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Tech Data Corp. (NASDAQ:TECD)

F2Q08 Earnings Call

August 22, 2007, 9:00 AM ET

Executives

Sharon M. Mathers - Sr. VP, IR and External Communications

Stephen P. DeFalco - President and CEO

Douglas S. Prince - CFO and EVP, Finance

Analysts

Douglas Miehm - RBC Capital Markets

Lennox Gibbs - TD Newcrest

David Martin - Dundee Securities

John Maletic - Scotia Capital

Alex Alvarez - Goldman Sachs

Joseph Walewicz - CIBC World Markets

Hari Sambasivam - Merrill Lynch

Maher Yaghi - Desjardins Securities

Presentation

Operator

Good morning. Welcome to the Tech Data Corporation Fiscal 2008 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Ms. Kristin Wiemer, Director of Investor Relations. Ma’am, you may begin.

Kristin Wiemer-Bohnsack - Director, Investor Relations

Thank you. Good morning and welcome to Tech Data's fiscal 2008 second quarter earnings conference call. Joining me for today's call are Bob Dutkowsky, CEO and Jeff Howells, Executive Vice President and CFO.

Before I begin today's call, we would like to remind the audience that certain matters discussed during today's call may contain forward-looking statements make pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Please be cautioned that such forward-looking statements are based on the Company's current expectations that involve a number of risks and uncertainties and actual results could differ materially from such expectations. Risks, uncertainties and other factors effecting the Company's business are contained in our filings with the Securities & Exchange Commission, specifically located in item Q of the Company's Form 10-Q filed on June 6th of this year.

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, it may not be recorded or rebroadcast without specific written permission from the Company.

I will now turn the call over to Jeff Howells.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Thank you, Kristin. Many of my comments will reference the supplemental schedules, which are available on Investor Relations section of our website. Also during today’s call, we will discuss certain non-GAAP financial measures. You may obtain additional information on these non-GAAP measures and a reconciliation of these measures to GAAP in Appendix A of the supplemental schedules or page eight of today’s press release on Investor Relations section of our website at www.techdata.com.

For comparison purposes please note our results for the second quarter of fiscal 2008 discussed on this call will exclude a $4.3 million charge for the loss on disposal subsidiaries and $16.3 million of restructuring charges. Loss and disposal subsidiaries relates to our decision to exit our operations in Israel and UAE, as part of our ongoing activities to optimize profitability and return on capital employed. Restructuring charges relates to the closer of a European Logistic Center in Germany to gain synergies and reduce future operating expenses. These operations were consolidated with the centralized facility in the Czech Republic.

Prior year second quarter results also exclude a non-cash charge of $136.1 million the impairment of goodwill associated with Europe, $12.8 million in restructuring charges and consulting cost related to European restructuring program, which was completed in the third quarter of fiscal 2007. And a non-cash charge of $8.4 million to increase the evaluation allowance for certain deferred tax asset associated with the European region.

Prior to starting the detailed financial review, I want to say how extremely pleased we are with the second quarter results which exceeded our internal plans and expectations in almost every metric. Continuing with the first two slides, worldwide net sales for the second quarter exceeded the high end of our business outlook reaching an all time second quarter record of $5.6 billion, an increase of 13.6% from $4.9 billion in the second quarter of fiscal 2007, an increase of 3.9% as compared to the first quarter of the current fiscal year.

On a regional basis, second quarter net sales in the Americas were $2.9 billion or 52% of net sales representing above market growth of 16.7% year-over-year and 16.2% sequentially. Second quarter net sales in Europe were $2.7 billion or 48% of net sales representing year-over-year growth of 10.3%, which is 3.4% local currency, a sequential decrease of 6.7% or 8.6% in local currency.

Slide three to five summarize our operating performance for the second quarter. Worldwide gross margin for the second quarter of fiscal 2008 was 4.89% compared to 4.56% in the prior year second quarter and 4.72% in the first quarter. The increase in gross margin was attributable to significant improvements in the Company’s inventory, pricing and management practices in Europe, partially off set by a shift in customer and product mix in the Americas.

Second quarter SG&A expenses were dollars $226.7 million or 4.03% of net sales compared to the prior year’s second quarter SG&A of dollars $209.2 million or 4.23% of net sales. SG&A costs have increased to support sales growth in the Company's strategic initiatives. However, as a percentage of sales we realized the 20 basis point year-over-year decline in SG&A is a result of the leverage achieved in the Americas. And to a lesser extent in Europe during the second quarter.

Operating income for the second quarter on a non-GAAP basis was dollars $47.6 million or 0.85% of net sales compared to dollars $18 million or 0.36% in net sales in the same period last year. On a regional basis, operating income for the second quarter in the Americas was $45.2 million or 1.56% of net sales versus $37.6 million or 1.51% of net sales in Q2 of last year.

In Europe, non-GAAP operating income was $4.9 million or 0.18% of net sales compared to an operating loss of $17.9 million or 0.73% of net sales in the second quarter of fiscal 2007, which represents a 91 basis point improvement year-over-year. As a reminder, stock based competition expenses is reported on a worldwide basis represented as a separate reconciled item in the Company's segment reporting. Other financial highlights for Q2 include, interest rate expense in the other $4 million to improve balance sheet management throughout the quarter. Effective tax rate for Q2 on GAAP basis was 72.8% and effective tax rate on non-GAAP basis was 39.5%.

For the third quarter fiscal 2008, we estimated an effective tax rate in range of 34% to 36%. As noted in previous quarters, in accordance with FIN 18, quarterly effective tax rates may vary significantly depending on the actual operating results in our various tax jurisdictions.

Net income on a non-GAAP basis for the second quarter was $27.5 million or $0.50 per diluted share based on $55.5 million weighted average diluted shares outstanding. For the same quarter of fiscal 2007, non-GAAP net income was $295,000 or $0.01 per diluted share. The $1 million minority interest in second quarter of 2008 represents the Company's Brightstar Europe joint venture partner share of the start-up costs incurred to date. The joint venture remains in the formation phase and has not commenced sales as of July 31st, 2007.

Turning to the balance sheet, please refer to Slides 6 and 7. Our cash management performance during the quarter was exceptional in both regions and exceeded our internal plan. Accounts receivable totaled $2.3 billion, an allowance for bad debt of $67.3 million. Our DSO was at 38 days versus 48 days at the end of Q1. Inventory totaled $1.5 billion yielding a days of supply at the end of Q2 of 25 days versus 26 days at the end of Q1. Accounts payable was $2.1 billion, days payable outstanding at the end of Q2 was 36 days, yielding a total cash conversion cycle for the second quarter of 27 days, an improvement on one day over the prior year period and a three day improvement over the first quarter of fiscal 2008.

Cash provided by operations during the second quarter was $198.7 million and $429.5 million year-to-date. Total debt was $383.2 million compared to $443.2 million in January 31st. And the Company continues to enjoy excellent liquidity and financial flexibility with a Company debt net cash position of $233.8 million at July 31st. Total debt-to-cap was 17%. Funds available for using our credit facility totaled $683.8 million at the end of the quarter. Equity totaled $1.81 billion. Our headcount was approximately 8,130 full time equivalents at January 31st compared to 7,730 in the prior year, which is a total increase of approximately 5% or 400 FTEs, primarily support sales growth in various strategic initiatives.

Capital expenditures totaled $10.4 million in Q2. The current plan from the fiscal year… fiscal capital expenditures of approximately $40 million. Second quarter depreciation and amortization expense was approximately $12.7 million.

Turning to our product and customer classification on slide eight, the Company's net sales by product segment in the second quarter were relatively consistent in prior period. We estimated that peripherals account for 40% of net sales, systems, approximately 30% of net sales, networking approximately 15% of net sales and software 15% of net sales. The Company's net sales by customer segment in second quarter continue to be relatively consistent, while VAR accounted for approximately 60% of net sales, direct marketers and retailers, 25% of net sales, and corporate resellers, 15% of the net sales.

As we passed quarters, Hewlett-Packard was the only vendor generated more than 10% of our net sales worldwide. In the second quarter, HP represented 27% of our net sales compared to 28% in the prior year period.

Turning to our business outlook, the statements I will make are based on current expectations and the Company's internal plan. These statements are forward-looking and as outlined in the Company's periodic filings with the SEC, actual results may differ materially. For the third quarter ending October 31st, 2007, the Company anticipates net sales to be in the range of $5.75 billion to $5.9 billion. This assumption… this assumes year-over-year low double digit growth in the America and flat to low single digit growth in Europe on a local currency basis. As I noted earlier, we anticipated effective tax rate in the range of 44% to 36% for the third quarter.

I will turn the call over to Bob Dutkowsky.

Robert M. Dutkowsky - Chief Executive Officer

Thank you, Jeff. Good morning and thanks everyone for joining us on today's call. Over the past three quarters, we have used this form to communicate to you the foundation of Tech Data’s strategy, namely to enhance our execution, to invest in innovation and to wisely diversify our business. Our second quarter performance firmly underscores our ability to execute. Particularly, amid a quarter that is historically one of our toughest. We grew our top-line responsibly at above market rates, achieving record second quarter net sales of top $5.6 billion and we are building momentum for the remainder of fiscal 2008. Both regions performed well contributing to our solid operating performance, strong cash generation and improved cash day’s management. Our ongoing portfolio management efforts to remap marginally profitable business both in the Americas and in Europe and replace it with a more profitable mix are proving successful.

Looking at the Americas, our net sales exceeded our internal growth expectation which called for growth in the mid single digit range through strong execution and focused sales and product management efforts we want incremental business in the second quarter that boosted our growth rate to over 16% in the region, while still delivering our targeted operating margin. This double digit net sales growth was broad based with growth across virtually all of our product and customer segments. Of no… our renewed focus on the sweet spot of our business, namely, the small and medium business segment is delivering results as we continue to expand our presence and coverage in the SMB area. We believe that we gained share in this strategic segment during the quarter. Finally, our Latin American operations delivered another quarter of exceptional results. We believe we also gained market share in this rapidly growing region.

Our investments in our AIS group are also proving fruitful. The division performed very well in the second quarter with double digit growth in the VAR and SMB space and operating profits ahead of our expectations. We have a first to market advantage with AIS and we are extremely optimistic about the customer and vendor opportunities that lie ahead of us. We are taking the lead with respect to many emerging products by securing key vendor relationships with Company’s that are on the forefront on the next generation of technology. Earlier this quarter, we expanded our vendor portfolio in AIS with the addition of BakBone, a data protection and restoration solutions company and Virtual Iron, a software company that offers data set of virtualization products. New technology solutions in data protection, virtualization and industry standard service and storage continue to pave the way for higher growth opportunities in IT distribution and are well suited for AIS’s go-to-market model and customer mix.

Turning to our European operations, our steady focus on execution has helped transform our European business from an operating loss in Q2 of last year to one that has delivered four straight quarters of operating income on a non-GAAP basis. In fact, this is the first time in three years that our European operation delivered an operating profit for the second quarter on a non-GAAP basis.

Year-over-year, Q2 marked a 91 basis points improvement in operating income on a non-GAAP basis setting the stage for continued improvement. There is a renewed strength in the European market which resulted in relatively steady demand during the quarter. In this environment, we achieved improved performance with both our existing and new customers. Excluding the operations related to the UAE and Israel unit, our net sales on a local currency basis grew approximately 7% year-over-year, 3% including the exited ops validating our view of the encouraging environment and of our improving execution.

We continue to make measured improvements in our under performing regions in Europe and I am optimistic about the positive changes taking place. For example, the new Managing Director of our central region has been in place for a few months now. She has assessed the operations evaluating where additional changes in leadership, people and process are necessary. Recruiting and staffing critical open positions is already under way. All of these steps will help us drive this region to long term profitability.

As Jeff noted, our efforts to exit several operations, namely Israel and UAE that were no longer meeting our profitability and return on capital requirements are nearing completion. Our efforts to consolidate our German logistic center into our Czech facility was also completed in the quarter This step allows Tech Data to optimize its logistics initiatives for the central and eastern regions of Europe, providing better service to our customers and reducing our overall operating cost.

As you can see, we are making measurable progress towards turning Europe around. Once again the turnaround of our European operation will take time, as we work country-by-country to improve each of our processes and our overall execution. But with the challenges of recent year behind us, we are optimistic for the future. To that end I want to know that several regions in Europe continue to be star performers, executing ahead of our expectation.

The number attest to the improvements and changes throughout the Europe. Six of our seven regions in Europe delivered year-over-year growth in net sales in the quarter. We are making great headway on our pricing and inventory manages… management practices also. This is evident in our growth profit performance in Europe, where the majority of our drove nice year-over-year improvement in their margins.

Overall, our team is very positive about our direction and the opportunities that lie ahead. Its important to note that these results in Europe also include some minimal cost associated with the start up of the Brightstar Europe JV, but there are no sales reported yet. Continue with Brightstar, we finalized our joint venture agreement with Brightstar Corporation during the second quarter and announced our first vendor agreement with Motorola.

As with most with start up of greenfield operation, the initial phase can take longer to get ramp for our plans of proceeding with hiring, training and getting customers on board. We expect Brightstar Europe to start selling in the second half of the year as Motorola's next generation of devices hit the market. We fully committed to capitalizing of the growth opportunities in the European mobile device market and are reviewing additional meanings of diversifying our business in this arena through the JV. The impact of JV is not expected to be material this year as we ramp up the operations.

In August, we entered into an acquisition agreement inline with our strategy to strengthen and diversify our position in existing market. We are purchasing the assets and client base Actebis's operations in Switzerland. Although, not significant in scope, the acquisition will strengthen our position in Switzerland and the SMB space, while providing our existing and new customers with the broader portfolio of vendor, expanded line card of hardware and software offer and improved sales coverage and support.

Now, before I turn to our outlook, let me update you on some recent hires we made to strengthen our management team. I would like to welcome Greg Parsonson who has been named VP of Corporate Development. Greg will lead our diversification efforts on evaluating new markets and technologies, broadening our customer base and enhancing our product's offerings. With nearly 10 years of experience in the IT supply chain management, international product distribution, sales marketing and business development, Greg is well suited to lead our strategic initiatives.

We have also appointed Caryl Lucarelli, the Head of our Americas and Corporate Human Resource Group. Caryl l has considerable experience in the distribution industry and has demonstrated strong leadership in all aspects of Human Resource management. She is a valuable addition to our team, as we work to further strengthen our Human Resource policies and practices. Both Greg and Caryl will report directly to me.

Turing our focus to Q3, we are entering into next quarter of renewed sense of optimism. Our Q3 business outlook calls for low double digit year-over-year growth in the Americas and flat to low single digit growth in Europe on the local currency basis. While we are pleased with our improving performance, we realized there is still tremendous room for us to responsively and selectively grow our net sales, profitability and market share. We will continue to make targeted investments across our worldwide operations in IT enhancement, sales program and new business units as we optimize our process and we innovate the ways we do our business.

Our financial position has never been stronger with over $600 million in cash on the balance sheet and a record net cash position of over $233 million. Tech Data is in the solid position to further leverage our strength and execution to improve our performance in the second half of this fiscal year. In summary, I am encouraged and pleased with our second quarter results and I want to extend my appreciation to our worldwide team for executing on all fronts and exceeding our expectation.

With that, we would now like to open the call to your questions.

Question and Answer

Operator

We will now begin the question-and-answer session. [Operator Instructions]. One moment please for our first question.

Our first question comes from Min Park of Goldman Sachs.

Min Park - Goldman Sachs

Yes. Thank you. Just a few question, please. On first, your Americas revenue growth was almost up 17% but then came in much stronger than we expect and obviously, we expected as well. Can you help us to understand what the primary driver of the growth were in this market? I know you mention that was pretty broad base, but can you help us to tell us what verticals of product categories outperformed specifically?

Robert M. Dutkowsky - Chief Executive Officer

Min, I will go first and then let Jeff jump in. But as we said it was… the growth was balanced across virtually all segments and all products. Our large accounts are small and medium size VARs. All grew and about an equal range and growth is really spread across all product segments. So again, I think the performance in the America calls out the solid execution that our team delivered in the quarter.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

And add to that that last year we spent a lot of time in the America balancing our customer and product portfolio, laying the ground work for what the team executed on first half of this year. So, our growth last year was may be ahead or slightly below market as we look close our customers and product portfolio. We haven’t completed that process, quite frankly, we will never complete that process. But I think we saw acceleration as a result of having that pruning done. Customer rewarded our team everywhere with incremental business and actually, as Bob alluded to our growth was tremendous in both Latin America and I didn’t mention but Canada also.

Those two regions actually exceeded the average at certainly smaller revenue. But our team throughout North America and into Latin America did a great job and I think its executing on plans that we laid out and we have more traction on Latin America and then in the Europe. We are laying that ground work this year hence, even in our forecast low single digit growth in the local currency is the net impact of our plan and our operations.

Min Park - Goldman Sachs

Okay. And I wonder… your primary competitor highlighted that obviously, in the North America market, commercial demand was little bit softer than they had expected in the prior quarter. Can you give us your thoughts on demand, obviously, gain shares versus then? But what… how did commercial demand actually end up versus your expectation going into quarter?

Robert M. Dutkowsky - Chief Executive Officer

Min I will ask Ken Lamneck, our President of The Americas to answer that for you.

Kenneth Lamneck - President, The Americas

Min, we are seeing consistent demand as Bob and Jeff mentioned across all of the segment. So, our customer set can usually get pretty good visibility to two quarters out and we see them pretty optimistic to what has see IT spend going forward now. So, we remain optimistic and continue to drive and execute on the business levels. But I would certainly say that there is good consistent growth out there in the market.

Min Park - Goldman Sachs

And the lastly, there was a bit of concern out there right now regarding the financial services vertical, both in the larger companies as well as more the small SMB side. I was just wondering if you actually started to see any or heard from some of your VARs enterprise are trying to cut, spending on the factor at all or your expectation for demand in the second half, are you expecting kind of slowdown in this particular vertical?

Robert M. Dutkowsky - Chief Executive Officer

Well, one of the beauties of the Tech Data model as were distributed across virtually every major vertical. So, there is a little softness in one vertical, we can typically weather those kinds of storms. Tech Data, we are totally focused on financial services and the home building market we would be in a different position than we are. So, as Jeff said, we have no loan customer that represents more than 10% of our revenues and no one vendor other than HP, so are distributed nature of our business really plays well in difficult times inside of one sector. All in all, we feel very comfortable about the demand statement itself.

Min Park - Goldman Sachs

Great. Thank you.

Operator

Thank you. Our next question comes from Jason Gursky of JP Morgan.

Jason Gursky - JP Morgan Securities

Hi, good morning everyone. Just a couple of quick follow up on the Americas business. Perhaps you could offer your view as the overall market growth at this point, so we have basis for comparison when you say that you are grew in the market. And I am just trying to understand little bit as well, the Latin American strength, I mean you call it a specific country, where those coming from Brazil, for example. And then, if you can just give us your general thoughts on the pricing environment across the various buckets, the VARs, the direct marketers, et cetera?

Robert Dutkowsky - Chief Executive Officer

I will start with that, Jason. I think you, as we always say, you have to kind of look at the distribution industry and one proxy is the average of what we all may be doing. Now, our businesses are diversifying and we are more pure IT product distribution than maybe two of our competitors, but if you take the average of two or three of us you will probably get closer to true demand. So it probably for distribution in the high single digits in the Americas, I think as Ken alluded to, there continues to be very good demand and it exceeded our expectations, and I can obviously say, one quarter ago we would not have anticipated giving you a double-digit growth estimate for Q3, but we feel comfortable with that.

Our LA strength is both in our export business out of Latin America… out of Miami into Latin America are far more mature, in country locations and then the operation we started a couple of years ago in Mexico. Now the team is doing a great job there and you didn’t ask but I will tell you our growth in Canada. I don’t use words like this, but it’s rather explosive, so we’ve had great growth in Canada and we think that will continue.

The pricing environment is competitive, but rational. You can see that in our gross margin achievement. Now, certainly part of our gross margin achievement is the opportunity to over achieve in some of the opportunities with our vendors because yes, we did exceed our expectation so. But on balance it’s a competitive, but rational pricing environment out there today.

Jason Gursky - JP Morgan Securities

Okay. And then just a couple of bookkeeping questions to follow up and I will get off. How sustainable do you view the day’s payable at this point and the interest expense levels that you just reported this quarter?

Robert Dutkowsky - Chief Executive Officer

Well, one is a picture and the other is a movie. On the days payable that’s a snapshot at the end of the quarter, which was quite good, but I think we are certainly driving for the cash days, the net cash days in that 27,28 day range. And quite frankly, I don’t think we get too obsessed on whether that number is 26, 27, 28 or 29, but what we are more obsessed with is trying to control the three primary drivers every day of the quarter.

I would characterize our achievement on interest expense is probably like the rest of our P&L this quarter, significantly exceeding our expectations. So interest expense will go up in the following quarters. Not giving exact numbers or forecasts, but it’s probably closer to somewhere between the first two quarters as we start ramping up the business in Q3 inventory to be able to service our customers in Q4.

Jason Gursky - JP Morgan Securities

That’s helpful. Thank you, guys.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Jason, I will just summarize once again. I know I don’t want to beat the dead horse, but the company executed very well in the quarter. We bought the right products at the right prices. We covered the right market segments with our coverage model. We managed all the elements of the P&L very effectively and the results speak for themselves. So it’s a very solid quarter for the company driven around strength and execution and a strong opportunity statement in the marketplace.

Jason Gursky - JP Morgan Securities

Okay, great. Thanks, guys.

Operator

Thank you. Our next question is from Matthew Sheerin of Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Yes, thanks. I have got a question about Europe before I go back to North America. Again, it looks like you have had some nice, slow, steady improvement in operating margins there. I know Bob you talked about being a little bit choppy in terms of getting to some of the long-term goals. I know you talked about 1% and so in the past, but are you getting better visibility on the margin expansion there and you ready to give us a goal for timing of when you can get to 1% or better than that?

Robert M. Dutkowsky - Chief Executive Officer

Yes. Clearly, the European unit is moving in the right direction and I think this quarter validates that many of the changes that the Company has worked on over the last three years are settling in and taking effect. And I think the management team is maturing in the regions, so that they are more aggressively managing their business and you see that in inventory management, you see it in front end and back end management, you see it in gross margin performance. And all those pieces come together over time and you see the kinds of improvements that we are delivering, but the work is not done there yet. There continues to be opportunities for improvement on virtually all fronts and all regions and Nester and his team are focused on step-by-step improvements to bring that unit to a level that we want it to be at.

Matthew Sheerin - Thomas Weisel Partners

Okay. Could you give us any short or long-term targets that you have internally?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

This is Jeff. The only thing I will add to Bob is first, no, we are not going to give a mathematical computation. But I think now more than ever in Europe, we are clear on what Tech Data’s ability in future is. We've got so many things behind us and such a world class logistics and IT infrastructure in place over there. We shed a few incremental countries and finished the regionalization of another warehouse that became a new opportunity earlier this year. So we are clear on what we can do, but we don’t know what the next six quarters will bring in the economy, vendor actions, competitive actions and that more than anything else keeps us from giving you a mathematical calculation. So, the theme is poised, we are doing great in most of our regions if not all, on all metrics. But we are not going to give a mathematical calculation, but we have more positive thoughts than we have had in a couple of years.

Matthew Sheerin - Thomas Weisel Partners

Okay. Great.

Robert M. Dutkowsky - Chief Executive Officer

And Matt I think, part of the reason we called out the acquisition that we made in Switzerland, albeit small. I think it states our confidence in our… in the management team in Europe, ability to handle more. A couple of quarters ago we added the Brightstar joint venture. That’s been a lot of work for the team in Europe. A few years ago my guess is they could not absorbed the operations of the day-to-day business an addition like Brightstar. And now we added another addition in the acquisition of Actebis in Switzerland. Those are all statements I hope you read into our confidence, the building confidence we have in the management infrastructure in Europe.

Matthew Sheerin - Thomas Weisel Partners

Okay. Fine and then just back to North America, you did talk in the opening statement about margins being impacted somewhat by customer and product mix. So could you help us understand that better exactly what you meant by that and was there some… any kind of gross margin pressure that was offset by SG&A leverage.

Robert M. Dutkowsky - Chief Executive Officer

I think we answered your question. But I wouldn’t call it pressure, I would say it’s to whom we sell what at what price and what the cost that attached to those. We did grow our business very nicely with some customers that while very competitive pricing exists in that particular space. Our ability to serve them through our infrastructure here helps us leverage as a key contributor to leveraging that SG&A and the 20 basis point year-over-year decline. So, no… I would not describe it as a pricing pressure. Certainly every day is a challenge in trying to make sure everyone is pricing appropriately and rationally, both within Tech Data and watching what our competitors do. But I think it is a clear direction that our team is managing to. Among other things they have got the information to help them get there.

Matthew Sheerin - Thomas Weisel Partners

Okay. Were they volume customers then like the direct marketers? We’d saw the strength.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Yes. As I said earlier it was really across the board. Our biggest customers grew aggressively and our smallest customers grew aggressively. And the percentage of growth was really pretty balanced across all sectors. So, I think, that states to the effectiveness of our coverage models. We are reaching in to the right market segments and applying Tech Data value and realizing balanced growth across all sectors.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thanks.

Operator

Thank you our next question is from Brian Alexander of Raymond James.

Brian Alexander - Raymond James

Thanks good morning. Just, I guess going back to Europe and I know you have talked about a lot of this and I am just trying to boil it down Bob and Jeff if you can maybe just site the top two or three reasons kind of an order of impact. On how you were able to improve the European profitability. I know you touched on a bunch of things like leadership mix, a stronger macro. I am just trying to get a sense for, what was the biggest driver of the year-over-year change or top two or three drivers of the year-over-year change in profitability and how broad based was it and I.E., is Germany part of the picture recovery there? And Bob it sounds like your comments that you are pretty comfortable that you have turned the corner there?

Robert Dutkowsky - Chief Executive Officer

I will go first and then Jeff can jump in. I think if you look at Europe, the vast majority of the regions exceeded their net sales goals. So, we had good top line performance across…balanced good top line performance across the regions. And then you sprinkle in good inventory management across all the regions and front end and back end margin management and we put more revenue and better management of the flow underneath that. And you will see an improved operating income for the unit. And so that would be observation number one.

Observation number two is, as I was trying to say earlier, the teams in the regions are maturing, they are now running their organizations more like businesses. They are measured and compensated on metrics like ROSI. So, they tried to find good profitable market opportunities for Tech Data and that’s where they are applying the resource. Implied in that is that we are exiting revenue opportunities that are not as profitable. And so you see that kind of churn that sits underneath each of the region and when you add that together, you realize the more profitable better functioning European team. And I have now seen the team in action for the three quarters and its stunning to me on how much the organization is improving before our eyes. We review every region twice a quarter and then in time that I watched that the process and the discipline has really been very marked. And when organization… field organizations execute in the disciplined fashion, you see the results and things like profitability and market share gains, and I think that’s exactly what’s happening in our European business. But let me be clear we are not declaring victory. We have a long way to go in Europe before we have the predictability that you are asking us for. We are working towards that, we are not there yet and we know what we need to do to get there, but we are not there yet.

Brian Alexander - Raymond James

And just follow-up on time Brightstar, you were clear that’s it probably not going a meaningful contribution in the back half of the year, but as you look into your next fiscal year calendar ’08, I mean, any metrics or expectations you can share about. How this might impact your business maybe range of revenue or EBIT contribution that you might be willing share based on certain market share assumption?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Brian this is Jeff. Now I think with the startup enterprise, it’s a little hard for us to share those. We actually thought we are going to be up and running a little sooner in the revenue generation here, and for variety of reasons or not, but that’s fine. We rather do it right, and do it methodically. But I think it will just see another positive that we will see next year as we ramp that revenue throughout the year. And as Bob indicated in his comments we’ve got Motorola, they are rolling out new product technology literally as you can speak. So that should be nice for the second half and then we are looking at other ways to grow that business. So, I can’t give you any metrics on it, but I think it is a small, reasonable safe bet on the very, very interesting and potentially exciting areas for Tech Data versus doing the opposite of acquiring a significant company and trying to integrate it and go through those trials and tribulations.

So, it will take us a little longer to have the kind of desired revenue and bottom line impact, but all that being said, it’s a step out, it’s something new, more exciting as what’s in our based business and what’s transpiring there. And as you can tell by our Q2 results we are making dramatic process….progress and especially compared to last year and even the prior year.

Brian Alexander - Raymond James

And then I guess the final, two questions really tie together on cash flow. Jeff, correct me if I am wrong, but I would assume that for the next two quarters, you are probably not going to be cash flow positive at least from an operating cash flow standpoint, given the seasonality, so if you could just confirm that. And then tied into that, you should still have a pretty sizable net cash position as we exit the year, can you just talk about your priorities for that cash use in terms of your appetite per M&A, additional share repurchase or other investments you are anticipating. And within the M&A question, are you any closer to thinking about moving into Asia? Thanks.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Okay. And I am not sure that was two questions, but Brian, yes historically we can consume some cash in the second half of the year, but I would also say the team is very obsessed with minimizing that impact and I think as we really focus this year on improving our return on capital employed in conjunction with hopefully margin improvement, SG&A leverage and interest expense savings making improvements up and down our P&L. We want to minimize how much capital we consume in the second half. All that being said, the key is manage it day by day, be opportunistic to grow the business and be realistic with giving terms and conditions to customers. There are customers that we try to pull the terms and conditions in. That’s one other reason or maybe… that is one of the reasons for us being more than willing to accept flattish local currency growth in Europe. Because while these customers may have had reasonable gross and operating margins they consume too much capital, so we had inappropriate ROSI on those customers. So, we may consume cash, but we are going to try and minimize the impact.

As far as the cash position, yes we are in a great position. We have zero net debt, we have a very efficient financing vehicle with a convertible instruments that we put in place last year. We are of course looking continuously at M&A opportunities that we stated on prior calls are priority in the M&A arena is to leverage our existing infrastructure and investments. Are there opportunities to fill in somewhere in Europe like the insurance we mentioned in Switzerland? Are there opportunities to invest in areas like AIS in the Americas and fund infrastructure there or inventory, consuming capital? And then as you know there are many companies they are looking to be acquired. And then finally the Asia question that doesn’t provide much in the way of current leverage of any of our infrastructure, so that would be a distant third as far as on the M&A versus the Europe, Americas and then Asia Pacific.

We are certainly open to investigate opportunities, but it just can’t be a price on a multiple, its accretive and its got to have the right ROSI stats and the right opportunity. We have to be very diligent and understand it can be managed effectively and efficiently.

As far as the stock buyback, we have no current plans on that in the second half of the year. So we would rather harvest the capital, maybe our business will continue to grow above our expectations and then also having a safe and secure balance sheet in this period where sometimes as you have mentioned in your commentary, all investors don’t understand the financing vehicles for distribution industry. And we want to make sure that everyone knows we are rock solid both in our balance sheet and the availability of capital to us.

Brian Alexander - Raymond James

Okay. Great. Thank you very much.

Operator

Our next question is from Rich Kugele of Needham & Company.

Richard Kugele - Needham & Company

Thank you, good morning. Just following up on some of those… just comments you made a second ago, your position is well understood, especially with your debt-to-cap 17%, but when you look down into your VARs and your system integrators, the various customer sections you have. Have you had to make any internal changes to whether your bad debt expense or your credit terms or what your expecting from the payment cycle from these guys to compensate for the market or are you comfortable that your customer base is also on the same footing you are?

Robert Dutkowsky - Chief Executive Officer

I would say that first of all we continually look at our customer base. But I can also say we had no dramatic shift and in fact our portfolio has remain very clean, very timely and we work very closely with our customers as far as what their financial strength is and the risk and exposure we will take there. So, of course, it’s a concern in this environment but I think over all, if I really think about the U.S. and the America more than Europe. Over the last four years, five years there is been a fairly significant consolidation in the resellers space.

Yes, there are still many, many, many resellers out there but there has been consolidation and lot of that consolidation led to the strong getting stronger. So, while we try and reach out to those new and growing bars and rest on these efforts. Our customer base has gained quite a bit of strength over the last four or five years. So, we are very comfortable with our receivable position, our credit terms and conditions and our credit efforts.

Richard Kugele - Needham & Company

That’s helpful. And I guess just on the product front, you had noted, you had included Virtual Iron, as a virtualization offering. As a seller of also servers what is your expectation there? Do you anticipate there being some slowing of those sales as virtualization catches up or have you seen even at this preliminary stage that the IT dollars moving elsewhere in your product line?

Robert M. Dutkowsky - Chief Executive Officer

Yes, I think the debate is still open why the virtualization technologies are going to dampen the server sales or not. Clearly, virtualization technologies allow you to put in larger more robust servers which have typically bigger ASPs and more margin with them. So, the unit count could decline slightly but the processing capacity that’s necessary goes up. And the more processing that’s installed in an environment the more storage and networking capacity that it typically brings with it and it drags more software and more end user technology and everything grows. So, anything that enables more processing which is what virtualization does creates more opportunity in the IT space and that creates opportunity for Tech Data.

Richard Kugele - Needham & Company

Okay, that’s great. Thank you very much.

Operator

Our next question is from Richard Gardner of Citi Investments.

Richard Gardner - Citi Investments Research

Hi, thank you. I had a couple of questions. First of all the guidance question for the third quarter. Your U.S. revenue guidance does look I guess very conservative, Jeff. You are typically mid single digits quarter-to-quarter in the third quarter in the U.S. and the guidance implies flat to down sequentially. So, I am wondering if you have seen any change in the environment since Q2 or whether there is business that you would consider non-recurring in your second quarter U.S. results?

Also in Europe I wanted to ask you… I am not sure you are able to comment but we have heard out of Asia that there has been a normal… an earlier than normal seasonal rebound in Europe and was wondering if you could comment on the demand conditions that you are seeing there during August in particular? Thank you.

Robert M. Dutkowsky - Chief Executive Officer

I will handle the Europe question first. As we said earlier, the demand in Europe was solid throughout the quarter. And we don’t see that declining or slowing down right now. Assuming that all other macro conditions remain constant the European demand looks solid. And on track with its historical trends.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Yes, let me add to that remember, we reported 3.5% growth in Europe in local currency but ex the two countries that we exited, it was almost twice that near 7%. So, we had great growth throughout the quarter in Europe month-by-month. And the trends that we have seen in August, while we have a history of not giving a month-by-month trend are typical. But August, we will not give you any indication of what a real quarter will be in Europe. It is the height of the vacation period in many countries but Europe should be fine. We are looking for net growth there, so the market opportunity… if we grew 7% in local currency ex our two exit of Israel and UAE. And I would say to things, one good market and we took share.

As far as the change in Americas guidance, we are not going to cost this business for 16% growth. We are going to cause this growth rationally reasonable growth and give our sales team the opportunity to continue that portfolio. We are not looking up to take every dollar revenue, we are looking or quality. And so that may be a sequential, and a mathematical, historical calculation. Our teams led by Ken need the opportunity to select that which they want to sell. And we think that selection process will be low level digit growth from Canada down to Brazil. And in everything we have seen that guidance is probably above market.

Richard Gardner - Citi Investments Research

Okay. And then just two other questions. The… I knew that last quarter I think you said the Israel and UAE businesses lost $5 million at the operating line. I was wondering if you could give us a sense of how much these businesses we are losing on an annual basis, so that we can figure out how much that’s going to benefit the P&L for the full year? And then secondly, Jeff, should we expect further restructuring charges in future quarters?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well first of all I clarify, in Q1 running through the operating income was an expense related to our shutdown in UAE that was inventory receivable evaluation in a shutdown versus our continuing operations mode.

Richard Gardner - Citi Investments Research

Okay.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Yet since we were still most likely selling into the country that’s not a disco op or anything like that, same as Israel. Though, in those impacts were minimal… net impacts were immaterial in Q2. These operations didn’t necessarily lose money. In fact, UAE was wildly profitable until the last couple of years. As I mentioned before, if we came marginally profitable or marginally loss and the issue for us there was not that there was a robust market, it was the cost of doing business with escalating at an incredible pace because there was so much going on in UAE. They cost to hire people were going up 20% year-after-year. And so, we exited now versus trying to endure that.

In Israel, actually its… generally speaking profitable enterprise for us. But the return on capital was not appropriate for us. So, rather than it continue to operate those two small companies, we decided earlier this fiscal year, there were opportunities to exit and we chose that path. Sitting here today, I have no reason to believe that the second half of our year as we are seeing yesterday, Bob and I GAAP is… GAAP should equal non-GAAP. I am not anticipating us making any other structural changes, restructuring charges were not so I think we are in very good shape to complete the year and focus on operating versus restructuring. And if the opportunity comes along to any M&A opportunities versus divestitures opportunities.

Richard Gardner - Citi Investments Research

All right. Thank you so much.

Operator

Our next question comes from Harry Blount of Lehman Brother.

Harry Blount - Lehman Brother

Hi. Just another follow up on the guidance. I am not entirely sure I understand your answer on why the Americas guidance is going to be sequentially, seasonally lower than normal because you are getting numbers a little higher than that?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well, primarily Harry because we are not… we have done a bottom up calculation and the historical sequential is very much distorted by the opportunities presented to us in Q2. We have doe this long enough where we don’t want to be inappropriate in our revenue guidance. And we know that we have among other things competitors out there. We know that 16% Americas guidance are results in growth is extremely strong. So, if we are double digit growth on a year-over-year basis in Q3 in the Americas, that would show that we are growing faster than the market place still. So, I think the answer in my view is you have got to take all aspects and triangulate what the appropriate guidance would be. And in this case the over achievement in Q2 could lead to the wrong conclusions in Q3. Maybe we will grow faster but we are certainly not going to project that, we are not going to cost it that at that point in time. And we want to be cognizant of the fact that we do not wanted to disturb the distribution industry creating kind of an inappropriate price war out there.

Harry Blount - Lehman Brother

Let me attack maybe this way. If you take a look at since you built it really more for… from a bottom up perspective given the over achievement in this current quarter, is there any particular area that you guys are conservative or are you basically essentially more conservative across the board since you outperformed across the board.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

I would say… I don’t want to give exactly where Ken is targeting this quarter’s opportunity, but I have to say it’s more across the board than we are pulling back in any sector.

Harry Blount - Lehman Brother

Okay.

Robert M. Dutkowsky - Chief Executive Officer

And Harry, we wanted… as we said several times, we want to have the ability to try to move away from a less profitable revenue opportunities. And implied in that is that we are… there will greater growth than maybe what is ultimately reported as we divest out of market opportunities that don’t make sense for us. Whether that’s a customer or product segment, we want to target our resources, target our cash, target our coverage model, places where we think we can give the greatest returns to our shareholders and that’s not always just top-line growth. So, good top-line growth gives us the ability to do this portfolio management under the covers. When you see good solid growth, we believe we are gaining share but there is a lot of movement underneath that, that’s healthy for the Company.

Harry Blount - Lehman Brother

Okay. And then lastly any commentary on terms of visibility in seeing Dell in the channel?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

I don’t think we have anything to say. Your industry is reporting of what we see there, a great customer and we work closely with them day in and day out. And we don’t anticipate any negative impact on Tech data Corporation by their actions.

Harry Blount - Lehman Brother

Okay, thanks.

Operator

Our next question is from Ben Radinsky of Bear Stearns.

Ben Radinsky - Bear Stearns

Hi, good morning. The first, was there any currency impact to North American revenues?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Currency impact in North America…

Ben Radinsky - Bear Stearns

Primarily from Brazil or--?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

No, no nothing.

Ben Radinsky - Bear Stearns

It was immaterial?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

No, there was nothing. Nothing, material whatsoever.

Ben Radinsky - Bear Stearns

Okay. Looking out over the next six quarters, would you say that operating margins are going to improve primarily because of improvements on the gross margin lines or controlling SG&A?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

I think the answer would get back to almost the question on Americas growth. It depends, are you comparing it to what we just did or the prior year. Each quarter has a little bit of seasonality in expense growth and margins. So, I think I would answer that question by… our plan for this year is to hopefully accomplish some improvement in our worldwide gross margin percentage over the prior year, some leverage in our SG&A, so that we have a reduced SG&A as a percentage of sales over the prior year, improvements in our interest expense because of our balance sheet management and a convertible debt instrument we put in place all coupled with reasonable growth. So, it’s all of those mixed together. But if I think specifically, the upcoming quarter, I think there is room for gross margin improvement and some SG&A leverage. But quite frankly, last year on a non-GAAP basis in the Q3, we had very good SG&A leverage. So, that’s that but with an excellent number for Tech Data Corporation in the industry.

Ben Radinsky - Bear Stearns

Okay. And then the last one from me. If you take a look at your working capital days by quarter over 2007, Q2 versus Q1 in '07… in fiscal ’07 was down fairly sequentially, similar to this year. But then in Q3 and Q4 it kind of picked up again. Is that the pattern that you believe is now true seasonality or is there something else going on with your good working capital this year relative to last year.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well, again I look at those days as a picture and it’s what landed in inventory that day and what our payables position was in our receivable. So, there can be some distortion just by you know what came in, in the warehouse versus what went out in the last three days of the period. On the inventory side, I think we generally consume a little more capital as we have an inventory position going into Q4 in Europe and then receivables coming out of a robust Q4. Now, that may change again by the days and the landing and the forecasting but somewhere in that 27, 28, 29 days of net capital employed is in the ballpark of where we are currently driving the Company. I would rather have 26 but we may go over 26 but my guess is that 27, 28, 29 is important.

But more important to me is actually how we are managing that day in and day out. And I think as I take that the two things; one the discipline in the Americas because we have always had the tools here is improving. And in Europe the tools to create discipline are now world class. Our team can look across every dollar of revenue in Europe in one IT system, which is the best in the marketplace and manage all aspects of the business. They didn’t have those tools over the last couple of years. So, I think we have discipline and tools leading the more discipline in Europe, which will help us manage our balance sheet.

Ben Radinsky - Bear Stearns

So, the bottom-line is that you believe that your cash from operations will be significantly higher than in ’07 for fiscal ’08? Is that a fair comment?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

I am not projecting accurately what we are going to do and in the second half. We are going to manage it day in and day out and make the correct business decisions.

Ben Radinsky - Bear Stearns

Okay, thanks.

Operator

Our next question is from Carl Kipkey [ph] of Hampshire Asset Management.

Unidentified Analyst - Hampshire Asset Management

Good morning and congratulations on the great quarter. Your business requires significant short-term borrowings to fund your operations in the short-term credit markets are rolling right now. And I am trying to ascertain the impact on the Company and your $400 million asset back commercial paper program. In the last week, specifically, have you experienced any trouble of correcting or attaining buyers in your CP?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

We have never in 10 years had any problems including this week and last week.

Unidentified Analyst - Hampshire Asset Management

How have your cost to funds, are you paying a higher rate this week than you were a week or two ago?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

On an incremental fund, you have remember that we have $350 million converted but the 2.75% which is our primary borrowing instrument. And so that’s fixed and that’s locked in. The other incremental borrowing, actually, the interest expense is… interest rates are under what we forecast for this fiscal year. So, it is… if I list any concerns in the company that our debt availability financing or the cost there of is not even in the radar screen.

Unidentified Analyst - Hampshire Asset Management

Okay. But what my specific question was in terms of your cost to funds on your asset back to commercial paper program. First of all, what is your current draw on that program and what is your cost of money on that program today versus a week or two ago?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

The draw is zero at the end of the period. I don’t get daily draws but there is a very small difference in pricing over the last few weeks.

Unidentified Analyst - Hampshire Asset Management

Okay.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Completely insignificant to our overall financial section.

Unidentified Analyst - Hampshire Asset Management

So, would you categorize your $400 million CP program as unimportant as you get into your cash draw period here in the next couple of months?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Again, it is not a concern. We think we have very good pricing and it’s not going to impact our financial results.

Unidentified Analyst - Hampshire Asset Management

Okay. Let me tell you the reason why many of us are concerned. The commercial paper program… the commercial paper market out there is $2.2 trillion, $1.2 trillion of that is asset back commercial paper just like yours that has been ceasing over the course of the last week. Many of those auctions are failing and you have got lots of companies going to their credit facilities, borrowing from banks because they can’t find buyers for their commercial paper. So, I appreciate that you are currently not using that program but there… that’s the back commercial paper is only been created in the last five or six years, something around forever and there are many people who are speculating now that this maybe a financing vehicle that could go away. So, are you doing anything to actively or proactively investigate this and cover yourselves, so that in case that is not available going forward, that you have other options?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well we currently have in place other options and whether it would be our revolving credit facilities or local lines in countries and I would say we are the beneficiary of people waiting in line and quite frankly, we have too much… too many people calling on us to lend us money around the world versus our needs for money at this point in time. So, we do not anticipate that being a problem whatsoever. Yes we investigate things, yes we our in daily communications with the financial institutions that are putting those… any facility in place and with material that Tech Data Corporation checked in with our treasury department are in constant communication and forecasting a scheduling that out including the forecast that we just put together for our board for the second half of the year. So, we are not taking it lightly. We just do not believe that it is a concern for Tech Data Corporation and we barely… in Q2, barely even borrowed any facilities.

Unidentified Analyst - Hampshire Asset Management

That was need based, was it not as opposed to whether or not you didn’t need to borrow on it in the second quarter, I guess?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Let me give you another quick source of cash. We take early paid discounts on over half of the purchases that we make in the quarter. So, if we buy $6 billion in inventory this quarter, we pay early on our $3 billion of those purchases. And we don’t have to take that. As far as $3 billion of incremental capacity level in a very macro wild sense.

Unidentified Analyst - Hampshire Asset Management

And again congratulations on the great quarter.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

You take that other pay discounts, right and certainly not required to take it.

Unidentified Analyst - Hampshire Asset Management

Okay. Thanks all. And congratulations again.

Operator

Our next question is from Bill Fearnley of FTN Midwest.

William Fearnley - FTN Midwest Research

Yes, thanks. Just two quick questions here. Can you give additional color on the volume in ASP trend here in the PC and peripherals market, again, systems is 30%, when you look at peripheral categories like printers, what’s the pricing in volume trend and then I have a follow-up here on Europe if I could?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

The volumes fell into the historical ranges and that the Company has been in this game now for 30 years and the relative ratio of contribution between peripherals and systems and networking and software has remained relatively consistent over that broad period of time. So, this past quarter, didn’t look anything out of line in terms of volumes and the ASPs have… some products that remain constant, some products have come down slightly, some products have gone up slightly. So, and when you sell as much technology as we did in the quarter, you can’t paint it all with one brush, it won’t be accurate so.

William Fearnley - FTN Midwest Research

Branded ASPs you guys are okay with?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Yes.

William Fearnley - FTN Midwest Research

Okay.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

They fell within the range that we planned.

William Fearnley - FTN Midwest Research

Okay, thanks for that. And then on Europe, you have political changes in U.K., Germany and France, how are you seeing that affect you towards the back half of the year, I mean you have definitely produced the solid results this quarter but anything you looking at from the political environment that make you either more or less optimistic for the back half of the year, for that region will be helpful? Thanks guys.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well I will try and answer that Bill, I am not sure that I can, I think what we control is the execution the Tech Data and where we target our resources and spend money and put our strategies in place and then we are comfortable that the trajectory we are on in the second half of the year, its going to perform well in Europe. The macro political environment there… Tech Data doesn't have a big influence on how that works out. If it stays constant and stable and in environment that we see today, we are optimistic. If things go side ways that changes the game, but that’s not under our control. We are focused on what we can control.

William Fearnley - FTN Midwest Research

No, I understand it’s not in your control but in terms of… are you seeing anything in the back half of the year in Europe that might concern you politically. And it doesn’t sound like you do?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Not, not really.

William Fearnley - FTN Midwest Research

Okay.

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

I don’t know. Yes, you are right there is been some pretty dramatic change in some of the big countries but right now things appear to be relatively stable.

William Fearnley - FTN Midwest Research

Thanks guys.

Operator

Thank you. Our final question comes from Jason Gursky of JP Morgan.

Jason Gursky - JP Morgan Securities

Hi guys. Just a quick follow up for Jeff. Can you give us a little bit more insights on expectations around the tax rate. As we move forward, you are projecting mid point of range 35% for this next quarter. Should we continue to see some seasonality of that and can we get to a 30% or below tax rate as we move into some of the subsequent quarters?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Well, I think the conversation is going to be that last year in Q4, we had a near 30% rate and I think that’s a good example of a kind of a ballpark of where the rate could be and I don’t so remember whether it was 31% or 29% or 30%, I mean its… only about 30% probably in the fourth quarter in a normalized basis, honestly it should be lowest in Q4, highest in Q2 and then somewhere in between Qs four and three. This year, I think you can see and I don’t remember what range we gave you in Q2, but you can see that when you earn money, it comes down in Europe. So, it’s just where we earn money as on the 5% difference on our actual versus anything we do project. We did over achieve in Europe. That yielded a lower tax rate than we anticipated in this quarter. So, yes, it will come down in Q4 and then it will go back up in the first half of next year.

Jason Gursky - JP Morgan Securities

Yes, your projection was 45% to 50% for this quarter, so on the year-on-year basis, as we move into next year, assuming the profitability in Europe holds then the tax rates each quarter ought to be lower than they were this quarter in fiscal ’07 and fiscal ‘08?

Jeffery P. Howells - Executive Vice President and Chief Financial Officer

Each quarter, its hard to say because Q4 again, we were doing very well last year. But hopefully, the average rate for next fiscal year will keep coming down based upon improved operating income generated in key countries in Europe.

Jason Gursky - JP Morgan Securities

Okay. Thanks guys.

Robert M. Dutkowsky - Chief Executive Officer

Thanks.

Operator

Thank you. And this concludes today’s Tech Data Corporation fiscal 2008 quarter results conference call. A replay of the call will be available in about one hour at techdata.com. It will remain available until Wednesday, August 29th at 5 o’clock PM Eastern Time. Thank you for attending today’s conference call. And have a great day.

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