Tech Data Corporation's (TECD) CEO Bob Dutkowsky On Q2 2015 Results - Earnings Call Transcript

| About: Tech Data (TECD)

Tech Data Corporation. (NASDAQ:TECD)

Q2 2015 Results Earnings Conference Call

August 26, 2014, 09:00 AM ET


Arleen Quinones - Vice President of Investor Relations

Robert M. Dutkowsky - Chief Executive Officer

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


Matt Sheerin - Stifel

Brian Alexander - Raymond James

Lou Miscioscia - CLSA

Osten Bernardez - Cross Research

Jim Suva - Citigroup

David Ryzhik - Brean Capital


Good morning. Welcome to Tech Data Corporation's Fiscal Year 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) 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 second quarter fiscal year 2015. 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

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 and remediation related expenses and the value added tax assessment.

For the second quarters of fiscal 2015 and 2014, we incurred expenses of $5.4 million and $11 million respectively, related to the restatement and remediation effort. For the second quarter of fiscal 2015 we incurred a benefit of $6.2 million related to a decrease in the accrual for a value-added tax assessment. 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 the 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 that Tech Data delivered an outstanding quarter in Q2 of fiscal 2015 and improved IT demand environment together with strong execution by our teams in both regions, produced record Q2 sales and earnings per share, results that exceeded our expectations.

You may recall that on our last two earning calls we stated that our priorities in fiscal ’15 are to focus on the market and operational execution. The results of this intense focus were clearly in play and instrumental in driving our strong Q2 and first half results.

Both regions responded to a vibrant PC market with strong sales execution as well as solid margin, cost and balance sheet management. Our performance during Q2 demonstrates that our diversified customer and vendor portfolio, combined with superior execution capabilities and investments in world class systems and tools enable Tech Data to meet the demands of an ever changing IT market and to deliver strong results for our shareholders.

I'll now turn the call over to Jeff, who will provide an overview of our operational results and our outlook for Q3. I’ll close the call with an update on the business 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 four, second quarter worldwide net sales increased 8% year-over-year to $6.8 billion driven by stronger demand 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 sales comparison by approximately 2.3 percentage points.

For the six months ended July 31 2014, our worldwide net sales increased approximately 9% year-over-year to $13.6 billion, the strengthening of foreign currencies against the U.S. dollar positively impacted year-over-year net sales comparison by approximately 3 percentage points.

Now turning to sales by region, beginning on slide five. In the Americas, second quarter net sales grew 4% in the prior year to $2.7 billion, led by a solid growth in the U.S. and Canada. U.S. sales were fueled by strength in the SMB markets as well as the education and healthcare vertical sectors, which all posted strong double-digit growth.

On a product level, the region's growth was driven by strong sales of broadline products, mainly PCs and good performance in our advanced infrastructure solutions or AIS division. For the first six months of fiscal ’15, Americas sales grew 6% from the prior year to $5.2 billion.

Turning now to Europe on slide six and seven, our European regions second quarter sales reached $4.1 billion, an increase of 11% in U.S. dollars and 7% in euros from the prior year, reflecting an overall improvement in demand environment across most of Europe. The majority of our trade regions posted year-over-year growth while Germany, the Nordics, Iberia, Italy and Switzerland all showed double-digit sales improvement.

At a product level, our broadline business led by PCs as well as software posted double-digit growth. For the first six months of fiscal ’15, European region grew 11% to $8.4 billion an increase of 6% in euros.

Turning now to our gross profit and margin performance on slide eight. Worldwide gross profit grew 11% to $351.4 million in Q2 resulting in gross margin of 5.14% compared to 4.99% in the prior year quarter. The year-over-year increase is due primarily to lower inventory cost in Europe compared to the prior year quarter.

For the first six months worldwide gross profit grew 8% to $686.7 million with a gross margin of 5.06% compared to 5.12% during the prior year period. The year-over-year decrease in gross margin is due primarily to changes in customer and product mix.

Turning to slide nine for a review of our SG&A expense. Non-GAAP SG&A expenses for the second quarter, which excluded acquisition related intangibles and amortization expense of $7.4 million, were 277.1 million or 4.05% of net sales, compared to $267.8 million, or 4.23% of net sales in the prior year quarter. The increase in non-GAAP SG&A from the prior year quarter is due primarily to the strengthening of certain foreign currencies against the U.S. dollar.

As a percent of net sales, the year-over-year improvement of 18 basis points in Q2 is attributable to operating leverage resulting from higher sales in Europe.

Non-GAAP SG&A expenses for the first six months of fiscal ’15 which exclude acquisition related intangible amortization expense of $14.9 million, were $561.3 million or 4.14% of net sales compared to $544 million or 4.36% of net sales in the prior year period. The increase in non-GAAP SG&A from the prior year is due to primarily a strengthening of certain foreign currencies against the U.S. dollar. As a percent of net sales the year-over-year improvement of 22 basis points is attributable to operating leverage resulting from higher sales in Europe.

Slides 10 through 12 summarize our worldwide and regional operating income for the second quarter and the first six months. Worldwide non-GAAP operating income in Q2 grew 55% to $74.3 million. Non-GAAP operating margin was 1.09% of net sales compared to 0.76% of net sales in the prior year quarter.

Year-to-date, world wide non-GAAP operating income was $125.4 million, or 0.92% of net sales, compared to $94.3 million, or 0.76% of net sales in the prior year period. On a regional basis the Americas Q2 non-GAAP operating income was $39.2 million or 1.44% of net sales compared to $35 million or 1.33% of net sales in the prior year quarter. The increase in operating margin is primarily attributable to improvement in gross profit.

In the first six months, non-GAAP operating income in the Americas region was $68.5 million or 1.32% of net sales compared to previous year’s non-GAAP operating income of $64 million or 1.3% of net sales.

In Europe, non-GAAP operating income in Q2 more than doubled from the previous year quarter to $38.9 million. Operating margin was 0.95% of net sales, an improvement of 54 basis points from the prior year. The year-over-year improvement is due primarily to higher sales, lower inventory cost and good expense management.

For the first six months, non-GAAP operating income in European region was $62.8 million or 0.75% of net sales compared to previous year of $35.6 million or 0.47% of net sales.

Stock comp expense in Q2 was $3.9 million compared to $2.2 million in the prior year quarter. We expect stock com expense to be approximately $4 million per quarter for the remainder of fiscal ‘15.

Interest expense in the quarter was $7.4 million, compared to $6.2 million in the prior year quarter. The increase in interest expense from the prior year is primarily attributable to interest recorded in Q2 related to a value added tax assessment in one of our Spanish subsidiary.

Excluding our non-GAAP adjustments, our non-GAAP effective tax rate in the second quarter was 35.3% compared to 32.2% in the prior year second quarter. As we noted in previous quarters, quarterly effective tax rates may vary significantly depending on the actual and forecasted operating results in our various tax jurisdictions.

Turning to net income and EPS on slide 13. Non-GAAP net income for the second quarter of fiscal 2015 was $42.9 million, an increase of 54% from the prior year quarter. Earnings per diluted share was $1.12 compared to $0.73 in the previous years Q2. This was based on $38.4 million weighted average diluted shares outstanding versus $38.2 million average shares outstanding in last years Q2.

For the first six months of fiscal ’15 non-GAAP net income was $70.5 million, an increase of 33% from the prior year’s first half. Earnings per diluted share or $1.84 per diluted share based on $38.4 million weighted average diluted shares outstanding compared to $1.39 per diluted share based on $38.2 million weighted average shares outstanding in the first six months of the prior year.

Now turning to some balance sheet and other highlights, starting on slide 14, our cash conversion cycle in Q2 was 22 days, an increase of only one day from the prior year. Net cash used in operations in the second quarter was $46 and for the first six months we generated $50 million of cash compared to $392 million in the prior years six month period.

The year-over-year decrease in cash from operation can be primarily attributable to the timing of both cash received from our customers and payments to our vendors. We exited the quarter with cash balance of $612 million.

Our total debt balance at the end of Q2 was [$420 million] and we ended the quarter with a total debt, total capital ratio of 16%. Funds available for use under our credit facilities were approximately $875 million at the end of the quarter.

Accumulated other comprehensive income, which consists of currency translation net of applicable taxes was $324 million at the end of Q2. At July 31, 2014, the company had approximately $2.2 billion of equity and 38.2 million shares outstanding, resulting in a book value of approximately $56.28 per share.

We had approximately $383 million of goodwill on acquired intangibles, resulting in tangible book value of approximately $46.28 per share. Capital expenditures were $7.2 million in Q2. For fiscal 2015, we expect capital expenditures of approximately $38 million.

Depreciation and amortization expense for the second quarter was $18 million. We earned a return on invested capital on a non-GAAP basis for the trailing 12-month period of 11% versus our benchmark of 10% and our actual cost of capital which is estimated to be 8.3%.

Now, looking at our customer and product mix for the 12 months ended July 31, on slide 17. We estimate the breakdown of our customer segments as a percentage of net sales to be VAR 48%, direct marketers and retailers 29%, and corporate resellers 23%. In terms of product mix, we estimate broadline products represented 47% of our net sales, data center products 22%, software 18%, mobility 10%, and consumer electronics 3%.

In Q2, we had two vendors that represented more than 10% of our net sales. HP represented 20% and Apple 13% of our net sales during the quarter.

Turning now to our business outlook. As we indicated in our earnings call in May, we began the year expecting an earnings improvement on a non-GAAP basis would occur in the second half of the fiscal year due to the size and seasonality of our European operations. However, with 33% growth in non-GAAP EPS in the first half of fiscal ’15, we currently capitalized on the market opportunities that exceeded our expectations. We continue to be cautiously optimistic that recent demand trends will continue in both regions.

For the third quarter of fiscal 2015, we expect low-to-mid single digit year-over-year growth in the Americas and mid-to-high single digit year-over-year growth, sales growth in Europe; however we expect the gross margin percentage to be more in line with the first quarter levels.

For modeling purposes in Q3, we expect to incur an incremental $6 million of severance cost both sequentially and year-over-year as we reallocate resources primarily in Europe. For the full fiscal year severance is not expected to be materially different in the prior year. We do not consider these incremental charges to be a non-GAAP expense.

Also in Q3, we estimate a non-GAAP effective tax rate of 31% to 33% and we expect the average U.S. dollar to euro currency exchange rate to be $1.34 to €1. For fiscal 2015, we expect a non-GAAP effective tax rate to be 31% to 33%.

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

Robert M. Dutkowsky

Thanks, Jeff. As we entered the second half of our [40th] year in business, I am pleased with the progress we made adding new products and vendors to our line card, as well as bringing new value added services to the market place.

Our investments in integrated supply chain services, the cloud, mobility and in the data center have strengthened our value proposition to our vendor partners and our customers. During the quarter, we leveraged these investments as well as continuing to leverage our investments in broadline distribution to further grow our business. We are constantly aligning and optimizing our vertically focused business units to match up with the demand and realities of the market. And example of this focus is the transformation of our U.S SMB division over the last several months.

We have realigned our uniquely qualifies SMB sales divisions to better connect them with the specific needs of our customers improving the speed and effectiveness at which we deliver solutions to the market place. The result of this realignment contributed to record SMB sales in the U.S. in Q2.

To further support our small and medium sized solution providers in the U.S.; in June, we launched a new interactive website and that streamlining the order process and providing our SMB customers with a nimble platform customized to best meet their business needs. This intuitive content rich consumer class website is unique to the IT channel giving our SMB solution providers real time access to important features, such as account status and order monitoring. Its responsive design will work equally work on a browser, tablet or mobile phone and its live chat feature enables our customers to communicate with their Tech Data sales team when they need to wherever they are.

Since its launch in June, 57% of our SMB customers have used this site to process more than 25,000 orders yielding a conversion rate that nearly doubled the industry standard for our business to business site. We are excited about the early adoption of this unique offering and it’s another example of how innovation, deep domain knowledge, powerful modern IT systems and a heightened focus on the market are differentiating Tech Data in the distribution market place.

By leveraging our state of the art IT and logistics infrastructure, we continue to diversify our business into more specialized higher growth areas, including integrated supply chain services. Building on our successful and long standing supply chain services contract with Xerox in Europe, in the U.S. last week we announced an agreement with Xerox to manage fulfillment services for their authorized agents in North America.

As part of this agreement, Tech Data will manage the end-to-end supply chain operations and fulfillment services for Xerox’s North American authorized agents selling certain multi function printers. The relationship will strengthen Xerox’s indirect sales strategy allowing them to provide their agent partners with a superior customer experience.

Our success with Xerox in Europe and its new agreement in North America demonstrates that Tech Data has the infrastructure and expert resources necessary to provide integrated solutions that deliver value to the world’s premier technology vendors. It also highlights Tech Data’s ability to successfully leverage our core strengths, including our worldwide IT platform to develop new and exciting value added services.

Another area where we are investing in and remain heavily focused on is our innovative TD Cloud platform. During the quarter, we expanded our relationship with Cisco in the U.S. achieving the Cisco cloud services aggregator designation. This designation will be granted to a select group of distributors and reseller partners that have demonstrated success in establishing a solid Cisco powered solution services cloud practice, partnering with providers like Peak 10 to deliver a hosted cloud solution.

Tech Data is committed towards enabling reseller partners to transform their legacy Cisco practice to a hybrid IT Cisco practice. The Cisco specialization, combined with our award winning TD Cloud Solution store allows Tech Data to offer an even stronger mix of Cisco Cloud Solution including the agreement we announced last month to provide Cisco’s Meraki's suite of cloud networking solutions.

Cloud computing continues to be a strategic area of focus for Tech Data, and our expanded relationship with Cisco underscores our commitment to providing the best and most comprehensive cloud and data center offerings in the IT channel.

As our channel partners increasingly embrace private, public and hybrid clouds, we continue to dedicate leadership and resources to our cloud business. We now have executives appointed in both regions to lead a strategic direction and go-to-market execution of our worldwide TD Cloud initiative, acknowledging the unique rate and pace of cloud deployment in each geography, while further solidifying our commitment to growth in cloud computing.

And finally, as further validation of our global team’s execution and diversification into the cloud and the software eco system, last month Tech Data Europe was named 2014 Distribution Partner of the year by Microsoft. Tech Data Europe was also named winner of the Microsoft worldwide sales achievement award for SMB distribution for the second consecutive year. These accolades recognize Tech Data’s excellence, innovation and outstanding business performance in 2014. As Microsoft’s largest distribution partner in Europe, these awards are a testament to our long standing partnership and the hard work and commitment of both teams throughout Europe and around the world.

In summary, our focus on the markets and operations is visibly working and play the key role in our strong first half results. We strengthened our connection with the market as evidenced by our optimization of strong PC demand in the first half of the fiscal year. And while it’s important to note that Q2 of the prior fiscal year was relevantly weak for us, particularly in Europe, our teams executed at the highest levels we’ve seen in several years during this just reported quarter. They delivered strong topline performance, solid margin and expense management and we strengthened our balance sheet by further improving the quality of our inventory and of our receivables.

During the second half of the fiscal year, we will continue to drive our strategy of execution, diversification and innovation while maintaining our dual focus on operations in the market place. And as we move to the second half of the year we will continue to ensure that our resources and cost structures are appropriately aligned with both the opportunities and the realities that the market presents.

While we remain cautiously optimistic that the current demand environment will continue, the margin opportunity presented to us in Q2 is not assured to be sustainable during the second half, therefore we will take our usual conservative approach to plan for more normalized margins and if demand tries to exceed our expectations, we will once again have an opportunity to over achieve.

I’d like to extend our thanks to our vendors and our customers for their business and their partnerships and especially to my Tech Data colleagues for their continued hard work and dedication. With that, we’d like to open the call up to your questions.

Question-and-Answer Session


Thank you. We'll now begin the question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin - Stifel

Yes, thanks, and good morning. A couple of questions from me. First, on the gross margin guidance, it returned to where you were in Q1, is that primarily a function of mix? Could you just elaborate why you saw that upside to gross margin in the July quarter while you are guiding it down?

Jeffery P. Howells

Yeah, Matt this is Jeff. I think, the – one of the main drivers was just the quality of the balance sheet management that impacted both our gross margin and our operating expenses. The increased volumes and the velocity gave us the opportunity to work with our vendors to really improve the aging of inventory and sell-through products, which brought down our GAAP provisions for inventory and receivables, and as you can see ending the quarter with a couple of billion dollars of inventory and a little over $3 billon or around 3 billion of receivables the days are very much inline, very much in check.

So it’s a quality and on top of that, I think our teams executed in both regions on realizing strong overall margins both front and back end. The puts and takes some vendor relationships we over achieved, some geographies we over achieved, some we were slightly under, but on average we were at or above our expectations which gave us that solid margin.

Moving forward into the next quarter, we believe that the market will still give us an opportunity to earn a good return with new product introductions by some of our key vendors that overall that margin opportunity is generally at or below the corporate average and on top of that the fact that we have probably one of the most pristine balance sheets we’ve ever had, it’s always good, it’s always clean but it’s better than ever. We don’t see further relief in some of the reserve categories.

So net net you know the prior four quarters were in that 5% range that’s what we are targeting going into the second half of the year and as Bob said if the market gives us the opportunity to exceed our expectation on quality revenue we could have further opportunity. But we are just saying straight up that's what we are planning, that's what we see. That's the way we think the customer and product mix will yield for us.

Matt Sheerin - Stifel

Got it. That's helpful. And then on the SG&A, you talked about that incremental $6 million in severance costs this quarter coming up. Apples to apples are you expecting SG&A percentage to be relatively where it's been, or are you seeing additional costs coming out, and with those severance costs, are you basically reallocating those resources to other initiatives, or will we see incremental savings going forward?

Jeffery P. Howells

I think the key to that is we’re reallocating resources, as we said, and consolidating resources. So in many cases both in Europe and in the Americas we’re consolidating resources from one office or one area into another, shutting down acquired office space in Europe, and then on top of that, reallocating from slower growth initiatives to higher growth initiatives.

So, we’re not looking at it as a net-net savings, although, there will be some operational savings as we reduce some of our occupancy expenses. But the majority of it will be reinvested and staffed in different location, in a different business unit of Tech Data Corporation. So, for the year, as I indicated in my comments, severance expense will be pretty much in line with the prior year, but it will be a little lumpy in Q3 of this year.

Matt Sheerin - Stifel Nicolaus

Okay. Thanks very much, Jeff.


Thank you. The next question is coming from the line of Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander - Raymond James

Okay. Thanks and good morning. So just looking at the results year-to-date versus your original expectations, Jeff, you talked about two quarters ago the profit growth would be largely second half driven, and I think year-to-date profits are up over 30%. If I take your Q3 outlook at face value, it seems like we may not see much profit growth in the second half of the year, despite the 30% plus growth we've seen in the first half. So I'm just trying to understand if your full year view has changed and if maybe we're just shifting it from second half to first half?

Jeffery P. Howells

I think it’s a combination Brian. First of all, I think the execution by the team, the PC growth and the marketplace when there is such growth we able to work with vendors to sell-through inventory. That might have amply been 30 or 60 days old, but really move through product is one of the reasons why we exceeded our expectations in like first half of the year, of course primarily in Q2.

If you combined the two quarters, you get more of that average gross margin. I think it comes out at about 5.05% or whatever for the six months. I don’t remember off the top of my head. So you can see that that’s pretty much tracking and within five basis points of the average of the prior four, five, four quarters.

And then with the incremental severance and good expense control and those revenue targets that we put out, I think Q3, we would be pleased repeating our earnings performance of the prior year. But I think that still allows us for continued opportunity as we go into Q4, yet the strength in demand continues in the geographies that we operate in. There’s no sign of it pausing. We generally have a strong Q4 and with our tight expense management including the reallocation of resources into the higher growth areas that expense leverage will be the catalyst for continued growth.

As I said on the prior couple of calls, our overall strategy is to reallocate resource, tweak expenses, and grow into our expenses to create the operating leverage in the Company more in Europe than Americas, but Americas has room for operating leverage also.

Brian Alexander - Raymond James

So I guess just to clarify, my question is, has your second-half view changed at all since the beginning of the year, in light of the out performance that you've had in the first half, or did you just overachieve in the first half and your second-half outlook remains intact?

Jeffery P. Howells

Yeah. Again, the difference in the second half outlook is primarily related to incurring incremental severance in Q3 that we thought may have been incurred earlier or more spread out through the year. It took incremental analysis, a lot of thought, a lot of discipline to determine where we want to reallocate resources. So, you could infer from that that had we had the ability to determine -- make decisions, we would have started that process a little sooner in the fiscal year. It’s in full swing at this point in time.

So, a little bit warnings in the first half. But we are anticipating a good close to the year in Q4 and a strong Q3, but we’re not going to take out that $6 million as a non-GAAP item.

Brian Alexander - Raymond James

That makes sense. Just a final one for me is, its been a while since you've had a share repurchase program, and I just wanted to get an update on your latest thoughts on a potential buyback given the balance sheet is in the best shape it's been in a while? Thanks.

Jeffery P. Howells

Buyback is always an opportunity and one that we will continue to discuss internally and with our Board of Directors. Our history and buying back $1.1 billion of our shares has -- we were fortunate enough to acquire those shares at very favorable terms. So one of the considerations also is this robust market that we are all participating in here and the stock is performing -- had performed very well especially in the year-to-date and 12 months basis. So we look at all of those factors. Yes, we have the capability, the capacity and we will discuss it at the upcoming board meeting and in future board meetings and make a decision collectively with our board and financial advisors. Nothing has been determined to do so at this point.

Brian Alexander - Raymond James

Great. Thanks a lot.


Thank you. Our next question is coming from the line of Lou Miscioscia with CLSA. Please proceed with your question.

Lou Miscioscia - CLSA

Okay. Thanks. Can you just reiterate both in the Europe and the Americas the different areas that you saw strength? I think you call out education, healthcare. Maybe just go into more detail in that, if you could?

Robert M. Dutkowsky

Lu, this is Bob. I’ll try that. So from a end market perspective SMB was strong in the U.S. Education and healthcare were both up double digits. From geographic perspective in Europe, Italy, Iberia, the Nordics, Switzerland, Germany were all up double digits. So they were both vertical strength and geographic strength in the quarter as reported. Couple of the highlights from the product perspective, software was up 5% worldwide. The tablet -- an interesting data point, tablets were down 2% but ASPs were up and that was primarily driven around a mix change.

And in the Americas our data center practice, AIS was up 7.5%. So there’s pockets of strength, there’s product pockets of strength, there’s vertical pockets of strength, and it’s reflected in the bottom line numbers that we’ve reported this morning.

Lou Miscioscia - CLSA

In the AIS area, do you have a number of the different convert systems that you are reselling? Maybe you could mention who you have won in that area?

Robert M. Dutkowsky

Yeah. The converged architecture seems to be beginning to gain some momentum. We have a broad set of converged systems from HP, from Cisco, from IBM on our line card and as they become more functional and integration becomes more tightly woven around hardware and software, we believe that market is going to continue to grow and we’re well positioned with our vendor partners to supply in that space.

Lou Miscioscia - CLSA

Okay. Last question is on SG&A. So, it was obviously down. I would have thought that with the increased revenue, it would have went up. Obviously I heard the comments earlier; just maybe you clarify again how you are able to get it down with revenue higher. And then, as you look forward, do you want the severance to be flat quarter to quarter in absolute dollars? Thank you.

Jeffery P. Howells

I’ll answer the second part of your question first. The severance will be incremental to the cost we just incurred in Q2, and/or compared to what that particular item was embedded in Q3 of last year. As far as the costs, one was executing as we anticipated. Our goal is to grow into our cost structure. Two, the balance sheet performance was second to none, and that helps especially on the credit line where our teams did a stellar job in both geographies on improving our receivables collections and minimizing our bad debt expense to a number that is quite impressive in historical terms, and then real tight control on head count. I hate to be repetitive, but our goal is to continue to grow into this cost structure and reallocate it.

We don’t need a restructuring. We don’t need a major program. We know what we have. We are diligently assigning resources to the growth areas of the Company, and have maniacal focus on minimizing our incremental spend in order to return ourselves to the operating margins that would be more appropriate compared to our historical -- our recent historical performance.

Lou Miscioscia - CLSA

Okay. Thank you.


Thank you. Our next question is coming from the line of Benjamin Reitzes with Barclays. Please proceed with your question.

Unidentified Analyst

Hi. Thanks. It’s actually Ryan in for Ben. I was curious to hear your thoughts on the sustainability of the PC demand after XP. That impact wears off later this year. I was also interested in what your thoughts are about handoff to maybe server cycle because you have some catalysts such as Windows Sever 2003 and [Grantley] both in the pipeline, so I just curious to hear what your views are in those areas?

Robert M. Dutkowsky

Yeah, first off, on the PC, clearly the conversion away from XP has benefited the whole ecosystem. And we’ve all been able to take advantage of that transformation. But, I think you also have to factor in that there are other growth factors in the PC market. Employment clearly grew over the last few quarters and that drives PC purchases, as does just the ageing of he fleet that was installed, clearly over the last years or so PC demand was down, that fleet aged and now with some renewed confidence in the strength of the economies, as well as enhancements in growth and in employment, that’s driven the PC market very nicely.

I think the other factor that’s come into play in the PC space is the penetration of tablets has really grown and the performance and capability of the tablet is now very clear. It does some things well. There’s other things that it doesn’t do as well, that the PC is optimized to perform. And so, those cycles swing, and the concept of optimizing technologies to workloads have happened in the IT space for 30 years. And I think that, this moment in time is one of those conversions of all those factors I just described.

The server cycle is kind of yet to be seen. The Windows Server update really will start to come into fruition in the middle part of next year. Customers and enterprises will start the planning process now, and so the opportunity for us through our partners and through our resellers is to begin to build pipeline of those enterprise wide conversions. And, so that’s the investments that we’ve described that we’ve made in resources and optimization of resources around those more complex data center opportunities are underway and position us very well to take advantage of the server refreshes that we believe will happen in the latter part of this year and early next year.

Unidentified Analyst

Thanks. And one final follow-up from me. How should we think about Tech Data’s free cash flow potential in the second half?

Jeffery P. Howells

As I’ve said before I look at it on three-year average and that we have the ability on average to generate well in excess of $200 million in cash flow. The use of cash in this quarter is basically the timing of the payments. You can see inventory days, receivables days were high quality, payables days were down a little bit and taking advantage of the buying patterns as well as the cash discounts that our vendors afford us. So, we use our balance sheet prudently to do that.

I would point you at our return on invested capital. And if you take the whole of all the metrics of our sales performance, our gross margin management, our operating expense management yielding, our operating income at 11% trailing 12 months, non-GAAP return on invested capital is one of the best in the industry especially compared to Bloomberg indication that our cost of capital is the lowest compared to our U.S. competitors at 8.3%, so highest return on capital, lowest cost to capital, and so we’re using our assets very efficiently, and of course, we believe there’s room to improve as we go and through this year and into the next two fiscal years.

Unidentified Analyst

Thanks. Congratulations on the quarter.

Jeffery P. Howells

Thank you.

Unidentified Analyst

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

Osten Bernardez - Cross Research

Hi, good morning. Thanks for taking my questions. I guess just to get back to the SG&A question, does it fair to assume that there will be some growth -- there should be some growth to SG&A from a full year perspective. However just I would assume that you’re still expecting from a full year perspective to grow your sales at a much faster rate?

Jeffery P. Howells

I’m not sure how to answer that because we don’t get specific line item guidance. I think the most significant item of change will be our -- the incremental severance in Q3. Our goal is to control our incremental spend, incremental headcount. Generally the spend from Q2 to Q3 can be minimal as far as increase. We’re not anticipating much of any of incremental spends. Of course, as a dollar the exchange rate could vary compared to our estimate of [134]. As a percent, we anticipate getting more leverage than we did in the prior year, even though we will have that incremental severance within our reported numbers.

So, we believe there is room for leverage both in Q3 and Q4 in our non-GAAP SG&A as percentage of sales. And I think just looking at our overall performance, bringing the expenses down in Q2, we’re in line or right in line with our expectations, and we want to continue that close monitoring of expenses. So the goal if with the sales estimates that we provided is to keep it in check. Clearly if sales exceed our expectations by a material amount, we would have to spend more dollars or euros, but it would be anticipated those would be a low incremental spend, and we still get leverage. So, it’s all about operating leverage going forward.

Osten Bernardez - Cross Research

That's helpful. Thank you. And then taking a look at the enterprise computing side of the business, data center in Europe, could you provide some color as to what type of -- what the demand environment is like for you there? Obviously you've had some decent growth, and if you could just provide us with an update on just how SDG is performing relative to your expectations?

Robert M. Dutkowsky

I’ll take that one. So, data center demand in Europe was not as strong as it was in the Americas and that’s no revelation. That was reflected in the results of our vendor partners and several of our competitors over the last few months. We think we took advantage of market opportunities in both geographies and optimize our resources and compete it in the spots that we wanted to and had good effective win rates. As I said in the U.S., AIS was up 7.5%, that’s much faster than data center performance from any of our major vendor partners. So we optimized our resources and performed very well.

In SDG, as we already reported, the integration of SDG was completed. The all three companies are now on our SAP system in Europe and the execution and performance of the integrated company is moving forward at a pace and rate that we’re pleased with.

Osten Bernardez - Cross Research

Thank you very much.


Thank you. Our next question is coming from the line of Jim Suva with Citi. Please proceed with your questions.

Jim Suva – Citigroup

Thank you and congratulations to you and your team.

Jeffery P. Howells


Jim Suva – Citigroup

When you talked about the North America strength, can you help us understand a little bit about -- do you believe it was mostly end market demand recovery, or you also talked about the rollout of your new streamlined effort to be faster to market and more agile? Any thoughts around was the majority of it which one or the other, and then am I correct to assume this new program has yet to be rolled out to other parts of the world such as Europe?

Robert M. Dutkowsky

Yes. I think Jim, the performance of the Americas business was -- we executed well in a good solid market, and all of the investments that we’ve made over the last several years to -- whether it would be our deployment of SAP or the resources that we applied to specialty areas like supply chain and data center, on all fronts the Americas business took advantage of the market opportunity that was presented to us. And we wouldn’t be in that position had we not made these investments over the last several years.

Much of the positioning that were describing that’s happening today are moves that we believe will pay dividends in the long term just like our investments in integrated supply chain and data center had paid dividends in the quarter we just reported. That’s the process of running an IT distribution business when the technology is constantly changing you have to optimize. You have to take the opportunity to match up your resources, you skills and your investment streams with the real opportunities that exist.

The actions that are teams took several quarters ago and the Americas paid off here and in Europe in this quarter that we just announced. So this is a process and the discipline that we’re pretty good at and one that we are constantly executing and driving.

Jim Suva - Citigroup

And has this program been rolled out to Europe also, or is that still to come, and them my last question is, can you update us on the profitability or status of the mobility segment? Thank you.

Robert M. Dutkowsky

So, Jim, there’s really two programs that we reference in our comments, one was the new and enhanced SMB website, that’s a U.S. tool only and its in the process of a very controlled rollout so that we make sure we get the right feedback from our customers and respond with updates and enhancements. It’s a powerful tool and you can think that we’re going to roll it out over as much as the geography as we possibly can over time.

The other one is our TD cloud initiative that’s driven by the StreamOne product sets and that also was the tool that’s beginning to be rolled out across our whole footprint. It’s not completely rolled out in Europe today, but our plans are to cover the whole European continent with StreamOne over time. So, two sets of initiatives, two sets of tools, two sets of products with two different rollout strategies, ultimately our goal would be to have it cover as much of our opportunity as possible, because they are competitive advantages clearly in the marketplace.

Jeffery P. Howells

As far as the mobility question, our mobility division, of course, is just primarily Europe as far as it how it impacts the P&L continues to do very well. I think the contribution margin out of that operation is in line with our expectations, and at this point in time we’re actually looking at more supply chain opportunities in that business where we’ve had the one that we’ve highlighted for quite a while in the UK, and that’s becoming more mature and we’ve had a great learning experience for that.

So, we hope to continue to move the business over the future into more supply chain services or fee for service compared to the majority of our business today remains the revenue recognition on normal handsets and devices. So, it’s a good strong piece of the business, and as we see its 10% of our worldwide revenue and it’s a nice piece of diversification, and now the Americas has the opportunity to start ramping that business up. We’ve brought on some incremental talent and there’s incremental opportunities here and we hope to capitalized on those over the next fiscal year or two.

Jim Suva - Citigroup

Great. Congratulations to you and your team.

Robert M. Dutkowsky

Thank you.

Robert M. Dutkowsky

Thank you. Our final question of the day comes from the line of David Ryzhik with Brean Capital. Please proceed with your questions.

David Ryzhik - Brean Capital

Hi, guys. Thanks for taking my question. David Ryzhik here for Ananda Baruah. Bob, if you can just give some quarter-to-date commentary on the European demand tenor. There has been some buzz around perhaps a slightly softening European economy. Just any color on what you are seeing quarter to date and then I had a follow-up. Thanks.

Jeffery P. Howells

This is Jeff. I will answer that question. We wouldn’t comment on the quarter to date. We did just provide our expectation for the entire quarter and clearly that’s inline with what the collective countries believe the market opportunity is. I would caution you to not necessarily look at August as a indicator of what volumes are in Europe because a lot of August means shut down in Europe where countries are operating on 20% of available staff because of the tail end of the vacation season.

So, I mean we feel comfortable that in euros our best estimate is that we were growing in that I think it was mid-to-high single digits which would indicate that the market continues to have strength and we called out several countries that had I’m going to say strength higher than our normal expectation. So, we haven’t seen a pause yet, and you know probably as we go into our Q4, I would just caution you as you pull your models together, remember we had a Q4 in Europe last year exceeded all of our expectations. So that compare will be to us probably hard a more difficult compare for growth than Q3. And my final comment on Europe will also be related to the availability of new product introductions especially in our mobility business. Do they come and are they available in our Q3 or do they roll over and are available in our Q4 as far as material volumes compared to our overall sales and growth.

David Ryzhik - Brean Capital

Great. Thanks. With respect to regional operating margins, definitely a solid job with Europe operating margins in July queue. How can we think about October [queue] Europe operating margins? I mean, should we assume year-over-year improvement from last year, and are those incremental severance costs -- are they should be thought of as European or Americas? Thanks.

Robert M. Dutkowsky

Yeah, I wouldn’t give any more color than we already have on the components on our P&L in Q3, but the severance cost are primarily in Europe so that will impact our reported non-GAAP results for Europe, but I think overall our expense management continues to be strong in Europe other than that I you know just refer you to the collective comments we’ve already made in our press release to create new model.

David Ryzhik - Brean Capital

Thanks a lot.

Robert M. Dutkowsky

Thank you.


Thank you. Ladies and gentleman, we have reached the end of our question-and-answer session. And this does conclude Tech Data Corporation’s fiscal year 2015 second quarter earnings conference call.

A replay of this call will be available in about one hour at Thank you for attending today’s conference call and have a great day.

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