Tech Data Corporation Q3 2007 Earnings Call Transcript

Nov.27.07 | About: Tech Data (TECD)

Tech Data Corporation (NASDAQ: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 MidwestResearch

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

Richard Kugele – Needham& Company

Ananda Baruah – Banc of AmericaSecurities

Min Park– Goldman Sachs

Brian Alexander – Raymond James & Associates, Inc.

Jason Gursky – J.P. Morgan Securities Inc.

Richard Gardner – Citigroup Smith Barney

Operator

Good morning and welcome to the Tech Data Corporation’sFiscal 2007 Third Quarter Earnings conference call. At this time all of the participants are in alisten only mode. After the presentationwe will present the question and answer session. To ask a question please press startone. Today’s conference is beingrecorded, if you have any objections you may disconnect at this time. Now, I will turn the meeting over to Mrs. KristinWiemer Bohnsack, Director of Investor Relations. Ma’am you may begin

Kristin WiemerBohnsack – Director of Investor Relations

Thank you. Goodmorning 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, NestorCano, President of Europe and Ken Lamneck President of the Americas.

Before we begin today’s call I would like to remind theaudience that certain matters discussed during today’s call may contain forwardlooking statements pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Please be cautioned that such forward looking statements are based onthe company’s current expectations that involve a number of risks and uncertaintiesand actual results could differ materially from such expectations. Risks, uncertainties and other factorsaffecting the company’s business are contained in our filing with theSecurities and Exchange Commission specifically located in item Q of thecompany’s Form 10-Q filed on September 5, 2007.

Please be advised that the statements made during today’scall should be considered to represent the expectations of management as of thedate of the call. The company undertakesno duty to update any forward looking statements to actual results or changesin expectations. In addition, this callis the property of Tech Data and may not be recorded or rebroadcast withoutspecific 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 areavailable in the investor relations section of our website at www.TechData.com. There are no GAAP and non GAAP reconcilingitems in the current year third quarter however, we will discuss certain nonGAAP financial measure for the comparable third quarter of fiscal 2007. You may obtain additional information onthese non GAAP measures and reconciliation of these measures at Appendix A ofthe Supplemental Schedules or page 8 of today’s press release also available onTech Data’s website. For comparisonpurposes please note non GAAP results for third quarter of fiscal 2007 excludes$6.1 Million of structuring charges and $2.8 Million in consulting costsrelated to the European Restructuring Program which was completed in October of2006.

Beginning with the first two slides worldwide sales reachedour third quarter record of $5.9 Billion. This is an increase of 9.1% from $5.4 Billion in the third quarter offiscal 2007 and an increase of 5.5% compared to the second quarter of thecurrent fiscal year. On a retail basisthird quarter net sales in the Americaswere $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 $3Billion or 51% of net sales representing year-over-year growth of 7.9% which isa 1.7% decline in local currency and a sequential increase of 12.5% or 9.2%increase in local currency. Excludingthe prior year sales relating to the operations in the UAE in Israelwhich we exited earlier this year our net sales on a local currency basis grew1.4% year-over-year.

On slides three through five we summarize our operatingperformance for the third quarter. OurWorldwide gross margin for the third quarter of fiscal 2008 was 4.79% comparedto 4.56% in the prior year third quarter. The increase in gross margin was primarily attributable to solidimprovement in the company’s inventory pricing management practices in Europeas 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 thirdquarter of fiscal 2007. On a dollarbasis SG&A expenses increased to support sales growth and the company’sstrategic initiatives. The stronger Euroand related foreign currency translation impact also contributed to the increasein SG&A expenses year-over-year. Asa percentage of net sales SG&A declined year-over-year primarily due toleverage achieved in Europe in the elimination of $2.8Million of expense incurred in the prior year period for consulting costsassociated with the European Restructuring Program.

Operating income for the third quarter was $59.5 Million or1.01% 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 Americaswas $44.2 Million or 1.54% of net sales versus $40.1 Million or 1.54% of netsales in Q3 of last year. In Europeoperating income was $17.8 Million or .58% of net sales compared to non GAAPoperating income of $3 Million or .11% of net sales in the third quarter fiscal2007 representing a 47 basis point improvement.

As a reminder stock based compensation expense is reportedon a worldwide basis and is presented as a separate line item on the company’ssegment reporting. Other financialhighlights for Q3 include interest expense and other was $2.7 Million comparedto $9.5 Million last year due to improved cash and debt level managementthroughout the quarter. The effectivetax rate for Q3 was 32.3% and the fourth quarter fiscal 2008 we estimate aneffective tax rate in the range of 30-32%. It is noted in previous quarters, in accordance with FIN 19 quarterlyeffective tax rates may vary significantly depending on the actual operatingresults and various tax jurisdictions.

Net income for the third quarter was $40.9 Million or $0.73per diluted share based on $55.7 Million weighted average diluted sharesoutstanding. The same quarter of fiscal2007 non GAAP net income was $18 Million or $0.33 per diluted share. We recorded $864,000 of minority interest inthe third quarter fiscal 2008 which represents our Bright Start Europe JointVenture Partner share losses comprised primarily of start up costs incurredduring the quarter. We began shippingproduct in August of 2007 but we do not expect the joint venture to have amaterial 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 28days. Accounts payable was $2.5 Billion. Days tabbed outstanding at the end of Q3 was40 days. Full cash conversion cycle forthe third quarter was 30 days an increase of one day over the prior yearperiod.

Net receivables sold under the company’s trade receivablepurchase facilities which would have otherwise been outstanding in the thirdquarter totaled approximately $219.4 Million. Cash used in operations during the third quarter of fiscal year 2008totaled $127.7 Million. Year-to-date wehave 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 excellentliquidity 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 fundsavailable for use on our credit facilities totaled $715 Million at the end ofthe quarter.

Our equity totaled $1.94 Billion dollars and our tangiblebook value was approximately $34.72. Capitalexpenditures totaled approximately $13.5 Million in Q3 with a current plan forfiscal 2008 remaining for capital expenditures totaling approximately $40Million. Third quarter depreciation andamortization expense was $13.6 Million.

In September, we did announce $100 Million stock repurchaseprogram. To date we have purchased 7,700shares. We were only in the market ashort while before our buying window closed for our third quarter blackoutperiod.

Turning to our prior customer classifications on slide 8,the company’s net sales by product segment in the third quarter were relativelyconsistent with prior periods. Weestimate peripherals account for approximately 40% of net sales, systemsapproximately 30% of net sales, networking 15% and software 15%. The company’s net sales by customer segmentfor the third quarter continue to be relatively consistent with the baraccounting for 60% of sales, direct marketers and retailers 25% and corporateresellers 15%. As in past periods, HewlettPackard was the only vendor that generated more than 10% of our Worldwide ofnet sales and in the third quarter HP represented 20 Million percent of our netsales compared to 28% in the prior year period.

Turning to our business outlook, these statements that Iwill make are based on current expectations and the company’s internalplan. These statements are forwardlooking and is outlining the company’s Pure Act filings with the Securities andExchange Commission; actual results may differ materially.

With fourth quarter ending January 31, 2008, the company anticipates net sales to bein the range of $6.35-6.5 Billion. Thisassumes low double digits year-over-year growth in the Americasand mid to high single digit decline in Europe on alocal currency basis. The anticipateddecline in Europe primarily reflects the continuation ofour strategy to reduce the level of retailed business in our mix as well as ourdecision to exit operations in Israeland UAE during the current fiscal year. As I noted earlier we anticipate an effective tax rate in the range of30-32% 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 quarterconference call. We are pleased toreport another solid quarter. Over thepast year I’ve gotten to know our company from all fronts. The long standing relationships with ourcustomers, the importance of continuous dialog with the hundreds of vendorpartners we do business with, the extensive domain knowledge of our employeesand last but not least how our shareholders value our company and our strategicchoices. Looking back a few years we seethe tremendous transformation Tech Data has undergone and as a result we nowhave a much stronger foundation for growth in place. Our third quarterperformance validates not only the positive direction and momentum tech datahas been gaining but also the power of our ability to execute. We are executing with a new energy andprogressing towards responsibly growing our business and improving ourprofitability Worldwide.

Our strategic investments both in Europeand the Americascouples with the synergies we’ve obtained in our European infrastructure areyielding results. Not only strengtheningour position in the market place but also driving a significant improvement inour operating performance. As a proofpoint, our record third quarter sales performance of $5.9 Billion helped drive45% year-over-year growth in our operating income on a non GAAP basis.

Looking at the Americasregion we continue to fine tune our powerful logistic engine and examine opportunitiesto strategically invest in higher margin customer segments and product adjacencies. We’ve taken steps to improve our fundamentalsin many areas. For example, earlier thisyear, we organized our sales associates into smaller teams with more focusedterritories. This management actiondrove deeper account penetration, greater accountability and better customerservice. We’ve also invested inincremental sales head count to support our focus on the S&B market segmentand we are beginning to realize measurable success.

We continue to back our growth in the Americaswith a consistent operating margin of 1.5% plus. Last fiscal year we began the right mix ofproducts and customers in the Americasand today that mindset is ingrained in our daily execution. It is important to note that we are executingthe same fundamental strategy in Europe and withadditional work we look forward to the continued stabilization and improvedprofitability of our European operations.

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

At the end of September we also announced the deployment ofour wireless specialized business unit. While many of our customers are veryfamiliar with indoor wireless technologies we recognize there is a growingdemand for design, employment and support of outdoor wireless solutions. We’re partnering with the leadingmanufacturers like CISCO and Nortel to help our bar succeed in the municipalwireless market.

In an important validation of our initiatives, [inaudible]recently rated Tech Data as most sourced among all broadline distributorsaccording 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 SummitConferences in the Americas and in Europe where we briefed our vendors onwhat’s new in Tech Data’s marketing programs for the coming year and how theseprograms and services can help them connect more with resellers thus, betterpositioning them for optimized sales and profitability. This year’s Summitdrew over 740 vendor representatives and Tech Data employees from around theWorld making it the largest turnout in our history. We also hosted the largest Tech SelectPartner Conference in the history of the program. For those of you who aren’t familiar, TechSelect is an independent association of some of our best customers. This Conference attracted more than 400 USand Canadian attendees where we explored our Tech Data’s value add can helpthem capitalize on the growth in the IT and SNB markets.

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

Our Bright Start Europe JV commenced sales of Motoroladevices starting Q3 and we have signed additional vendors in selective regionsaround Europe to support our multi vendor distributionmodel. As noted in prior quarters we donot expect these operations to have a material impact in the fiscal year. However, we plane for this strategicinitiative 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 SMBsector. We have already experiencedgreat success in certain regions of Europe as wecontinue to reduce our retail concentration. In one particular European region where tech data historically had astrong dependency on retail segment we put our action plan to work, exited moreretail business and now we’re growing our SMB sales. Putting numbers to it, year-over-year in Q3we grew SMB sales in this region at a percentage rate two times the rate of thedecline in retail sales while driving significant improvements in operatingincome, return on capital employ and cash days. While there is still work to do on this front as we balance our customerand product mix across all regions, I’m pleased to see the majority of ourEuropean regions performing at or ahead of our expectations. However, matched against all of our Europeanregions, Germanyremains behind target. During the pasttwo quarters we’ve made significant changes to our management team in Germanyand these new executives bring domain knowledge and proven track records ofsuccess to our team. We are dedicated todriving measurable improvements in our German operations with the goal ofreaching balanced performance in line with our other European regions.

We completed the asset acquisition of Actavis in Switzerlandduring the third quarter. This bill andacquisition provided Tech Data access to a solid customer base with greatercoverage in the SMB space. The integrationof the employees, inventory and customer base into our organization wentseeminglessly. The success of thisacquisition will serve as a model for future strategic consolidation efforts byTech Data.

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

As Jeff mentioned, we expect fourth quarter sales in the lowdouble digits in the Americas and in Europe we anticipate mid to high singledigit declines on a local currency basis as we consciously exit certainsegments of the business that don’t meet our financial objectives. Now, let me help you size the magnitude ofthis strategic repositioning of our sales stream. In the fourth quarter a traditionally heavyretail season in Europe we expect our European sales tobe down approximately $200 Million Euro year-over-year. The anticipated decline is a result of ourongoing efforts to optimize our customer mix and long term profitability throughthe reduction of retail sales as well as the exit of our under performingoperations in Israel and the UAE earlier this year. While our remix strategy will impact thelevel of sales growth in the fourth quarter we expect it to deliver continuedyear-over-year improvements in our operating income and return on capitalemployed. With the strongest balancesheet in our history, including over $425 Million in cash and increasingprofitability, our footing is solid. TheBoard’s recent approval of $100 Million stock repurchase program is testamentto their confidence in our company and our direction as well. Our number one priority as we complete fiscal2008 and move into fiscal 2009 will be to leverage our worldwide infrastructureto the fullest further advancing our strategic goals of execution, innovationand diversification.

Finally, I want to take this opportunity to thank ouremployees for delivering another quarter of solid execution and improvingresults. I’m very proud of their effortsand I look forward to their continued execution as we wrap up our fiscalyear. With that, we’re happy now to takeyour questions.

Question-and-AnswerSession

Operator

If you would like to ask a question, please press star oneon your touch tone phone. You will beprompted to record your name. To cancelyour question, please press start two. Once again, that’s star one to ask aquestion. One moment please for thefirst question. Our first question comesfrom Mr. Bill Fearnly of FTN Midwest Research.

William Fearnley –FTN Midwest Research

Yes, thanks. Goodmorning. Any commentary here on anyupdated thoughts on Dell as they expand their channel footprint and get readyto launch their formal channel plan here? They announced a deal with a big European retailer this morning aswell. 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 themarket. So, I’m sure Dell is a well runcompany 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 andhow 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, anyavailability concerns on the upcoming calendar quarter? There have been some industry reports aboutcertain products like notebooks perhaps being tighter than expected. Any commentary there?

Robert M. Dutkowsky

Yeah, I think there are some products that are inconstraint. That’s a typical environmentespecially products that may get into the consumer segment like laptops but,we’re well positioned with the biggest vendors of these technologies in theWorld to get our fair share of products. So, we continue to work closely with our vendor partners to make surethat 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 andstorage would be helpful as well. Thanksguys.

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 intothe enterprise phase so, we don’t have a clear view into that space but, allsigns 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 BearStearns.

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

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

Robert M. Dutkowsky

Yeah, I would describe Bright Start, the opportunity forwireless cell phones and handheld PDAs in Europe stillappears to be a plus 10% growth market segment so, it’s creative to the growthengine that Tech Data’s European business has in general. That was what attracted us to the space andit looks like the data validates that it’s going to continue to grow at thoserates. We’ve now entered into therevenue segment of the growth of the Bright Start JV but, you have to think ofthe 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 thatwas it. So, we’ve used the last fewquarters to begin to build out that infrastructure, to attract customers to theBright Start value proposition and also to add new vendor products to our linecard in that space. So, we’re optimisticthat as the next few quarters unfold that Bright Start JV will continue to rampup. To date, it’s been, it’s hadvirtually no impact on the performance of the company and we don’t see itaffecting the company through the end of the fourth quarter in any positiveway. But, the opportunity for us to growthere continues to be bright and we remain committed to the execution and thegrowth of the JV.

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

Your margin forecast for that business is about twice thatof the corporate average? Or, would itbe 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 lastquestion for me relating to Bright Start is you mentioned other vendors, youhave a multi vendor strategy, can you talk about some of the other vendors thatyou signed deals with? And, if youhaven’t signed with any other majors, are you intending on it in the next sixmonths?

Robert M. Dutkowsky

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

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

Then, just one housekeeping question, DSOs continue to riseeven though you are exiting retail. Whatis going on with that mix? Why are DSOscontinuing to rise?

Jeffrey P. Howells

This is Jeff. I wouldjust answer that as it is quite mathematically and a snapshot at the end of theperiod but, as you can tell by our interest expense, our team around the worlddid a great job at managing inventory, receivables and payables every day ofthe 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 acouple of quick questions. First, youhave been talking for some time about your transition away from some away fromthese less strategic products and I guess really, to some degree, you’re doingthat all the time. But, in terms of Europespecifically, how long do you think it will take to get to your optimal mix?

Robert M. Dutkowsky

Well, Europe been on a veryinteresting transition over the last few years. You know we, as you know historically, we restructured the business backseveral years ago and over the last four quarters or so we’ve begun to realizethe leverage that all of that restructuring offered to the company and you cansee it in the consistently improving operating income and the metrics that theEuropean team has been able to delivered. As you said, it’s not a moment in time exercise, it’s a process thatNestor and his team are running in Europe. We’re focused on improving the metrics bycountry, by region day in and day out and that includes mixing products, mixingcustomers, modifying the coverage models that we have, using and leveraging theinvestments in logistics capabilities that we have across the pan Europeanstructure. So, in other words Rich,there are a lot of moving parts that are delivering the improved performancethat you see. Our goal is to continue toimprove quarter-over-quarter, year-over-year and drive the European business toan acceptable level. I could tell youand you can tell by our comments, it’s not there yet and we’re not done withthat process improvement but, to date, I’m very pleased with the progress thatNestor 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, insteadbeing much more leveraged to the faster growing SMB space but, have you gottenany sense, at least on a preliminary basis from the bars or resellers what somepreliminary 08 commentary has been on budgets or spending levels?

Robert M. Dutkowsky

No, the bars have a pretty good picture for two quarters outinto the business model and again, that’s probably mostly based on the factthat their SMB orientated so those projects are smaller, they turn over quickerthan the larger complex project in the enterprise and so, they look out, sowhen we chat with them we see, we see this upcoming quarter plus one morequarter into the next calendar year and the pipeline looks full and theopportunity looks good. But, you know,you can’t ignore all of the economics swirl that’s taking place all around usparticularly in the USand 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 shortterm pipeline looks good.

Richard Kugele – Needham & Company

Okay. Thank you verymuch.

Operator

Our last question comes from Ananda Baruah of Banc ofAmerica.

Ananda Baruah – Bancof America Securities

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

Jeffrey P. Howells

This is Jeff. I’m notsure we gave a figure that indicated 7% growth. You’re referencing what wethink European market demand is?

Ananda Baruah – Bancof America Securities

No. I thought therewas a figure you gave last quarter for European growth on a like-for-likebasis. So, excluding the business thatyou had exited.

Jeffrey P. Howells

Oh, I think we gave you the most color on that in twoways. One, I referenced that if youexclude the countries that we exited we would have had positive sales growth ofabout 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 MillionEuros of retail revenue and the most specific comment we made is now on thefourth quarter where we’re saying a combination of the move away from some moreretail in the seasonally stronger fourth quarter, seasonally retail strongfourth quarter plus our exit of UAE and Israel a $200 Million Euro differencein our sales target that we would have had otherwise, if you will. And, that’s the most pronounced change in Q4because of the strong up tick.

Ananda Baruah – Bancof America Securities

Got it. Okay. Thechanges that you’re implementing in German, that you’ve been implementing andthat you’re still flushing through, can you give us any sense for when thechanges may be, when you may be at sort of a steady state there? Not in terms of, you know sort of revenue ormargin in fact but, in terms of getting everything in place to the point whereyou 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 teamhave added to the German management team will all be in place inside of thisquarter and so then, they need some time to settle in and begin to really driveprocess improvement across all of the unit. We’re not sitting and waiting for that to happen though we’re measuringthe improvement of that unit week-by-week, month-by-month, quarter-by-quarterand that started several quarters ago and we’re driving that improvement acrossall of the core processes inside the German business unit and we anticipatethat we’ll be able to continue to improve.

Ananda Baruah – Bancof America Securities

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

Robert M. Dutkowsky

Yeah. As we drivedeeper into the SMB segment, that should produce more profitable revenue for usbut, that includes that we’re adding more sales head count to be able to driveour penetration into that segment. So,you see, we’re carefully balancing the investments in SG&A against theleverage that we think it can deliver to us and also we’re investing ininfrastructure tools to make the organization more efficient. We’re launching a new frontend sales toolactually this month in the Americasthat we believe will make our sales organization more efficient and be able tobetter serve the customer. That was adevelopment project that has gone on for a couple of years and we’ve investedsignificant amounts of money to build that tool out that, you know, we believewill allow us to serve our customer better and improve the profitability of thecompany. But, it equals investment inthe frontend and you’re seeing those investments being made in the quartersthat we’re reporting.

Ananda Baruah – Bancof America Securities

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

Robert M. Dutkowsky

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

Ananda Baruah – Bancof America Securities

Okay. Great. Thanks a lot.

Operator

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

William Fearnley –FTN Midwest Research

Yeah. Thanks againguys. On the interest expense, reallygood improvement by your team on interest expense on this quarter. Directionally, how should we be thinkingabout interest expense on the fourth quarter into FY 09? Is the 3Q performance more indicative of howto look at the interest expense going forward? Or, has the historical trend more realistic here? Then, I have a quick follow up if Icould. 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 theextreme. I think our team dramaticallyoverachieved and did a great job. Idon’t think we’ll take the pressure off of daily balance sheet managementhowever, we don’t expect to drive that type of performance every day throughoutthe quarter. So, the interest will besomewhere in between what you would think of as historical trends and theincredible Q3 performance.

William Fearnley –FTN Midwest Research

Okay. Thanks. And then, with the change in some of yourfocus and some of the SG&A investments that you’ve been making over theyear and you’ve been talking about going forward, are you expecting any changesin customer mix here either in the fourth quarter or going into calendar2008? 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 kindof the never ending process. Ken Lamneckand his team divide the market segments here in the Americasinto some broad categories. We have over100,000 customers worldwide that we try to categorize and we move our coveragemodel against those categories as efficiently as we can. You know, we constantly move customers aroundin our coverage model. Some customershave direct sales coverage, some customers have telephone coverage, somecustomers we do business with solely through ecommerce and electronictechniques and we’re always trying to optimize that coverage model againstwhere the customers are spending money and where the best profit opportunitiesare. I think we’re getting better andbetter at that each quarter. Some of theIT tools we have in place allow us to see that data more clearly today thanmaybe in the past and we’re optimizing our coverage model against the data thatwe see and we think that’s allowing us to drive improvements andprofitability.

William Fearnley –FTN Midwest Research

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

Robert M. Dutkowsky

You know, our business partners, our vendor partners areasking us to drive penetration into SMB and so we’re building programs andsales coverage models that drive the penetration into SMB. Our partner, our vendor partners have theability to service the large retailers direct and so there’s not theprofitability in the retail segment nor is there the return on capital employedthat we want to see. So, you here usdescribing a strategy to thoughtfully exit retail where it doesn’t make sensefor us and move that resource and investment into SMB where there’s greatergrowth, greater profitability and our vendor partners want us to focus. So, we’re running that play very carefullyand 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 couplequestions please. Your European revenuecame in slightly below our and your expectations on a cost in currencybasis. Can you just help us to betterunderstand the demand environment in Europe now andspecifically, is currency becoming a bigger driver of demand? And also, even accounting for the segmentsyou’ve exited and are exiting, your outlook for the January quarter seems alittle bit more negative than what you’ve been seeing prior to thisquarter. Is there anything that’s goingon 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 itcontinues to be stable and solid but, you’re hearing us describe we’restrategically exiting retail revenue during the peak retail season. So, you know, I think the convergence ofthose factors maybe have our revenue declining a little bit faster than whatyou may have anticipated but, it’s part of our business plan to search forthose more profitable revenue segments and I gave you that one example of oneof our regions that historically has had a heavy dependency on retail wherewe’ve backed away from retail and grew our SMB business at twice the rate ofthe decline of the retail revenue and have also improved operating income[inaudible] at the same time. So, that’sthe play we’re trying to run across all of Europe. It’s playing itself out at different ratesand paces as you would expect because each of the businesses are different bycountry and by region. But, overall, ourfocus on finding more profitable faster growing revenue streams is contributingto the success we’re seeing in Europe. The other factor that is contributing to the successin Europe as Jeff described is we’re doing a much betterjob at pricing and inventory management in Europe. Nestor and his team are focused on inventoryand pricing, they have the tools in place to manage those leverage points andyou can see the impact that it is having on our profitability.

Min Park – Goldman Sachs

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

Robert M. Dutkowsky

I think Q3 we grew exceptionally fast. The market opportunities were there and ourexecution was very strong in the Americas. We took advantage of the opportunities wesaw. In the quarter that we just reported, in Q3 we believe we grew faster thanthe industry grew during that quarter and so, we’re pleased with the growthrates. You know, we always want tobalance growth and profitability and we constantly make those tradeoffs everyday but, we think that the growth we had in the quarter just reported was solidin the quarter and faster than the industry.

Min Park – Goldman Sachs

Great. Thank you.

Operator

Our next question comes from Mr. Brian Alexander of RaymondJames.

Brian Alexander –Raymond James & Associates, Inc.

Good morning guys. Bob, in your prepared remarks when you talked about the $200-300 MillionEuro relative to Q4 of a year ago, I just want to clarify, is that how muchrevenue you’re walking away from versus a year ago? Or, is that the total local currency decline you’rebaking 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 donot anticipate taking plus the revenue loss on a year-over-year basis from UAEand Israel.

Brian Alexander –Raymond James & Associates, Inc.

Okay. So, if I wereto add that back in.

Jeffrey P. Howells

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

Brian Alexander –Raymond James & Associates, Inc.

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

Jeffrey P. Howells

That is correct. Andto maybe guess your question and to add more color to Min and his question, Ithink it shows more discipline than market conditions. Bob and I can sit here and ask Nestor and Kento go out and get incremental revenue most any week of the quarter and ourdiscipline is firm. We are not going todo that. We’ve set objectives, we’retrying to control the costs, we’re trying to pick and choose to whom we areselling what while we talk about the retail mix change because it is the mostnoticeable number, if you will, that’s only one of many changes in mix oncustomers and products that they’re working on day in and day out throughoutthe 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 Irealize that you don’t guide this way but, maybe if you could just help usthink about the incremental profit that you’re expecting in Q4? Normally in Q4 you get somewhere between 200-300basis points of contribution margins. So, given that you’re doing more pruning than you’ve done in the pastshould we expect the incremental contribution margin on a sequential basis tobe above that range? Because, I think ifyou run those numbers you could potentially hit a 1% operating margin in Q4but, 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’scomments is that we anticipate improving our operating performance in Europeon a year-over-year basis. The magnitudeof that improvement we wouldn’t guide to.

Brian Alexander –Raymond James & Associates, Inc.

Okay. Then maybe justone 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 quarterend working capital metrics which were a little bit higher than I was expectingsuggest that maybe you had a back end loaded quarter. So, I was just wondering if you could confirmthat or add more color by region in terms of whether the quarter ended onstrength.

Jeffrey P. Howells

I would say in general this quarter would generally end onstrength because it begins with August. And, in both regions August is historically one of the slower months, ifyou will, on average out of the quarter and business ramps from mid Septemberforward. So yes, it would historicallydo that and I don’t think it would be inappropriate to say that would be anormal trend.

Brian Alexander –Raymond James & Associates, Inc.

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

Jeffrey P. Howells

Yeah, it’s one day. Remember, you have to look at the payable increase that supported theincrease in receivables and in inventory. We could send one more day at the snap shot of the balance sheet basedupon our inventory, receivable and payables position and so, clearly one day ina near $6 Billion quarter, in a very large balance sheet is really notsomething that we can precisely quantify and that one day on a year-over-yearbasis with the revenue growth we had, I think it’s excellent performance by ourteam.

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 ofAmerica.

Brian Alexander –Raymond James & Associates, Inc.

Hi guys. Just onequick follow up, how do you think about tax rate right now as we enter fiscalyear 09?

Jeffrey P. Howells

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

Brian Alexander –Raymond James & Associates, Inc.

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

Jeffrey P. Howells

Seasonal swings certainly will be there with the, generallyspeaking, all things being equal a highest tax rate probably in Q2 and, youknow, that may not be the way it adds up every time but, Q2 would be probablythe seasonally weakest and then the lowest tax rate in Q4 and Q1 and 2somewhere 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. Ihad some technical glitches this morning with the line so please excuse me ifthis question has been asked. Obviously,you had a little bit of decelerating growth in the Americas this quarter and itlooks like you’re forecasting a similar trend as we move into the fourthquarter, maybe kind of flattish year-on-year. I was wondering, in light of that, Bob maybe if you can talk a littlebit about the general demand environment here in the Americas from kind of50,000 feet and then also, talk a little bit about the pricing environment inthe region and whether that is stable relative to the last quarter or if it hasintensified at all?

Robert M. Dutkowsky

First of all, the growth of the Americaswas solid performance. Again, lastquarter 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 itand it depends on how we want to balance the profitability and the way we useour cash. So, in the quarter, in my view,we grew faster than the industry in Q3 in the Americasand that’s a good solid performance and when you couple that with the operatingincome that unit delivered and its efficient [inaudible] performance, I’m verypleased with the way the Americasperformed in the quarter. Well, a 50,000foot level, as I said earlier, you know, I think that we see the opportunity isgood as we head into Q4. The marketopportunity looks good, the pipeline that we see looks good but, we have tokeep our ear to the ground in terms of the turbulence that sits underneath theeconomy.

I think the beauty of the Tech Data model is thediversification of its customers. Wehave 100,000 customers that cover virtually every segment of the economy as Isaid in the prepared comments. I thinkwe sell into every zip code in the economy and that diversification allows usto not feel the same kinds of swings that a company that is focused say on theenterprise sector might see. You know where financial services are really, Ibelieve is realizing a slow down, that’s just a small component of the TechData revenue stream and our diversification serves us very well in difficulttimes like this.

I think the other important thing to note is Tech Datamanaged through these IT cycles, the ups and downs of these IT cycles veryefficiently for 30 years. So, we knowhow to read the tea leaves in terms of where the opportunity may be slowing andwhere the opportunity may be growing and we make careful decisions on coverageand inventory and the way we use our cash based on what we feel the market isgoing to be able to return to us. Wecould always squeeze a little bit more revenue and a little bit more profit outof the business but, if we over buy, for example with inventory, there’s noturning back in some cases. So, I thinkour experience serves us very well in this kind of environment.

Jason Gursky – J.P.Morgan Securities Inc.

Great. So lastquarter you grew 16% year-on-year. Thisquarter you grew 10, the operating margin didn’t really move quarter-on-quarterso it sounds like perhaps there was 5% there of growth that you didn’t findattractive this quarter so, does that say anything about the current pricingenvironment in the market here in the Americas?

Jeffrey P. Howells

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

Jason Gursky – J.P.Morgan Securities Inc.

Okay. Fairenough. Then, just a quick follow up foryou Jeff, on inventory this quarter. Itgrew faster on a year-on-year basis than your sales did, I think, for the firsttime since the second quarter 06, so I’m just curious as to whether currencyhad an impact there? Whether the assetacquisition that you made during the quarter that perhaps brought someinventory on? Or, if it’s just aquestion of, you know, bringing up some inventory in one region as yourredeploying some of the assets in Europe that you’re divesting from or walkingaway from and there’s just a little bit of a teething here as we go throughthat process?

Jeffrey P. Howells

I would say it is three things. One, it’s a picture, it’s not what we haveevery day, so it just happened to be what landed on the shelf. It is currency heavily impacted of making theEuros larger and as referenced, I think, on the first question from Bill, youknow, we’ve certainly been reading what the analyst have been writing about thepotential shortages in products that have glass for example so to the extentthat we had an opportunity to buy prudentially we certainly would have done soand when that lands whether its on October 15th or October 31st or November 15th,those orders are staged out but, we certainly wanted to get our fair share ofthat product that Bob alluded too. So, Iwould not read anything into it. Ourinventory is being managed better than we have probably managed it collectivelyin two years in Europe and in the Americasour team is continuously second to none in managing product categories. So, a picture, currency and making sure wecan 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 ofCitigroup

Richard Gardner –Citigroup Smith Barney

Thanks. I just have acouple of housekeeping questions, first Jeff, I was wondering why the tax rateguidance was so high in the fourth quarter, much higher than its been for thelast couple of years and it sounds like your expecting, if anything, betterprofitability in Europe and secondly, was wondering well, actually I’ll comeback to my second question.

Jeffrey P. Howells

Rich, first of all it is unfortunately the interaction ofwhat we have earned and compared [inaudible] in level setting that and pickingthat up in Q3 and 4 due to the wonderful accounting [inaudible] that we have tooperate under. But, certainly to answeryou specific question, we do anticipate and hope to make more money in Europein Q4 this year than we made last year and that will impact the rate dependingon where we do make it. To the extentthat we make more of the improvement in countries that we are already payingtaxes that’s one answer to the extent that we make it in a country where wehave a tax loss, of course, that’s a different answer. But, that interaction of where we are goingto make the money.

Richard Gardner –Citigroup Smith Barney

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

Jeffrey P. Howells

I think off the top of my head, the rate in Q3 average liked137.9 or something like that, 139.5 Chuck is telling me. We have modeled it all over the place in Q4and came up with sort of a mid point of where it was compared to where it istoday and included that in our range of guidance on the revenue. So, if it was just under 140 and it’sstraight at 145, you know the midpoint is 142, 142.5. But, clearly our revenue will swing onwhether it stays with the strength that it is currently today and it will helpexceed the mid point. But, in the 142.5is probably an average for the quarter.

Richard Gardner –Citigroup Smith Barney

Okay. And then forQ3, Jeff?

Jeffrey P. Howells

Q3 was the 139 and change, was the average rate that ourrevenue 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 thirdquarter results conference call. A replyof the call will be available in about one hour at www.TechData.com and will remain availableuntil Tuesday, December 4th at 5:00 PM. Thank you for attending today’s conferencecall and have a great day.

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