Tech Data's (TECD) CEO Bob Dutkowsky on Q3 2017 Results - Earnings Call Transcript

| About: Tech Data (TECD)

Tech Data Corporation (NASDAQ:TECD)

Q3 2017 Earnings Conference Call

November 22, 2016 09:00 AM ET

Executives

Arleen Quinones - VP, IR

Bob Dutkowsky - CEO

Chuck Dannewitz - EVP, CFO

Analysts

Adam Tindle - Raymond James

Param Singh - Bank of America Merrill Lynch

Matt Sheerin - Stifel

Ananda Baruah - Brean Capital

Lou Miscioscia - CLSA

Rich Kugele - Needham & Company

Jim Suva - Citigroup

Shannon Cross - Cross Research

Keith Housum - Northcoast Research

Operator

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

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

Arleen Quinones

Thank you, Michelle. Good morning and welcome to Tech Data's earnings conference call and webcast to review our financial results for the third quarter of 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 third quarter results, please review our financial highlights summary slide presentation posted this morning on the IR portion of our website 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, including those filings related to our proposed acquisition of Avnet’s Technology Solutions business, as well as our most recent Annual Report on Form 10-K, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

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

Also, throughout this conference call, we will reference both GAAP and 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 website. In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without special written permission from the Company.

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

Bob Dutkowsky

Thank you, Arleen, good morning everyone and thank you for joining us today. We're pleased to report that Tech Data delivered a strong performance in Q3. While the overall IT demand environment remained challenging in both regions, our teams proved that they are up to the task, turning in top line growth and excellent earnings improvement. Higher sales coupled with strong expense management delivered double digit growth to non-GAAP operating income, double digit growth to non-GAAP net income and double digit growth in non-GAAP earnings per share to a record Q3 level.

Our Americas team executed very well in the quarter with year-over-year sales growth and the regions highest non-GAAP operating income dollars in more than four year. The investments we’ve made over the last year and half, investments such as centralizing our SMB sales teams in the U.S., broadening our field's sales coverage and expanding our capabilities in higher growth next generation technology such as cloud and security are all delivering results and are differentiating Tech Data in the market, and while categories such as the cloud and services currently represent relatively small portion of the Americas overall business they are growing quickly and we expect them to contribute to earnings more meaningfully over time.

Turning to Europe, our European team turned in an impressive performance, delivering the highest Q3 non-GAAP operating income in the region's history. Strong demand for mobility and broad line products in several countries particularly in the UK resulted in solid sales growth in constant currency and contributed to record European Q3 non-GAAP earnings despite the tough compare to last year's strong Q3 performance. As we look at our results through the first nine months of fiscal 2017, we grew non-GAAP earnings per share by 12%, generated $211 million in cash from operations; and for the trailing 12 months, we earned a return on invested capital of 14%.

These year-to-date results reflect the strength of our operations as well as the depth and breadth of our customer and product portfolio. All of which allow us to quickly adopt and align our resources with the realities of the IT market. Our operational excellence and end-to-end capabilities position Tech Data uniquely in the IT supply chain, enabling us to deliver differentiated value to our customers and vendor partners, to create opportunities for employees and to produce strong results for our shareholders.

During the quarter, we also made one of the most exciting announcements in the history of our company. On September 19th, we spoke to you following the announcement that we entered into a definitive agreement to acquire Avnet’s Technology Solutions business. We believe the strategic and financial benefits resulting from this transformative combination are compelling for our company and for all of our stakeholders, and we’re excited about the future opportunities ahead. I’ll share some additional thoughts on the Avnet Technology Solutions transaction later in my prepared remarks.

But now, I’ll turn the call over to Chuck, who'll review our financial and operational results for the quarter as well as our outlook for Q4.

Chuck Dannewitz

Thank you, Bob, and good morning everyone. We’re very pleased with our performance in both regions during Q3 with our teams posting double digit increases in non-GAAP operating income dollars and continuing our industry leading return on invested capital.

On a reported basis, our consolidated sales were $6.5 billion, an increase of 1% over the prior year quarter. On a constant currency basis, worldwide sales were up 4%. A year-over-year currency impact is due primarily to a decline of approximately 17% in the British pound to the US dollar exchange rate. At a regional level, our Americas team executed very well in the quarter despite a challenging IT environment. Q3 sales improved 2% to $2.6 billion on the both the recorded and on a constant currency basis.

In the U.S., sales to resellers serving the public sector primarily the education and healthcare verticals and sales to large national accounts and within our SMB division were strong. This was partially offset by lower sales to large value added resellers and into the retail channel. At a product level, the Americas experienced solid sales growth in several traditional product categories including notebooks, desktop and tablet PCs as well as in third platform technologies including cloud, mobility and security. This growth was offset partially by lower sales of storage products and consumer electronics.

In Europe, sales were $3.9 billion, up 1% on a reported basis and up 5% in constant currency. Our European team also executed well in the quarter with several countries posting solid year-over-year sales growth in local currencies most notably France, Switzerland and Italy. And our UK operations turned in an exceptional quarter with double digit growth in local currency fueled by strong sales of mobility and broad line product. At a product level, Europe sales growth in constant currency was driven primarily by mobile phones, notebooks and new form factor tablet PCs partially offset by lower sales of storage and software.

Worldwide gross profit was $315.8 million, an increase of $1 million. On a constant currency basis, gross profit grew $8.8 million or 3%. Worldwide non-GAAP SG&A expenses, which exclude $5.2 million of acquisition related intangibles, amortization expense were down $9.2 million or 4% primarily due from the impact of the decline in the British pound. On a constant currency basis, non-GAAP SG&A expenses declined $4.2 million or 2% from the prior year quarter. As a percentage of sales, non-GAAP SG&A expenses declined 17 basis points as a result of improved operating leverage from excellent expense management. Worldwide non-GAAP operating income was $81.1 million, up $10.2 million or 14%. On a constant currency basis, non-GAAP operating income improved $13 million or 18% year-over-year.

On a regional basis, the Americas non-GAAP operating income grew $5.8 million to $42.5 million, an increase of 16%. As a percentage of sales, the Americas non-GAAP operating income grew to 1.62%, up 20 basis points from the prior year quarter. In our European region, non-GAAP operating income dollars increased 11% to a Q3 record of $42.2 million despite facing currency headwinds from the devaluation of the British pound. On a constant currency basis, Europe's non-GAAP operating income grew $7.1 million or 19% year-over-year of the prior year quarter. As a percentage of sales, Europe's Q3 non-GAAP operating income was 1.09%, an improvement of 11 basis points. Our non-GAAP effective tax rate for Q3 was 30.6%, non-GAAP net income was $50.9 million, an increase of 13% and non-GAAP earnings per diluted share was $1.44 also a 13% improvement over the prior year.

Turning now to some of our balance sheet metrics, our cash conversion cycle in Q3 was 22 days, flat compared to Q2 and up one day from the prior year quarter. In Q3, cash generated by operations was approximately $27 million and we exited the quarter with a cash balance of $692 million. Year-to-date, we've generated $211 million of cash from operations. Capital expenditures were $9 million in the quarter and for fiscal 2017, we expect capital expenditures to be 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 was approximately 9%.

At the end of Q3, we had $2.1 billion of equity, a 15% debt-to-capital ratio and access to approximately $900 million of bank debt facilities. In Q3, three of our vendor partners represented 10% or more of our sales, Apple represented 20%, HP Inc. was 13% and Cisco was 10%.

Turning now to our business outlook, for the quarter ended January 31, 2017, we anticipate worldwide sales to be in the range of $7.4 billion to $7.6 billion with relatively flat local currency sales growth in both regions. Our outlook assumes an average U.S. dollar to Euro exchange rate of $1.09 to €1.

We anticipate non-GAAP earnings per diluted share to be in the range of $2.11 to $2.21. This guidance assumes $35.5 million weighted average diluted shares outstanding and a non-GAAP effective tax rate in the range of 27% to 29%.

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

Bob Dutkowsky

Thanks, Chuck. As we enter into the final quarter of our fiscal year, we are very pleased with the momentum of our business and we remain especially excited about the pending acquisition of Avnet's Technology Solutions business. Since we spoke to you last on September 19, we've established an integration management office which consists of key functional leaders from both teams across the regions who are responsible for putting plans in place that will ensure our integration goes smoothly for our customers, vendors and employees. I'm pleased to report that the teams have made good progress on our integration planning effort including two major integration milestones.

First, the U.S. government permitted the transaction to proceed; and second, that we have put in place $1 billion of term loan facilities which will be drawn upon at the closing of the transaction, as well as upsizing our revolving credit facilities from $500 million to $1 billion. While there is much work yet to be done, we're pleased with the progress we've made that have been made by our integration teams thus far and we remain on schedule to close in the first half of calendar 2017. The response we have received on the transaction from our stakeholders has been extremely positive. In particular, customers and vendors have shown overwhelming support of the deal, as they see multiple benefits from the proposed transaction. They are encouraged by our strategic vision to expand in the new and emerging third platform technology.

Today Tech Data's core competency is the breadth of our customer and product portfolios in the range of our skills. With the addition of Technology Solutions will have an even broader set of offerings and deeper set of skills, creating the most complete end-to-end IT distributor in the market. Employees on both sides are excited about the many opportunities to be created by the combination of our two great businesses. We cannot be more excited to have the Technology Solution employees join our Tech Data team. Fundamental to our strategy in acquiring Technology Solutions is that we believe that demand for computing will continue to grow and at a faster rate than ever before. However as computing grows, workloads will be progressively distributed across a broader way of platform from smartphones to devices in the home, PCs, small data centers all the way up to world-class mainframe. And at the core of all this is software and cloud computing.

Accordingly, the need to secure the devices and the data will become increasingly important. We’re computing reside whether it'd be in the cloud in the data center, on your desktop in your home or your car becomes a well then overtime to a distributor. What is increasingly differentiating to distributors like Tech Data is that we have the right skills, relationship and capabilities in place to support the computing spectrum, so that we’re prepared to meet the increasing demand of the IT market, regardless of the technology. It is our view that the power of the complete end-to-end IT solutions portfolio, the place where we believe the future of computing life is the optimum strategy, and the only strategy that creates shareholder value over the long term.

Importantly, as product lines blur and workloads fragment, the value proposition our resellers offer to their customers is also revolving. More and more, our resellers are moving away from simply selling products and instead they are focused on designing solutions and services that deliver business outcomes for their customers. The solutions there designing and supporting are end-to-end spanning the entire computing continuum. In this environment, it’s imperative that resellers have access to all technology from the desktop all the way through to the cloud, so that they can do what they do best, that is deliver solutions and services that solves their customers business problem.

With Technology Solutions, Tech Data will become that complete end-to-end distributor from the data centre to the living room. The combination will give us a deeper set of skills and services then we have today, and when you combined these skills with an end-to-end solutions portfolio including our already robust data center business, it perfectly positioned us to effectively serve the IT market over the long run. While we progress towards closing the transaction, we remain focused on the current business. Underscoring Tech Data’s outstanding execution around the number of technologies categories and business initiatives, our Tech Data teams in both regions received a very special recognition from some of our most strategic channel partners in Q3.

In September at HP’s Global Partner Conference, our Americas team was recognized as HP Inc’s 2016 Distributor of the Year. And just last month, our Canadian team was named Dell EMC Canadian Distribution Partner of the Year. In Europe, our teams were also awarded Distributor of the Year by both Western Digital and Seagate. And earlier this month at Cisco’s Partner Summit, in addition to receiving a number of countries specific awards, Tech Data was named Cisco’s Global Distribution Partner of the Year; and finally at their Annual Partner Summit last week, Tech Data received CDW’s 2016 Partner of the Year Award. We’re honored to be recognized by these strategic channel partners and we thank them for the business and our dedicated partnership.

We look forward to sharing additional information with you about the Technology Solutions business once the transaction is closed. In the meantime, we will continue to look for opportunities to expand our presence in next generation technologies and to optimize our legacy businesses. We remain focused on maintain disciplined cost control and gaining profitable market share in key geographies within selective product categories and with leading vendors. Our execution has enabled to grow faster than the industry, improve non-GAAP operating income and generate industry leading returns on invested capital. We remain focused on continuing to deliver solid result in these areas going forward.

I'd like to extend our thanks to our vendors and customers for their business and their partnership and to my Tech Data colleagues for the continued hard work and dedication.

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

Question-and-Answer Session

Operator

Thank you, we'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.

Adam Tindle

Okay thank you, this is Adam in for Brian today. I wanted to ask first about expenses down 4% year-over-year despite revenue and gross profit dollar growth and based on our model that was the biggest source of upside. Can you elaborate on this and speak to the areas of savings this quarter that were perhaps temporary given earnings outlook at below expectations despite revenue that's above?

Chuck Dannewitz

Right, Adam, this is Chuck. No, the teams from both of our regions continue to do an excellent job in cost control and managing our cost structure to the revenue opportunities that are in place. So it's really nothing out of the norms than what the teams usually do, and we see opportunities to continue to optimize our operations.

Adam Tindle

Is it possible that the timing of the Avnet transaction might have played into the timing of your decision to invest in growth initiatives?

Chuck Dannewitz

No, we continue to invest as we always have Adam.

Adam Tindle

Okay. And on the Avnet transactions, since you announced that Avnet's reported results were toward disappointing in the computing business maybe a question for Bob. Help us understand what you've learnt since announcing the deal and confidence level in the ROI that you contemplated is intact?

Bob Dutkowsky

Yes, Adam, we won't comment on Avnet's results. Keep in mind, we're a competitor with Avnet at this point, so we won't comment on the results, but we believe the strategy that I tried to outline in our prepared comments about the power of the end-to-end and the distributor that's able to support the broad continuum of computing regardless of where the workload resides is absolutely intact. And what we've been able to learn about Avnet through the integration process, the slide about that we've seen has reinforced our belief that they bring the skills and capabilities that are going to be necessary for us to expand Tech Data's reach to the end-to-end. So we've seen or learned nothing that's changed our opinion and the model remains intact.

Adam Tindle

Okay. Just one quick clarification, Bob can you remind us of the 100 million in cost savings, how much of that goes to the bottom line versus gets reinvested in the business? Thanks.

Chuck Dannewitz

This is Chuck. The synergies that we talked about in regards to the TS transaction were $50 million of savings during the first year and a $100 million of savings in the second year and thereafter, and all of those come to the bottom line.

Operator

Thank you. Our next question comes from the line of Param Singh with Bank of America Merrill Lynch. Please proceed with your question.

Param Singh

Question on the revenue line here, you saw a year-over-year growth in this quarter now you are guiding to flat, like what are the puts and takes there, obviously Apple and your mobility business should come down sequentially little bit towards Jan, but what else are you seeing out there? And why wouldn’t you continue to see a year-over-year growth trend on the top line? And is it all FX related? And then I have a follow-up.

Bob Dutkowsky

Param, there is a couple of factors that enter into our guidance’ clearly we build our guidance from a bottoms up perspective. We listen to the opportunity that each of our countries articulate and that forms the basis of the way that we build our guidance. We also listen to the performance of not only our competitors, but our strategic business partners and vendor partners in the marketplace. And if you've listened to pretty much universally, the tone has been that it appears the next quarter is going to have muted IT demand. And so, I think out guidance reflects not only our view but also the overall view of the industry.

And then the other factor that exist is our product mixes are changing pretty dramatically. And as we grow our content in the datacenter, the datacenter is typically a Q4 backend loaded purchasing cycle. As we've entered more into the retail market which is impacted by the holiday season or some of our historical compares are changing on the fly. So, we attempt to reflect all of that in our guidance, and we think that the guidance that we've offered up is very much reflective of our business and the realities of the market.

Param Singh

So, correct me if I'm wrong, it's going to be harder to see a year-over-year growth trend in revenues? Or is that something that's achievable because your team is doing much better like you did in this current quarter?

Chuck Dannewitz

Param, this is Chuck. A couple of things that keep in consideration, and the first one is as last year in both of our regions, I think we had double digit sales growth, so the compares are little bit tougher year-over-year. And then of course, we continue to selectively look at opportunities in the marketplace and deselect certain opportunities that are not profitable. So, that's all reflected in our guidance.

Param Singh

Got it. And then on that based on your EPS guide, it appears that your operating margin in both regions should be flat to maybe slightly down year-over-year. Can you give me a little bit more color on that?

Chuck Dannewitz

I mean just as the teams roll up what our opportunities are, it really has to do with product mix and the opportunities that exist. And you’re spot on is that we're guiding somewhat flat in terms of operating margins, so we believe that's a realistic outlook for Q4.

Operator

Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin

Just a couple of follow-ups from the first two questions. Just regarding the guidance, it implies that gross margin is going to be down. And I know typically it has been down seasonally. You spoke, Bob, about seasonality changing a little bit in terms of consumer. And then you have got the big smartphone business in Europe, and it also sounds like enterprise -- a bit less than seasonal than normal. Are those basically the contributing factors to the margins down sequentially or is there some pricing that plays into it as well?

Bob Dutkowsky

Matt, I think you’re spot on, I think it’s the reflection of the mix that’s available for us to compete for in the quarter and that mix becomes more retail oriented. Clearly, the smartphone business is more robust in Q4. Product cycles would lead you to that conclusion as well with some of our vendors bringing products freshly to the market. And then lastly, as you described I think the data center business is -- the demand in the data center space is muted right now. And so when you compile all that together, it represents the kind of margin outlook that we guided.

Matt Sheerin

Okay, great. And then you've mentioned that the cloud business growing significantly. But it doesn't sound like a big generator of profits yet, because, obviously you are making investments there. Could you give us a ballpark of revenue run rate there, and when you expect the profits to grow and be a contributor?

Bob Dutkowsky

Matt, we're on a $300 million a year run rate in our cloud business, and compare that with our annual revenues you can see that the cloud revenue still remains behind the decimal point in terms of its impact on revenue. But I can tell you that we’re investing an over-weighted percentage in the development of our cloud toolset. And that’s the products that we have called StreamOne that we continue to invest in, we continue to upgrade its capabilities as the cloud morphs into a more tangible computing environment where distributors can add value. So much of the profits that we’re earning in our cloud business, we're plowing right back into the development cycle.

And we believe that that’s a smart play in the long run because the cloud clearly is one of the center pieces of that third platform where over the next decade growth in the IT spending environment is going to reside. Keep in mind that Avnet also has a robust cloud set of offering and one of the integration opportunities we have is to take the best of Tech Data’s cloud offering and the best of Avnet’s cloud offering and build a even more complete offering in for our partners in the cloud. So, we look forward to combining those pieces of the business together to continue to grow in the cloud.

Operator

Thank you. Our next question comes from Ananda Baruah with Brean Capital. Please proceed with your question.

Ananda Baruah

Congrats on a strong quarter. And it is good to see the stock work in your favor as well. I have a few, if I could. So, Bob, and Chuck, going back to the cost base, flat synergy guidance you guys have given, can you remind us specifically what goes in, or what is included in those numbers? And then I have a follow-up off of that. Thanks.

Chuck Dannewitz

Ananda, you’re talking about the synergies related to the TS transactions?

Ananda Baruah

Correct.

Chuck Dannewitz

So, it really is the efficiencies that will come from combining our technology platform or both on SAP. Some selected front-and back-office functions where there's overlap and then other administrative functions. So, it really is from combining and getting the leverage of the two operations, the back office and so forth that drives those synergies. Again, starting in year one by the end of the year that follows the close of the transaction, we'll have saved $50 million during that. We estimate 50 million during that time period and then growing to a $100 million in the second year.

Ananda Baruah

Got it. And that's helpful. Is the $100 million, I assume that includes -- some of that is SAP synergies, if not much of it, by that point. Is that the entirety of the SAP savings? Or do think that would grow in year three, going forward?

Chuck Dannewitz

Ananda, we didn't include that estimate right now, but we would think that we would gain additional efficiencies as time goes on, because I think that's a fair statement.

Ananda Baruah

So, SAP would be incremental to the numbers that you provided -- SAP savings.

Chuck Dannewitz

I mean that would be to the extent we get efficiencies going into the future that would be correct, and again, whether we invest those in further technologies and so forth is another question going forward.

Bob Dutkowsky

Ananda, we believe that there is opportunities to improve our service levels to our vendors and our customers by enhancing the combined SAP system. So, we may choose to reinvest to continue to differentiate ourselves with value added services through our IT implementation. It's too early for us to tell right now, exactly how that's going to play out.

Ananda Baruah

Totally get it, guys. And then just quickly, I know when you announced the deal, I believe that there was mention of central to synergies in Europe as the deal closes, and customer overlap. And then there was also, I think, commentary around potential risk to the core business until the deal closed from distraction, et cetera, from the Tech Data side. It certainly doesn't seem like there has been much distraction with regards to the top line impact. But wanted to get if you have any updated thoughts there with regards to what potential distraction might be on revenue. And then have you had a chance dimension, to any extent, what the dyssynergy -- well, I guess, what did you update on your most current dyssynergy? That would be great, also.

Bob Dutkowsky

So, regarding the quarter and the rest of the year and until the transactions close, we really are managing the Company with two distinct teams of people. One team under the leadership of Rich Hume, our COO, is driving the integration. And then the other team is our tactical execution team under our geographic leadership teams and their extended teams. So, we're trying very hard to keep the two tasks separate. And I think you can see in the quarter, we've succeeded very well in not becoming overly distracted by the transaction.

And then you know the dyssynergy that you refer to whether they'd be customer or vendor dyssynergy, keep in mind Ananda, we bought 20 companies in the last 10 years, and so we believe we have a pretty sound model of what the dyssynergy opportunities are on both fronts. And we built those projected dyssynergy into our three year plan. And quite frankly, we took very little sales synergy upside into consideration in our plan. So, the dyssynergy we think our model pretty intelligently with the lot of experience and we anticipate that the modeling we have in place is going to play out pretty accurately.

Ananda Baruah

Bob, I appreciate that. That's really helpful and just one quick follow-up off of one of your most recent comments. Do you have any sales impact baked into the synergy numbers and stage numbers that you provided us so far? Or when you speak of sales expectation -- sales synergies expectations in your three-year plan, is that a plan that you have yet to share with us?

Bob Dutkowsky

We have very small sales synergies baked into our plan and in some cases for example today we are not in Asia-Pacific. When we close the transaction, tech data will have in Asia Pacific footprint and several of our vendors have encouraged us to take their products to Asia Pacific pre the transaction. So, there are cases where we can see upside in the sales opportunity particularly around Asia. But there, it's way too early to judge what those upside sales opportunities are, and so consequently there is very little of it baked into our modeling.

Chuck Dannewitz

And Ananda, to be clear that 50 million and a 100 million numbers that we provided are solely cost saving.

Ananda Baruah

Got it, got it. Bob, just real quick -- and Chuck -- is it your expectation that investors will be happy with your three-year sales plan when you provide it?

Bob Dutkowsky

Ananda, you broke up try again.

Ananda Baruah

I was asking, is it your expectation that investors will be pleased with your three-year sales plan, whenever you provide that to us?

Bob Dutkowsky

We give quarter-to-quarter guidance Ananda and that's our story.

Operator

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

Lou Miscioscia

Happy for you guys delivering a nice quarter here. So, on the demand picture, just anything you could just add. I guess the thing that seemed a little bit interesting is that we all sort of knew that public sector was going to be good. But what is a little bit odd is that large, national accounts in SMB -- if I got it accurate -- were good or strong, but then VARs were weak. You would think that all three of those would go together. If you could help maybe just differentiate, or parse that out a bit.

Bob Dutkowsky

They don’t all go together interestingly enough and part of it Lou, is a factor of our coverage model. So we cover the nationals in a very comprehensive fashion, and we compete for lots of different product lines at the nationals, and consequently as I mentioned in my prepared comments, we were recognized by CDW or largest customer in the world as their Partner of the Year. And I think that reflects to the breadth of our product offerings and the type of coverage we give there. When you get to the VARs in SMBs where they are literally tens of thousands of those customers, our coverage model is different, it's some onsite coverage, it's some phone coverage, it's lots of e-commerce opportunities.

And frankly, we don’t touch every one of those customers. and then last year and a half as we've commented as we've talked about the reinvestment in resources in the Americas as an example we have deployed more outward bound sales coverage. We've deployed more SMB coverage. We've changed the kind of compensation plans that sales teams have that focused them on new account generation as oppose to coverage. And all of that is yielded a very good result in the Americas. And so, I think to answer your question specifically, it’s very much reflective of our ability to cover the opportunity. And we’ve tuned those coverage models and we’ve been able to see the results.

Lou Miscioscia

Okay. Then in Europe, obviously, you said that the UK was good. Anything that you can share, either on Brexit concerns, or also as the rest of Europe?

Chuck Dannewitz

Lou, this is Chuck. Basically, we’ve seen a very good performance by our UK team. They're just out executing in the market place, double digit sales growth, very strong mobility sales, very strong broad line sales. And they really have a great team that's attacking the SMB market there with great success. So, kudos to our UK team they are just outperforming.

Lou Miscioscia

Okay. And then last question, I believe when we had the call on the acquisition, you had mentioned 200 million of tax benefit. Could you just help us understand, is that locked in? And does that come in on a pretty much linear basis? Just trying to understand how that would add to the synergies, as we think about the significant accretion from the Avnet deal.

Chuck Dannewitz

Sure, the $200 million of tax benefit is a result of a step up in tax basis for the assets that are in United States primarily or maybe some additional tax basis step ups in other countries, but the $200 million relates to the U.S. So, we'll get a step up in tax basis there which is amortized for tax purposes over 15 years, and that cash flow will into the companies through a lower tax rate that will pay to the U.S. government. So, it is linear, it will be over 15 years, and it will be strength-lined, and the $200 million is the present value of the tax benefit.

Operator

Thank you. Our next question comes from the line of Rich Kugele with Needham & Company. Please proceed with your question.

Rich Kugele

Just two areas of questions. First, Bob, can you just elaborate on the storage weakness you saw in both regions? Are you referring to systems, legacy systems, or components? And then in terms of Asia, since it is a new geography for you somewhat, what type of market are you walking into? Are you walking into one that is heavily data center-oriented? Or are you going to have a decent mix of consumer, as well, just in terms of what type of mix should we expect in that region in particular? Thanks.

Bob Dutkowsky

So, first off on the storage side, keep in mind that we’ve have a very small business in the component side of storage. So, our storage commentary is all around systems. And if you listen to our big suppliers all of them had weak performance on the storage front. But we continue to invest in the converged infrastructure, hyper-converged infrastructure side and into the flash storage market where we believe the future of the storage industry is really headed towards. And we’re building up our practices there albeit they're small. And one of the things that was attractive to us about Technology Solutions from Avnet is they have a more robust flash in solid-state storage business.

Rich Kugele

So, were those categories better than the more traditional ones, then?

Bob Dutkowsky

Yes, the both categories are growing rapidly, but they are not growing as rapidly as the traditional storage market is declining. So, the two curves that not yet crossed and I think it’s going to take awhile before they actually do cross, but they will and thus our investments in preparing ourselves for that marketplace is really important. Those are different skills and those products often times come from different new vendors. So we think that we're well positioned to take advantage of the growth that's going to happen in those spaces.

On the Asia front because our footprint will be the Technology Solutions footprint, it's a primarily a value business, data center business, although they do have some broad line products that they distribute in some countries, but it's primarily going to be a data center business there. And we'll have to make determinations, if we should expand our line card with other product to really most importantly deliver our end-to-end value proposition, which we believe is a differentiated value proposition in the market. So, it's way too early for us to understand the details about the Asian business other than we're excited to finally plant the Tech Data flag in that geography.

Operator

Thank you. Our next question comes from the line of Jim Suva with Citigroup. Please proceed with your question.

Jim Suva

Can you talk a little bit about in your guidance typically for this time of year, many places have a budget flush; if they don't use the money for this year, they may use it. Are you expecting a traditional IT budget flush, a little bit more or a little bit less? And then I may have a follow-up. Thank you.

Bob Dutkowsky

It's a very good question Jim. Traditionally, that data center space in particular has a budget flush process that happens at the end. Typically, it's even more pronounced in Europe than it is in the Americas. If you recall last Q4, we commented that we didn't particularly see a big budget flush happen and we had more strength last year in the broad line space than we did in the data center space in Q4. So I don't really, I can't tell you how the CFOs of the world are going to react and whether they were ahead of their budgets or not ahead of their budgets. But if they have excess money available on their budget one good place to spend it is in IT capability, and if the demand overextends our plan we'll have the ability to stretch and respond to that kind of demand if it exists.

Jim Suva

Okay. But for your guidance or your modeling are you kind of expecting more of a normal or you are stronger in Europe weaker or both equal or how should we think about that.

Bob Dutkowsky

Yes, I think it just would be -- we would view it as a normal cycle.

Jim Suva

Okay great. And then my follow-up is, your results with the sales being stronger than your guidance. Can you talk about like the linearity was like the last month of the quarter particularly stronger or was it equal weighted or linear through the quarter? Thank you.

Bob Dutkowsky

No, it was very much equal throughout the quarter. We clearly got off to a quick start in the quarter, and therefore, we were able to be very thoughtful about the kind of business that we took and thus you saw the improvement in operating income, but demand was very stable throughout the quarter.

Operator

Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Please proceed with your question.

Shannon Cross

My first question is just with regard to the election. I am curious; some others have commented that they saw some pullback, some concern. Clearly your numbers were pretty strong. But I am curious as to what you have heard from customers. Could any of the VAR weakness be associated with that? And then I was wondering, given that there is some speculations -- there is lots of speculation, but -- there is some speculation about from a Trump tax plan that he might actually allow for expensing of investments as opposed to capitalizing them. If you could look back historically, did that have any benefit to your business the last time that was put in place? Thank you.

Bob Dutkowsky

Yes, so first off the impact of the election, I think the election had the whole infrastructure in an unstable environment. How close the election was made it very difficult for management teams and CFOs to project forward? How investments and infrastructure may play out? How tax rates may play out et cetera, et cetera, etcetera? So, I think it had a cooling effect on the market and you may now see that some of that's been lifted. In terms of the capital impacts on tax rate, we've looked back on it and we've seen de minimis impact on our business when one of those changes happen. So in terms of our thought process going forward, we don’t have a lot of, it's not impacting the way we think of the business.

Shannon Cross

Okay, great. And then can you just talk a bit about what you saw in the PC market? Clearly strength in the quarter, I am guessing a little more caution given your guidance, perhaps not. But if you can just talk about, obviously, HP, I assume, trended up because you are selling more notebooks, and it appears at least more of the higher-end PCs. But be curious as to what you're thinking about in terms of inventory levels and demand, just any color you can give there. Thank you.

Bob Dutkowsky

Yes, the PC business it's -- the PC business for us in the quarter was an interesting case study because one vendor decided to move a chunk of business that they had traditionally done direct and move it into the channel, and we competed and won the business. So, that's contributed pretty greatly to why our PC growth was as high as it was. And we often had said the very best market share we can gain is when we get share from our vendors and that's an example in this quarter where that happened, and it fueled a lot of the growth that we had as well as several of the PC vendors brought out new product that created demand in the marketplace. So, the PC market was strong for us in the quarter and we were able to realize that the demand that existed there and serve that demand effectively.

Shannon Cross

And given that you -- this is incremental demand; obviously, it is not going to help you sequentially. But on a year-over-year basis, does this -- what you gained from your vendor something that should continue to benefit as we go through the next two quarters?

Bob Dutkowsky

Yes, because we wasn’t there in Q4 of last year either.

Operator

Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Please proceed with your question.

Keith Housum

Guys, as we look at your guidance and in Brexit, obviously, the currency has weakened quite a bit over in the UK, and you have a lot of your vendors that have been raising prices. As you think about your guidance, has the increased prices made their way into the market yet as you guys have seen it? And then do you expect Brexit to continue to outperform based on a weakening as a realization of the weaker currency gets filtered into the economy?

Chuck Dannewitz

Keith, this is Chuck, and we did see some vendor price and that is factored into our guidance as well. We continue to do execute extremely well in the UK and have also factored that into our guidance, so another strong performance by our UK team is already in our forecast.

Keith Housum

Got it. And just for clarity, what was the impact to the FX on the bottom line?

Chuck Dannewitz

On the bottom line from Brexit?

Keith Housum

No, no, I'm sorry -- just overall in the quarter, the impact of foreign currency on EPS.

Chuck Dannewitz

It wasn’t overall, it wasn’t that significant update. Hang on one second.

Bob Dutkowsky

We know it’s tripled back off that is well.

Chuck Dannewitz

Yes, Keith, it was about $0.05

Bob Dutkowsky

$0.05 benefit or drag?

Chuck Dannewitz

Drag.

Operator

[Operator Instructions] There are no further questions at this time. This concludes Tech Data Corporation's fiscal year 2017 third quarter earnings conference call. A replay of the call will be available in about one hour at techdata.com. Thank you for attending today's conference call. And have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!