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Tech Data Corporation (TECD)

Q2 2011 Earnings Call

August 18, 2011 9:00 AM ET

Executives

Robert M. Dutkowsky – CEO

Jeffery P. Howells - EVP and CFO

Arleen Quinones - Director, IR and Shareholder Services

Murray Wright – President, the Americas

Analysts

Richard Kugele - Needham & Company

Matthew Sheerin - Stifel Nicolaus

Richard Gardner - Citi Investment Research

Ananda Baruah - Brean Murray, Carret

Brian Alexander - Raymond James and Associates

Benjamin Reitzes - Barclays Capital

Craig Hettenbach - Goldman Sachs Asset Management

Operator

Good morning. Welcome to Tech Data Corporation fiscal year 2012 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, Director of Investor Relations. Ma’am you may begin.

Arleen Quinones

Thank you Latonya. Good morning and welcome to Tech Data’s fiscal 2012 fiscal second quarter earnings conference call. I am joined this morning by Rob Dutkowsky, Chief Executive Officer, Jeffery Howells, Executive Vice President and Chief Financial Officer and Murray Wright, President the Americas.

Before we begin I would like to remind all listeners that today’s earnings press release and certain matter discussed in today’s call may include forward-looking statements as defined in the Private Security’s 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 release and in our filings with the Securities and Exchange Commission. Please be advised that the statements made during today’s call should be considered to represent the expectations of management as of the date of the call. The Company undertakes no duty to update any forward-looking statements to actual results or changes in expectations. In addition, this call is the property of Tech Data, and may not be recorded or rebroadcast without specific written permission from the company.

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

Robert Dutkowsky

Thank you, Arleen. Good morning everyone and thank you for joining us today. We are pleased to report another record sales and record earnings quarter for Tech Data, highlighting the strong execution by our teams in both regions. As we articulated at our investor day in April, we feel the company that is able to execute with precision and adapt rapidly to changing markets and our second quarter results are further evidence of our progress. While global economic uncertainty and volatile stock markets dominate the headlines and science points to a worldwide moderating growth, we believe and recent history shows that our strategy of execution, diversification and innovation, together with our resilient business model enables Tech Data to gain targeted market share, achieve double digit earnings growth, generate strong cash flow and earn and excellent return on invested capital in both up and down cycles.

Good overall IT demand and a strong euro, combined with our continued focus on responsible growth and disciplined costs and working capital management, resulted in year-over-year and sequential improvement in all major metrics. Sales grew 18% year-over-year to $6.4 billion. Gross margin improved three basis points, operating income grew 20% and net income improved 23% to a second quarter record $50.1 million.

Strong earnings and aggressive share repurchases during the past year resulted in earnings per share of $1.10, a 34% increase over last year, making this our eleventh straight quarter of double digits EPS growth and the highest second quarter EPS in our company’s history. In addition, we generated a return on invested capital of 15% for the last 12 months, squarely within our targeted range of 14 to 16%. Highlighting our strong commitment to creating shareholder value, this quarter we completed $200 million in share repurchases announced earlier this year. This brings the total amount of share repurchase to $800 million, meaning that we bought back over 20 million shares of our stock in the last six years. And today we announced our board’s authorization for another $100 million buy-back program, strongly re-enforcing the company’s commitment and our continued confident in our long term prospects.

Jeff will now cover the financials in greater details and then I will review the regional performance and provide some business highlights. Jeff.

Jeffery Howells

Thank you, Bob. Many of my comments will reference the supplemental schedules which are available on the investor relations section of our website at www.techdata.com. Beginning with the first slide, worldwide net sales for the second quarter ended July 31, 2011, were $6.45 billion, an increase of 18% from $5.47 billion in the prior-year second quarter. The strengthening of certain foreign currencies against the U.S. dollar positively impacted the year-over-year net sales comparison by approximately 9 percentage points.

Second quarter net sales in the Americas were $2.70 billion, or 42% of worldwide sales, representing an increase of 4% over the prior-year period. Net sales in Europe totaled $3.75 billion, or 58% of worldwide net sales, representing an increase of 30% over the prior-year quarter in US dollars and a 14% increase in euros. Organic growth in the quarter in euros was approximately 5%.

Slide 2 shows year-to-date worldwide net sales of $12.8 billion, an increase of 15%. Looking at our regions, Americas grew 5%, European sales increased 24% in US dollars and 14% in euros on a year-to-date basis. Organic sales growth in euros was approximately 5% year-to-date.

Slide 3 summarizes our operating performance in the quarter. Worldwide gross margin for the second quarter was 5.28%, an improvement of three basis points from the prior year quarter, reflecting our ongoing product diversification efforts and effective execution of the company’s pricing and freight management practices.

SG&A expenses were $262.1 million, or 4.06% of net sales, compared to $221.8 million, or 4.05% of net sales in the prior-year second quarter. The increase in SG&A expenses was attributable to a stronger euro, operating expenses related to acquisitions made in our previous fiscal year and increased costs to support our growth.

Operating income for the second quarter was $78.8 million, an improvement of $13 million or 20% over the prior year quarter of $65.8 million. As a percentage of sales, operating income improved two basis points to 1.22% over the prior year’s 1.20%

On a regional basis, operating income in the Americas for the second quarter was $47.6 million, or 1.77% of net sales, compared to operating income of $44.6 million, or 1.72% of net sales in the prior-year. In Europe, the company generated operating income of $33.9 million, or 0.90% of net sales, compared to operating income of $23.8 million, or 0.83% of net sales in the prior-year period.

Interest expense was $8.1 million compared to $7.1 million in the prior year. Both periods included approximately $2.5 million in non-cash interest expense related to the current treatment for convertible debt instruments which was adopted at the beginning of our fiscal 2010 year.

The company’s effective tax rate for the second quarter was 27% compared to 30.2% in the prior year period. The year-over-year increase in the effective tax rate was primarily attributable to the relative mix of earnings and losses within the taxing jurisdictions in which the company operates. As noted, the previous quarters in accordance with the FIN 18 accounting pronouncement, quarterly effective tax rate may vary significantly depending on the actual operating results in our various tax jurisdictions.

Slide 4 shows our operating highlights for the first six months of the fiscal year. Worldwide gross margin was 5.28%, an improvement of five basis points from the prior year period.

SG&A expenses were $519.8 million, or 4.07% of net sales, compared to $445.1 million, or 4.01% of net sales in the prior year period.

Operating income for the six months was $154.4 million, an improvement of $19.2 million or 14%, compared to $135.2 million in the prior year. As a percentage of net sales, operating income for the first six months was 1.21%, compared to 1.22% in the first six months of the prior year period.

On slide 5, we summarize net income and earnings per share. Net income attributable to shareholder of Tech Data for the second quarter was $50.1 million, an increase of $9.2 million or 23%, compared to the $40.9 million in the prior year’s second quarter. Earnings per share based on $45.6 million weighted average diluted shares outstanding were $1.10, an increase of 34%, compared to $0.82 per share in the prior year period which was based on 50 million weighted average diluted shares outstanding. We estimate approximately 44 million weighted average diluted shares outstanding from the second half of the fiscal year excluding the impact of the $100 million share repurchase program announced today.

Slide 6 summarizes our share repurchase activity. During the second quarter, the company repurchased approximately 3.2 million shares of its common stock at a cost of $148.7 million related to the company’s $200 million share repurchase program authorized earlier in the year. Since April 2005, the company has cumulatively purchased $800 million of its common stock or 20.4 million shares at an average price of approximately $39.21 per share. Today we announced a new authorization to repurchase an additional $100 million of our stock.

Turning to the balance sheet by looking at slides seven and eight. Accounts receivables totaled $2.8 billion and allowance for bad debt of $63.2 million. Our DSO was 40 days compared to 39 days in the prior year quarter. Inventory totaled $1.9 billion. Our days of supply during the second quarter were 28 days, an improvement of 3 days from the prior year period and an improvement of seven days from Q1. Accounts payable were $3 billion, days payable outstanding at the end of the quarter were 44 days.

Our cash conversion cycle for the second quarter was 24 days, compared to 25 days in the prior year quarter for the four day improvement from Q1. Cash provided by operations during the second quarter was approximately $264 million. Total debt was $487 million. The company continues to enjoy excellent liquidity and financial flexibility with a cash position of $905 million and a net cash position of $418 million at July 31, 2011.

Total Debt to total Cap was 18%, funds available for use in our credit facility is approximately at $900 million at the end of the quarter. Our equity totaled $2.2 billion at the end of the quarter.

Accumulated other company entered income, which consists of foreign currency translation net of applicable taxes was $446 million at the end of the second quarter, compared to $489.8 million at the end of the first quarter fiscal 2012, sequentially decreasing $43.8 million.

As of July 31st, the company had 43.4 million shares outstanding and $125.6 million of Goodwill which resulted in tangible book value of $46.17 per share attributable to shareholders of Tech Data.

Capital expenditures totaled $12 million in Q2 and the current plan for fiscal 2012 capital expenditures is $44 million. Our depreciation and amortization expense was $14.2 million from the second quarter and our return on invested capital was 15% for the 12 months.

Looking at our product and customer classification on slide nine. We estimate the breakdown for the 12 months ended July 31st, peripherals 31% of our business, systems 34%, networking 18% and software 17% of our business.

Our customer segment for the same period, VARs 53%, direct marketers and retailers 26%, corporate retailers 21%.

Hewlett-Packard was the only vendor to generate more than 10% of our sales in the quarter. HP represented 25% of our net sales, compared to 26% in the prior year.

In terms of our outlook for the third quarter, we expect continued year-over-year mid-single-digit organic sales growth in both regions on a local currency basis. We remind you that the Triad Acquisition anniversary is on October 1st of this year. Therefore beginning in the fourth quarter, year-over-year comparisons will be more consistent.

Let me now turn the call back over to Bob Dutkowsky for additional comments.

Robert Dutkowsky

Thanks Jeff. I will now provide some regional highlights, a few examples of our strategy and action in the quarter and our outlook. On average, the demand for technology products continued to be good in both regions during the quarter and this demand helped drive our solid top line performance.

Our European region reported sales growth in euros of 14%, with organic growth of 6%. At the country level, Germany, the UK, Denmark and Norway led the way with double-digit growth, helping to offset ongoing weakness in Spain, Portugal and the Czech Republic. In Europe’s end markets the commercial sector continued to perform well, while most consumer market remained soft throughout the quarter. However, amid this week consumer market, mobility products, including tablets which are sold primarily through retail outlets in Europe, were among the top selling categories in the region, along with servers, notebooks and desktops in the commercial space.

Despite the macro economic issues plaguing in Europe, the overall demand environment for IT products was positive and our team remains steadfast in their execution, generating the highest second quarter sales and operating income in euros in the region’s history. Operating income grew at nearly twice the rate of sales, yielding the region’s highest second quarter operating income margin in 11 years. Our European region’s second quarter results clearly demonstrates that the significant work we’ve done over the past few years to improve the region’s operations and diversify our product and customer portfolios, together with our broad European footprint, has helped to mitigate our overall exposure in the region and enables Tech Data Corporation to produce more profitable, balanced and consistent results. Our European team’s hard work is paying off and I would like to recognize them for their tremendous effort and significant accomplishment.

Turning to the Americas, the region delivered another strong performance in the second quarter, posting sales growth of 4% and improving operating income to the highest second quarter level in 11 years. Good top line growth, together with effective margin and cost management resulted in operating margin expansion of five basis points to a strong 1.77%. As in Europe, tablets, notebooks, desktops and servers were among the regions top selling products in the quarter.

Within the Americas region, Latin America continued its double-digit top line growth trend, while our Canadian team delivered excellent profitability in the quarter. And in the US, the team remains focused on selectively pursuing more profitable business. Our US business again did an excellent job growing responsibly, exercising disciplined pricing practices and managing cost appropriately, resulting in year-over-year improvement in nearly all key metrics.

From a US and market perspective, SMB, our core customer set continued to grow with a healthy pace in the quarter. While sales to resellers who serve the Federal government sector decreased in the quarter, the decline was offset by strong sales in our healthcare vertical which delivered impressive year-over-year as well as sequential growth.

Like our diversified product portfolio and broad geographic footprint, our specialized vertical business units which target resellers that focus on specific end-user market, enable us to capture higher growth market opportunities while continuing to deliver more balanced and consistent results.

On a worldwide basis, pricing remained relatively rational, although as we highlighted last quarter, we continued to see some competitive pricing pressures in the European mobility market. From a supply perspective, our team made excellent progress in the quarter, reducing inventory levels to 28 days of supply, a year-over-year improvement of three days and a sequential improvement of seven days. Overall, both our Americas and European regions delivered strong performances in the quarter driven by excellent execution, the fundamental pendant of our strategy.

Now I would like to highlight a couple of the examples of other elements of our strategy, namely diversification and innovation. In support of these efforts, we are continuously investing in innovative initiatives that enable us to capture new and exciting market opportunities, gain selective market share, strengthen our value proposition and improve our overall profitability and returns.

An example of this strategy and action is our recent announcement in one of our specialty areas, namely software. We recently announced, with availability this fall, our Streamone solution store, the second offering in Tech Data’s Streamone platform. The Streamone solution store will provide independent software vendors and cloud providers with a platform to market software as a service and other products to more than 60,000 value added resellers in the United States. It opens up a previously unavailable route to market for these independent software vendors and cloud providers, connecting them with resellers who through this platform will be able to access themselves softwares and cloud based solutions more easily and profitably to their customers.

This unique and innovative platform is an excellent example of how Tech Data uses innovation and its strategic position in the supply chain to differentiate itself in the market place and create a unique and compelling value proposition for our vendors and reseller customers. In fact, in recognition of our long standing and successful partnership with Microsoft and our US team’s dedication to providing resellers with complete solutions for their end-users in July, we were awarded Microsoft’s OEM distributor of the year.

Another one of our specialty areas, mobility, again delivered an outstanding performance through our Brightstar Europe joint venture. The European JV continues to be our fastest growing business, with second quarter organic sales coming in well ahead of plan and up 64% in US dollars over the previous year. Brightstar Europe continued to gain share in the European market and to add new customers, vendors and product lines, helping to strengthen and enhance our business and tap into the fast growing mobility market.

In summary, as evidenced by our second quarter results, our team’s excellent execution, our diversified product and customers portfolios, strong customer and vendor relationships and superb cost and working capital management, continued to serve Tech Data well. Our fit, focused and flexible business model enables us to strengthen our position in selected markets, improve our overall profitability, generate strong cash flow and earn a return on invested capital well above our cost of capital. Looking ahead, we believe on average that the demand for technology products will remain stable. If the global economy worsens, we believe we’ve proved through the last downturn that we have the right strategy, a resilient business model and a value proposition that becomes even more compelling to our partners during challenging times.

For the third quarter, we expect year-over-year mid single-digits organic sales growth in both regions in local currencies. In addition, we remain confident in our ability to achieve our stated goals of double-digit operating income and earnings growth, as well as a return on invested capital within the range of 14 to 16% for the fiscal year, excluding special charges if any that may be incurred related to our Brazilian subsidiary.

And finally we believe that in this fiscal year, we will continue to make progress on our three year operating margin target of exceeding 1.5% before stock compensation expense in fiscal year 2013. As always, I would like to thank our vendors and customers for their business and partnership, our shareholders for their confidence and all my Tech Data colleagues for their excellent execution and continued dedication.

With that we will open the line for your questions.

Question and Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator instructions) one moment please for our first question. Our first question comes from Rich Kugele with Needham & Company. Please proceed with your question.

Richard Kugele - Needham & Company

Gentlemen, again, well done in a tough environment. In terms of the inventory, it was a fairly significant drop, both sequentially and year-over-year. Any particular areas that needed to be worked down? Anything notable in the change and are you comfortable with your inventory levels at this point given back-half seasonality?

Jeffery Howells

Hi Rich, this is Jeff. Yes, the inventory work down was as we anticipated and as we had said we had anticipated working it down a little more in Q1. We didn’t make as much effort on that primarily due to decline in the retail business in Europe. Our team worked with our vendor partners to move that inventory through very effectively. As you can see we maintained our margins in doing so. So it was primarily working it down in inventory, but well reported build up of inventory and slowdown in Europe, our team executed very well, but the key to that is working together with our vendor partners to put that inventory into the right hands at the right value.

And as far as our current inventory, we are very pleased with the level in both the America and in Europe and to anticipate another question, they really aren’t getting any significant shortages at this point in time. So the best we can see, there is no lingering impact of the events in Japan earlier this year on the supply chain availability of inventory. There is adequate inventory, there is good clean supply and with the reduction of our inventory by seven days sequentially, our inventory is extremely clean.

Richard Kugele - Needham & Company

Okay. Then just lastly, in terms of demand trends, if we're going to break out the months a little bit, just in the last month in particular, given what's been said by both Dell and even Network Appliance last night, any comments on trajectory? Do you think that there is a deceleration in the most recent month or is it just in the targeted verticals that you talked about in your prepared remarks and its offset in other areas?

Robert Dutkowsky

I think one of the things that’s very appealing about our model Rich is that although there may be pockets of slowdown, there’s also pockets of strength. We use the example of the slowdown in the Federal spending in the US offset by the increased spending in healthcare. So one of the things that we work very hard on in all of our operations is to make sure that we are focused on the areas where opportunity appear to be strongest and we rapidly deploy our attention and our programs there and we also deselect applying resource and energy to places we sense there is a slowdown. And so you saw in this quarter where all around us the ecosystem appeared to be slowing, we grew at our above market rate because of that deployment of resource and focus. That is a real core fundamental strength of our company and it serves us well in good times and it serves us well in softening economies.

Richard Kugele - Needham & Company

Great. Thank you very much.

Operator

Our next question comes from Matt Sheerin with Stifel Nicolaus. Please proceed with the question.

Matthew Sheerin - Stifel Nicolaus

Yes, thank you. Just sticking to the topic of North America and your comments around weakness in the federal, obviously you're getting into seasonally up quarter with the Federal Government. Are there any signs that lead you to believe that it's going to be less than seasonal in that business? And can you tell us what percentage of your North America sales approximately ends up at the federal or the public sector?

Jeffery Howells

Matt, we don’t disclose the breakdown by the various customer sets of Federal State education. Otherwise I think the key point that we want to make on this call is the fact that our Americas business grew 4% right in line with the market over the quarter. Good operating margins and any downturn in Federal and State local spending that we saw was made up by our healthcare SBU. So we anticipate that trend containing into the next quarter. In other words, we are not going to sit here and expect a rebound in government spending by any manner or form.

So our view when we continue sequential performance off the lower spend and we’d have no reason to believe that we wouldn’t have good sequential performance out of our healthcare specialty business unit because of the strength in that and the available dollars that are being spent in the whole healthcare arena with record management privacy etc. so it’s a very nice piece of our business, but again we don’t break out the exact percentage of it.

Matthew Sheerin - Stifel Nicolaus

Got it, okay. And then in Europe, it sounds like Brightstar has been a real bright point if you will for you, very strong growth. It looks like a nice contributor on the operating margin line. But you did talk about some pricing pressure there. Are you still seeing margin improvement on the leverage of the higher volume and do you also continue to see market share opportunities in that business?

Jeffery Howells

The answer is yes. There is pricing pressure as we’ve indicated for the last couple of quarters on the handsets. But it is a reasonable margin and more importantly or most importantly, we’re getting good leverage on the infrastructure because of the huge volumes. As Bob indicated, 64% organic year-over-year growth and that excludes the acquisition revenue that we’re leveraging through our infrastructure, through both our AKL and our NCC acquisitions this past year. So the operating margin leverage is there and we’re looking at ways to add incremental services and accessories to our portfolio products over there. But the business is very good, very strong and as we anticipated, the key to it is leveraging our cost structure. The fixed elements of our IT logistics in office and management infrastructure can take incredible share in the European market in the handset space.

Matthew Sheerin - Stifel Nicolaus

Okay. Thanks a lot.

Operator

Our next question comes from Richard Gardner with Citi Investment Research. Please proceed with your question.

Richard Gardner - Citi Investment Research

Okay, a couple of questions please and also congratulations. First of all, I wanted to go back to Richard’s earlier question and I guess I’m still not sure whether I’m clear that if there was any sort of abnormality in terms of linearity of demand throughout the quarter. Did you basically just see a typical seasonal pattern throughout the quarter?

Jeffery Howells

Rich, I don’t think anything is typical anymore in this environment. As we indicated last quarter, we ended softer in Europe than we had anticipated. Whether it was because of Easter or demand or whatever, no one really knows. But I think we saw some trends for that softness into the second quarter as you can see by our revenue results, both organic and the benefit of our acquisitions. Well, monthly data is hard to interpret. I think we would say that in both regions, our middle month of June was our strongest month, but we have no complaints about the revenue that we experienced in May or July.

So they’re a little different shift than maybe looking back at the prior couple of years. Last year especially, if I recall off the top of my head, the Americas was extremely strong in July or July close. So extremely tough compare on year-over-year basis, but we had three strong months highlighted by our June performance.

Richard Gardner - Citi Investment Research

Okay, great and then I guess the follow up question is on the additional reto [ph]. Can you talk about how aggressive you intend to be with that over the next quarter or two? Obviously the stock is very attractive at a discounted book. Do you expect to wrap that up before the end of the year?

Jeffery Howells

Well, the market will determine that as we put in place a 10B five filing with what we believe are reasonable ranges. I think you can see from our past, $800 million we announce a stock buy-back and we execute on it. We don’t announce it to have some kind of an impact of just having it theoretically out there. We announced $200 million this year as of our June annual shareholder meeting and we executed very quickly on buying that back. The market clearly has given us an opportunity to acquire our shares in an attractive value. So I think the only thing I can say is our past performance in there is we will move forward at a very responsible rate. But all that being said I see no reason why we wouldn’t complete it in this fiscal year, if not sooner.

Richard Gardner - Citi Investment Research

Okay, great. Thanks and good job.

Operator

Our next question comes from Ananda Baruah with Brean Murray, Carret. Please proceed with your question.

Ananda Baruah - Brean Murray, Carret

Thanks guys and congratulations again on a pretty solid quarter. After seeing an impact in Europe last quarter, Bob, just wondering if you could sort of give us a little more meat around your comments that you think ultimately through the same tech spending is going to remain, I think you said like more stable as opposed to last, other than you’re seeing kind of what the order book is right now, is there anything that you can tell us that you’re hearing from customers that are sort of feeding that feeling? Anything anecdotal would be helpful. Thanks.

Robert Dutkowsky

So if you listened to my prepared comments, I clearly said several times that on average, demand was good. What we’re trying to say is there are pockets of strength and demand. Our reference, the mobility side of the world. Cell phones, smartphones and tablets, the demand there is strong and the growth opportunities are exceptionally strong and then you can, or I mentioned strength in the pick of your Germany and the UK as an example. Strength, our business performed very well in those geographies and we saw opportunities to not only perform well but to gain share.

Then there’s the flipside of that. While Germany and the UK were strong, Portugal and Spain and Italy were weak and so when you average the demand together it turned out to drive a very nice growth opportunity for Tech Data, when you factor in our selectivity that we put into our coverage model. So our goal is to try to grow the business at or slightly above what IT spending is going to drive in the quarter or for the year and I think that the performance that we had this quarter clearly put us into that range and we’re very comfortable executing in that app or slightly above the market IT spending rates.

Ananda Baruah - Brean Murray, Carret

Got it, that’s helpful and I guess, it sounds like mobility and tablets are clear drivers of strength for you guys. Can you anecdotally give a sense of how meaningful those are? So if you didn’t have those, would you still feel relatively the same about the core business?

Robert Dutkowsky

Yeah. I would say that clearly that the cell phone, smartphone business has been a very positive addition to our European portfolio. The tablet business, albeit fast growing, is not huge amounts of revenue. It could evolve and emerge into a very important contributor to our revenue and our profits and that’s why we’re focused on it, but today tablets are still a relatively small percentage. And as we said in our prepared comments, we had good performance year-over-year on desktops and notebooks and it continues to be an important segment for us. And the other piece that we mentioned was that we had strength in SMB which is our core market. In the US we had double digit growth again in SMB. So there are good pockets of strength out there that we’re focused on and we’re deploying resources and we have our management team and infrastructure focused on those areas.

Ananda Baruah - Brean Murray, Carret

Bob, just the last one for me. I didn’t hear storage sort of discussed one way or another in the comments. Can you just give us a sense of how storage was for the quarter?

Robert Dutkowsky

Yeah. Storage was okay. It didn’t make the top four categories as I mentioned in my prepared comments. But storage was a net positive contributor in both geographies.

Ananda Baruah - Brean Murray, Carret

Okay, great. Thanks a lot.

Operator

Our next question comes from Brian Alexander with Raymond James. Please proceed with the question.

Brian Alexander - Raymond James and Associates

Thanks and I apologize for the background noise in the airport, but with Brightstar being your fastest growing segment in Europe, is there any way to ballpark what the local currency growth was in the commercial segment in Europe? Bob, I think you just said double digit SMB. I wasn’t sure if that was referencing Europe, so I’m just trying to get a sense for the commercial growth in Europe specifically.

Jeffery Howells

I don’t have that off the top of my head. I think what you can probably do is just back out the local currency; convert the 64% dollar growth which I can’t remember was 30%, 40%, 44% local currency growth. Take that out of our number. I think at our investor day we gave you some idea of the size of our mobility business for the year. But I think from our perspective the mobility business it took it out, would still have a very good quarter in Europe. But three or four years ago we clearly chose that as one of our key areas of diversification and so from that perspective I think it’s, be careful about taking it out of the results of our European operation because it was a clear conscious decision in diversification like we’ve done in AIS also, our Advanced Infrastructure Solution in both geographies. So core piece of our business off the top of my head, I haven’t calculated what it was without it, but…

Robert Dutkowsky

Brian, when you think of those specialty businesses, now just kind of integrated into the day-to-day flow of the business, mobility and data center and software and consumer electronics are a part of Tech Data. It’s not fair to kind of pull them out and say they’re separate because if we weren’t invested there we’d be invested in something else to use our fixed cost infrastructure efficiently. So although we measure and manage it, it’s all kind of part of what Tech Data is today. It’s a different Tech Data than it was a few years ago.

Jeffery Howells

Yeah. I’d say a final comment on that is as we have moved into the specialty areas and mobility in Europe, AIS in both geographies, consumer electronics, it allows us the opportunity to wean ourselves off of less profitable business. It still may have been profitable. It may have had fixed cost coverage that we wouldn’t have given up otherwise. I would just say that we would have most likely grown or maintained revenue in other pieces of our business at a different pace had we not had these alternatives that we’ve developed over the last three to five years.

Brian Alexander - Raymond James and Associates

Okay, if I could just follow up and then I'll put it on mute. On the share count, Jeff, I couldn't hear you clearly but I thought you said 43.5 million shares outstanding at the end of the quarter. You've got a buyback for $100 million which will probably get you another 2 million shares, yet you said 44 million shares for the second half? I'm just trying to reconcile those comments.

Jeffery Howells

Yeah. 44 million the second half. I have the dream that investors are going to move our stock up and so we have the dilutive impact of equity stock options and other things out there slightly increasing the weighted average number for shares outstanding, because we have some equity offerings or some option grants that are underwater at the current valuation. So 44 million is our best guess, excluding any impact of the $100 million buy-back that we announced this morning because we don’t know the pace at which that will be achieved.

Brian Alexander - Raymond James and Associates

Got it. That’s what I wanted to confirm. It’s not in that 44 million.

Jeffery Howells

It is not.

Brian Alexander - Raymond James and Associates

Okay, thank you.

Operator

Our next question comes from Ben Reitzes with Barclays Capital. Please proceed with your question.

Benjamin Reitzes - Barclays Capital

Hey, thanks. Guys, just two questions for me. I just wanted to kind of go into the guidance a little more for the next quarter on the revenue side. I guess mid single digit organic growth in both regions. Just to pin it down, at current rates what is the currency, Jeff, based on your math just as a rate of today or however you want to say it and I would assume, I have a number in my head and then acquisitions is another five points, because since the deals don’t anniversary, the big deal doesn’t anniversary until October 1st, can we just assume another five points from acquisitions and then what’s the currency number on top?

Jeffery Howells

Yeah, again we would have as you said two months of the acquisition before it sunsets on October 1st giving us some incremental revenue. For modeling purposes we would just assume a slight weakening of the Euro to be conservative, to make sure we don’t overspend within the corporation. But honestly we don’t expect a whole lot of movement in the Euro on average throughout the second half of the year as we sit here today. So just if I had our internal model I would just have just slight weakening of the Euro against the dollar.

Benjamin Reitzes - Barclays Capital

I was going to use something around 5% and five points and then obviously, with the closing, with the anniversary of October 1st we use a point or two less for acquisitions I guess as a benefit. That sound about right?

Jeffery Howells

Yeah. I think the key is we’ll move into the, through the second quarter with some moderation in our reported growth in Europe because we only have two or three months because we’re saying organic growth is about the same as we’ve experienced on average in the first two months. So we’ve had about 5% organic growth in the first half of the year as I indicated and that’s yielded 13% to 14% growth in Euros in Europe as reported and so organic growth stays at about the same range of mid single digits you would deduct, that the actual growth in Europe would be slightly lower than what’s been reported in the first half of this year, all things being equal and if we were to achieve our results and just a slight, for conservative purposes we would assume a little bit of weakening of the Euro, but not much movement.

Benjamin Reitzes - Barclays Capital

Okay. Then just in terms of, I understand the strength of your model and where you can tap into strength and what not. The devil’s advocate would say that SMBs might see some of this economic weakness in both geographies on delay after large business in governments etc and I was just wondering if you could put some context based on both your experiences in the past slowdowns and when SMB feels it and or the degree of immunity. Just a little more context on your ability to kind of buck the trends and why you have so much confidence you can see the same organic growth, not only this quarter but hit your goals for the year and how SMB is affected and the timing of past slowdowns etc.

Jeffery Howells

My experience Ben is that SMB slows down the latest and re-energizes the fastest. If you think about it a large majority of the job growth in the US happened in SMB in the last few quarters. It started to move quicker than the rest of the economy and that spilled over into tech spending as well. So if an SMB account needs hires another person, a sales person, they need a new laptop or new cell phone or they need more network capacity to be able to support their point-of-sale system or whatever. It happens much quicker in the SMB arena and a look back to 2009 when tech spending fell off the edge of the earth. Tech Data declined less than the average and we delivered record earnings. We were able to apply our resources to the right spots rapidly to be able to put the right kind of results on the board. So if SMB slows down we’ll be able to deploy into the right places, but I think historically it slows down slightly slower and speeds up quicker.

Benjamin Reitzes - Barclays Capital

Okay. Thanks gentlemen.

Operator

Our last question comes from Craig Hettenbach with Goldman Sachs. Please proceed with your question.

Craig Hettenbach - Goldman Sachs Asset Management

Yes, thank you. Maybe just taking the outlook from a different angle, just on a sequential basis, even if it’s just directionally, could you talk about October quarter for the core business versus typical seasonality that you would expect?

Jeffery Howells

Craig, this is Jeff. I think the math is that we’d have a reasonable sequential uptake in our business and again we’re saying off the prior year actual results which were very good and very strong we anticipate it being up mid single digit organically over those. So sequentially it should be a good quarter for Tech Data and one of the variables of course will be the actual exchange rate and if you look at in US dollars what the Euro did to the dollar sequentially last year versus sequentially this year. So as always we caution people to start with your base Euro and local currency assumptions and then add your currency assumptions and then come up with the reality of the currency. Last year I think sequentially there was a greater strengthening of the Euro to the dollar than we would be forecasting or I just said it in response to an earlier question.

So if you look that at a heads up sequentially in dollars, you get a different answer than you dig down and do the math organically in local currency and organic local currency we think will be good. Then remember also you’ve got to take in the effect the impact of the triad one month last year, two months this year and then it sunsets. But sequentially it was different last year because it added net acquisition revenue in one month. This year sequentially it’s already imbedded in the second quarter results. So that’s why we really focus on the first and original analysis on the year-over-year basis and of course we do our bottoms up country by country.

Craig Hettenbach - Goldman Sachs Asset Management

Okay and if I could follow up Bob, the company has done a great job in taking the OpEx and improving margins particularly in Europe. If business does slow in here can you talk about any leverage that you have to pull to adjust on the OpEx front going forward?

Jeffery Howells

Yeah, this is Jeff. I’ll answer. The main lever is we hold back on back bills and we have a certain percentage of our employees are variableized being temp employees. In fact the second half of the year is one of the, I’m going to say slightly easier parts of the year to variableize our resources because we especially in Europe plan to have some temporary increases in resources. So we could modify that plan to add resources to handle the up tick in Europe. [Dropped audio]

Operator

One moment ladies and gentlemen as our speakers rejoin in one moment.

Craig Hettenbach - Goldman Sachs Asset Management

A question. Thank you.

Jeffery Howells

Do you mind repeating?

Robert Dutkowsky

Yeah, but Craig I’ll pick up slightly, this is Bob, I’ll pick up a slightly different tact. What we do when we enter the year-end and a specific quarter is we size the business from a cost perspective slightly smaller than we think the opportunity is going to be and so consequently we believe we can stretch our way up if the market is stronger than what we anticipated and conversely if the market gets softer than we think, we have a downsize buffer than we work with every single quarter and so as we look out into the market space and we figure out what we think is a reasonable cost structure for that opportunity and we typically run on the underside of that and that’s served us very well.

Craig Hettenbach - Goldman Sachs Asset Management

Okay. Thanks for that.

Operator

This concludes Tech Data’s teleconference for the fiscal year 2012 second quarter earnings conference call. A replay of the 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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