Tech Data (TECD) Bob Dutkowsky on Q1 2017 Results - Earnings Call Transcript

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Tech Data Corp. (NASDAQ:TECD)

Q1 2017 Earnings Call

May 26, 2016 09:00 AM ET

Executives

Arleen Quinones - VP, IR & Corporate Communications

Bob Dutkowsky - CEO

Chuck Dannewitz - EVP and CFO

Analysts

Matt Sheerin - Stifel

Brian Alexander - Raymond James

Ananda Baruah - Brean Capital

Osten Bernardez - Cross Research

Louis Miscioscia - CLSA

Param Singh - Merrill Lynch, Pierce, Fenner & Smith

Jim Suva - Citigroup

David Rold - Needham and Company

Operator

Good morning. Welcome to Tech Data Corporation's Fiscal Year 2017 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Arleen Quinones, Vice President of Investor Relations. Ma'am, you may begin.

Arleen Quinones

Thank you, Kevin. Good morning and welcome to Tech Data's earnings conference call and web cast to review our financial results for the first quarter fiscal year 2017. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; and Chuck Dannewitz, Executive Vice President and Chief Financial Officer.

For a detailed look at our first quarter results, please review our financial highlights summary slide presentation posted this morning on the IR portion of our web site located at www.techdata.com/investor. Unless otherwise specified, all growth comparisons we make on the call today relate to the corresponding period of the previous fiscal year.

Before we begin, I would like to remind all listeners that today's earnings press release and certain matters discussed in today's call may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations and are subject to risks and uncertainties.

These risks and uncertainties include, but are not limited to, those factors identified in the press release and in our filings with the Securities and Exchange Commission, specifically our most Annual Report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

Please be advised that the statements made during today's call should be considered to represent the expectations of management as of the date of this call. The company undertakes no duty to update any forward-looking statements to actual results or changes in expectation.

Also, throughout this conference call, we will reference non-GAAP financial measures, from which we exclude from our GAAP financial results, certain items. A detailed reconciliation between results reported in accordance with GAAP and non-GAAP financial measures can be found in the press release and on the Investor Relations portion of our company's web site. 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 and good morning everyone and thank you for joining us today. We are pleased to report a strong start to fiscal year 2017 for Tech Data Corporation. In Q1, our teams capitalized on pockets of demand and delivered above market sales growth in local currencies. Higher sales, coupled with strong margin and expense management resulted in double digit growth in non-GAAP operating income, double digit growth in non-GAAP net income, and double digit growth in non-GAAP earnings per share.

In addition, we generated $276 million in cash from operations, and earned a return on invested capital with 14%, a 300 basis point improvement over the prior year period, which represents our highest ROIC in four years.

On a regional basis, our Americas team turned in a strong performance, with year-over-year growth across most product categories and in most customer segments. The Americas team went after the right mix of business, gained select market share, de-selected less profitable business and as a result, improved non-GAAP operating income 29%.

The investments we made over the last several quarters to realign resources, deploy additional field sales and technical resources, and build out our capabilities in strategic and high growth areas, such as the cloud, integrated supply chain and value added services are beginning to deliver results, and they position us very well for the future.

In Europe, software had an unexpected [ph] demand in Q1, resulted in sales that came in at the low end of our guidance range. Despite an uncertain and mixed demand environment, the team executed well, outgrowing the market in a number of product categories and countries. Strong sales on broadline products were largely offset by a sharp decline in mobility products across most of our handset vendors.

In the face of significantly lower demand for mobility products throughout the region, Tech Data Europe was able to tap into the strength of its broadline product portfolio and gain share from both vendors and competitors in other product categories and deliver solid results, despite the tough comparison to a strong Q1 performance in the prior year.

Tech Data Corporation's Q1 fiscal 2017 results are a testament to the strength of our geographic, vendor, product and customer portfolios, and to the flexibility of our business model. Our diverse end-to-end portfolio of IT solutions enables us to capture opportunities in the evolving IT marketplace. This diversity enables Tech Data to deliver differentiated value to our customers and vendor partners, and produce strong results for our shareholders.

I will now turn the call over to Chuck, who will review our financial and operational results, as well as our outlook for Q2.

Chuck Dannewitz

Thank you, Bob, and good morning everyone. Both regions executed well in the quarter, outperforming the market, and delivering consolidated sales of $6 billion, a 1% increase over the prior year quarter, on a reported basis.

On a constant currency basis, and excluding from Q1 of the prior year, $21 million in sales, generated by our operations in Chile, Peru, and Uruguay, that we exited in March of last year, worldwide sales increased 2%. In Q1, the changes in foreign currencies had an immaterial implant on our remaining items included within our income statement.

At a regional level, our Americas team performed very well in the quarter. In Q1, sales in the Americas improved 2% to $2.4 billion. Adjusting for constant currency, and the exited operations, sales increased 4% year-over-year.

Both the U.S. and Canada delivered strong results, with solid top line growth and earnings improvement. Our Canadian team delivered the second highest quarterly sales in our history in local currency, fueled by strong sales to the federal government.

At a product level, the Americas growth was driven by solid sales growth in most product categories, including desktops, notebooks and new form factor tablet, PCs. Mobility, consumer electronics, networking and security products also delivered solid growth in the quarter.

In Europe, Q1 sales were $3.6 billion, up 1% on both a reported and constant currency basis. Despite facing a slightly softer demand environment, most notably, in the mobility market, our European team capitalized on pockets of strength, taking share in select product categories and geographies. At a country level, the U.K., Germany and Switzerland delivered solid growth during Q1.

At a product level, our European operations posted sales growth in broadline products, including notebooks, ultrabooks and tablet PCs, as well as software, consumer electronics and security products. This growth was offset by lower sales in mobility and datacenter products.

Worldwide gross profit in Q1 was $298.6 million, an increase of $6.7 million or 2%, primarily due to higher sales volumes. Worldwide gross margin of 5.01% increased five basis points year-over-year, primarily due to product mix.

Worldwide non-GAAP SG&A expenses, which exclude $5.4 million of acquisition related intangibles amortization expense, remained essentially flat, due to excellent expense management, offset in part by higher expenses resulting from our ongoing strategic investments, reallocation of resources, and enhancements to our field sales coverage model. As a percentage of sales, non-GAAP SG&A basis declined 7 basis points, primarily as a result of operating leverage from higher sales.

Worldwide non-GAAP operating income was $57.6 million, an increase of $7.4 million or 15%. Non-GAAP operating margin improved 12 basis points to 0.97% of sales.

On a regional basis, Q1 non-GAAP operating income in the Americas region increased $7 million or 29% to $31.4 million. As a percentage of sales, the Americas non-GAAP operating margin improved 28 basis points to 1.32%.

In our European region, non-GAAP operating income dollars increased approximately 1% to $29.8 million. As a percentage of sales, Europe's Q1 non-GAAP operating income was 0.83% of sales, consistent with the prior year quarter. Our non-GAAP effective tax rate for Q1 was 30.1%. Non-GAAP net income was $37 million, an increase of 25% compared with the prior year quarter, and non-GAAP earnings per diluted share increased 31% or $1.05.

Turning now to some of our balance sheet metrics; our cash conversion cycle in Q1 was 22 days compared to 23 days in the prior year quarter. In Q1, cash generated by operations was approximately $276 million, and we exited the quarter with a cash balance of $826 million. Capital expenditures were approximately $12 million in the quarter and for fiscal 2017, we expect capital expenditures of approximately $44 million.

For the trailing 12 months, we earned a return on invested capital of 14%, well above our weighted average cost of capital, which is approximately 9%.

At the end of Q1, we had $2.1 billion of equity, a 15% debt-to-capital ratio, and access to approximately $846 million of bank debt facilities. This strong capital and debt structure provides us with a great deal of financial flexibility, to invest in strategic opportunities.

Over the years, we have taken a very balanced approach in how we deploy our capital. Each quarter, our board of directors and management teams evaluate whether to fund organic growth, pursue M&A opportunities or repurchase our shares and these are not mutually exclusive. We will continue to closely review our capital structure and allocation strategy, to maximize our future operating results and return to our shareholders. And finally in Q1, two of our vendor partners represented 10% or more of our sales; Apple represented 17% and HP Inc. was 14%.

Turning now to our business outlook; for the quarter, ending July 31, 2016, we anticipate worldwide sales to be in the range of $6.55 billion to $6.75 billion. This guidance assumes year-over-year constant currency sales growth of flat to low single digits in both regions, and an average U.S. dollar to Euro exchange rate of $1.12 to €1.

We anticipate non-GAAP earnings per diluted share to be in the range of $1.39 to $1.49. This guidance assumes $35.4 million weighted average diluted shares outstanding and a non-GAAP effective tax rate in the range of 28% to 30%.

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

Bob Dutkowsky

Thanks Chuck. As we enter the second quarter, I am pleased with our progress and the momentum of our business. Our strong Q1 performance validates the investments we have made, and continue to make, developing an end-to-end portfolio of solutions. Strategic investments in the data center, consumer electronics, mobility, software, supply chain and the cloud, have recast Tech Data as far more than a broadline distributor. Today, we think of Tech Data as a hybrid distributor, with a broad array of technology solutions and value added services, ranging from the data center to the living room.

Tech Data's strategic position in the IT ecosystem is stronger today than ever, and we are poised to take full advantage of the next set of opportunities being created in IT, such as the emergence of the cloud computing, the endless potential of the Internet of Things, and the never-ending challenge of securing an interconnected world.

As the Internet of Things continues to create new network connections between people, machines and devices, we will continue to see an increase in security threats to those network connections. Tech Data is dedicated to helping our customers help their customers address these threats, by offering a comprehensive array of security solutions. To this end, we recently launched security solution practices in each region, with dedicated resources strategically focused on customer enablement, reseller recruitment, and onboarding new and emerging security vendor partners.

Tech Data is well positioned, both from a skills and scale perspective, to help our customers and to help our solution providers capitalize on market opportunities, like security and proactively address their customers' ever-evolving requirements.

Over the years, we have taken a number of steps to optimize our operations and to build an infrastructure, that enables us to meet the dynamic demands of our markets, and do more for our vendors and customers. One of our most significant step, and one that truly differentiates Tech Data in the market, is our state-of-the-art IT platform, through which more than 95% of our revenues now flow. Our IT platform, enables us to make a more holistic view of our business, and has been a key factor in our ability to quickly respond to market demands, out-execute the competition, and capture market share.

The next step in optimizing our business model is extending our worldwide operating model to our field operations. During Q1, we announced the appointment of Rich Hume to Executive Vice President and Chief Operating Officer. As COO, Rich now leads Tech Data's regional field operations and is responsible for all of our customers and vendors on a worldwide basis. We are thrilled to add Rich to our team, a seasoned executive who brings a fresh perspective on global IT, as well as deep knowledge of the channel, our customers, value-added services and the competitive landscape in our geographies. I am confident, Rich will accelerate our ability to share and deploy best practices across our regions, while driving enhanced excellence in execution, across our footprint.

Looking ahead, we continue to closely monitor the overall demand environment, and we remain cautious on the IT spending outlook in the regions we serve. Although, overall IT spending is somewhat muted, our ability to grow is not solely dependent on overall IT spending patterns.

Over the last few quarters, we have grown faster than the market in certain product categories, not because of accelerated growth in these categories, but because of our strong execution, our ability to win incremental business from our vendor partners, and gain share from our competitors.

One example of this, is our above market growth in PC and tablet sales over the last several quarters, a mid-end environment where sales from both products have been declining. As new and established vendors bring more products through the channel, we will quickly respond to these opportunities, which we believe, allows us to continue to outperform the market.

In summary, we will continue to balance profitable growth and investments in targeted strategic opportunities. We remain focused on delivering market share gains in key geographies, product categories, and with key vendors.

We believe this balanced approach has and will continue to enable us to grow faster than the industry, improve operating income in local currencies, and generate industry leading return on invested capital.

I'd like to extend our thanks to our vendors and customers for their business and their partnership, and by Tech Data colleagues for their strong start to our fiscal year.

With that, we'd like to open the call up to your questions.

Question-and-Answer Session

Operator

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

Matt Sheerin

Yes, thank you and good morning everyone. Just couple of questions for me; just first question regarding your guidance, it looks like on a sequential basis, you're guiding similar to the results that you had in the last July quarter, which were very strong and benefitted somewhat from Apple, which I know was up strong sequentially. Given that you are talking about a week, mobility environment, how do you explain the guidance?

Chuck Dannewitz

Matt, this is Chuck. Basically what we do, we do a bottoms-up approach in both of our region, with our management team to fare it out exactly what the opportunities that they see in front of us. So really, it is a bottoms up approach. We take into account the vendor mix and the customer mix that we see in front of us. So that's basically how they come up with it, and again, as you have noticed it, Q4 and Q1 and really throughout the history, we are able to pivot very nicely to the opportunities that present themselves. So we are confident in the flat-to-low single digit growth that we have projected and included in our guidance.

Bob Dutkowsky

And Matt, let me give you just a little bit more color on Apple in the quarter; the iPhone, as you well know, was down, but every other Apple category for us was up in the quarter. iPads, desktop, beats [ph], accessories, notebooks, the whole product line was up in every category. So Apple is not just iPhones for us, I think that's an important distinction.

Matt Sheerin

Yeah. And Bob, I think you have talked in the past about iPhone representing a third or a less of your Apple business, is that right?

Bob Dutkowsky

That's correct.

Matt Sheerin

Okay. And then, you talked about market share gains; and I know in the last couple of quarters, part of that has come from somewhat selective pricing, giving up some margin, but you have had some good drop-through from that. And also, it sounds like you're protecting margins somewhat now; so talk about how you're gaining market share, and then specific to Ingram Micro, which is going through an acquisition, has that benefitted you at all, are you seeing any market share gains from that competitor?

Bob Dutkowsky

So from a market share perspective, there is a few ways -- I think it's important that you look at it. One is, share gain from our competitors, and that for Tech Data and all of us in the marketplace is business as usual. We compete day in and day out for business. We have a very capable set of competitors, and we differentiate ourselves with execution and value-added services, and availability of product. So I don't think the competitive environment today is any different than it is, in any other quarter that I have been in the company.

I think the important other pocket of market share gain that's available, is when a vendor brings more products into the channel. So for example, as well documented recently, Dell has moved more of its product from direct sales into the channel, and that is pure market share opportunity, that some distributor is going to win. And we believe in the last few quarters, we have done very-very well, winning those jump balls, where vendors bring more product to the channel. And why do we win, because our execution is exceptionally strong, because our ability to manage that vendor's relationship across our whole footprint with a consistent IT system differentiates us. And our more aggressive sales coverage model that we have talked about over the last year or so, deploying both in Europe and the Americas, is clearly delivering results.

So net-net, Matt, market share gains don't just come at the expense of the competitors. There are other market share opportunities and Tech Data's executing in that arena very well.

Matt Sheerin

Okay, great. Any comments on Ingram?

Bob Dutkowsky

We wouldn't comment on our competitors Matt.

Matt Sheerin

Okay. Fair enough. Thanks a lot.

Operator

Our next question today is coming from the line of Brian Alexander from Raymond James. Please proceed with your question.

Brian Alexander

Okay. Thank you and good morning everyone. So I understand you take a bottoms-up approach to guidance, but just given the commentary in Europe seemed a little bit more cautious than prior quarters, why would see growth that's above historical seasonality in the July quarter, or has seasonality changed versus prior years?

Chuck Dannewitz

Brian, this is Chuck. Again, it is a bottoms-up approach. We are really only forecasting flat, which is really retaining the shares we had from last year. Albeit last year, we did have a very robust Q2. We are confident, looking at the opportunities that are in front of us, to reach those types of volumes.

Brian Alexander

Maybe just, as you look at the expectations for Q2, do you think the growth, particularly in Europe; do you think the growth is relatively broad-based or are there specific countries and/or categories that are carrying it for the second quarter, so it's more concentrated than broad-based?

Bob Dutkowsky

Yeah I think Brian; there are several very big franchise companies that we have or countries that we have, the U.K., France, Germany, The Benelux, and the smaller countries that we do business in, in particular in the South, Spain and Italy, the big countries growth rates have been consistent, and the smaller country growth rates have slowed down recently. And so when you mix all that together, we can see kind of flattish year-over-year opportunity inside of Europe.

And then Brian, I think the other thing you have to factor into that, is we are constantly adding new products. So what we sold last year, the line-up -- the products that we sell this year, the customers that we sell those products to, changes. So year-over-year comparisons are interesting, but the market is so dynamic, that in some cases, it doesn't align.

If we win a very big-big opportunity, let's say at a big retailer, that can move a lot of revenue to the Tech Data registers, that we didn't even compete for last year. So you got to slice it a bunch of different ways, by country, by vendor and then by customer set. And that's why we have confidence in the bottoms-up view that we take each quarter on the opportunity.

Brian Alexander

And you delivered. So I just wanted to get more color on that. On the balance sheet, high class problem, net cash over $450 million, I think that's the highest in almost six years. You haven't bought any shares, I don't think the last couple of quarters. So just talk about the priorities for capital allocation in the current environment? I know it has been balanced historically, and what kind of appetite you have for sizable M&A? Thanks.

Bob Dutkowsky

As Chuck mentioned in his prepared comments, our board looks at our capital allocation strategy and execution every quarter. And we have done, I think a very good job of balancing organic investments versus M&A, versus returning cash back to the shareholders through stock buybacks.

We are in a period right now, Brian, where organic investments are important to us, as we build out our capabilities in the cloud and in supply chain, and so, the board has been tilted more towards funding organic efforts recently. But the Board has its eye squarely on M&A opportunities, as well as the potential for stock buybacks.

Brian Alexander

Okay. All right. Thanks very much Bob.

Chuck Dannewitz

And Brian, I'd only add one more comment; as you know, we had $7.5 billion of sales in Q4. Some of that was in the retail section. So that cash would be coming into Q1, and with only $6 billion of sales compared to $7.5 billion in Q4, you are going to see a massive cash flow generation in Q1, which is normal. And then as we go, as we are projecting $6.5 billion of sales or more, in Q2, you will see us use some of that cash, and we will use some of that cash as we go into the third and fourth quarter. So the $826 million is a momentarily point in time.

Operator

Thank you. Our next question today is coming from Ananda Baruah from Brean Capital. Please proceed with your question.

Ananda Baruah

Hey guys. Congrats on the results. Very impressive. I guess, a couple few for me, if I could; the first is, back to Europe. This is probably the first quarter in a while, that the data center sort of wasn't highlighted by you guys as an area of strength. It sounds like -- the implication, I think, is a through getting [ph] product in the spending softness. So could you -- due to this incremental that you are seeing there, but could you kind of talk to some of the specifics that you saw in data center through the Q, and I guess, what's your expectation kind of for July too, with those dynamics as well, and then I have a follow-up or two. Thanks.

Bob Dutkowsky

Yeah Ananda, that's an accurate observation. We have had a really good run in the data center, in both geographies, both in the Americas and in Europe, and clearly, the European data center slowed down in the quarter. From our perspective, I don't necessarily have much value to add, other than, if you read all the reports from all of our vendor partners, and their prints for the quarter, you can see that there is a pretty consistent message that performances were down in all of the broad category, short of networking. And we had good networking performance across our footprint.

So networking appears to remain strong. Clearly, security is an opportunity that's robust and growing, and as we said in our prepared comments, we have launched security practices now in both geographies, to take advantage of that opportunity. And I think to a certain extent, the rest of the data center maybe in a bit of a transition from legacy technologies to newer technologies, and those transitions oftentimes cause pauses to happen and those pauses oftentimes result in upswings in later quarters. And that could be the case in the data center, inside our footprint, as the second half of the year unfolds.

Ananda Baruah

Maybe baked on your -- part of your comments. Although, it might be too early to know the answers to a follow-on I am going to ask you in that regard; but if it is such a shift, or if it is at least partially transformed [ph] by such a shift. Do you guys have the visibility as to now, if you would have exposure to those product areas that you would want to be and ultimately capture that shift? And if it is sort of a -- if there is some sort of incremental shift to the public, you have all the public guys right now, kind of turns on to the extent that if you want, you have the VAR coverage turned on to the extent that you want to participate broadly, etcetera and so on. And I do have one more follow-up, thanks.

Bob Dutkowsky

Ananda, I think that the transitions that are happening in the data center, for example from spinning disks to solid state storage and flash, those are transitions that don't happen overnight, they evolve, and that's a broad array of vendors that are bringing those products to the market, and we are fairly well positioned. The market share leaders in those, for example in flash and solid state are companies like HP, EMC, IBM and we have access to all of those products.

So as the transitions happen, the first measure that we take is the strength of our line card as the future transition happens, and we think we are in pretty good shape. But we continue to work aggressively to strengthen that line card every single day. It's our lifeblood. The strategic relationships we have with our vendor partners are what makes Tech Data go, and we are always focused on that.

Ananda Baruah

Got it. That's helpful. But you continue talking about the general positioning. And then last one for me, just with regards to Apple, how much -- I mean, I think you guys got; so year-over-year I think you were up 43% -- your Apple revenue was up 43% sequentially, which is big. Sequentially, I think you were down about around 44%, and overall that day it was down kind of 20%. So I guess the question is, how much of -- and so that was sort of -- just the [indiscernible] was down even more than 44%. So the question really is, how much of what you are seeing is channeled -- resulted in their channel action this quarter, versus kind of just the secular iPhone demand issue -- situation, I will say dynamic, not issues. And part B of that is, I'd love to get your guys take on it, if you think, their channel adjustment is sort of one-time-ish; meaning, this quarter or if there could be more to do, as we sort of try to dimension that aspect of your business, since Apple is so meaningful? Thanks.

Bob Dutkowsky

Apple is an important partner of ours. And I think -- and the thing that you have to keep in mind when you think of Apple; we look at Apple across a broad array of product categories; notebooks, tablets, desktops, consumer electronics, watches, Apple TV. I mean, Apple for us is much broader than iPhone, and actually, Apple iPhone declined in one of our geographies, but actually grew in the other geography, as we opened up new customers and began to sell iPhones to new places we didn't sell before. So that's why, we can have a different profile than a vendor, because of the way that we are able to take products into new opportunities.

Clearly with Apple, one of the opportunities is, Apple into the enterprise, and that's gaining momentum in both of our geographies, and that's incremental if you want to think opportunity for Tech Data. And I think, Apple is adjusting the inventory positions that they have in the marketplace to be able to optimize these market opportunities that are evolving.

So it's important that you look at the performance of a vendor, like in the case of Apple, but I think you have to look at, how we then take that vendors products and optimize our performance, underneath the umbrella that their products represents.

Ananda Baruah

Just last one, where is that new iPhone gear [ph] that you opened up? Thank you. That's it for me.

Bob Dutkowsky

It would be iPhone into the Latin America market sector. Through our Miami export business.

Ananda Baruah

Got it. Thanks.

Operator

Thank you. Our next question today is coming from Osten Bernardez from Cross Research. Please proceed with your question.

Osten Bernardez

Good morning. Thanks for taking my questions. At first, I would like just to follow-up with respect to the mobility outlook, if you can, discuss for the year; understanding the puts and takes around Apple. But given the success that you had in that business that you have had over the past several quarters. What's your vision in terms of how that business can grow from a full year perspective, if you will, essentially given the, some of the -- given the slowdown that has taken place in the overall market?

Bob Dutkowsky

Yeah Osten, it's Bob again. We don't give full year outlooks for -- not only in our performance, but the performance of a vendor partner. And obviously the reason being is, the vendors constantly update their products, they are constantly bringing out new features and functions in product sects that we have the privilege to sell. But in many cases, we don't know what those products are, until they literally are announced. And so for us to outlook or forecast a particular vendor in a particular segment, just doesn't make any sense for us. Instead Osten, the way you want to think of Tech Data, is our ability to respond to that dynamic environment very rapidly. When a new product or a new technology comes to the market, and our ability to understand it, staff it, and then energize our channel to be able to go create profitable revenue opportunities, is really the secret sauce of Tech Data. It's not the technology, it's what we do with it, once our partners bring it to the marketplace.

And so when we talk about execution, those are the components that we measure ourselves on, and as we said in our prepared comments, we are executing as well as we have in a long time, and you can see that in the results that we have. Even in markets that are soft, we are able to execute well and deliver nice returns to our shareholders.

Osten Bernardez

Got you. And so, with respect to the overall demand picture and the relatively muted outlook, the cautious outlook on IT spending that you are having, in terms of the space that you serve, could you sort of highlight how that breaks down by end customer for you? By that, I am talking about whether its resellers, integrators, retailers, are you seeing the same level of cautiousness across those different routes of customers, or how would you split that?

Bob Dutkowsky

I think Osten that, again, as Chuck described, we do a bottoms-up by country, forecasting process, every quarter. And so, to the best of our ability, we hear from our organizations, what the IT spending feels like at the country level, by segment, and that's how we roll our way up to our forecasts, to our quarterly plans and to the guidance that we give. So we don't get granular in the way we describe that to you, but we want to assure you that the way we build it is granular in the way you describe.

And by geography and by segment and by technology, our view is, all of that feels muted right now, compared to the last few quarters. So it's important to note, that Tech Data can still deliver good results, even in that muted market environment, because of our ability to optimize our coverage and the customers that we sell to.

So muted is not necessarily a bad thing, it's just the reality that we don't see the strong growth that has existed in the IT spending environment, like it has been, say over the last four or five quarters. And again, we are one datapoint for you, but look at the performance of our vendor partners and their outlooks as well, and you will hear the same tone everywhere.

Osten Bernardez

Got it. And just lastly, if I could just parse that down a little further; looking ahead, just from a full year perspective, do you have a view of the second half of what second half sales look like versus the first half, relative to the performance that you put up over the past couple of years, or the first half/second half has generally been -- just a few points above the second, maybe it has been 52%, 55% of sales. Do you have any vision of that?

Bob Dutkowsky

Yeah. We don't give full year guidance, but clearly, the portfolio of Tech Data's business has changed over the last few years, as we have driven into more of the retail with new products from new vendors, and so we become slightly more second half oriented, than we have been historically, and I see that continuing.

Osten Bernardez

Thank you very much.

Operator

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

Louis Miscioscia

Okay. Thank you. I guess, we are all trying to ask about the sustainability of the good results. So let me ask for the first part; when you look out this quarter with a bottom up approach, can you give us the categories that you are suggesting -- you are seeing the most strength into, where you can get a better understanding? Obviously, the explanation of Dell and the PC strength, maybe it's things like that, but if you go by a category basis, make us all feel a bit better?

Chuck Dannewitz

Yeah Lou, this is Chuck. In our prepared remarks, we did go over the areas that we experienced solid growth in each of the regions. I mean, we are going to reiterate that again, but it’s a variety of product sets and various countries in the European marketplace as well. We had strong demand, 4% demand compared to the market in Americas. So it's really pretty based, the ones that we called out that were weaker than others, in Europe, was really the mobility and then also the data center products. But across the board, we had fairly good results on the rest of the product sets.

Louis Miscioscia

And going into this quarter, just basically the ones that were strong will continue, more or less?

Chuck Dannewitz

We don't give that granularity in terms of which product sets that we view, it's just -- we just don't provide that guidance.

Louis Miscioscia

Okay. And I guess, Bob, we are all looking to just understand how long this is sustainable. I guess, when you look back to 2014, Synnex had a great year. It seems like they are in the distribution area, but struggling a bit now and you guys are doing well. I know you gave some comments to that, you have a secret sauce there. I mean, do you feel that this is sustainable for multiple quarters, because we would expect obviously that Ingram Micro or Synnex, or whoever, just have to get more aggressive and that the results here eventually -- the concern is obviously, it would start to fall off?

Bob Dutkowsky

Lou, if you survey customers which we obviously do constantly, price is not the top thing on their list, why they choose a distributor to do business with. They choose to do business with a distributor, because of the breadth of the product offerings, because of the execution that they are able to realize and able to experience when they do business with a distributor. The skills of the people that they deal with, day in and day out, and that's why -- again, that's when we talk about excellence in execution, Tech Data is executing exceptionally well on all of those fronts and our customers realize that and business -- our business with them is solid.

We are not going to comment on the execution of our competitors, we will only say that our execution and the things that our customers value, we are performing very-very well on it, and we believe we are being rewarded for that excellence and execution.

Louis Miscioscia

Okay. Last question, something you had said earlier; obviously about new products coming to the channel, again doesn't have to be guided to your numbers, but what are you seeing as a pipeline of possibilities of additional business coming to you or the channel in general, from the OEMs?

Bob Dutkowsky

The OEMs are constantly trying to optimize their routes to market. There are products and services that they believe are designed and built to be taken directly with their sales for us, and there are other products that they build specifically for channel deployment. And if you look at some of the very largest vendors in the marketplace today, whether that be Cisco or HP Enterprise, the vast majority of their business comes through the channel. So when they are either building products or acquiring companies, they spend a lot of time and effort, assuring that the products are channel ready. And our job in that continuum is to be ready to work with their product innovations, when they bring them to the market.

Louis Miscioscia

Okay. Thanks guys. And good luck on the new year.

Bob Dutkowsky

Thank you.

Operator

Thank you. Our next question today is coming from Param Singh from Merrill Lynch. Please proceed with your question.

Param Singh

Hi. Thanks for taking my question. So firstly, on the gross margin side, obviously you saw a reversal from the trend last quarter. Is that partly because of software or are you also not pushing as hard into the retail channel, and then I had a follow-up?

Bob Dutkowsky

Yeah Param, good morning. Definitely, in regards to the sequential improvement from Q4, it's definitely -- a part of that is the less mobility, as well as less retail, because that's -- it’s a product mix and then also, a customer mix that sequentially, we had that uptick. On a year-over-year basis, we only went up five basis points, and that was really just due to the various product mix.

Having said that, we are more focused on gross margin dollars, than the percentage, and how much SG&A it takes to service those gross margin dollars. And then importantly, the resulting operating income that's derived from our shareholders, and importantly, you saw that in Q4, you saw it again in Q1, where we are up 15% on our operating income. And then importantly, how much capital it takes to produce those results, and again, our teams did a stellar job, producing a lot of cash, having an excellent balance sheet and having an industry leading return on invested capital of 14%. So just a great job by the team and an excellent quarter, and again, we are focused on gross margin dollars more than we are on gross margin percent.

Param Singh

I mean, clearly Bob, you guys [indiscernible] very well, so there is some of that. Now, as a follow-up, can you remind us when the Dell -- started penetrating the channel, or when did you start getting sales with them, and when do you expect to overlap that?

Bob Dutkowsky

We started to sell Dell, I am going to say, almost five years ago, with the addition of their desktop product line to our line card. The most current addition of Dell to the marketplace, are their data center and more advanced products. Their server product line, their storage product lines, their virtual desktop product lines. So Dell is far more today, than just PCs and laptops for Tech Data, and so much of that growth is in the higher end products.

Param Singh

Well let me be more specific then; in the Americas, Dell PC sales is up about 30%-ish in the channel year-over-year, and that's coming from an increased -- well, increased channel sales overall from Dell specifically over the past year. So just wondering if you -- what benefit you guys saw from that over the past year, versus your traditional relationship with Dell?

Bob Dutkowsky

All of that is what I was trying to describe earlier as market share gains from the vendor. When the vendor brings more product to the channel, that's real upside for companies like Tech Data and we have invested heavily to be able to win market share of that revenue that's brought into the channel by the vendors. Those investments are clearly paying off for us in both of our geographic footprints.

Param Singh

Got it. Thank you, Bob. I appreciate the color.

Bob Dutkowsky

Thanks.

Operator

Thank you. Our next question today is coming from Jim Suva from Citi. Please proceed with your question.

Jim Suva

Thank you. And congratulations to you and your team on the great results and good outlook.

Bob Dutkowsky

Thanks Jim.

Jim Suva

My first question is, your operating profit, whether you look at dollars or margins, year-over-year has really been growing, especially this quarter than the past few. When we look at guidance you gave, which is better than expected, which is a good thing, it looks like the year-over-year or at least the EPS gains you are starting to take right out of it? Is that due to more investments you are doing, or the restructuring or actual items on operating gross margins are starting to lap, [indiscernible] consequence, once you start thinking about those big improvements in gains, it looks like they are starting to level off a little bit. But drives EPS kind of more flattish year-over-year compared to the big, big gains you can see?

Chuck Dannewitz

Jim, this is Chuck. Clearly, as we have more muted growth, either flat to low single digit, it doesn't give us the opportunity to leverage our income statement, the gross margin dollars as much as in prior periods. So you would see of the potential for increasing your operating income percentage, as you have in prior periods.

Having said that, we are also still -- included in our guidance, is significant investments in the cloud, in our field sales coverage, and our various other initiatives. So that's all included in our operating expenses, and so, that's all rolled into our guidance as well.

Jim Suva

Got you. Okay. And then as a follow-up on that, you mentioned this since the cloud, do you have that goal, [indiscernible] some of your expense will start to level off, or is it kind of more just a steady kind of investments to the cloud?

Bob Dutkowsky

Jim, it's Bob. Our investments in the cloud started almost four years ago, when we built and launched our cloud enabled toolset called StreamOne. And so, we continue to invest in StreamOne and actually are investing more now than ever before in that toolset; because we see the opportunity that exists in the cloud, that help our vendor partners and our channel customers take advantage of this emerging and evolving technology opportunity.

We are currently on pace now to exceed $300 million in sales in the cloud, for fiscal 2017, which we think positions us very well in the ecosystem, as a company that's adding value to the emerging cloud opportunity. But that doesn't happen without investments. And as Chuck was describing, those organic investments are high on our priority list or high on our board's priority list, and we will continue to invest to take advantage of the emerging cloud opportunity.

Jim Suva

Great. And then finally on tax rate, I know there is quarter-over-quarter seasonality that can impact your tax rate based upon geographic locations and such; but year-over-year, your tax rate has been going lower. Is that something you should expect to continue and continue and continue, or is it more just year-over-year stream [ph] relative to other markets? It has been changing, and therefore that mix can impact your tax rate. And again, congratulations on your results?

Chuck Dannewitz

Thank you very much, Jim, and in regards to tax rate, it does vary depending on the mix of where our earnings are generated. So it really is an estimate that we are providing. Having said that, our tax rates, at least on a GAAP basis, were a little higher last year, as we had large LCD legal settlements that was all taxed in the U.S. And as you know, the U.S. is one of the highest tax rate jurisdictions in the world. So it really depends on the mix of our earnings and where its located, to determine our tax rate, and we are giving you our best estimate for Q2.

Jim Suva

Thank you and congratulations again.

Bob Dutkowsky

Thanks.

Operator

Thank you. Our next question today is coming from David Rold from Needham and Company. Please proceed with your question.

David Rold

Hey thank you. Just one for me; wondering on the European demand environment; do you have a sense to what extent the cautiousness there, maybe just pause ahead of the U.K. referendum? Is that impacting at all or is this bigger than that?

Bob Dutkowsky

David, Europe is a complex market. We do business in 16 countries there, and all 16 countries have their strengths and weaknesses, and you bundle a bunch of them together and call them the EU, and if one of the pieces move slightly, it impacts all of the EU. So yes, I have to believe that the U.K. referendum is having an influence on the European market. But, through it all, products and technologies still have demand statements, and so our job is to figure out what the real demand is for products and literally muscle our way through these dynamics.

One example I would give you, if you recall back when the Greek debt issue was really -- had Europe kind of out of balance, that data continues to sell products across the European footprint. And so, I think the U.K. issue is real, and it could be contributing to the pause, but our job is to find opportunities and continue to sell and serve our customers and vendors.

David Rold

Okay. Great. Thank you.

Operator

Thank you. This concludes Tech Data Corporation's fiscal year 2017 first 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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