Tech Data's CEO Discusses F4Q2012 Results - Earnings Call Transcript

| About: Tech Data (TECD)

Tech Data Corporation (NASDAQ:TECD)

F4Q2012 Earnings Conference Call

February 28, 2012, 09:00 a.m. ET


Arleen Quinones - Director, IR and Shareholder Services

Bob Dutkowsky - CEO

Jeff Howells - EVP and CFO

Néstor Cano - President, Europe

Murray Wright - President, The Americas


Brian Alexander - Raymond James

Matt Sheerin - Stifel Nicolaus

Ananda Baruah - Brean Murray Carret and Company

Scott Craig - Bank of America/Merrill Lynch

Ben Reitzes - Barclays Capital

Osten Bernardez - Cross Research

Craig Hettenbach - Goldman Sachs


Good morning. Welcome to Tech Data Corporation’s Fiscal Year 2012 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time.

Now, I’ll turn the meeting over to Ms. Arleen Quinones, Director of Investor Relations. Ma’am, you may begin.

Arleen Quinones

Thank you, Latonya. Good morning and welcome to Tech Data’s fourth quarter and fiscal year 2012 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 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 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 on our fourth quarter and fiscal year 2012 earnings conference call.

We’re very pleased to report another solid quarter and a record fiscal year for Tech Data. We entered fiscal year ‘12 with strong momentum and with the tailwinds of an IT market recovery at our back. As the year progressed, we faced challenges brought on by natural disasters in Japan and Thailand, a European sovereign debt crisis and a slowing IT market. Despite these challenges, our focus on responsible sales growth, improved earnings and return on invested capital remained unchanged, and the results are reflected in our solid fiscal year 2012 performance.

Sales grew 9% in the year to more than $26 billion. Excluding the costs to exit Brazil and Colombia, we improved both operating and net income and achieved non-GAAP earnings per diluted share of $5.09, our fifth consecutive year of double-digit earnings growth per share. We generated $503 million of operating cash flow and earned return on invested capital of 14%, well above our weighted average cost of capital.

In addition, we returned $315 million of value back to our shareholders in the form of stock repurchases, the most stock we bought back in any one year, bringing our accumulative repurchases to $915 million since 2005. And while delivering a solid financial performance, we also took proactive steps to further strengthen and better position the company for the future.

In the fourth quarter, we exited unprofitable markets in Latin America and realigned our resources in Europe to improve productivity and match our cost structure with market conditions. During the year, we acquired two European specialty software distributors. We further integrated Triade, invested in technology including our innovative one-of-a-kind TDMobility and Stream One initiatives, and enhanced our capital structure to provide us with greater financial flexibility at lower cost.

We have clearly demonstrated once again what we believe to be a hallmark of our business model and one of Tech Data’s core competencies, the ability to successfully navigate the ever-changing IT market landscape and deliver strong results for our shareholders. Our strategy of execution, diversification and innovation is differentiating Tech Data in the market. Our disciplined focus is delivering excellent results for our shareholders, and together, they position the company for long-term market share gains, improved profitability and shareholder value creation.

I’ll now turn the call over to Jeff for a review of our financial results. And then I will provide some additional 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

Please note that in our commentary and slides, we have excluded a $28.3 million loss on disposal of subsidiaries related to the company’s exit of its in-country operations in Brazil and Colombia from the current-year period. A reconciliation could be found in our press release and in the supplemental schedules.

Beginning with the first slide, worldwide net sales for the fourth quarter ended January 31, 2012 were $7.1 billion, consistent with the prior-year fourth quarter. The weakening of certain foreign currencies against the U.S. dollar compared to the same period in the prior year negatively impacted the year-over-year sales comparison by approximately 1 percentage point. Sequentially, net sales for the fourth quarter ended January 31, 2012 increased 8% over the third quarter. Weaker foreign currencies during the fourth quarter negatively impacted the sequential growth by approximately 4 percentage points.

Fourth quarter net sales in the Americas were $2.7 billion or 39% of worldwide net sales, representing a decrease of 1% over the prior year fourth quarter. Excluding Brazil from both periods, sales grew by 2% in the quarter. Net sales in Europe totaled $4.4 billion or 61% of worldwide net sales, representing an increase of 1% over the prior year fourth quarter in U.S. dollars and a 2% increase in euros.

Slide 2 shows worldwide net sales of $26.5 billion for the fiscal year ended January 31, 2012, an increase of 9% over the prior fiscal year. The strengthening of foreign currencies positively impacted year-over-year sales comparison by approximately 3 percentage points. Looking at the regions, the Americas net sales grew 3% and European sales increased 13% U.S. dollars and 8% in euros for the fiscal year.

Slides 3 through 5 summarize our operating performance in the quarter. Worldwide gross margin in the fourth quarter was 5.27% compared to 5.32% in the prior-year fourth quarter. The year-over-year decrease in gross margin was primarily attributable to competitive pricing conditions in certain markets during the quarter. Non-GAAP SG&A expenses were $262.8 million or 3.7% of net sales compared to $261 million or 3.67% of net sales in the prior-year fourth quarter. The increase in SG&A expenses was primarily attributable to year-over-year incremental severance cost of $11 million in Europe and the cost realignment efforts we announced in our last earnings call.

Non-GAAP operating income for the fourth quarter was $112.1 million or 1.58% of net sales. This compared to net operating income of $117.8 million or 1.65% of net sales in the same period last year. The year-over-year decline is primarily related to the incremental severance cost in Europe. On a regional basis, non-GAAP operating income in the Americas for the fourth quarter was $55 million or 2.01% of net sales, as compared over the prior years fourth quarter of $48.6 million or 1.75% of net sales.

In Europe, the company generated operating income of $59.8 million or 1.37% of net sales, compared to $71.6 million or 1.65% of net sales in the prior-year period. The decrease is primarily attributable to year-over-year incremental severance cost of $11 million.

Interest expense was $6.2 million compared to 8.3 million in the prior-year quarter. The decrease of interest expense is attributable to the redemption of our convertible debentures in mid-December. The current period includes approximately $1.3 million and the prior period includes approximately $2.5 million of non-cash interest expense related to the accounting treatment for convertible debt instruments, which was adopted at the beginning of our fiscal 2010 year.

The company’s effective tax rate on a non-GAAP basis for the fourth quarter was 25.7% compared to 25.4% in the prior-year period. Non-cash charges during the quarter associated with the write-off of deferred tax assets in Brazil were essentially offset by the reversal of deferred tax assets valuation allowances in Europe, resulting in an immaterial change to the tax provision on both a GAAP and a non-GAAP basis. For fiscal year 2013, we expect an effective tax rate of 29 to 30%.

Slide 5 summarizes the net income and earnings per share. Non-GAAP net income attributable to shareholders of Tech Data for the fourth quarter was $73.3 million compared to $77.3 million in the previous year’s fourth quarter. Non-GAAP earnings per share based on 41.9 million weighted-average diluted shares outstanding or $1.75 compared to $1.63 per share in the prior-year period on 47.3 million weighted average diluted shares outstanding. For the fiscal year, non-GAAP net income attributable to shareholders of Tech Data was $225.6 million compared to 214.2 million in the prior year. Non-GAAP earnings per share based on 44.3 million weighted average diluted shares outstanding were $5.09, an increase of 17% compared to $4.36 per share in the prior-year period based on 49.1 million weighted average diluted shares outstanding.

Turning to the balance sheet on Slide 6 and 7. At quarter end, our net accounts receivable totaled $2.9 billion and allowance for bad debt of $53 million. Our days sales outstanding were 37 days consistent with the prior-year period. Our inventories totaled $1.8 billion giving us days of supply at the end of Q4 of 24 days compared to 30 days in the prior-year period. Our accounts payable totaled $3 billion. Days payable outstanding at the end of Q4 were 41 days compared to 43 days in the prior-year fourth quarter.

Our days payable outstanding reported in the prior year includes an adjustment to previously reported balances as a result of a change in the way the company accounts for book overdrafts. Historically, the company has presented certain book overdrafts representing check issued in wired transfers that have been initiated but have not been presented for payment for the banks as accounts payable. Based upon agreements with these banks in certain countries, we determined a significant portion of this book overdrafts were covered by rights of set-off in favor of the respective banks and therefore, we have classified these amounts as reductions to cash and accounts payable as of January 31, 2012.

We have adjusted our financials for the year ended January 31, 2011 to be consistent with the current year presentation. The impact of this adjustment was a decrease of $76.2 million to cash and accounts payable as of January 31, 2011. This had an effect of reducing our previously reported DPO and increasing our previously reported cash days in the prior-year fourth quarter by one day. Our cash conversion cycle for the fourth quarter was 20 days compared to 24 days in the prior-year fourth quarter, including the adjustment for book overdrafts I just mentioned.

Our total debt was $105 million. On December 20, 2011, the company redeemed the entire $350 million updating principle on our convertible senior debentures which were issued in 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.

The company’s cash balance at January 31 was $505 million, with net cash position of $400 million. Total debt to total cap was 5% at January 31. Funds available for use on our credit facilities approximated $1.3 billion at the end of the quarter. Equity attributable to shareholders of Tech Data totaled $2 billion at January 31, 2012.

Accumulated other comprehensive income which consists of currency translation net of applicable taxes was 283.8 million at the end of the fourth quarter compared to 371.6 million at the end of the third quarter of fiscal 2012, sequentially decreasing $87.8 million. As of January 31, 2012, the company had 41.1 million shares outstanding and $153 million of goodwill and acquired intangibles, which resulted in a tangible book value of $45.01 attributable to shareholders of Tech Data.

Capital expenditures totaled $12 million in Q4 and $44 million for the year. The current capital expenditure plan for fiscal 2013 is approximately $40 million. Fourth quarter depreciation and amortization expense was $14.5 million.

On Slide 8 is a summary of our cumulative share repurchase activity and cash flow highlight. In the fourth quarter, we announced another $100 million share repurchase program. During the quarter, we purchased approximately 300,000 shares at an average cost of $50.65 per share. In the fiscal year, we purchased 6.7 million shares at an average cost of $46.74 per share, bringing our cumulative purchases since 2005 to $915 million or 22.9 million shares at an average cost of $39.93 per share.

Cash provided by operations during the quarter totaled $108 million. During the fiscal year ‘12, we generated $503.4 million of cash from operations. Cash provided by operations during the first nine months of fiscal 2012 increased by $1.7 million and by $57.5 million for the year ended January 31, 2011, due to the company’s adjustment of prior-period cash flows as a result of its accounting for book overdrafts, as I discussed earlier.

On Slide 9, we’ve included our return on invested capital calculation which was 14% for the last 12 months, consistent with the prior-year period after adjusting for book overdrafts in the prior-year period.

Turning to our product and customer classification on Slide 10, as a percentage of net sales, we’ve estimated the company’s product segment breakdown for the fiscal year to be as follows: peripherals, 29%; systems, 35%; networking, 19%; software, 17%.

Looking at the customer segment breakdown, the percentage of net sales for the fiscal year approximates the following: 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 fourth quarter, HP represented 22% of our net sales.

Turning to our business outlook. Our plan for the first quarter of fiscal 2013, taking into account the exit of Brazil and Colombia, anticipates flat sales growth in both regions in local currencies. Throughout the remaining quarters, regional sales comparisons may range from slightly positive to slightly negative resulting in flat sales for the fiscal year in local currencies.

Although the euro to the dollar has average exchange rate of $1.32 once a day, our plan assumes an average euro to U.S. dollar exchange rate of €1 to $1.28 for the fiscal year and the first quarter. If this weakening euro-to-U.S.-dollar exchange rate proves to be accurate, it would negatively impact our sales by approximately $303 million in the first quarter and $1.2 billion for the fiscal year.

As you know, this compares to an average euro rate to U.S. dollar exchange rate in the first quarter of fiscal ‘12 of €1 to $1.41. And for the fiscal year ‘12, the exchange rate was €1 to $1.38. We provide this information only to give you a guideline as to the strength of the euro and the impact on our reported sales in U.S. dollars.

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

Bob Dutkowsky

Thanks, Jeff. Now, let me provide you with some of our regional and business highlights. As I mentioned in my opening remarks, we entered our fiscal year on a strong note with positive momentum from a recovering IT market. Throughout each quarter, our year-over-year comparisons reflected a slowing IT market and our deliberate focus on selecting more profitable revenue opportunities.

In recent quarters, we have commented on pockets of strength and weakness in our regions and how our broad geographic footprint, together with our diverse array of products and customer sets, have helped to mitigate our overall exposure to the softer areas. And the fourth quarter was no exception.

From a regional perspective, our European operations reported record fourth quarter sales in both dollars and euros, growing 2% in euros year-over-year. The region’s sequential growth in euros of 21% shows that despite the headlines, demand for technology products in Europe continues and seasonal patterns remained intact. At the country level, Germany, the UK, Netherlands and Norway led the way with double-digit sales growth in local currencies, helping to offset continued weakness in Spain, Portugal and Switzerland.

As we announced on our last call, in Q4, we further realigned resources in Europe to eliminate redundancies, match our skills portfolio with growth opportunities and align our cost structure with the market conditions. This resulted in incremental year-over-year severance costs of approximately $11 million in the quarter. We accelerated those costs into the fourth quarter of fiscal year ‘12 to prepare for what we believe will be flat sales environment in local currencies during at least the first half of this fiscal year.

In many countries, Europe’s commercial and SMB sectors continue to perform relatively well, while most consumer markets remained weak. Mobility products, including phones, tablets and notebooks, as well as desktops, were among the bestselling products categories in the region.

In summary, our European region’s solid and balanced results reflect the operation’s diverse product and customer portfolios, its broad geographic footprint and its robust systems, and they solidify our position as Europe’s number one distributor of IP products.

Turning now to the Americas, revenue in the region declined 1% year-over-year in the fourth quarter. Excluding Brazil from both periods, the Americas region sales grew by 2% in the quarter. At the country level, sales growth in the U.S. including our Latin American export business, Peru and Uruguay was offset by lower sales in Canada and Mexico.

As we announced in December, Brazil’s complex legal, tax and regulatory environment made it increasingly difficult to earn a sufficient return on invested capital. And therefore, after conducting business there for 15 years, we ceased our commercial in-country Brazilian operations in the fourth quarter.

In Columbia, we launched the Greenfield operation in early ‘10. And while it is still a relatively small business for us, we have not been able to gain a level of traction equal to our investment in that market. Ultimately, the business fell short of our profitability and return on invested capital goals, so we also shut down our in-country Columbian operations during the quarter. We will continue to serve both the Brazil and the Columbia markets through our Miami export business.

Excluding the loss on disposal of subsidiaries, excellent cost management and leverage resulted in strong profitability in the Americas for the quarter led by great execution by our U.S. team. Operating income in the Americas region, on a non-GAAP basis and before stock compensation expense, grew 13% to its highest Q4 levels in 11 years, and operating margin expanded by 26 basis points to an exceptional 2.01%. The region delivered strong profitability for the fiscal year as well, growing non-GAAP operating income at more than three times the rate of sales growth.

From an end market perspective, the U.S. SMB market continued to show strength in the quarter posting double-digit growth, and our healthcare vertical posted high double-digit year-over-year growth again this quarter helping to offset lower sales to resellers serving the government sector. Top-selling products in the Americas region in the quarter included software, tablets, and notebooks. In addition, software and network service and support were also top performers in the quarter. These value-added services consist of contracts with various options such as onsite support, parts replacement and technical support. It’s important to note that services are now appearing as one of our fastest-growing categories, reflecting our continued investment in delivering value-added services to our customers.

In terms of the impact of hard disk drives in the quarter, our diversification strategy for the last five years has purposely shifted our product focus away from components such as hard disk drives with more focus on higher-margin, more specialized end user products. The evolution is clearly evident in our product mix change of 35% peripherals in fiscal year ‘10 to 29% in fiscal year ‘12. And although we did see some uplift to our fourth quarter gross margin from hard disk drives primarily in Europe, our exposure and thus the benefit was significant less than our competitors. We believe the benefit from favorable pricing on hard disk drives in the quarter gave us flexibility to capture share in other areas of our business such as mobility. Overall, both regions demonstrated excellent execution, delivering solid operating performances in the quarter that were in line with the outlook we provided last quarter.

Now, let me provide some examples of how by leveraging our superb logistics capabilities, deep customer and vendor relationships and the efficiency of our broad-line engine, we are moving into higher growth, more profitable specialty areas, including cloud and mobility and how we’re using innovation to truly differentiate Tech Data in the marketplace.

Our data center practice on a worldwide basis grew to more than $7 billion in sales in fiscal year ‘12. And while overall growth slowed from the previous year, networking and storage products along with virtualization software performed exceptionally well throughout the year, helping to offset lower industry standard server sales.

Last month, our American AIS division expanded its product offering by joining the VCE partner ecosystem that enables our reseller customers to help end user easily transition to private cloud computing. The VCE Vblock infrastructure platform brings together leading computing, networking, storage and virtualization, security and management technologies from Cisco, VMware and EMC into a pre-packaged and pre-tested private cloud solution, providing a scalable approach for our resellers to easily sell a virtualized plug-and-play offering to the end user.

In the area of mobility, our Brightstar Tech Data European joint venture reported strong growth in the quarter, bringing its sales to $1.8 billion for fiscal year ‘12. Capitalizing on its broad footprint in the forward momentum of the mobility market, the JV delivered another outstanding performance, overachieving its plan in the quarter and for the fiscal year. The JV continues to develop its distribution network throughout Europe including, for example, signing an exclusive agreement with Motorola to distribute its Razr line of mobile devices.

Expanding on our success of the Brightstar joint venture in Europe, we introduced the groundbreaking TDMobility offerings, a U.S. joint venture with Brightstar Corporation that simplifies the selling, delivery and support of mobile services for reseller serving the SMB market. Based on the very positive customer feedback we received from our limited TDMobility roll out in 2011, last week, we launched the offering throughout the U.S. reseller channels.

TDMobility removes the complexities and barriers that historically have prevented reseller adaption of mobile sales and provides the industry’s first end-to-end platform including mobile hardware, software, service plans, activation and billing across multiple carriers. Empowering our reseller customers and simplifying their route to market to the mobile market through TDMobility is yet another example of how Tech Data is using innovation to deliver value-added services to the channels.

Our third specialty area of business is software, which grew 10% in fiscal year ‘12 to $4.6 billion. Another one of our groundbreaking initiatives targeted at driving software sales is Tech Data’s Stream One Solution store launched in January. Combined with our Stream One License Selector which dramatically simplifies the selection and purchase of software for resellers, our Stream One Solution store allows resellers to offer cloud services, software as a service, infrastructure as a service, and platform as a service in a simple automated fashion. Stream One provides independent software vendors a platform to reach more customers, and resellers the opportunity to provide specialized products that otherwise would be difficult for them to obtain.

Stream One is one of the largest e-business tool investment in Tech Data’s history, and it sets a new standard for the IT channel by making software and cloud service enablement, provisioning and deployment faster, affordable, personalized and far more accessible to the channel.

Our Consumer Electronics business is another important specialty area, one that capitalizes on the convergence of consumer mobility and IT products due to sale of digital signage, televisions, tablets, networking and other consumer-focused technologies. Despite weak overall consumer markets, our worldwide business grew to more than $3 billion in sales in fiscal year ‘12.

And finally, in our integrated Supply Chain Services business, our team continues to work closely with our valued vendor partners, providing them with new go-to-market supply chain models. As a proved point, in fiscal year 2012, we grew our U.S. fee-based Supply Chain business by 45% by expanding our relationships with existing accounts, as well as the addition of several new customers.

In summary, we are very pleased with our results this past fiscal year. Despite the market challenges, Tech Data again delivered record fiscal year sales and earnings per share, generated strong cash flow and earned a return on invested capital well above our weighted average cost of capital. In the fourth quarter, we also took aggressive actions by realigning our European cost structure, investing in industry-leading initiatives in the Americas, strengthening our capital structure and exiting non-profitable markets.

Our results in these actions were possible because of the strength of our execution, our diversified portfolios and the flexibility of our business model. And they are testament to the talent, hard work and dedication of our worldwide team. Our strong performance also reflects the result of significant investments we’ve made over the years, deploying internal IT systems that provide us with a flexible and scalable infrastructure to meet the demands of the ever-revolving market.

In fiscal year 2013, our investments in infrastructure will continue in Europe. And we will continue to deploy core applications currently running in our European business, in our Americas region. We have successfully completed such deployment dozens of times including standardizing our North American financial systems and logistics network on SAP with minimal business disruption.

Internal IT systems enhancements are a key success for any large enterprise. And we have demonstrated the skills and the experience to manage them. We are committed to continue to invest and improve our IT infrastructure and thus our competitiveness. On an overall basis, our plans for the first quarter taking into account our exit in Brazil and Colombia anticipates flat sales in both regions in local currencies.

Throughout the remaining quarters, sales growth may range from slightly positive to slightly negative resulting in flat sales for the fiscal year in local currencies. Like the past fiscal year, some areas will grow, some will decline. But for Tech Data, flat revenue is not selling the same products we sold the year before. It’s selling the right products at the right prices while deselecting less-profitable business that could deliver better returns to our shareholders.

Even in a flattish sales environment, we believe our diverse product portfolio, coupled with the proactive steps we’ve taken and the investments we have made, will support our operating margin goal of approximately 1.5% for the fiscal year. Although we expect the operating margin expansion to occur in the second half, this does not assume an anticipated recovery in IT spending in the second half. It is in line with our normal seasonality which historically results in less leverage achieved in the first half of the fiscal year than the second half, our normal first-half investments, and the significant European sales lift that generally occurs in the fourth quarter. If the IT market cooperates and grows at a faster rate in fiscal ‘13, we are confident that Tech Data will be ready and well-positioned to capitalize on the opportunity.

I want to thank our customers and vendors for their partnership and continued support. And in particular, I thank my Tech Data colleagues for their dedication and exceptional efforts in Q4 and throughout fiscal year ‘12.

With that, we’d now like to open it to your questions.

Question-and-Answer Session


Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander - Raymond James

Just on the demand commentary, I think last quarter you indicated you expected modest growth over the next three to five quarters, and now you’re talking about flat trends for most of FY ‘13, so how much of that change is the tougher macro versus exiting Brazil and Colombia specifically? I know you called it out for the quarter, but what would that look like for the year versus maybe additional pruning of the portfolio? And then I have a follow-up.

Jeff Howells

Brian. This is Jeff. Actually I don’t think our tone was meant to vary from our comments in the Q3 earnings release. At that time as we’re putting together our plan we said we’re anticipating a flattish year in fiscal year ‘13. And that’s what we’re costing the business for this year. So, our belief is there’s a nice tone to business out there. There is plenty of business to go around, and we continue to select a business that will best utilize our infrastructure and provide the improvement in profitability both in quality and quantity that we want in the short-term and the long-term. So, no intentional change in tone from what we thought two or three months ago.

Brian Alexander - Raymond James

Okay, any way to quantify, Jeff, just what the kind of annual headwind would be to top line from exiting those two countries?

Jeff Howells

Yes, let me go ahead and give you some ideas on that. Our business in those two countries had turned out to be a several hundred million dollars. In this past fiscal year, very round numbers, Q1 through Q4, about $100 million in the first couple of quarters 100 million each and then decreasing the 50 and then 10 or 20 in the last quarter.

Brian Alexander - Raymond James

Okay. And the follow-up, just to get to the 1.5% which you’re still endorsing, will more of that margin expansion come from the Americas? I think you had talked about more coming from Europe before. But now that you’re exiting this country, perhaps you’ll get more incremental margin from the Americas, which might be why your tax rates are going up for the year? Just help us with that.

Jeff Howells

Actually, it is also consistent with our prior thought that the Americas operating performance is where we want it in the current state. So, it gives us some room to invest in the Americas operation. Exiting the Brazilian and Columbia operations relieves us of some small losses on a relative basis, so not overly material. But our goal for reaching the 1.5% operating margin is to maintain our operating results in the Americas and expand our European margins with the hopes of bringing those back to that baseline which is about two-thirds of what we earn in the Americas and then move it forward from that step in both regions. So, just the key for our achievement of the 1.5% would be reaping the benefit of the cost realignment that we did in Europe and the continued product mix via the acquisitions that we completed over the last couple of years in Europe, and just general leverage in the infrastructure, expanding that operating margin. I can’t remember if there was one other component to your question.

Brian Alexander - Raymond James

No. I think that’s it. Thanks a lot.

Bob Dutkowsky

Yes, Brian. This is Bob. I think there’s still good leverage available from all of the acquisitions that we made in Europe over the last few years. And so, there are tools available for Néstor and his team to continue to generate improved profitability out of our European business.


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

Matt Sheerin - Stifel Nicolaus

Just following up on Brian’s question regarding the operating margin expansion this year. Are you still looking at sort of the flattish gross margin range and the range that you’ve talked about kind of 5.2, 5%? So, I was kind of curious, you had strong EBIT margin growth in North America. You talked about services and better mix. And I thought that gross margin might be benefited there. So, is that leverage going to come primarily just on the cost side or should you see some gross margin expansion as well?

Jeff Howells

This is Jeff. I think in Europe, we may have an opportunity for some gross margin expansion with the product mix. I think our overall gross margin goal remains the same annualized, exceeding or achieving the 5.2% or better. We’ve been fortunate enough for the last couple fiscal years to average more in the 5.25% range, certainly, a target that we will look to diminish on an annualized basis. But the overall product mix helps support that, take into consideration the competitive marketplace. But the key to our success in the current fiscal year is to leverage the cost infrastructure with the steps we’ve taken, while simultaneously investing in both regions so that we can continue the momentum as we move into complete fiscal year ‘13 and move into establishing a new three-year target for the company.

Matt Sheerin - Stifel Nicolaus

Okay. Great. And then, as my follow-up, I noticed the minority interest line was up pretty significantly again year-over-year implying that Brightstar continues to move forward in Europe. Could you talk about that business, the revenue run rate, profitability targets that you’re at right now? And are you pretty much built out in Europe with Brightstar or do you see continued opportunities for market share growth?

Jeff Howells

It is not built out. There are still opportunities for market share growth. The incremental profit is reflective of the results for the quarter. And also, there are some cumulative, I guess, they’re technically called some cumulative preferred distributions that go in to that line for our joint venture partner as we have clearly recouped all of the investments otherwise known as losses in the early years of the joint venture partnership and distributing back to them some preferential payments. However, those are immaterial in the overall scheme of things. The joint venture reached annualized sales rate of $1.8 billion significant year-over-year growth. It continued to have a lot of opportunities, as Bob mentioned, most recently, getting access to the new Razr line for Motorola. Geographically, there’s still opportunities. Operationally, there’s still opportunities. Product lines, there’s opportunities. So, there’s still more to do in that mobility business in the European operations.

Matt Sheerin - Stifel Nicolaus

And, Jeff, do you see the operating margin opportunities for Brightstar at a higher rate than your core distribution business in Europe?

Jeff Howells

It is clearly helping the overall or the advancement of the operating margin in Europe. I can say for the products that we are current selling, the gross margin is tight because we’re primarily distributing devices at this point in time and less in the way of services. So, the actual economics of the business are very strong revenue growth, a gross margin a little tighter than our European average, but the operating margin accretive to our European average.

Bob Dutkowsky

And Matt, as Jeff called out, there continues to be vendor relationships that are good opportunities for us. There continues to be geographic opportunities, but the real opportunity in the mobility space is to add more services. And those services have different gross margin profiles. So, as the JV continues to mature, there are other opportunities for us to have it become a better performer for Tech Data.


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

Ananda Baruah - Brean Murray Carret and Company

I guess just a couple of things, if I could. I guess the first is U.S. mobility initiative relative to Europe and how would you like and think about the potential there? And then, I guess, also on the operating margins. After you get Europe to the point that you want, Bob, I think you commented that the goal is to then continue to expand in both regions. And what might be some of the things that you can do at that point?

Bob Dutkowsky

Yes. First of all, from a mobility initiative, the JV in Europe is very different than the TDMobility initiative here in the United States. But I’d like in the Brightstar JV in Europe to more of our traditional distribution business. We buy products and sell them into various routes to market that cover the European market. In TDMobility initiative is specifically targeted at our traditional IT resellers to sell products into the SMB market. In order for them to be able to do that, they need access to products and services but they also need the ability to do activations and billing consolidations. And so it’s a completely different set of services that TDMobility represents in the U.S. market. It’s why they’re two distinct initiatives. So, our anticipation is that the TDMobility initiative in the U.S. will ramp up overtime as more and more resellers see that mobile products are good opportunities. And if you turn your attention just a little bit further forward, soon there will be more and more tablet platforms that will be LTE and 4G enabled and they will need activation capabilities. And so the infrastructure that TDMobility represent today is deployed in smartphones. But into the future, it’s got much greater potential and that’s the reason we have invested so heavily in that market space.

Ananda Baruah - Brean Murray Carret and Company

Got it. And then just some of the ways we should think about you guys being able to expand the operating margins, looking out longer term once you get to where you want it to be?

Jeff Howells

Yes. I think there is the continued cost leverage and that’s why we continue to invest in IT infrastructure and systems. It’s the leverage we get out of our logistics infrastructure by adding ways to make each and every facility more productive. And then as we go into the next two or three years, we have to weigh the opportunity of expanding operating margin percentages versus operating margin dollar growth. At the end of the day, once we hit this target, the number one goal going forward is getting the right blend to maximize operating profit growth, and so we’ll have to look at how much we want in a way of percentage versus the dollar. For example, we can price ourselves into more business as long as it has the right returns on capital employed, that may leverage the cost of infrastructure very effectively and efficiently. The other end, we could make a decision in certain geographies to focus more in expanding operating margin percentage to get that return on capital employed off in that particular geography. The end of the day, there’s going to be a mix of the two with the end results not to be repetitive but to grow operating profit and net income and earnings per share at the appropriate rate.


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 and Bob, just a quick clarification on the operating profit performance that you’re looking for in fiscal 2013, you mentioned the second half of the year you expect the improvement. And just to clarify, does that mean on a year-over-year basis or typically that would be sort of a no-brainer as far as on the second half versus first half, so just clarification there. And then, secondly, Jeff, any impact to the top line from the hard disk drive issues? In other words, were you having problems getting products or were you able to substitute them fairly easily?

Jeff Howells

Yes. On the first question, first half versus second half, we did take action in Europe to reduce our overall cost that we entered in the first half of this year. But in the first half of the year, we absorbed the general cost increases which are compensation, insurance, etcetera, related to employees, employees being two-thirds of our cost. Now, we offset that with the efficiency and optimizing the different departments throughout the company. However, in a flattish environment, that leads to less operating income expansion. When we get to the second half of the year, what we generally see here, we anticipate this year to see more operating income leverage as the mix and the product categories that we sell, as we move into the second half of year especially in Europe, come to light and especially seeing the leverage out of Europe, which is where we’re looking to that operating margin expansion because they go into the Q3 and Q4 with the lower head count. And we deploy resources into, what we believe, are the correct initiatives in the correct country. So, those resources will be, in some cases, added in the first half of the year, and then we reap the benefit in the second half of the year. So, it’ll be the market and the velocity and then the redeployment of the resources especially in Europe that give us the leverage in the second half of the year.

We had a good year throughout the year in the Americas this past year. And the only real depression in our performance in Europe is Q4 by absorbing that incremental expense of the 11 million. So, that goes away in the next year, and then we get the benefit in the second half of redeploying those resources. You also mentioned the hard disks, and do we have any issues getting product? Clearly, I’m sure there’s something else that we could have bought and could have sold in a more normalized environment. I don’t think we could realistically quantify if it had any kind of a material impact on our sales. However, when you have sales growth in the 2% in the Americas and couple in Europe, ex-Brazil and in euros, a little bit more availability could have made that 1 or 2%, 3% or some other number. I’m sure there were some impact. I don’t think it changed our overall view on the quarter, though.


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

Ben Reitzes - Barclays Capital

I got two questions. First, I just want to clarify, you were pretty clear about operating margin getting better in the back half of the year and making that the way you’ve hit your operating margin target. What about revenues? You mentioned flat. Does that mean that you could decline on a local-currency basis in the first half, and then do you expect to grow in the second half, or do you not want to be that specific?

Jeff Howells

Our answer on that one, Ben, is if you’re planning flattish, clearly, that means you could be up a few points in a quarter in a market or down a few points in a quarter in the market. For the very short-term, our view of Q1 is flattish in both markets ex-Brazil. So, if you need Brazil in the prior year that means the Americas might be down a percent or two whatever the math is. But our point of saying slightly up and slightly down is you’ve got kind of band of flattish environment. So, the answer is yes, we could have a geography that aggregates down a little offset by the other geography that would be up a little generating a difference in a quarter. We believe that neutralizes out for the year and is flattish for the year in both regions.

And honestly, as we sit here today, we don’t know if that means the Americas is flat for the year up to, down to same answer for Europe. But what we’re doing is cost in the business conservatively to produce the operating results that was in our three-year target, generate the operating income that we need, the net income growth. And then with the changes in our capital structure both in the debt and the equity, it will lead in a very conservative year into good earnings performance we expect and then set us for two or three things. One, if the market is better than we anticipate, we’re prepared to capitalize on it. Two, as we exit this year, if the economy stabilize in Europe and we continue to see improvement in the American economy in the Americas, it gives us the platform for increased performance either in a later part of the year or in the next fiscal year. But again we are planning conservative.

And also underneath that flattish comment there are obviously sectors and segments that are performing exceptionally well. Like we said, our SMB business was up 10% in Q4. Obviously, things like mobility platforms and tablets and software are growing extremely well. And so, part of our flattish outlook says that we’re going to optimize our resources against some areas that we think are better, and they’re going to make up more radical declines in other spaces. Average it together and it comes out to be flattish.

Ben Reitzes - Barclays Capital

I was wondering also about your strategy with vendors in general. I mean, you had just reported revenue declines and share losses actually across probably every segment and obviously, their 22% of sales and they used to be higher, do you have any plans in placed to diversify vendors? And maybe you’re hitched to their ride a bit, so does it make sense to try to get more Apple product or is there anything else that you can do if the Hewlett share losses are sustained and you’re tied to that, can you diversify away from that? Is there anything that you’re doing in initiative wise that would be able to answer that?

Bob Dutkowsky

Yes, part of our model is to constantly look for vendors that have either offerings that diversify our reach, take us into new segments and access to new customers or we diversify the way we take products into the market. So, we have teams of people in both geographies that are constantly recruiting new vendor platforms. And we continually add platforms to our array of our line card. And then we try to change the way we take those products to market, either with value-added services or initiatives around, say, for example, StreamOne.

And I’ll just give you one metric for StreamOne. StreamOne is an app store for commercial applications. It opens up a route-to- market to approximately 20,000 independent software vendors. The vast majority of those software vendors today we don’t do business with because our model didn’t work with the kind of support that they needed. But by adding StreamOne, it gives us access to a whole new set of partners to take to the market.

Having said all of that, we remain committed to HP as an important partner to Tech Data. Their investments in research and development and the diversity and breadth of their product offerings fit perfectly into our strategy. And so, although our percentage of revenue declined slightly with HP, that’s partly reflective of some really strong performance by a few other vendors and then us selecting the right HP product lines to take to the market aggressively.


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

Osten Bernardez - Cross Research

First question pertains to how we should be thinking about future cash usage, in particular, your view on acquisitions given your commitment to achieving the 1.5% operating margin in the coming year.

Bob Dutkowsky

Our uses of capital have remained relatively consistent. The three target areas we use to leverage our capital are first of all organic investments in the business. Things like StreamOne and TDMobility were uses of capital to create those differentiators in the market. We obviously have been busy on the M&A front over the last handful of years. We bought more than a dozen companies. And as we said in our prepared comments, we bought back over $900 million of our stock. I would say that as we enter into this next year, the prioritization for us would be about the same as what we just described. Organic investments, very targeted and specific M&A that gives us access to customers or platforms that we may not have in a country, and then lastly, continue to look at stock buyback as a way to return our shareholders for their to further investments in Tech Data.

Osten Bernardez - Cross Research

All right. That’s helpful. And then, same question pertains to the $11 million severance expense in Europe and how that relates to the $15 million that you sort of guided to last quarter? Whether that difference is either a savings or whether that difference includes sort of reinvestments that were made in the business?

Jeff Howells

This is Jeff. I think that the key, as we’re trying to give you the best information to analyze the impacts on the quarter on a year-over-year basis and we looked at what we spent last year in the quarter and compared to what spent this quarter. And while we had a budget to spend $15 million, the most useful piece of data that we can provide you is we spent 11 million more in the quarter than we did in the prior year. Each and every quarter in both geographies, we have literally millions of dollars spent on hiring and in some cases, millions spent on severance and relo. So hiring relo and severance are encouraging each and every quarter in both geographies, and so I’ll leave at its 11 million incremental compared to what we spend in Q4 of last year in Europe.

Osten Bernardez - Cross Research

Just want to know that there wasn’t any big difference there. And then lastly, I just wanted to clarify, regarding HDD pricing and your benefits for the quarter, was the benefit sort of, would you say, immaterial? You didn’t necessary give any further details of it other than saying that you were able to offset sort of a margin compression on margin in other sort of segments.

Bob Dutkowsky

Yes. So, as we said in our comments, we consciously deselected components as an area where we didn’t believe it could give us the right profitability and return on invested capital. So, we began to exit the hard drive business several years ago, and the remaining hard drive business is relatively small for Tech Data.


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

Craig Hettenbach - Goldman Sachs

Jeff, just a follow-up on OpEx, you talked about kind of matching OpEx to flattish-type growth environment. The run rate exiting the January quarter, is that about the level or are there other leverage you’re looking to potentially pull on the OpEx side?

Jeff Howells

Yes. Let me first caution you about as I tried to mention in my comment about exchange rate because exchange rate can have a very large optical illusion on our revenue and cost of goods sold, and then it moderates as we come down the P&L. But clearly, it can have an impact. As far as exit rate, we generally have some incremental cost in Q4 as we did this year. And as we move into the first quarter of the New Year, we will have a lower spend rate and as far as a way to guide that, I think our overall goal is to achieve the leverage out of Europe so we’ll spend fewer euros and dollars in the U.S. or the Americas, we’d probably won’t spend less than the prior year. So, in a roundabout way, take out the 11 million incremental in this current quarter plus the 28 million, so you take out some 40 million and you’re down to a run rate of 248. Our goal is to get our run rate below that as we go quarter-by-quarter this current year.

Craig Hettenbach - Goldman Sachs

Okay, very helpful. Thanks. And Bob, if I can follow-up, your comments on the strength in the SMB, as you look to fiscal ‘13 in a flat environment, anything you could share with us in terms of what you’re hearing from VARs on the SMB environment for this year as well as what you’re seeing this year for the consumer market?

Bob Dutkowsky

From an SMB perspective, as we said, in Q4 we grew double digits in the Americas in the SMB arena. And we had countries of strength in SMB in Europe as well. So, even in the kind of the unsteady economic environment that we navigated over the last second half of the year or so, SMB remained a strong point for us in both geographies. And quite frankly, the bars that we talked to continued to see good opportunities in that space. So, we remain optimistic about the strength of SMB heading into the next fiscal year. Consumer is slightly different. We still don’t see the spark of optimism in that space. But having said that, we sell virtually every tablet that we can get our hands on and many of those go into the consumer space. Obviously, the mobility initiative has targeted an awful lot at the end user consumer. So, those are two areas where, although the consumer spending appears to be down, our optimization around the right spots and the right places that pay dividends for us.


We have a follow-up question from Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander - Raymond James

Thanks. I’ll make it quick. I know the call is running late. Jeff, thoughts about longer-term capital structure and whether you plan to term out the debt in relation to the convert that you just retired. And on the buybacks, should we still expect that 100 to 200 million for fiscal ‘13 given you overachieved on that in fiscal ‘12 buying back 315? So, I don’t know if we should look at that as kind of a blended average, which means you might come in below your long-term target or what do you expect to buyback at your long-term target for this year, specifically?

Jeff Howells

Yes. First of all we have no current plans to do anything with our debt structure to term it out because of the facilities that we have in place on a committed basis for five years and in our revolver which renews annually for years. As far as the buyback momentum and our most recent prices, certainly, our momentum is lower. So, if I were going to sit here today, I would hope for the better recognition of the company’s performance in stock price valuation and less of a buyback this year, and that we look to deploy that in the longer term through acquisition or organic growth as that resumes for the enterprise.


This concludes Tech Data Corporation’s fiscal year 2012 fourth quarter earnings conference call. A replay of the call will be available in about one hour at Thank you for attending today’s conference call and have a great day.

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