. Howells

The win with the key customers I think is sustainable in the foreseeable future. And the difference in that marketplace is, it’s a heavy governmental business, government season being in our first fiscal quarter, and second two industries up there are the natural resources and banking. So the sales volumes go very much in hand with government spending, price of natural resources, and how the banks are doing.

Osten Bernardez – Cross Research LLC

Thank you. And then finally for me with respect to the pilot program that you mentioned earlier, when you said that it was extended, was it at all expanded from a geographical standpoint, and could you remind me of which geographies you’re actually in for the pilot?

Jeffery P. Howells

We had it in all key countries in most of the key countries in Europe, Western Europe.

Robert M. Dutkowsky

But it was isolated to a European pilot.

Osten Bernardez – Cross Research LLC

Understood. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of Ananda Baruah with Brean Capital. Please proceed with your question.

David Ryzhik – Brean Capital LLC

Hi, guys, this is David Ryzhik in for Ananda Baruah. Just a quick question, can you talk about the regional dynamics within Europe. On the last Q, you discussed the rebound in Spain while there was some softness in Germany and UK, any specifics would be helpful and a quick follow-up, thanks.

Robert M. Dutkowsky

Yes, I need a pullback out my specific comments, but we indicated the strength that we saw in key countries and the recovery in Spain I think has continued and that’s a normal situation if you will because what happened was Spain was down, down, down, unemployment grew, grew, grew, and then all of a sudden, it hits a new plateau, certainly much lower and then the economy and the banking infrastructure stabilizes and move back. I mean we saw strong year-over-year growth in the Benelux region, Nordics, Italy all double-digit improvement in the local currency and other countries were clearly in good shape as we said the most countries were okay.

So clearly Q4 we saw a different demand environment in Europe than we saw in Q2 and Q3 especially and at the tail of Q1. And we don’t want to get too far in front of ourselves, we hope that current demand that we saw in Q4 continues into the new calendar and fiscal year for us. We know there is seasonality, so our sales will go down sequentially in Q1 and flat to down in Q2, then start coming back up in Q3, and jump in Q4 as they always do.

And then final note is since mobility is a big piece of our European business and tablets are a big piece of our worldwide business, sales are somewhat – incremental sales are at the mercy of the product introductions and the obstructions of those two product categories, as the vendors introduce new handsets and they have functions and features that people want to upgrade. That has a different impact and if the handsets are introduced that market doesn’t absorb at the same pace that has been in the prior years.

But working in concert with our vendors, the key point is we have the vendor relationships. So when someone comes to market with a new product, our goal is to be able to have that and clearly there are products that sunset and either from a vendor or in a category as we’ve now indicated and I think others have indicated. We are seeing desktop, traditional desktop growth and we had all hope for it with the expiration of XP in 2003 or whichever. I apologize I don’t have the exact license that was sunset service, but this is traditional desktop as well as notebook growth. So that’s what we had all hope for and that’s what right now we are seeing, how long and how sustainable that is the market will make that decision.

Jeffery P. Howells

And the other interesting dynamic is when a new category gets created like Chromebooks, we’re able to quickly move into the Chromebook space and serve that market effectively as well. So as that – is that demand shifts between mobile devices, and tablets, and laptops, and Chromebook, and desktops all the way up into the data center we’re able to move with the demand very efficiently and that’s why we highlighted on today’s call our investments in the cloud because clearly some computing is moving into the cloud and that creates an opportunity for us that we are responding too aggressively.

David Ryzhik – Brean Capital LLC

Great, thanks. And thanks guys. So and turning to the balance sheet, it looks like the cash balance is high since October of 11, given the SDG acquisition is pretty much fully integrated, how active in M&A, can we anticipate you to be in fiscal 2015?

Robert M. Dutkowsky

As we stated on our last call, we would not very active in M&A. We have a lot of internal focus on harmonizing and optimizing especially in Europe where we did some 17 acquisitions over last seven or eight years. We are well diversified as I mentioned previously on the call, we are the largest broadline distributor in Europe. We are by far the largest value distributor and we’re the one of the largest if not the second largest mobility distributor.

Key areas we cover the market for our vendors, we cover the market for our resellers, now we have to harmonize the U.S. and the Americas market consolidated years ago. So there is a great opportunity for us to focus on improving our operational efficiency to deliver improved results for our shareholders.

David Ryzhik – Brean Capital LLC

Great. Thanks, guys.

Operator

Thank you. Ladies and gentlemen this does conclude our question-and-answer session, and this does conclude Tech Data Corporation’s fiscal year 2014 fourth quarter earnings conference call. A replay of this call will be available in about one hour at techdata.com.

Thank you for attending today’s conference call and have a great day.

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