Tech Data Corporation Q3 2007 Earnings Call Transcript

Tech Data Corporation (TECD)

Q3 2007 Earnings Call

November 27, 2007 9:00 am ET

Executives

Kristin Wiemer Bohnsack – Director of Investor Relations

Robert M. Dutkowsky - Chief Executive Officer

Jeffrey P. Howells – Executive Vice President and CFO

Nestor Cano – President of Europe

Kenneth Lamneck – President of Americas

Analysts

William Fearnley – FTN Midwest Research

Ben Radinsky – Bear, Stearns & Co., Inc.

Richard Kugele – Needham & Company

Ananda Baruah – Banc of America Securities

Min Park – Goldman Sachs

Brian Alexander – Raymond James & Associates, Inc.

Jason Gursky – J.P. Morgan Securities Inc.

Richard Gardner – Citigroup Smith Barney

Presentation

Operator

Good morning and welcome to the Tech Data Corporation’s Fiscal 2007 Third Quarter Earnings conference call. At this time all of the participants are in a listen only mode. After the presentation we will present the question and answer session. To ask a question please press start one. 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 Mrs. Kristin Wiemer Bohnsack, Director of Investor Relations. Ma’am you may begin

Kristin Wiemer Bohnsack – Director of Investor Relations

Thank you. Good morning and welcome to Tech Data’s Third Quarter Earnings Conference Call. Joining us this morning are Bob Dutkowsky, Chief Executive Officer, Jeff Howells, Executive Vice President and CFO, Nestor Cano, President of Europe and Ken Lamneck President of the Americas.

Before we begin today’s call I would like to remind the audience that certain matters discussed during today’s call may contain forward looking statements pursuant to the safe harbor provisions 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 affecting the company’s business are contained in our filing with the Securities and Exchange Commission specifically located in item Q of the company’s Form 10-Q filed on September 5, 2007.

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 the call. The company undertakes no duty to update any forward looking statements to actual results or changes in expectations. In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the company. I will know turn the call over to Tech Data’s Chief Financial Officer, Jeff Howell.

Jeffrey P. Howells

Thank you Kristin. Many of my comments will reference the supplemental schedules which are available in the investor relations section of our website at www.TechData.com. There are no GAAP and non GAAP reconciling items in the current year third quarter however, we will discuss certain non GAAP financial measure for the comparable third quarter of fiscal 2007. You may obtain additional information on these non GAAP measures and reconciliation of these measures at Appendix A of the Supplemental Schedules or page 8 of today’s press release also available on Tech Data’s website. For comparison purposes please note non GAAP results for third quarter of fiscal 2007 excludes $6.1 Million of structuring charges and $2.8 Million in consulting costs related to the European Restructuring Program which was completed in October of 2006.

Beginning with the first two slides worldwide sales reached our third quarter record of $5.9 Billion. This is an increase of 9.1% from $5.4 Billion in the third quarter of fiscal 2007 and an increase of 5.5% compared to the second quarter of the current fiscal year. On a retail basis third quarter net sales in the Americas were $2.9 Billion or 49% of net sales representing growth of 10.3% year-over-year and a decline of .9% sequentially. Third quarter net sales in Europe were $3 Billion or 51% of net sales representing year-over-year growth of 7.9% which is a 1.7% decline in local currency and a sequential increase of 12.5% or 9.2% increase in local currency. Excluding the prior year sales relating to the operations in the UAE in Israel which we exited earlier this year our net sales on a local currency basis grew 1.4% year-over-year.

On slides three through five we summarize our operating performance for the third quarter. Our Worldwide gross margin for the third quarter of fiscal 2008 was 4.79% compared to 4.56% in the prior year third quarter. The increase in gross margin was primarily attributable to solid improvement in the company’s inventory pricing management practices in Europe as well as continued changes in customer and product mix Worldwide.

Third quarter SG&A expenses were $224.2 Million or 3.70% of net sales compared to $290.3 Million or 3.85% of net sales in the third quarter of fiscal 2007. On a dollar basis SG&A expenses increased to support sales growth and the company’s strategic initiatives. The stronger Euro and related foreign currency translation impact also contributed to the increase in SG&A expenses year-over-year. As a percentage of net sales SG&A declined year-over-year primarily due to leverage achieved in Europe in the elimination of $2.8 Million of expense incurred in the prior year period for consulting costs associated with the European Restructuring Program.

Operating income for the third quarter was $59.5 Million or 1.01% of net sales compared to non GAAP operating income of $41 Million or .76% of net sales in the same period last year. On a retail basis operating income for the third quarter in the Americas was $44.2 Million or 1.54% of net sales versus $40.1 Million or 1.54% of net sales in Q3 of last year. In Europe operating income was $17.8 Million or .58% of net sales compared to non GAAP operating income of $3 Million or .11% of net sales in the third quarter fiscal 2007 representing a 47 basis point improvement.

As a reminder stock based compensation expense is reported on a worldwide basis and is presented as a separate line item on the company’s segment reporting. Other financial highlights for Q3 include interest expense and other was $2.7 Million compared to $9.5 Million last year due to improved cash and debt level management throughout the quarter. The effective tax rate for Q3 was 32.3% and the fourth quarter fiscal 2008 we estimate an effective tax rate in the range of 30-32%. It is noted in previous quarters, in accordance with FIN 19 quarterly effective tax rates may vary significantly depending on the actual operating results and various tax jurisdictions.

Net income for the third quarter was $40.9 Million or $0.73 per diluted share based on $55.7 Million weighted average diluted shares outstanding. The same quarter of fiscal 2007 non GAAP net income was $18 Million or $0.33 per diluted share. We recorded $864,000 of minority interest in the third quarter fiscal 2008 which represents our Bright Start Europe Joint Venture Partner share losses comprised primarily of start up costs incurred during the quarter. We began shipping product in August of 2007 but we do not expect the joint venture to have a material impact on the current fiscal year.

Heading now to the balance sheet on slides six and seven, accounts receivable totaled $2.7 Billion. The allowance for bad debt was $68.7 Million. Our DSO was at 42 days. Inventory totaled $1.8 Billion. Our days in supply at the end of Q3 was 28 days. Accounts payable was $2.5 Billion. Days tabbed outstanding at the end of Q3 was 40 days. Full cash conversion cycle for the third quarter was 30 days an increase of one day over the prior year period.

Net receivables sold under the company’s trade receivable purchase facilities which would have otherwise been outstanding in the third quarter totaled approximately $219.4 Million. Cash used in operations during the third quarter of fiscal year 2008 totaled $127.7 Million. Year-to-date we have generated $301.8 Million in cash from operations.

Old debt was $423.5 Million compared to $443.2 Million at January 31, 2007. The company continues to enjoy excellent liquidity financially flexibility with a cash position of $525.9 Million at October 31, 2007. Net cash October 31, 2007 totaled $102.4 Million. Total debt to total cap was 18% with funds available for use on our credit facilities totaled $715 Million at the end of the quarter.

Our equity totaled $1.94 Billion dollars and our tangible book value was approximately $34.72. Capital expenditures totaled approximately $13.5 Million in Q3 with a current plan for fiscal 2008 remaining for capital expenditures totaling approximately $40 Million. Third quarter depreciation and amortization expense was $13.6 Million.

In September, we did announce $100 Million stock repurchase program. To date we have purchased 7,700 shares. We were only in the market a short while before our buying window closed for our third quarter blackout period.

Turning to our prior customer classifications on slide 8, the company’s net sales by product segment in the third quarter were relatively consistent with prior periods. We estimate peripherals account for approximately 40% of net sales, systems approximately 30% of net sales, networking 15% and software 15%. The company’s net sales by customer segment for the third quarter continue to be relatively consistent with the bar accounting for 60% of sales, direct marketers and retailers 25% and corporate resellers 15%. As in past periods, Hewlett Packard was the only vendor that generated more than 10% of our Worldwide of net sales and in the third quarter HP represented 20 Million percent of our net sales compared to 28% in the prior year period.

Turning to our business outlook, these statements that I will make are based on current expectations and the company’s internal plan. These statements are forward looking and is outlining the company’s Pure Act filings with the Securities and Exchange Commission; actual results may differ materially.

With fourth quarter ending January 31, 2008, the company anticipates net sales to be in the range of $6.35-6.5 Billion. This assumes low double digits year-over-year growth in the Americas and mid to high single digit decline in Europe on a local currency basis. The anticipated decline in Europe primarily reflects the continuation of our strategy to reduce the level of retailed business in our mix as well as our decision to exit operations in Israel and UAE during the current fiscal year. As I noted earlier we anticipate an effective tax rate in the range of 30-32% in the fourth quarter.

I will now turn the call over to Bob Dutkowsky.

Robert M. Dutkowsky

Thank you Jeff and good morning everyone. Thank you for joining us on our third quarter conference call. We are pleased to report another solid quarter. Over the past year I’ve gotten to know our company from all fronts. The long standing relationships with our customers, the importance of continuous dialog with the hundreds of vendor partners we do business with, the extensive domain knowledge of our employees and last but not least how our shareholders value our company and our strategic choices. Looking back a few years we see the tremendous transformation Tech Data has undergone and as a result we now have a much stronger foundation for growth in place. Our third quarter performance validates not only the positive direction and momentum tech data has been gaining but also the power of our ability to execute. We are executing with a new energy and progressing towards responsibly growing our business and improving our profitability Worldwide.

Our strategic investments both in Europe and the Americas couples with the synergies we’ve obtained in our European infrastructure are yielding results. Not only strengthening our position in the market place but also driving a significant improvement in our operating performance. As a proof point, our record third quarter sales performance of $5.9 Billion helped drive 45% year-over-year growth in our operating income on a non GAAP basis.

Looking at the Americas region we continue to fine tune our powerful logistic engine and examine opportunities to strategically invest in higher margin customer segments and product adjacencies. We’ve taken steps to improve our fundamentals in many areas. For example, earlier this year, we organized our sales associates into smaller teams with more focused territories. This management action drove deeper account penetration, greater accountability and better customer service. We’ve also invested in incremental sales head count to support our focus on the S&B market segment and we are beginning to realize measurable success.

We continue to back our growth in the Americas with a consistent operating margin of 1.5% plus. Last fiscal year we began the right mix of products and customers in the Americas and today that mindset is ingrained in our daily execution. It is important to note that we are executing the same fundamental strategy in Europe and with additional work we look forward to the continued stabilization and improved profitability of our European operations.

Our Canadian and Latin America teams delivered another quarter of double digit net sales growth. To support our Latin America growth initiatives we recently opened an operation center in Costa Rica. This Tech Data managed facility was put in place to target new customers and sales opportunities in Latin America as well as to expand our coverage more cost effectively in existing markets and segments.

At the end of September we also announced the deployment of our wireless specialized business unit. While many of our customers are very familiar with indoor wireless technologies we recognize there is a growing demand for design, employment and support of outdoor wireless solutions. We’re partnering with the leading manufacturers like CISCO and Nortel to help our bar succeed in the municipal wireless market.

In an important validation of our initiatives, [inaudible] recently rated Tech Data as most sourced among all broadline distributors according to CRN’s 2007 sourcing study. We also outperform peers in other categories including available credit, technical expertise and post sales support. We thank our customers for making these distinctions possible.

In October Tech Data hosted its Vendor Partner Summit Conferences in the Americas and in Europe where we briefed our vendors on what’s new in Tech Data’s marketing programs for the coming year and how these programs and services can help them connect more with resellers thus, better positioning them for optimized sales and profitability. This year’s Summit drew over 740 vendor representatives and Tech Data employees from around the World making it the largest turnout in our history. We also hosted the largest Tech Select Partner Conference in the history of the program. For those of you who aren’t familiar, Tech Select is an independent association of some of our best customers. This Conference attracted more than 400 US and Canadian attendees where we explored our Tech Data’s value add can help them capitalize on the growth in the IT and SNB markets.

Turning to Europe, we delivered our highest third quarter operating income margins since fiscal year 2005. Our third quarter performance underscores our ability to drive change and execute. Each of our core processes from buying products, to serving the customer, to driving improvements in our return on capital employed are being closely measured and are improving country by country. As an example of our drive for process improvement, our European team is using the industries most advanced IT tools to manage pricing and inventory better than ever before. You see the results of these efforts in our improved gross margin performance.

Our Bright Start Europe JV commenced sales of Motorola devices starting Q3 and we have signed additional vendors in selective regions around Europe to support our multi vendor distribution model. As noted in prior quarters we do not expect these operations to have a material impact in the fiscal year. However, we plane for this strategic initiative to be close to break even in the next fiscal year.

We remain focused on responsible growth in Europe, managing our revenue mix by exiting more retail business and targeting the SMB sector. We have already experienced great success in certain regions of Europe as we continue to reduce our retail concentration. In one particular European region where tech data historically had a strong dependency on retail segment we put our action plan to work, exited more retail business and now we’re growing our SMB sales. Putting numbers to it, year-over-year in Q3 we grew SMB sales in this region at a percentage rate two times the rate of the decline in retail sales while driving significant improvements in operating income, return on capital employ and cash days. While there is still work to do on this front as we balance our customer and product mix across all regions, I’m pleased to see the majority of our European regions performing at or ahead of our expectations. However, matched against all of our European regions, Germany remains behind target. During the past two quarters we’ve made significant changes to our management team in Germany and these new executives bring domain knowledge and proven track records of success to our team. We are dedicated to driving measurable improvements in our German operations with the goal of reaching balanced performance in line with our other European regions.

We completed the asset acquisition of Actavis in Switzerland during the third quarter. This bill and acquisition provided Tech Data access to a solid customer base with greater coverage in the SMB space. The integration of the employees, inventory and customer base into our organization went seeminglessly. The success of this acquisition will serve as a model for future strategic consolidation efforts by Tech Data.

Looking to the fourth quarter we remain optimistic over the opportunities that we see. We are also keeping a watchful eye on the market and the economic environment especially in the US. Our customer base and sales outlook appear to be firm but its prudent management for us to be mindful of the potential of a downturn that could ripple through IT spending. We have over 30 years experience managing the tides of IT cycles and we believe too that our broad customer base which spans across virtually every zip code and industry sector provides us with an inherent diversification buffer against swings in the market.

As Jeff mentioned, we expect fourth quarter sales in the low double digits in the Americas and in Europe we anticipate mid to high single digit declines on a local currency basis as we consciously exit certain segments of the business that don’t meet our financial objectives. Now, let me help you size the magnitude of this strategic repositioning of our sales stream. In the fourth quarter a traditionally heavy retail season in Europe we expect our European sales to be down approximately $200 Million Euro year-over-year. The anticipated decline is a result of our ongoing efforts to optimize our customer mix and long term profitability through the reduction of retail sales as well as the exit of our under performing operations in Israel and the UAE earlier this year. While our remix strategy will impact the level of sales growth in the fourth quarter we expect it to deliver continued year-over-year improvements in our operating income and return on capital employed. With the strongest balance sheet in our history, including over $425 Million in cash and increasing profitability, our footing is solid. The Board’s recent approval of $100 Million stock repurchase program is testament to their confidence in our company and our direction as well. Our number one priority as we complete fiscal 2008 and move into fiscal 2009 will be to leverage our worldwide infrastructure to the fullest further advancing our strategic goals of execution, innovation and diversification.

Finally, I want to take this opportunity to thank our employees for delivering another quarter of solid execution and improving results. I’m very proud of their efforts and I look forward to their continued execution as we wrap up our fiscal year. With that, we’re happy now to take your questions.

Question-and-Answer Session

Operator

If you would like to ask a question, please press star one on your touch tone phone. You will be prompted to record your name. To cancel your question, please press start two. Once again, that’s star one to ask a question. One moment please for the first question. Our first question comes from Mr. Bill Fearnly of FTN Midwest Research.

William Fearnley – FTN Midwest Research

Yes, thanks. Good morning. Any commentary here on any updated thoughts on Dell as they expand their channel footprint and get ready to launch their formal channel plan here? They announced a deal with a big European retailer this morning as well. And then, I have a follow up.

Robert M. Dutkowsky

Bill, this is Bob. Regarding Dell we really don’t comment on the strategy of vendors in the market. So, I’m sure Dell is a well run company and Dell will make good decisions that affect Dell’s business.

William Fearnley – FTN Midwest Research

But, any update on any discussions you’ve had with them and how it relates to what they might or might not do in the channel?

Robert M. Dutkowsky

Yeah, we wouldn’t comment on that.

William Fearnley – FTN Midwest Research

And also, switching gears here on the revenue side, any availability concerns on the upcoming calendar quarter? There have been some industry reports about certain products like notebooks perhaps being tighter than expected. Any commentary there?

Robert M. Dutkowsky

Yeah, I think there are some products that are in constraint. That’s a typical environment especially products that may get into the consumer segment like laptops but, we’re well positioned with the biggest vendors of these technologies in the World to get our fair share of products. So, we continue to work closely with our vendor partners to make sure that we have supply.

William Fearnley – FTN Midwest Research

Okay then, if I could, on the enterprise segment in the US, any more color on specific performance on products like PCs, servers and storage would be helpful as well. Thanks guys.

Robert M. Dutkowsky

I’ll also try to answer that one Bill. Our business is more focused on the SMB segment, our value added remarketers and our customers don’t market aggressively into the enterprise phase so, we don’t have a clear view into that space but, all signs that we see in Q4 are for solid performance.

William Fearnley – FTN Midwest Research

Alright. Thanks.

Operator

Our next question comes from Mr. Ben Radinsky of Bear Stearns.

Ben Radinsky – Bear, Stearns & Co., Inc.

Thanks. The first question is on Bright Start, can you talk about some opportunities there, give some color? How big do you think it will be now that you have about 2/4 of visibility into that business?

Robert M. Dutkowsky

Yeah, I would describe Bright Start, the opportunity for wireless cell phones and handheld PDAs in Europe still appears to be a plus 10% growth market segment so, it’s creative to the growth engine that Tech Data’s European business has in general. That was what attracted us to the space and it looks like the data validates that it’s going to continue to grow at those rates. We’ve now entered into the revenue segment of the growth of the Bright Start JV but, you have to think of the JV more like a green field opportunity. You know, when we launched it we had no products and no customers. We had the Tech Data infrastructure and that was it. So, we’ve used the last few quarters to begin to build out that infrastructure, to attract customers to the Bright Start value proposition and also to add new vendor products to our line card in that space. So, we’re optimistic that as the next few quarters unfold that Bright Start JV will continue to ramp up. To date, it’s been, it’s had virtually no impact on the performance of the company and we don’t see it affecting the company through the end of the fourth quarter in any positive way. But, the opportunity for us to grow there continues to be bright and we remain committed to the execution and the growth of the JV.

Ben Radinsky – Bear, Stearns & Co., Inc.

Your margin forecast for that business is about twice that of the corporate average? Or, would it be even more than that?

Robert M. Dutkowsky

I don’t think that we would give that kind of detail.

Ben Radinsky – Bear, Stearns & Co., Inc.

Okay. Then, the last question for me relating to Bright Start is you mentioned other vendors, you have a multi vendor strategy, can you talk about some of the other vendors that you signed deals with? And, if you haven’t signed with any other majors, are you intending on it in the next six months?

Robert M. Dutkowsky

We decided back a couple of quarters ago to diversify the JV more aggressively. When we initially launched it was going to be built around Motorola as our sole partner. In the interim we’ve had dialogs with basically the important vendors, the cell phone vendors and PDA vendors in the European region. Each of those vendors offer contracts by Country and so we’ve had multiple dialogs with multiple vendors in each of the countries where the JV has been launched. And, as we sign additional vendors we’ll announce the success there.

Ben Radinsky – Bear, Stearns & Co., Inc.

Then, just one housekeeping question, DSOs continue to rise even though you are exiting retail. What is going on with that mix? Why are DSOs continuing to rise?

Jeffrey P. Howells

This is Jeff. I would just answer that as it is quite mathematically and a snapshot at the end of the period but, as you can tell by our interest expense, our team around the world did a great job at managing inventory, receivables and payables every day of the quarter so, the snapshot doesn’t concern us whatsoever. It trended nicely every day of the quarter.

Ben Radinsky – Bear, Stearns & Co., Inc.

Okay. Thanks. Good quarter guys.

Operator

Our next question comes from Mr. Rich Kugele of Needham & Company.

Richard Kugele – Needham & Company

Thank you. Just a couple of quick questions. First, you have been talking for some time about your transition away from some away from these less strategic products and I guess really, to some degree, you’re doing that all the time. But, in terms of Europe specifically, how long do you think it will take to get to your optimal mix?

Robert M. Dutkowsky

Well, Europe been on a very interesting transition over the last few years. You know we, as you know historically, we restructured the business back several years ago and over the last four quarters or so we’ve begun to realize the leverage that all of that restructuring offered to the company and you can see it in the consistently improving operating income and the metrics that the European team has been able to delivered. As you said, it’s not a moment in time exercise, it’s a process that Nestor and his team are running in Europe. We’re focused on improving the metrics by country, by region day in and day out and that includes mixing products, mixing customers, modifying the coverage models that we have, using and leveraging the investments in logistics capabilities that we have across the pan European structure. So, in other words Rich, there are a lot of moving parts that are delivering the improved performance that you see. Our goal is to continue to improve quarter-over-quarter, year-over-year and drive the European business to an acceptable level. I could tell you and you can tell by our comments, it’s not there yet and we’re not done with that process improvement but, to date, I’m very pleased with the progress that Nestor and his team are making in each of the regions in Europe.

Richard Kugele – Needham & Company

Okay. Just secondly, as you mentioned, you don’t have a lot of direct enterprise exposure, instead being much more leveraged to the faster growing SMB space but, have you gotten any sense, at least on a preliminary basis from the bars or resellers what some preliminary 08 commentary has been on budgets or spending levels?

Robert M. Dutkowsky

No, the bars have a pretty good picture for two quarters out into the business model and again, that’s probably mostly based on the fact that their SMB orientated so those projects are smaller, they turn over quicker than the larger complex project in the enterprise and so, they look out, so when we chat with them we see, we see this upcoming quarter plus one more quarter into the next calendar year and the pipeline looks full and the opportunity looks good. But, you know, you can’t ignore all of the economics swirl that’s taking place all around us particularly in the US and not believe that it has the potential for impact. So, I think the Bars have their antennas up, they’re watching carefully what’s happening in the market place but, the short term pipeline looks good.

Richard Kugele – Needham & Company

Okay. Thank you very much.

Operator

Our last question comes from Ananda Baruah of Banc of America.

Ananda Baruah – Banc of America Securities

Hi guys. Thanks. I believe last quarter you gave a growth rate excluding the businesses that you exited and I believe it was in the 7%. Do you happen to have that same figure this quarter?

Jeffrey P. Howells

This is Jeff. I’m not sure we gave a figure that indicated 7% growth. You’re referencing what we think European market demand is?

Ananda Baruah – Banc of America Securities

No. I thought there was a figure you gave last quarter for European growth on a like-for-like basis. So, excluding the business that you had exited.

Jeffrey P. Howells

Oh, I think we gave you the most color on that in two ways. One, I referenced that if you exclude the countries that we exited we would have had positive sales growth of about 1.5% in local currency in Europe. We referenced that we have moved away from, in the first few quarters of the year, hundreds, or well over $100 Million Euros of retail revenue and the most specific comment we made is now on the fourth quarter where we’re saying a combination of the move away from some more retail in the seasonally stronger fourth quarter, seasonally retail strong fourth quarter plus our exit of UAE and Israel a $200 Million Euro difference in our sales target that we would have had otherwise, if you will. And, that’s the most pronounced change in Q4 because of the strong up tick.

Ananda Baruah – Banc of America Securities

Got it. Okay. The changes that you’re implementing in German, that you’ve been implementing and that you’re still flushing through, can you give us any sense for when the changes may be, when you may be at sort of a steady state there? Not in terms of, you know sort of revenue or margin in fact but, in terms of getting everything in place to the point where you just need to go and execute.

Robert M. Dutkowsky

I would answer that. That’s a similar answer to the question Rich asked. You know, it’s a never ending process. But, the additions that Nestor and the team have added to the German management team will all be in place inside of this quarter and so then, they need some time to settle in and begin to really drive process improvement across all of the unit. We’re not sitting and waiting for that to happen though we’re measuring the improvement of that unit week-by-week, month-by-month, quarter-by-quarter and that started several quarters ago and we’re driving that improvement across all of the core processes inside the German business unit and we anticipate that we’ll be able to continue to improve.

Ananda Baruah – Banc of America Securities

Excellent. And then, just one last one if I could. On the Americas margin, you continue to, you know, I guess put up performance wherever margins are improving on a year-over-year basis or at least in line with previous year’s performance. Is this, can you just talk a little bit, I mean I know you’ve talked near the last few quarters about some of the structural changes that you’ve put into place, can you give us a sense of the exact, if we should expect this kind of dynamic to continue as we move into 2008? Is there still some, I guess, leverage so to speak from the changes and sort of with the sales force and some of the things that you are doing on the mix side that can allow you to continue to generate year-over-year improvement in the Americas operating margin.

Robert M. Dutkowsky

Yeah. As we drive deeper into the SMB segment, that should produce more profitable revenue for us but, that includes that we’re adding more sales head count to be able to drive our penetration into that segment. So, you see, we’re carefully balancing the investments in SG&A against the leverage that we think it can deliver to us and also we’re investing in infrastructure tools to make the organization more efficient. We’re launching a new frontend sales tool actually this month in the Americas that we believe will make our sales organization more efficient and be able to better serve the customer. That was a development project that has gone on for a couple of years and we’ve invested significant amounts of money to build that tool out that, you know, we believe will allow us to serve our customer better and improve the profitability of the company. But, it equals investment in the frontend and you’re seeing those investments being made in the quarters that we’re reporting.

Ananda Baruah – Banc of America Securities

Okay. So, it sounds like net-net long term Americas operating leverage is something that we should expect?

Robert M. Dutkowsky

We keep working on it every day and, you know, there’s more variables to that than just our performance. There’s the market, there’s the pricing on the technology and there’s the actions of our competitors and all those add together including the ability, or our ability to manage that. You see that in the bottom line of the business.

Ananda Baruah – Banc of America Securities

Okay. Great. Thanks a lot.

Operator

Once again, if you would like to ask a question please press star one on your touch tone phone. Our next question comes from Mr. Bill Fearnley of FTN Midwest.

William Fearnley – FTN Midwest Research

Yeah. Thanks again guys. On the interest expense, really good improvement by your team on interest expense on this quarter. Directionally, how should we be thinking about interest expense on the fourth quarter into FY 09? Is the 3Q performance more indicative of how to look at the interest expense going forward? Or, has the historical trend more realistic here? Then, I have a quick follow up if I could. Thanks.

Jeffrey P. Howells

Bill, this is Jeff. I’d say that you’d have to use those two data points as two ends of the extreme. I think our team dramatically overachieved and did a great job. I don’t think we’ll take the pressure off of daily balance sheet management however, we don’t expect to drive that type of performance every day throughout the quarter. So, the interest will be somewhere in between what you would think of as historical trends and the incredible Q3 performance.

William Fearnley – FTN Midwest Research

Okay. Thanks. And then, with the change in some of your focus and some of the SG&A investments that you’ve been making over the year and you’ve been talking about going forward, are you expecting any changes in customer mix here either in the fourth quarter or going into calendar 2008? Thanks.

Robert M. Dutkowsky

Bill, we’re constantly trying to find the most efficient, most profitable customer segments to focus our coverage model on. And, you know again, I described that as kind of the never ending process. Ken Lamneck and his team divide the market segments here in the Americas into some broad categories. We have over 100,000 customers worldwide that we try to categorize and we move our coverage model against those categories as efficiently as we can. You know, we constantly move customers around in our coverage model. Some customers have direct sales coverage, some customers have telephone coverage, some customers we do business with solely through ecommerce and electronic techniques and we’re always trying to optimize that coverage model against where the customers are spending money and where the best profit opportunities are. I think we’re getting better and better at that each quarter. Some of the IT tools we have in place allow us to see that data more clearly today than maybe in the past and we’re optimizing our coverage model against the data that we see and we think that’s allowing us to drive improvements and profitability.

William Fearnley – FTN Midwest Research

So, we shouldn’t be surprised to see you guys putting more emphasis on SMB and then taking the moves in Europe in particular and then maybe taking another look at retail in other regions of the world going forward?

Robert M. Dutkowsky

You know, our business partners, our vendor partners are asking us to drive penetration into SMB and so we’re building programs and sales coverage models that drive the penetration into SMB. Our partner, our vendor partners have the ability to service the large retailers direct and so there’s not the profitability in the retail segment nor is there the return on capital employed that we want to see. So, you here us describing a strategy to thoughtfully exit retail where it doesn’t make sense for us and move that resource and investment into SMB where there’s greater growth, greater profitability and our vendor partners want us to focus. So, we’re running that play very carefully and I think you see the results in both geographies are validating that action.

William Fearnley – FTN Midwest Research

Okay. Thanks for the additional detail. Thanks.

Operator

Our next question comes from Mr. Min Park of Goldman Sachs.

Min Park – Goldman Sachs

Hi. Just a couple questions please. Your European revenue came in slightly below our and your expectations on a cost in currency basis. Can you just help us to better understand the demand environment in Europe now and specifically, is currency becoming a bigger driver of demand? And also, even accounting for the segments you’ve exited and are exiting, your outlook for the January quarter seems a little bit more negative than what you’ve been seeing prior to this quarter. Is there anything that’s going on there that’s making you’re incrementally more cautious in the region?

Robert M. Dutkowsky

No, I think our view of the European market is that it continues to be stable and solid but, you’re hearing us describe we’re strategically exiting retail revenue during the peak retail season. So, you know, I think the convergence of those factors maybe have our revenue declining a little bit faster than what you may have anticipated but, it’s part of our business plan to search for those more profitable revenue segments and I gave you that one example of one of our regions that historically has had a heavy dependency on retail where we’ve backed away from retail and grew our SMB business at twice the rate of the decline of the retail revenue and have also improved operating income [inaudible] at the same time. So, that’s the play we’re trying to run across all of Europe. It’s playing itself out at different rates and paces as you would expect because each of the businesses are different by country and by region. But, overall, our focus on finding more profitable faster growing revenue streams is contributing to the success we’re seeing in Europe. The other factor that is contributing to the success in Europe as Jeff described is we’re doing a much better job at pricing and inventory management in Europe. Nestor and his team are focused on inventory and pricing, they have the tools in place to manage those leverage points and you can see the impact that it is having on our profitability.

Min Park – Goldman Sachs

Okay. And in the Americas you saw pretty healthy revenue growth year-over-year but sequentially, it was down slightly. How much of that is really due to the tough comparison coming out of your second quarter versus your competitors getting a little bit more aggressive to regain some of the share? And, after this quarter, you know, are the competitor dynamics more even now? Or, are you expecting more actions from your competitors to gain some of the share back?

Robert M. Dutkowsky

I think Q3 we grew exceptionally fast. The market opportunities were there and our execution was very strong in the Americas. We took advantage of the opportunities we saw. In the quarter that we just reported, in Q3 we believe we grew faster than the industry grew during that quarter and so, we’re pleased with the growth rates. You know, we always want to balance growth and profitability and we constantly make those tradeoffs every day but, we think that the growth we had in the quarter just reported was solid in the quarter and faster than the industry.

Min Park – Goldman Sachs

Great. Thank you.

Operator

Our next question comes from Mr. Brian Alexander of Raymond James.

Brian Alexander – Raymond James & Associates, Inc.

Good morning guys. Bob, in your prepared remarks when you talked about the $200-300 Million Euro relative to Q4 of a year ago, I just want to clarify, is that how much revenue you’re walking away from versus a year ago? Or, is that the total local currency decline you’re baking into your guidance?

Jeffrey P. Howells

Brian, this is Jeff. The $200 Million reference is to, a reference to our internal plan. The year-over-year retail revenue that we do not anticipate taking plus the revenue loss on a year-over-year basis from UAE and Israel.

Brian Alexander – Raymond James & Associates, Inc.

Okay. So, if I were to add that back in.

Jeffrey P. Howells

We would have been business as usual going for the same retail type customer and we still would have had operations in UAE and Israel our sales forecast would have most likely been $200 Million Euros higher in Europe.

Brian Alexander – Raymond James & Associates, Inc.

Right. So, if I add that back in Jeff, it implies that your guidance is for basically flat local currency growth in Europe on an apples-to-apples basis?

Jeffrey P. Howells

That is correct. And to maybe guess your question and to add more color to Min and his question, I think it shows more discipline than market conditions. Bob and I can sit here and ask Nestor and Ken to go out and get incremental revenue most any week of the quarter and our discipline is firm. We are not going to do that. We’ve set objectives, we’re trying to control the costs, we’re trying to pick and choose to whom we are selling what while we talk about the retail mix change because it is the most noticeable number, if you will, that’s only one of many changes in mix on customers and products that they’re working on day in and day out throughout the different countries we operate in. So, we’re focused on operating income improvement, [inaudible] improvement and getting the right mix of revenue to drive those two.

Brian Alexander – Raymond James & Associates, Inc.

So, if we look at Q4 operating margins by regions, and I realize that you don’t guide this way but, maybe if you could just help us think about the incremental profit that you’re expecting in Q4? Normally in Q4 you get somewhere between 200-300 basis points of contribution margins. So, given that you’re doing more pruning than you’ve done in the past should we expect the incremental contribution margin on a sequential basis to be above that range? Because, I think if you run those numbers you could potentially hit a 1% operating margin in Q4 but, I don’t know if that’s too aggressive?

Jeffrey P. Howells

You’re talking Europe specifically?

Brian Alexander – Raymond James & Associates, Inc.

Yes. Yes.

Jeffrey P. Howells

We wouldn’t give you that kind of detail. I think what we tried to say in Bob’s comments is that we anticipate improving our operating performance in Europe on a year-over-year basis. The magnitude of that improvement we wouldn’t guide to.

Brian Alexander – Raymond James & Associates, Inc.

Okay. Then maybe just one final one and I think we’ve touched on this a little bit already but, reconciling your interest expense which was obviously very low to your quarter end working capital metrics which were a little bit higher than I was expecting suggest that maybe you had a back end loaded quarter. So, I was just wondering if you could confirm that or add more color by region in terms of whether the quarter ended on strength.

Jeffrey P. Howells

I would say in general this quarter would generally end on strength because it begins with August. And, in both regions August is historically one of the slower months, if you will, on average out of the quarter and business ramps from mid September forward. So yes, it would historically do that and I don’t think it would be inappropriate to say that would be a normal trend.

Brian Alexander – Raymond James & Associates, Inc.

But I think the sequential change in your working capital metrics, Jeff was a little bit higher than it normally is in the third quarter and I’m just trying to understand what might have driven that at the end of the quarter?

Jeffrey P. Howells

Yeah, it’s one day. Remember, you have to look at the payable increase that supported the increase in receivables and in inventory. We could send one more day at the snap shot of the balance sheet based upon our inventory, receivable and payables position and so, clearly one day in a near $6 Billion quarter, in a very large balance sheet is really not something that we can precisely quantify and that one day on a year-over-year basis with the revenue growth we had, I think it’s excellent performance by our team.

Brian Alexander – Raymond James & Associates, Inc.

Just a final one for me. I think your tangible book ended the quarter at $34.70 or so per share, any idea what your NOL position was at the end of the quarter, Jeff?

Jeffrey P. Howells

I don’t have that with me. But, that would be another benefit going forward, of course.

Brian Alexander – Raymond James & Associates, Inc.

Thank you very much.

Operator

Our next question comes from Mr. Ananda Baruah of Banc of America.

Brian Alexander – Raymond James & Associates, Inc.

Hi guys. Just one quick follow up, how do you think about tax rate right now as we enter fiscal year 09?

Jeffrey P. Howells

I think the answer to that on an annualized basis it would decline due to our process of continuing to improve our European performance and being able to utilize some of the tax losses that were generated in Europe. The magnitude of the decline will have to complete our plan moving forward but, it should go down.

Brian Alexander – Raymond James & Associates, Inc.

Okay. Should we expect to see the same type of, I guess, seasonal swings that we’ve seen in the past?

Jeffrey P. Howells

Seasonal swings certainly will be there with the, generally speaking, all things being equal a highest tax rate probably in Q2 and, you know, that may not be the way it adds up every time but, Q2 would be probably the seasonally weakest and then the lowest tax rate in Q4 and Q1 and 2 somewhere in between those.

Brian Alexander – Raymond James & Associates, Inc.

Okay. Great. Thanks a lot.

Operator

Our next question comes from Jason Gursky of JP Morgan.

Jason Gursky – J.P. Morgan Securities Inc.

Hey, good morning. I had some technical glitches this morning with the line so please excuse me if this question has been asked. Obviously, you had a little bit of decelerating growth in the Americas this quarter and it looks like you’re forecasting a similar trend as we move into the fourth quarter, maybe kind of flattish year-on-year. I was wondering, in light of that, Bob maybe if you can talk a little bit about the general demand environment here in the Americas from kind of 50,000 feet and then also, talk a little bit about the pricing environment in the region and whether that is stable relative to the last quarter or if it has intensified at all?

Robert M. Dutkowsky

First of all, the growth of the Americas was solid performance. Again, last quarter we grew nearly 16%, this quarter was in excess of 10 and as Jeff said, we can go out and get revenue at the levels, at any level we really wanted it and it depends on how we want to balance the profitability and the way we use our cash. So, in the quarter, in my view, we grew faster than the industry in Q3 in the Americas and that’s a good solid performance and when you couple that with the operating income that unit delivered and its efficient [inaudible] performance, I’m very pleased with the way the Americas performed in the quarter. Well, a 50,000 foot level, as I said earlier, you know, I think that we see the opportunity is good as we head into Q4. The market opportunity looks good, the pipeline that we see looks good but, we have to keep our ear to the ground in terms of the turbulence that sits underneath the economy.

I think the beauty of the Tech Data model is the diversification of its customers. We have 100,000 customers that cover virtually every segment of the economy as I said in the prepared comments. I think we sell into every zip code in the economy and that diversification allows us to not feel the same kinds of swings that a company that is focused say on the enterprise sector might see. You know where financial services are really, I believe is realizing a slow down, that’s just a small component of the Tech Data revenue stream and our diversification serves us very well in difficult times like this.

I think the other important thing to note is Tech Data managed through these IT cycles, the ups and downs of these IT cycles very efficiently for 30 years. So, we know how to read the tea leaves in terms of where the opportunity may be slowing and where the opportunity may be growing and we make careful decisions on coverage and inventory and the way we use our cash based on what we feel the market is going to be able to return to us. We could always squeeze a little bit more revenue and a little bit more profit out of the business but, if we over buy, for example with inventory, there’s no turning back in some cases. So, I think our experience serves us very well in this kind of environment.

Jason Gursky – J.P. Morgan Securities Inc.

Great. So last quarter you grew 16% year-on-year. This quarter you grew 10, the operating margin didn’t really move quarter-on-quarter so it sounds like perhaps there was 5% there of growth that you didn’t find attractive this quarter so, does that say anything about the current pricing environment in the market here in the Americas?

Jeffrey P. Howells

This is Jeff. I would say hindsight being 20/20 16% growth was too fast. I think we tried to mention this in our last call, we know we’re in a competitive industry and that growing three times the market doesn’t necessarily sit well with competitors and it wouldn’t sit well with us either if they were growing three times faster than we were either except for when we’re making conscious decisions to exit some segments that they may pick up. So, growing more in the 2X market is where we have targeted for our team to focus and we’re very happy at that rate and I think if we would have grown 15% this quarter it wouldn’t have had a positive impact on the long term health of the distribution industry in the Americas.

Jason Gursky – J.P. Morgan Securities Inc.

Okay. Fair enough. Then, just a quick follow up for you Jeff, on inventory this quarter. It grew faster on a year-on-year basis than your sales did, I think, for the first time since the second quarter 06, so I’m just curious as to whether currency had an impact there? Whether the asset acquisition that you made during the quarter that perhaps brought some inventory on? Or, if it’s just a question of, you know, bringing up some inventory in one region as your redeploying some of the assets in Europe that you’re divesting from or walking away from and there’s just a little bit of a teething here as we go through that process?

Jeffrey P. Howells

I would say it is three things. One, it’s a picture, it’s not what we have every day, so it just happened to be what landed on the shelf. It is currency heavily impacted of making the Euros larger and as referenced, I think, on the first question from Bill, you know, we’ve certainly been reading what the analyst have been writing about the potential shortages in products that have glass for example so to the extent that we had an opportunity to buy prudentially we certainly would have done so and when that lands whether its on October 15^th or October 31^st or November 15^th, those orders are staged out but, we certainly wanted to get our fair share of that product that Bob alluded too. So, I would not read anything into it. Our inventory is being managed better than we have probably managed it collectively in two years in Europe and in the Americas our team is continuously second to none in managing product categories. So, a picture, currency and making sure we can get access to those products that may be constrained this quarter.

Jason Gursky – J.P. Morgan Securities Inc.

Okay. Great. That’s helpful. Thanks guys.

Operator

Our next question comes from Mr. Richard Gardner of Citigroup

Richard Gardner – Citigroup Smith Barney

Thanks. I just have a couple of housekeeping questions, first Jeff, I was wondering why the tax rate guidance was so high in the fourth quarter, much higher than its been for the last couple of years and it sounds like your expecting, if anything, better profitability in Europe and secondly, was wondering well, actually I’ll come back to my second question.

Jeffrey P. Howells

Rich, first of all it is unfortunately the interaction of what we have earned and compared [inaudible] in level setting that and picking that up in Q3 and 4 due to the wonderful accounting [inaudible] that we have to operate under. But, certainly to answer you specific question, we do anticipate and hope to make more money in Europe in Q4 this year than we made last year and that will impact the rate depending on where we do make it. To the extent that we make more of the improvement in countries that we are already paying taxes that’s one answer to the extent that we make it in a country where we have a tax loss, of course, that’s a different answer. But, that interaction of where we are going to make the money.

Richard Gardner – Citigroup Smith Barney

Okay. And then, the other question was where was the Euro accounted for in the third quarter and what are you expectations for Q4?

Jeffrey P. Howells

I think off the top of my head, the rate in Q3 average liked 137.9 or something like that, 139.5 Chuck is telling me. We have modeled it all over the place in Q4 and came up with sort of a mid point of where it was compared to where it is today and included that in our range of guidance on the revenue. So, if it was just under 140 and it’s straight at 145, you know the midpoint is 142, 142.5. But, clearly our revenue will swing on whether it stays with the strength that it is currently today and it will help exceed the mid point. But, in the 142.5 is probably an average for the quarter.

Richard Gardner – Citigroup Smith Barney

Okay. And then for Q3, Jeff?

Jeffrey P. Howells

Q3 was the 139 and change, was the average rate that our revenue and expenses developed over, it was 139.75 or something like that.

Richard Gardner – Citigroup Smith Barney

Okay. Alright. Thank you.

Operator

This concludes the Tech Data Corporations fiscal 2008 third quarter results conference call. A reply of the call will be available in about one hour at www.TechData.com and will remain available until Tuesday, December 4^th at 5:00 PM. Thank you for attending today’s conference call and have a great day.

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