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Tech Data Corporation (NASDAQ:TECD)

F3Q2012 Earnings Conference Call

November 21, 2011, 09:00 a.m. ET

Executives

Arleen Quinones - Director, IR

Bob Dutkowsky - CEO

Jeff Howells - EVP and CFO

Néstor Cano - President, Europe

Murray Wright - President, The Americas

Analysts

Matt Sheerin - Stifel Nicolaus

Brian Alexander - Raymond James

Craig Hettenbach - Goldman Sachs

Ananda Baruah - Brean Murray, Carret

Lou Miscioscia - Collins Stewart

Ben Reitzes - Barclays Capital

Rich Kugele - Needham & Company

Osten Bernardez - Cross Research

Scott Craig - Bank of America/Merrill Lynch

Operator

Good morning. Welcome to Tech Data Corporation’s Fiscal Year 2012 Third Quarter Earnings Conference Call. At this time all participants are in listen-only mode. After the presentation we will conduct the 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’ll turn the meeting over to Ms. Arleen Quinones, Director, Investor Relations. Ma’am, you may begin.

Arleen Quinones

Thank you. Latonya. Good morning and welcome to Tech Data’s fiscal 2012 third quarter earnings conference call. I’m joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; Néstor Cano, President, Europe; and Murray Wright, President, The Americas.

Before we begin I’d 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 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 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 this call. The company undertakes no duty to update any forward-looking statements to actual results or changes in expectations. In addition, this call is the property of Tech Data, and may not be recorded or rebroadcast without specific written permission from the company.

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

Bob Dutkowsky

Thank you, Arleen. Good morning, everyone and thank you for joining us today. Marked by weakening macroeconomic conditions in some of our geographies, and general economic uncertainty and others, our third quarter presented us with challenges on several fronts. But once again the Tech Data team delivered another quarter of record sales, record debt income and record earnings per share.

While overall demand for IT product has moderated from last year’s level, Tech Data’s solid execution and ability to strategically [to correspond] going after the right business opportunities are stronger than ever. This quarter’s performance clearly demonstrates the resiliency of our business model and our ability to deliver results for our customers, vendor partners and our shareholders. Our results also show how over the past five years, our strategy of execution, innovation, and diversification have created a strong foundation upon which we built the company that affectively navigate the always changing IT market.

Our consistent focus, a responsible growth, disciplined costs, and working capital management and return on invested capital has also served us well and remained steadfast; demonstrated by this quarters stable growth margin performance, double-digit operating income growth and record third quarter net income. Solid earnings growth and aggressive share repurchases during the past year resulted in earnings per share of $1.26, an 18% increase over last year’s third quarter. This is the highest third quarter EPS in our company’s history, and our 12 straight quarter of double-digit EPS growth. And is a particularly impressive performance given the comparisons to last year’s strong third quarter.

Our commitments to creating shareholder value also remain steadfast, having generated a return on invested capital of 15% for the last 12 months well above our weighted average cost of capital and squarely within our targeted range of 14 to 16%. In addition, in the quarter we completed our $100 million share repurchase program announced in August. This brings the total amount of share repurchases for the year to $300 million, just over 6 million shares, our highest amount of repurchases ever in one year. Cumulative purchases are $900 million with nearly 23 million or 35% of our outstanding shares repurchased in the last six years.

Jeff will now cover the financials in greater detail, and then I will review the regional performances and provide some business highlights. Jeff?

Jeff 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 third quarter ended October 31, 2011, were $6.6 billion, an increase of 7% from 6.2 billion in the prior-year third quarter. The strengthening of certain foreign currencies against the U.S. dollar compared to the same period in the prior year positively impacted the year-over-year net sales comparison by approximately three percentage points.

Sequentially, net sales for the third quarter ended October 31st increased 2% over the second quarter. The weakening foreign currencies during the third quarter negatively impacted the sequential growth by approximately two percentage points.

Third quarter net sales in the Americas were $2.8 billion or 42% of worldwide net sales, representing an increase of 3% over the prior-year third quarter. Net sales in Europe totaled $3.8 billion or 58% of worldwide net sales, representing an increase of 10% over the prior-year third quarter in U.S. dollars and a 6% increase in euros. Organic sales growth in Europe excluding the impact of Triade, acquired October 1st of last year, was relatively flat in euros.

Slide 2 shows year-to-date worldwide net sales of $19.4 billion, an increase of 12%. Looking at our regions, Americas net sales grew 4% and European sales increased 19% in U.S. dollars and 11% in euros on a year-to-date basis.

Slide 3 summarizes our operating performance in the quarter. Worldwide gross margin for the third quarter was 5.23% compared to 5.26% in the prior-year third quarter. SG&A expenses were $255.2 million or 3.87% of net sales compared to $243.2 million or 3.95% of net sales in the prior-year third quarter. The increase in SG&A expenses on a dollar basis was primarily attributable to costs to support growth and the impact of stronger foreign currencies. As a percentage of net sales, however, SG&A declined 8 basis points year-over-year.

Operating income for the third quarter was $89.6 million, an improvement of $8.6 million from the prior-year quarter of 81 million. As a percentage of sales, operating income improved 5 basis points to 1.36% from last year’s 1.31%. On a regional basis, operating income in the Americas for the third quarter was $52.6 million or 1.89% of net sales, a significant improvement over the prior year’s third quarter of $46.1 million or 1.71% of net sales. In Europe, the company generated operating income of $39.7 million or 1.04% of net sales compared to 37.1 million or 1.07% of net sales in the prior-year period.

Interest expense was $8.4 million compared to 7.7 million in the prior-year quarter. Both periods include approximately 2.5 million in non-cash interest expense related to the accounting treatment for convertible debt instruments, which was adopted at the beginning of our fiscal year ‘10.

The company’s effective tax rate for the third quarter was 29.1% compared to 30% in the prior-year period. The year-over-year decrease in 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 in previous quarters, in accordance with FIN 18 accounting pronouncements, quarterly effective tax rates may vary significantly depending on the actual operating results in our various tax jurisdictions. The annual tax rate is expected to be 27 to 28%, relatively consistent with the prior year.

Slide 4 shows our operating highlights for the first nine months of the fiscal year. Worldwide gross margin was 5.26%, an improvement of 2 basis points from the prior-year period. SG&A expenses were $775 million or 4% of net sales compared to 688.3 million or 3.99% of net sales in the prior-year period. The relative stability of our SG&A as a percentage of sales on a year-to-date basis is due to investments we have made to support our sales growth and diversification strategies being largely offset by operating leverage on the increase in net sales and cost savings initiatives during the respective periods.

Operating income for the nine months was $244 million, an improvement of 27.8 million or 13% compared to $216.2 million in the prior year. As a percentage of net sales, operating income for the first nine months was 1.26% compared to 1.25% in the first nine months of the prior-year period.

Slide 5 summarizes net income and earnings per share. Net income attributable to shareholders of Tech Data for the third quarter was $53.5 million, an increase of $3 million or 6% compared to $50.5 million in the previous year’s third quarter. Earnings per share based on 42.6 million weighted average diluted shares outstanding were $1.26, an increase of 18% compared to $1.07 per share in the prior-year period on 47.1 million weighted average diluted shares outstanding. We estimate approximately 42 million weighted average diluted shares outstanding in the fourth quarter.

Turning now to the balance sheet, please refer to Slides 6 and 7. At quarter end, our accounts receivable totaled $2.9 billion. The allowance for bad debt was 59 million. DSO was 40 days compared to 44 days in the prior-year period. Inventory totaled $2 billion. Days of supply at the end of Q3 were 29 days compared to 34 days in the prior-year period. Accounts payable were $3.3 billion. Days payable outstanding at the end of Q3 were 48 days compared to 50 days in the prior-year period.

Our cash conversion cycle for the third quarter was 21 days compared to 28 days in the prior-year third quarter. Cash provided by operations during the third quarter totaled $144 million. Total debt was 473 million. The company continues to enjoy excellent liquidity, with a cash position of $900 million and net cash of 427 million at October 31st, 2011. Total debt to total capital was 19%. Funds available for use on our credit facility was approximately 900 million at the end of the third quarter.

As you may have seen, we recently announced several steps that we believe will further strengthen our capital structure. In October, the company entered into a new $500 million five-year revolving credit facility, up $250 million from our previous credit facility. We also renewed our receivables securitization program, increasing our borrowing capacity from 150 million to 300 million, and extended its term to August of 2012. These combined actions increased our available liquidity by 400 million at reduced interest rates.

And lastly, we called for the redemption on December 20th, 2011 of the entire $350 million outstanding principal on our convertible senior debentures, which we issued in December of 2006. At this time, we believe we have sufficient liquidity, capital resources available and financial flexibility to support the company’s operating investment goals without this additional debt. We expect the annual interest savings from these combined actions to be approximately $16 million.

Equity totaled over $2 billion at October 31st. Accumulated other comprehensive income, which consists of currency translation net of applicable taxes was 371.6 million at the end of the third quarter compared to 446 million at the end of the second quarter of fiscal 2011, sequentially decreasing $74.4 million. As of October 31st, 2011, the company had 41.3 million shares outstanding and $156 million of goodwill and acquired intangibles, which resulted in tangible book value of $45.04 attributable to shareholders of Tech Data.

Capital expenditures totaled $13 million in Q3 and $32 million year-to-date. The current plan for fiscal 2012 capital expenditures is approximately $44 million. Third quarter depreciation and amortization expense was $13.9 million.

On Slide 8 is a summary of our cumulative share repurchase activity. In the third quarter, we completed our third $100 million share repurchase program this fiscal year, which we announced in August of 2011. During the quarter we purchased 2.2 million shares at an average cost of $45.18. Year-to-date, we have repurchased 6.4 million shares at an average cost of $46.57, bringing our cumulative purchases since 2005 to $900 million or 22.6 million shares at an average cost of $39.79.

On Slide 9, we have included our return on invested capital calculation. Our return invested capital was 15% for the last 12 months, consistent with the prior-year period and within our target range of 14 to 16%.

Turning to our product and customer classifications on Slide 10, as a percentage of net sales we estimate the company’s product segment breakdown for the 12 months ended October 31, 2011 to be as follows; peripherals 30%, systems 35%, networking 18%, software 17%.

We estimate our customer segment breakdown as a percentage of net sales for the same period to be; VARs 53%, direct marketers and retailers 26%, corporate resellers 21%. As in the past, Hewlett-Packard was the only vendor that generated more than 10% of our net sales worldwide on an annualized basis. In the third quarter, HP represented 25% of our net sales, consistent with the prior-year third quarter.

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

Bob Dutkowsky

Thanks, Jeff. I will now provide some regional highlights, a few examples of our strategy and action, and our outlook.

Despite the overall macroeconomic concerns, demand for IT products on average remained relatively good in the quarter, driving top-line year-over-year improvement. However, the demand environment is best characterized as spotty, with distinct pockets of strength and weakness within our regions and by customer and product sets.

Although general economic uncertainty persisted throughout much of Europe, some countries, particularly in Southern Europe, posted significant year-over-year sales declines, while other countries performed very well in the quarter, reporting solid demand and double-digit growth in local currencies. Our European region reported sales growth in euros of 6%, with relatively flat organic growth year-over-year. At the country level, the UK, Germany, Denmark, and Norway led the way with double-digit sales growth, helping to offset ongoing weakness in Spain, Portugal, and the Czech Republic.

In Europe’s end markets, the commercial sector continued to perform relatively well while most consumer markets remained soft throughout the quarter. Amidst this weak consumer market, mobility products were again among the top-selling product categories in the region, along with notebook and software in the commercial space.

Mobility delivered another strong performance through our Brightstar Europe joint venture. The JV was our fastest growing business in Europe this quarter, with sales coming in well ahead of plan. Brightstar Europe continues to gain share in the European market and add new customers and product lines, helping to strengthen and enhance our overall business while establishing a leadership position in the fast-growing mobility market. Even with Europe, the moderating growth and the headline economic issues, our team maintained their focus and executed well in the quarter, delivering select market share gains and the region’s highest third quarter sales and operating income in euros in the company’s history.

Turning to the Americas region, the team delivered a solid performance in the third quarter, posting sales growth of 3% and improving operating income to the highest third quarter level in 11 years. By smartly selecting and deselecting sales opportunities coupled with excellent margin and cost management, the team produced operating income growth of more than three times the rate of our sales growth and operating margin expansion of 18 basis points to an exceptional 1.89%. In the Americas, tablets, notebooks, and digital signage products were among the region’s top selling products in the quarter.

Our U.S. team led the region, delivering another outstanding quarter. The team’s focused on responsible growth and pricing discipline along with cost management resulted in year-over-year improvements in nearly all key metrics. Strong performances by our U.S. team and our Latin America export business offset lower sales in Canada and Brazil.

From a U.S. end-market perspective, SMB, our core customer set, continue to grow at a healthy double-digit pace in the third quarter over last year. And strong year-over-year growth of 55% in our healthcare vertical helped to offset lower sales to the federal government end market, which did not experience the bounce-back that government resellers predicted in the previous quarter.

During the quarter, the overall pricing environment clearly became more competitive. However, our gross margin performance of 5.23%, in line with our annual target of 5.2%, is evidence of our disciplined sales approach and strong commitment to maintaining the quality of our revenue. From a supply perspective, our team continued to effectively manage inventory levels, improving days of supply to 29, a year-over-year improvement of 5 days.

Looking forward, the floods in Thailand have impacted a number of our vendors. At this time, we have a handful of vendor partners who are beginning to experience product constraints, primarily centered around hard drives. It’s still too early to confirm the mid-term potential impact of these events on the overall IT supply chain. We continue to closely monitor the situation and work with our broad portfolio of vendor partners to ensure we obtain adequate supplies across the board.

Execution is the heart of what we do each and every day, but diversification and innovation continue to move the business towards new technologies, enhanced processes, and exciting market opportunities.

Let me now provide you with some highlights on our diversification and innovation efforts. On the diversification front, after a successful launch in the U.S. earlier this year, this month we announced the introduction of TDCloud in Europe. TDCloud is a comprehensive channel program that provides resellers with access to a broad range of cloud-enabling solutions and services from leading vendors. It also offers extensive educational, enablement, and activation resources that will help resellers develop cloud-based solutions, thus taking advantage of this high-growth environment. Working with leading vendors, our team in Europe will use the TDCloud platform to take full advantage of the market-leading reach of Tech Data and the focused value-added capacities of Azlan, our enterprise division.

Also in Europe, we recently completed the acquisition of the distribution business of Man & Machine, a value-added distributor in the design software market in several European countries. This acquisition strengthens Tech Data’s position as Autodesk’s leading value-added distributor in Europe by establishing a presence in Benelux and Romania and extending our product portfolio to include the Autodesk software for the manufacturing industry in Italy, France, UK, and Poland. The acquisition adds new customers and highly skilled and qualified professionals who we welcome to the Tech Data team.

On the innovation front, the introduction of our StreamOne Software License Selector tool in the U.S. has significantly improved the reseller’s software license purchasing experience and truly differentiates Tech Data in the marketplace. In fact, our StreamOne License Selector recently earned Tech Data its second straight appearance on the Information Week 500, ranking us in the top 100 as one of the country’s most innovative IT organizations.

The StreamOne License Selector allows resellers to more efficiently navigate the complex world of software licensing by helping them quickly find the correct SKUs and place orders instantly and accurately. Since its launch earlier this year, we’ve seen a 62% jump in the number of unique customers transacting software and a 38% increase in web traffic for software quoting and orders, while inbound call volume to our licensing software desk is down 30%. Software vendors such as McAfee, who recently honored Tech Data with the Distributor of the Year award for the second straight year, also benefit from the considerable reduction in order processing time and the improvement in order accuracy. With the StreamOne License Selector, Tech Data is not only generating incremental software sales and improving the overall reseller software licensing experience, it is setting a new industry standard for software license distribution.

Another example of our investment in innovation is our continued deployment of internal IT systems across both geographies. Over the past few years, we have implemented several components of SAP in North America, leveraging the experience gained from our pan-European SAP deployment. We will continue this process going forward, which is providing Tech Data with the flexible and scalable systems needed to meet the demands of the ever-evolving market.

This quarter we hosted several customer and vendor events throughout North America and in Europe, connecting hundreds of vendor partners and resellers while showcasing Tech Data’s innovative marketing programs, advancements in business analytics, online tools, and customer engagement programs. Through peer connection discussion groups, business enablement sessions, and business connection workshops, our resellers, vendor partners, and members of the Tech Data team came away with fresh industry and market data and collaborated on ways to optimize our collective performance in the coming quarters.

In summary, our third quarter results clearly demonstrate the strength of our business model and validate our strategy of execution, diversification, and innovation. In a difficult economic environment, our worldwide teams continued to execute, delivering top-line growth in line with the market, solid margins, record net income and EPS, strong cash flow, and return on invested capital well above our cost of capital.

Undoubtedly, our diversification efforts have strengthened our position and have allowed us to pick our spots, pursuing more profitable growth opportunities. And our investments and innovation continue to differentiate Tech Data and most importantly, deliver value for our vendor partners and customers.

Looking ahead, demand for IT products has clearly moderated from the levels we experienced for the last several quarters. Indications from our vendor partners and customers point to a modest growth environment over the next three to five quarters. As a result, for the fourth quarter we are planning in both regions for flat to low single-digit year-over-year sales growth in local currencies. We will continue our focus on responsible growth and on the quality of the revenue opportunities we pursue, taking into consideration our growth and operating margin goals.

In Europe, we are currently realigning our resources to more closely match our cost structure and our skills portfolio with the market opportunities, which will result in incremental costs of approximately $15 million in the fourth quarter. Despite this, we still expect to deliver a solid fourth quarter and another record-setting year for Tech Data.

As we look to fiscal 2013, we believe that the proactive steps we are taking now together with our successful track record of delivering a strong operating performance in the face of significant market challenges position us well to optimize our performance, even in a somewhat flat growth environment. Therefore, our three-year target of achieving operating margin of 1.5% before stock compensation expense coupled with 14 to 16% return on invested capital in fiscal year 2013 remain our goal. In addition, the significant reduction in our interest expense that Jeff mentioned along with a lower share count resulting from this year’s repurchase activity will provide for continued earnings per share growth in fiscal 2013.

As always, I want to take this opportunity to thank our customers and vendors for their partnership and continued support and all my Tech Data colleagues for their excellent execution and continued dedication.

With that, we will open the lines for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Matt Sheerin with Stifel Nicolaus. Please proceed with your question.

Matt Sheerin - Stifel Nicolaus

So, my first question is related to your commentary about the cost cutting efforts in Europe. Could you tell us where that’s going to be, what the expected savings, what the head count reduction would be? And are you cutting basically just to come into fiscal ‘13 with a lower cost structure because you expect demand to be weak next year, or are you also expecting to deselect certain sales opportunities in order to improve margins, so lowering the cost structure in advance of that?

Jeff Howells

Matt, this is Jeff. I’ll try to answer as much of that as I possibly can. The reductions we are taking in Europe is, first of all, to recognize the productivity improvements that we have as a result of both our system implementation over the years and the integration of our acquisitions coupled by reductions in areas where the environment has remained softer, such as Southern Europe. It also will be reallocating resources; in other words, hiring individuals in countries where we continue to grow and/or with our specialty businesses that we’ve added over the years. So basically, it’s a combination of productivity, acknowledging some of the slower markets, and then reinvesting some of the head count into our higher growth diversification efforts in various countries. There will be a net reduction in head count. But as far as the quantification of the savings, I think you can just circle that into Bob’s comment that said our goal remains to generate an operating income of 1.5% next year on a flattish sales environment, where we said previously that our hopes were to gain or reach the 1.5% level on normal market conditions which would be closer to mid single-digit sales growth.

Matt Sheerin - Stifel Nicolaus

Okay, great. And then on Thailand, you talked about some potential impact. But assuming that you haven’t baked that into your outlook in terms of your expectations for the quarter, did you expect to see any shortfall of sales because of product constraints? And as you look at the disk drive (inaudible) and allocation to various customer segments, where do you think distribution falls out in terms of your allocation? Will it be greater than normal because the OEMs or the suppliers will want to get to a broader or smaller environment, or are they going to be giving priority to the big OEM customers which would put distribution at the back of the line?

Bob Dutkowsky

Matt, this is Bob. I think, as I said in the prepared comments, it’s too early to tell the degree of impact it’s going have on Q4. We’re just starting to see some of the vendors show allocation processes, and I think the algorithms that they use to set allocations are going to remain relatively consistent. And as a big consumer of PC type technologies, we’re going to get our fair share of the drives that are available. Also when products go into allocation, that doesn’t necessarily, it can positively impact our ability to drive gross margins. So, we hope the Thailand situation works itself out in a timely fashion, but we anticipate getting our fair share of product and selling it.

Operator

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

Brian Alexander - Raymond James

Yes, thanks, Bob. I didn’t hear you mention this. But excluding the $15 million charge in the fourth quarter, are you still expecting operating income to grow double-digits this year? And then I have a couple follow-ups.

Jeff Howells

Brian, this would be Jeff. First of all, the 15 million of expense that we are incurring in the fourth quarter, we’re putting that out there just more for your modeling information and information. As is usual, we’re not looking for any excuse or anything or forgiveness on that number. That number is a cost that’s going to be incurred in Q4 to position us properly to go into next year in this moderating growth environment. All that being said, if our Q4 estimate of revenue is correct, it will moderate our double-digit operating income goals, and it could fall below that level. However, we are beginning to enjoy significant interest savings and our share count. So, we still will be able to deliver very nice results in Q4 for our shareholders as well as into next fiscal year, anticipating both this fiscal year to be another record earnings year and next fiscal year to be a record that would top that.

Brian Alexander - Raymond James

So, Jeff, on the 150 basis points for next year on flat sales growth, I think that would be up about 10 basis points year-over-year if I include stock comp. It looks like the expense actions might get you half of the way there. But could you maybe help us understand the right way to think about bridging operating margins in fiscal ‘12 to fiscal ‘13 in terms of OpEx leverage versus gross margin expansion and maybe any regional color? Thanks.

Jeff Howells

Yes, I think we will continue to look at Europe for the operating income leverage. That will be minimized this year because of the incremental cost. However, having integrated the acquisitions that we did last year, adding the small acquisition of Men & Machines this year, and the reallocation of adding resources to specialty areas and higher growth diversification efforts will allow us to gain incremental leverage in Europe, and that’s our plan going into next fiscal year. As far as the math, since we don’t provide a model and outlook, I can’t comment on [Euros]. But we believe that the leverage is there, especially in Europe. The Americas team, on the other hand, continues to deliver great performance. And to a certain extent, we want to make sure that, I’ll say, we stay in market and continue to add resources to the right place at the right time to take advantage of market opportunities. And so we’re not looking for as much leverage out of the Americas operation going into next fiscal year, more out of Europe.

Operator

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

Craig Hettenbach - Goldman Sachs

Bob, can you just touch on the North American market, very solid margins, as you mentioned, in the quarter, revenue growth 3%? So just update on the strategy of balanced growth from a revenue and profitability perspective and how you see that playing out in fiscal ‘13.

Bob Dutkowsky

I think, Craig, in the quarter just reported as well as for the last couple of years; our Americas team has showed tremendous discipline on picking the revenue opportunities that could deliver the best balanced performance. We call it responsible growth, so grow with the rate of the industry and deliver solid operating performance and return on invested capital. And so you could see the type of quarter that the Americas had this quarter. But look back over the past year or two and it’s been relatively consistent and very solid.

We believe that our teams have built a very disciplined approach to the market, market opportunities, vendor partnerships, pricing disciplines. And so as we look into the next year, we see the ability to continue to deliver that kind of disciplined performance. We’re only getting better at it, Craig, not worse at it. And so that’s where the leverage continues to come as our teams build their skills, get deeper relationships with new vendors, which lead us into new customer opportunities. And then we use our disciplined pricing approach to be able to find the right business opportunities.

Craig Hettenbach - Goldman Sachs

Okay. And then if I could follow-up your comments on a more competitive pricing environment, any color by geography or products in terms of where you’re seeing pricing most competitive?

Bob Dutkowsky

I think it was competitive in both geographies. That’s a symptom of a market that’s slowing down. Every opportunity becomes more competitive. But clearly, with our gross margin performance, we were able to take a disciplined approach to that competitive environment. We’ve said that for the year, our sweet spot for gross margin is 5.2%. And you can see we’ve delivered inside that range; in fact, exceeded that range in a market that we’re seeing that has become more competitive from a pricing point of view. So we’re very, very pleased with our execution on that front in a competitive pricing environment.

Operator

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

Ananda Baruah - Brean Murray, Carret

I guess just the follow-on that one, Bob, do you have any sense or could you necessarily tell if the pricing environment can mitigate as we get into fiscal year ‘13? And I guess what I’m really asking is how much of it do you think might be just maybe some excess inventory out there given that the demand has slowed a little bit more than expected across the industry? And if the inventory gets worked off, do you think that the pricing environment can be more stable as we go into next year?

Bob Dutkowsky

Ananda, we can only speak to our own disciplined approach to the market. And you can see that our inventory position was very solid for the quarter. We believe we have the right products on the shelf to sell. And then we took a disciplined approach to the business opportunities that we pursued. Again, it’s a systematic approach to the market. It’s disciplined and it’s backed by systems that give our teams better knowledge and information about the real cost to win business and the real cost to compete for business and the way we have to price to be able to give a good return to our shareholders. And that disciplined approach may, in fact, mute our top line at times. We may not grow as fast as others. But we think the balanced performance that we’ve been delivering, solid revenue growth, great operating margin, good earnings per share growth with an outstanding return on invested capital is the proper approach to the market, and that’s the approach we will continue to deploy this quarter and beyond.

Ananda Baruah - Brean Murray, Carret

Got it. And regarding the incremental cost in the Jan quarter, from where we stand today, is it reasonable to assume that that’s going to be the majority of what’s new and incremental from an initiative perspective? It’s loud and clear that you guys feel like the operating margin expansion story is intact through next year. But I guess for our modeling purposes, I know you can’t give us specific dollars after the Jan quarter. But does that feel like it can be the lion’s share of what’s going to be incremental given the new environment?

Bob Dutkowsky

I’d answer that question this way. As Jeff described, some of the 15 million will lessen our investments in some geographies or in the environments where we don’t believe the opportunity to grow profitably exists. And then other areas, we want to double down and reinvest in market segments that we think can grow faster or can deliver better profitability. And when you have a business the size of our European business, it’s just natural that over time you’re going to get an imbalance of resources. You’ll have the wrong talents in the wrong places. And so that natural rebalancing is part of what this investment we need to make today is. We would not make this investment today if we didn’t believe it’s going to have an impact on the long-term on the performance and profitability of Tech Data. So, many times we have told you we need to invest to position the company, invest earlier in the year to grow later in the year. This is an investment similar to that, but we can just see opportunities we want to make sure we’re aligned against early.

Operator

Our next question comes from the line of Lou Miscioscia from Collins Stewart. Please proceed with your question.

Lou Miscioscia - Collins Stewart

I guess, Bob, as we look to next year, and it seems like your comments were a bit more cautious, obviously than last quarter. But it still sounds like maybe Tech is going to be normal. Is there a possibility and are you getting enough feedback that maybe it’s actually going to be worse than expected? Obviously, you look at the macro situation, especially in Europe, and it just seems an awful lot more disconcerting. And then when you normally walk over into a new calendar year, budgets get reset. And often, they get reset a lot lower.

Bob Dutkowsky

Yes, Lou. I think, as I tried to say in the prepared comments, we just had very detailed discussions with our vendor partners in both geographies and literally hundreds of our customers to be able to get their feedback in terms of what they see as both the market growth opportunities and then segments or platforms that they wanted to make sure we were focused on. And we took all of that data and all that information and massaged it to come up with our view of the market for next year to be flat to low single-digit growth opportunity. Inside that, there will be market segments that are going to grow much faster. And we believe that we are very well positioned to take advantage of those upside opportunities. And we also want to make sure that if there are areas where our vendors and customers don’t believe there are good growth opportunities that we don’t overinvest in those. So, this reset process that we had, which by the way happens every year at this time, is an important part of our planning process and has a very large impact on the way we look forward over the next three to five quarters say. And so we are just articulating what we believe the market is going to provide us with in terms of opportunity.

Lou Miscioscia - Collins Stewart

Okay, great, maybe a little bit more granular, perhaps on systems, peripherals, networking, and software, or just whatever pockets you can either call out on the upside or downside.

Bob Dutkowsky

Well as we said in the prepared comments, anything attached to mobility seems to be a very good opportunity. And that’s why we are thrilled with the investments we have made in the mobility space as far back as three years ago to position ourselves for this, what we believe to be a very important emerging market opportunity. The peripheral side of the business slowed down, but that’s pretty predictable. The peripherals will continue to last and work, and so a customer can get more life out of a peripheral device. And then lastly, the software that connects all that together continues to perform nicely. And that’s why we highlighted, again, our investment in the StreamOne infrastructure because it enables our vendor partners and our customers to more successfully and rapidly at a low cost deploy software into the channel. And so if it’s mobile or its software, it’s performing very well and we are in a great position to take advantage of that.

Operator

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

Ben Reitzes - Barclays Capital

You guys covered a lot here around the margins, et cetera. I guess the below the line things I wanted to just clarify, what are the interest savings in the fourth quarter again?

Jeff Howells

The fourth quarter I did not outline, although we will have a redemption of our convert mid-quarter. So, if you wanted to do the calculation on savings, let’s say 5% on 350 million for half the quarter pre-tax, quite clearly, next year we are anticipating saving $16 million on interest expense.

Ben Reitzes - Barclays Capital

Okay. Now what was the ending share count in the quarter, and are you going to do any further buybacks from here?

Jeff Howells

Well we had approximately 42.5 million shares outstanding and estimate 40 on average for the quarter, and estimate 42 million shares going forward through Q4. We do not have an authorization for an incremental buyback established at this point in time. We’ll continue to look at that and discuss it with our board each and every quarter. The next step is to redeem the converts in December, and then we’ll continue to look at the opportunity to either buy back our stock or select M&A activity.

Ben Reitzes - Barclays Capital

And for the next year, tax rate we should use is 27 to 28 for the whole next year?

Jeff Howells

I think that’s a good estimate, yes.

Ben Reitzes - Barclays Capital

All right. And then final question is Hewlett-Packard, 25% of sales. If you do the math, you can get them, I don’t know, down 4% year-over-year. I don’t know if that’s exact because we’re just running off numbers from that you have disclosed. But the bottom line is, was there a disruption due to what they were saying about the PC business from Hewlett? And if that’s right, what was the amount with Hewlett down year-over-year? And I could have the wrong number from a year ago.

Jeff Howells

Yes, I would not say that there was disruption. I would say that we continue to grow other areas of the business in our diversification, so they end up mathematically having some degradation as a percent of what we sell as we grow mobility products in Europe. But as far as a measurable difference because of the comments that they had made in the potential spinoff of the PC, I don’t think we can see any impact.

Operator

Our next question comes from Rich Kugele with Needham & Company. Please proceed with your question.

Rich Kugele - Needham & Company

Just a couple of questions. In terms of Europe, can you break down your relative exposure rather than getting into the country specifics, which I don’t think you provide? Can you just say how much is Northern versus Southern versus the UK?

Jeff Howells

Rich, this is Jeff. Not really as to breaking down our business, but you can assume that we’re focused on the larger markets and generally enjoying number one, number two positions in those markets. In Germany, it’s the one market that’s the exception to the rule. So, we have very good presence in each and every country. However, Germany is the main region where we have the number three role at this point in time, but good diversification across. And as we’ve said in the last few quarters, the South is where business is slow, Spain, Portugal, Italy. Yet France, Germany, UK, Benelux, we’ve got very good and strong businesses.

Rich Kugele - Needham & Company

Okay. And then in terms of the incremental 15 million in expenses for Europe, are you saying that that’s a go-forward expense or is that just a Q4 event?

Jeff Howells

No, it’s a Q4 event.

Rich Kugele - Needham & Company

Okay. And then in terms of the inventory, that was a pretty noticeable inventory reduction on a day’s basis year-over-year. Is it in any particular category, or is it that the slowdown has been slow enough that you had time to moderate your own inventory levels to prepare for Q4 and into next year?

Jeff Howells

Well I think it’s actually a multi-quarter answer. If you look back Q3 last year, we made comments that we ended up with more inventory than we had anticipated. However, going into the fourth quarter is always the best time to have excess inventory because of your sales growth sequentially. We ended the year we ended Q1 also with more inventory than we had desired for a variety of reasons, including the slowdown in Europe of the consumer PC sales. But we demonstrated in our Q2 that we were on top of it early. However, you want to characterize it, our European team executed exceptionally well in Q2, bringing down the inventory, selling through the inventory, and maintaining the gross profit profile, working with our vendors to place the inventory appropriately. And so we had an excellent inventory position at the end of Q2 in Europe, continue to have an excellent position here in the Americas. And the key is that position was maintained as we went through Q3, working more closely with the vendors to stock the right product with full acknowledgement of what’s going on in the marketplace. So, I’d characterize it as a multi-quarter event concluding at the end of Q2 and showing our continued excellent performance in Q3.

Operator

Our next question comes from Osten Bernardez with Cross Research. Please proceed with your question.

Osten Bernardez - Cross Research

My first question is how would you rate the Triade acquisition now after a year, so with their being in operation?

Bob Dutkowsky

This is Bob. We’re pleased with the acquisition. If you recall, just in round numbers, Triade represented about a third of a broadline company, a third of a mobility company, and a third of a consumer electronics company. And we obviously know and understand the broadline business and quickly integrated that into our company. We used the strength of the mobility business to really enhance the Brightstar joint venture. And the consumer electronics business really for us was the opportunity to learn and to bring in a bunch of very talented people who understand that segment very well and to learn from them. And so as we look back a year later at the Triade acquisition, we’re very pleased that we made that move.

Osten Bernardez - Cross Research

Okay. And when I think although it’s early days, would you be able to highlight how you’re progressing with your ActivateIT initiative in the U.S.?

Bob Dutkowsky

As you said, it’s early. But we believe that that opportunity to bring mobility products into the VAR channel is a real opportunity and one that we’re excited that we’ve made the investments on. It’s different than the traditional deployment of smartphones in the market. It’s more complex and it needs more IT system support. And so through our joint venture with Brightstar and the acquisition of a company called OTBT, we’re able to put those pieces together and support that new market in a way that no one else can. And it’s got the attention of the carriers and it clearly has the attention of the VAR community and the handset providers. So, we’re excited about the upside that that represents, but it’s going to unfold over time. We have it in a very measured rollout stage right now. It’s not open to all VARs in the United States. It’s a limited rollout to make sure that all the systems and processes work correctly. But early next year, we’ll unleash that opportunity on the whole channel.

Osten Bernardez - Cross Research

Got it. And are there any particular targets by product groups that you would be willing to share with respect to next quarter, whether it would be displays or any other product groups?

Bob Dutkowsky

Product groups, I didn’t follow your question there, product groups we’re going to work on or.

Osten Bernardez - Cross Research

Product groups sales targets for product groups.

Bob Dutkowsky

Yes, we don’t articulate that, but you know the big categories that we’re focused on. And we believe that those will be the categories that will deliver our Q4 as well as next year and beyond. If there’s anything that we’re excited about the positioning of the company, it’s the focus we have across a broad array of platforms. So while one platform or area may be a little slower, another area is growing rapidly. Peripherals may be slower, but mobility products are moving very nicely. And that’s part of the magic of our model, is the diversity of our coverage model.

Osten Bernardez - Cross Research

All right. And lastly, after the expected reduction that’s coming up in December, would you be able to share what portion of your cash you expect to have in the U.S.?

Jeff Howells

We don’t break that down. But clearly, we’re going to be using a lot of our cash to redeem the convert. But we fully utilize our cash intra-quarter in both regions and become a net borrower, so we don’t really look at having any inefficiencies.

Operator

Our next question comes from Scott Craig with Bank of America. Please proceed with your question.

Scott Craig - Bank of America/Merrill Lynch

Hey, Jeff, with regards to cash flow going forward here over the next couple of quarters, anything in particular that we need to make note of that could shift it meaningfully one way or the other, and the same sort of question around the tangible book value? And then, Bob, from a long-term perspective, any change on your thought process with the operating profit potential in each of the regions, so more from a longer-term basis? Thanks.

Jeff Howells

On cash flow, we’ve had a very good year-to-date, some of the balance sheet actions and a little bit of the slowing in the business. But Q4, it’s not unusual to consume a little cash to support the sales growth in Europe. It still will end with a very nice strong year of cash flow generation. So, I’d say nothing unusual in that area. Tangible book value, anything material, I’d say no, nothing material. As we’ve disclosed in the prior quarters, the only issue outstanding out there is our situation in Brazil, which we continue to work through that. But even that wouldn’t have any material impact on tangible book value.

Bob Dutkowsky

And regarding the profit outlook by geography, we just would reiterate our goal to achieve the 1.5% operating income along with 14 to 16% return on invested capital in 2013 remains intact. And in order to get there, we have to mix a profitable Europe and a profitable Americas business unit. And underneath the covers of that, we have to find the right sales opportunities to the right customers and bring the right products into the market. And we continue to diversify those lifts, both customers and products, to find those profitable opportunities that can drive us to our long-term goal.

Operator

This concludes Tech Data Corporation’s fiscal year 2012 third 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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