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Tech Data Corporation (NASDAQ:TECD)

Q1 2013 Earnings Conference Call

May 21, 2012 09:00 am ET

Executives

Robert M. Dutkowsky - CEO

Jeffery P. Howells - EVP and CFO

Néstor Cano - President, Europe

Murray Wright - President, The Americas

Arleen Quinones - Director, IR and Shareholder Services

Analysts

Matthew Sheerin - Stifel, Nicolaus & Company

Richard Kugele - Needham & Company

Ananda Baruah - Brean Murray, Carret & Co, LLC

Nabil Hanano - Raymond James & Associates, Inc

Benjamin Reitzes - Barclays Capital

Osten Bernardez - Cross Research LLC

Craig Hettenbach - Goldman Sachs

Operator

Good morning. Welcome to Fiscal 2013 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time.

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

Arleen Quinones

Thank you, Latonya. Good morning and welcome to Tech Data’s first quarter 2013 earnings conference call. I’m joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President and Chief Financial Officer; Néstor Cano, President, Europe; and Murray Wright, President, The Americas.

Before we begin, I’d like to remind all listeners that today’s earnings press release and certain matters discussed in today’s call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the Company’s current expectations and are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.

Please be advised that the statements made during today’s call should be considered to represent the expectations of management as of the date of this call. The Company undertakes no duty to update any forward-looking statements to actual results or changes in expectations. In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the Company.

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

Robert M. Dutkowsky

Thank you, Arleen. Good morning, everyone, and thank you for joining us today. I’m pleased to report a solid start to fiscal year 2013 for Tech Data, with record first quarter operating income, net income and earnings per share.

Our first quarter results clearly show that despite volatile and uncertain markets, our strong operations, flexible business model and strategy of execution, diversification and innovation enabled Tech Data to capture a profitable market share and to once again deliver strong results to our shareholders.

As you may have seen in our earnings release, Q1 was an unusual quarter for us, with three key items optically distorting our operational year-over-year sales performance. The first item is a 6% difference in the U.S. dollar to euro exchange rate between this fiscal year’s first quarter and the prior-year, which negatively impacted our fiscal ’13 first quarter sales by approximately $229 million.

The second is our exit from Brazil and Colombia at the end of fiscal year ’12, which impacted our prior-year comparison by approximately $100 million.

And the third item that impacted our top line this quarter is the change in the way we’re now presenting sales of vendor warranty services and certain fulfillment contracts from a net sales basis to a net fee basis. This change in presentation reduced our reported first quarter revenue and cost of good sold by approximately $200 million. But had no impact on our gross profit nor our operating income dollars.

Jeff will provide additional details on this item and its impact on our financials in his remarks. But it’s important to note that operationally our results were inline with our expectations. Reported sales of $5.9 billion show a year-over-year decrease of 7%, but after adjusting for these items, year-over-year sales and constant currency were up approximately 1% in the quarter.

We grew our operating income dollars while expanding operating margin improved our net income and achieved double-digit earnings per share growth. In the first quarter we also repurchased $42 million approximately 783,000 shares of our stock and earned an industry leading return on invested capital of 15% on a trailing 12-month basis.

And lastly, we completed our $100 million share repurchase program, bringing our cumulative repurchases to $1 billion since 2005, firmly underscoring our commitment to creating shareholder value.

Jeff will now cover the financials and then I will review regional performance and provide some business highlights.

Jeffery P. Howells

Thank you, Bob. Many of my comments will reference the supplemental schedules which are available on our website at www.techdata.com/investor.

Beginning with slide 1, and also I ask you to look at slide 8 too. Our worldwide net sales for the first quarter ended April 30, 2012 were $5.9 billion, a decrease of 7% from $6.3 billion in the prior-year first quarter. The weakening of certain foreign currencies against U.S. dollar negatively impacted the year-over-year first quarter net sales comparison by approximately four percentage points.

As indicated in our press release, this quarter we prospectively revised our presentation of sales of vendor warranty services and certain fulfillment contracts, such as these items are now reflected on agency basis as net fees as opposed to net sales and cost of products sold.

We decided to make this change now given the fact that these contracts are anticipated to become a larger part of our business going forward and over the last few years has become industry standard practice to reflect them in this manner.

These items were contributed approximately $200 million of sales in the first quarter, which negatively impacted the year-over-year net sales growth comparison at approximately three percentage points. This change in presentation had no impact on gross profit dollars, SG&A expenses, operating income dollars, net income dollars, or earnings per share in any period reported, but positively impacted the gross margin and operating income margin percentages by approximately 15 and 5 basis points respectively and negatively impacted SG&A as a percentage of sales by approximately 13 basis points.

Also included in the prior-year net sales is approximately $100 million related to the in-country operations of Brazil and Colombia, which we exited at the end of fiscal ’12. Excluding these items in the negative impact of approximately $229 million attributable to a weaker euro, net sales increased by approximately 1% in the quarter.

First quarter net sales in Americas were $2.5 billion or 42% of worldwide net sales, a decrease of 6% from the prior-year first quarter. The change in presentation of warranty services and certain fulfillment contracts reduce the Americas first quarter fiscal 2013 sales by approximately $103 million.

Including the Americas prior-year net sales is approximately $100 million related to the in-country operations of Brazil, Colombia, which the Company exited at the end of fiscal ’12. Excluding these items, the Americas sales grew 2% in the quarter.

Net sales in Europe totaled $3.4 billion or 58% of worldwide net sales, a decrease of 7% from the prior-year first quarter U.S. dollars and a 1% decrease on a euro basis. The change in presentation of warranty services and fulfillment contracts reduced Europe’s net sales by approximately $97 million or €74 million. Excluding the change, net sales were grown 1% in euros.

Again, on A-2, the supplemental schedule, this information is provided in four forms so you can see how the math works specifically.

On slide 2 of our slide deck, we summarize our operating performance in the quarter. Worldwide gross margin for the first quarter was 5.43% compared to 5.27% in the prior-year first quarter. Increase is attributable to the change in the presentation of warranty services and certain fulfillment contracts, which positively impacted gross margin by approximately 18 basis points.

SG&A expenses were $239.3 million or 4.06% of net sales compared to $257.8 million or 4.07% on net sales in the prior-year first quarter. A decrease in SG&A expenses was attributable to a weaker euro and a net gain of $3.7 million associated with a legal settlement. The change in presentation of warranty services and certain fulfillment contracts, negatively impacted SG&A as a percentage in net sales by approximately 13 basis points.

Operating income for the first quarter was $80.9 million or 1.37% of net sales compared to $75.7 million or 1.20% of net sales in the prior-year first quarter. The change in presentation of warranty services and fulfillment contracts had no impact on operating income dollars, but positively impacted operating income as a percentage of sales by approximately five basis points.

On a regional basis, operating income in the Americas for the first quarter was $51.1 million or 2.08% of net sales compared to $47.9 million or 1.83% of net sales in the prior-year first quarter. The change of presentation of vendor warranty services and certain fulfillment contracts had no impact on the Americas operating income dollars, and increased the regions operating margin percentage by approximately eight basis points.

Americas operating income also includes a previously mentioned net gain of $3.7 million associated with a legal settlement. Operating income in Europe for the first quarter was $32.6 million or 0.95% of net sales compared to $30.3 million or 0.81% of net sales in the prior-year first quarter. The change of presentation of warranty services and certain fulfillment contracts had no impact on Europe’s operating income dollars or euros, but positively impacted the regions operating margin percentage by approximately three basis points.

Interest expense for the quarter was $3.1 million compared to $8.6 million in the prior-year first quarter. The decrease in interest expense is primarily attributable to the repayment of $350 million convertible senior debentures in December of 2011, which represented $4.9 million of interest expense in the first quarter of fiscal 2012. And a decrease in the average outstanding revolving credit loan balances in comparison to prior period.

Company’s effective tax rate for the first quarter was 29.9% compared to 26.6% in the prior-year first quarter. As noted in previous quarters, this equates with FIN 18. Current pronouncement quarterly effective tax rates may vary significantly depending on the actual operating results in our various tax jurisdictions. For fiscal 2013, we expect an effective tax rate of 28% to 30%.

Slide 3 summarizes our key metrics, including net income and earnings per share. Net income attributable to shareholders of Tech Data for the first quarter was a record $51.7 million or $1.24 per diluted share, based on $41.6 million weighted average diluted shares outstanding. This compared to $48.7 million or $1.03 per diluted share in the prior-year first quarter based on $47.4 million weighted average diluted shares outstanding.

During the first quarter of fiscal 2013, the Company repurchased approximately 783,000 shares of common stock at a cost of $42 million. As of May 18, 2012 the Company purchased an additional 843,000 shares at a cost of $43 million.

These share repurchases combined with approximately 300,000 shares purchased in the fourth quarter of fiscal 2012 at a cost of $15 million completes the $100 million share repurchase program authorized in November 2011. Since 2005, the Company has repurchased $1 billion or 24.5 million shares of its common stock.

Turning to the balance sheet, please refer to slide 4 and 5. Some highlights include, Company’s cash position at the end of quarter was $447 million, the allowance for bad debt was $52 million. Day sales outstanding of 41 days compared to 42 days in the prior-year period. Days of supply in the Q2 were 32 days compared to 34 days in the prior-year period. Days payable outstanding at the end of Q1 of 48 days compared to 47 days in the prior-year period.

Our cash conversion cycle in the quarter was 25 days compared to 29 days in the prior-year period. Cash provided by operations during first quarter totaled $8 million. Total debt was $89 million compared to $105 million at January 31, 2011.

The total debt to total capital was 4% versus 5% at January 31, 2012. Funds available for use under our credit facilities were approximately $1.2 billion at the end of the first quarter. Accumulated other comprehensive income which consists of currency translation net of applicable taxes were $311.4 million at the end of the first quarter compared to $283.8 million at the end of the fourth quarter fiscal 2012, sequentially increasing $27.6 million.

At April 30, 2012 the Company has 40.7 million shares outstanding and a $152.3 million of goodwill and acquired intangibles, which resulted in a tangible book value of $45.60 per share. We are estimating 40 million to 41 million shares outstanding on a go forward basis for the remainder of the fiscal year.

Capital expenditures totaled $12.1 million in Q1, and the current plan for fiscal 2013 is a total of $40 million. The first quarter depreciation and amortization expense was $13.4 million.

On slide 6, you will see our product and customer mix for the 12 months ended April 30, 2012 which remained relatively consistent. As in the past, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide on an annualized basis. In the first quarter HP represented 25% of net sales compared to 27% in the prior-year first quarter.

Turning to our business outlook. For the second quarter of fiscal 2013, we expect sales to be relatively consistent on a sequential basis in both regions in local currencies. The expected decline on a year-over-year basis is attributable to the fiscal 2013 change in presentation of vendor warranty services and certain fulfillment contracts. The exit of Brazil and Colombia at the end of fiscal 2012 and general market conditions as well as our selective approach to capturing profitable market share.

For modeling and year-over-year comparison purposes, we estimate the change in presentation of warranty services and fulfillment contracts to reduce worldwide net sales by approximately $200 million in each of the remaining quarters of fiscal 2013. On a regional basis the amounts each quarter are estimated to be approximately 4% of the America sale and approximately 3% of the Europe sale in euros.

Including the prior-year our sales for Brazil and Colombia by quarter of approximately $100 million in Q2, $50 million in Q3 and $20 million in Q4. We have also assumed the average U.S. dollar to euro exchange rate of $1.30 to €1 for the second quarter in the remainder of fiscal ’13. This compares to an average U.S. dollar to euro exchange rate of $1.43 to €1 in Q2 of fiscal year ’12 which is a 9% decline on a year-over-year basis.

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

Robert M. Dutkowsky

Thanks, Jeff. Let me now provide you with some regional and business highlights. In Europe our team performed remarkably well in the first quarter taking select share in markets and improving the regions profitability. Reported sales in euros were down 1% year-over-year. However, excluding the change made from warranty and fulfillment contracts, sales were up 1%.

Our product diversification efforts along with good margin management provided strong leverage resulting in operating income growth in euros to the highest first quarter level in the regions history, and operating margin expansion from the prior-year. The European demand environment for IT products can be characterized as spotty at best, geographically by product lines and within end markets.

From a country perspective, we saw strength in Germany, France and the UK, which helped to offset lower demand in the south and in the east. The other products in SMB markets remained solid in several countries while the consumer sector continues to lag, particularly in the economically weaker countries.

From a product standpoint, sales of mobility products including tablets and enterprise software were among the regions leading product categories. Our mobility joint venture turned into another exceptional performance posting double-digit sales growth and exceeding its plan in nearly every metric this quarter.

Our European regions performance proves that technology sells in any environment, and while we prefer to operate in strong and thriving economy weak markets strengthen our value proposition by allowing us to do more for our vendor partners and for our customers. In addition, our flexible business model, diversified product and customer portfolio, and our broad geographic footprint enable us to readily adapt to market conditions and produce balanced profitable results despite macroeconomic challenges in the region.

Turning to the Americas, excluding the change for warranty services and fulfillment contracts and prior year sales in Brazil and Colombia revenue grew 2% ahead of last year. At the country level results were mixed with growth in Latin America particularly in Peru, Mexico and our export business helping to offset lower sales in Canada and flat revenues in the U.S.

Our selective approach to revenue opportunities as well as excellent margin and expense management provided leverage resulting in the regions highest Q1 operating income and margin in a decade. In the U.S. end markets our SMB and healthcare vertical sale segments performed well again this quarter, both posting double-digit year-over-year growth. In addition, sales to resellers serving the government sector also grew from last years level as tax spending predominantly at the state level appears to have resumed.

Some of the first quarters top selling products in the region included storage and virtualization along with tablets and digital signage. Since this broad launch in February TDMobility is gaining strong momentum throughout the U.S. reseller channel. We now have more than 300 resellers – reseller customers utilizing TDMobility to provide end-to-end mobile services including hardware, software, activation and billing across multiple carriers to their SMB end user customers.

Clearly our strategy of execution, diversification and innovation is delivering results. Strong execution together with our efforts to diversify to specialty areas over to the years have enabled us to selectively grow market share, expand our profitability and improve overall returns to our shareholders.

As a leading end-to-end IT distributor, our product offerings stretch from the data center all the way into consumer electronics covering what we believe is the broadest and richest product portfolio in the market.

In the area of innovation our R&D dollars are spent on systems and tools that differentiate us in the market place and make us easier to do business with. As we mentioned in previous quarters we continue to invest in internal IT systems including leveraging and expanding our investment in SAP in both regions to provide us with a flexible and scalable infrastructure to meet the demands of the ever changing market. We operate in an industry that relies heavily on technology to improve efficiencies throughout the supply chain, so we along with our peers are continuously adding to and enhancing our systems to maintain our competitiveness, improve decision making and to better serve our customers and vendor partners.

In summary, in a low single-digit sales growth environment Tech Data took selected market share, expanded its profitability in both region’s and delivered record operating income, net income and earnings per share. We are confident that our strategy, strong regional operations and resilient business model will continue to serve us well enabling us to successfully navigate the IT market landscape and to deliver strong returns to our shareholders.

As Jeff indicated in his remarks, we expect our sales in both regions and in local currency to be relatively flat on a sequential basis. You’ll note that this is lower than historical seasonal trend but as we have consistently demonstrated in the past several quarters we’re picking our spots selectively going after the right market opportunities and costing the business accordingly to deliver expanded profitability and higher earnings.

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

With that, we’ll open it up to your questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. (Operator Instructions) One moment please for our first question. Our first question comes from Matt Sheerin with Stifel, Nicolaus. Please proceed with your question.

Matthew Sheerin - Stifel, Nicolaus & Company

Yes. Thanks and good morning. So a question Bob, on your outlook it sounds like you’re looking at little bit less than seasonal in both markets, but by and large, on a pro forma basis your revenue last quarter was basically seasonal and certainly in some areas weaker in Europe that we expected but certainly no worse than that. Looking at the macro picture you’ve had companies like Cisco coming out and being more cautious on enterprise recently. So, the question is have you seen any of that softness either on the enterprise side or other pockets of your business getting any incrementally worse in the last months or two or you’ve kind of seen a more steady cautious environment for a while now?

Robert M. Dutkowsky

Yeah Matt, it’s Bob. So, I’ll take a shot at that. Just to remind you revenues after all of the changes that we made including Brazil and Colombia including the exchange rate, revenues in Europe were up 1% and revenues in the Americas were up 2%. So, as we outlook the last quarter we said in the flattish environment we were going to be flat to low single-digit growth and we delivered on that.

As we look into this quarter where we see that Q2 looking similar to Q1 inside of that performance you saw some very strong results in European countries like Germany, the UK, and France and in the Americas region you saw a strength in sectors like healthcare and SMB and those offset other weaker areas to be able to deliver the kind of results that we had.

So, I think the strength to our model Matt is the diversification both geographically sectors and product areas that allow us to optimize around pockets of strength and neutralize pockets of weakness to deliver the kind of results that we had. Our focus as a Company is on responsible growth and improved profitability and we’ve been able to deliver on that quarter-after-quarter.

Matthew Sheerin - Stifel, Nicolaus & Company

But have you seen any changes significantly in the last two or three weeks or a month or so or is it the same?

Robert M. Dutkowsky

Yeah, I think with – the quarter ended up strong and it continues to be, as our outlook looks in terms of pockets of strength and pockets of concern and particularly around the southern parts of Europe for example.

Matthew Sheerin - Stifel, Nicolaus & Company

Okay. And then just my second question on your operating margin performance, and you certainly continued to be on track to that 1.5% and I know you took that target up a little bit. Is that still coming predominantly from continued strength in North America or have you sort of peaked just a little over 2% a year in North America, and most of that gap needs to be filled by Europe in the next few quarters?

Jeffery P. Howells

Matt, this is Jeff. Just to clarify, the Americas has two items in it. One, the re-class, and two, a $3.7 million gain on a legal settlement.

Matthew Sheerin - Stifel, Nicolaus & Company

Got you.

Jeffery P. Howells

So, on a more normalized basis, the Americas operating income is inline with the prior-year, couple of basis points improvement. So as we said, our goal this year is to maintain the operating income in the Americas, expand the operating margin in Europe, which is exactly what we did to take out the adjustment in Europe. Our operating margin was up over 10 basis points on a year-over-year basis in Europe. So that’s our plan for this year, and the change in the annual outlook for operating income as a percent is adding the five basis points for the reclassification – or the change in how we record the presentation of warranty fulfillment contracts.

So, expand European operating margin and maintaining Americas and the revenue on a year-over-year basis in the flattish range in local currency. The other thing I might add is if you look at the profile of the revenue, generally our Q2 in a perfect world would have Europe down sequentially in local currencies and the Americas just up slightly, but too somewhat netting, and this year with all that – what’s going on in the world we’re just projecting flattish in both environments, which actually, I’d say, Europe is doing as well or better than normally expected. So, we’re very pleased with both the results that the team delivered and also for the updated plan that’s put together for the second quarter.

Matthew Sheerin - Stifel, Nicolaus & Company

Got it. Okay, thanks a lot.

Operator

Our next question comes from Rich Kugele with Needham & Company. Please proceed with your question.

Richard Kugele - Needham & Company

Thank you. Good morning, gentlemen. A few questions, just now that we’re well on the way on your exit from certain countries in Latin America, where would you say your overall share has gone now? I mean do you think that this impacted the $100 million that you’re talking about declining as the year progresses is just some share that you’ll gradually recover or is that business you’re intentionally walking away from or any comments on the Latin American share?

Jeffery P. Howells

Just to be clear, that the $100 million is what we sold in-country last year in Brazil and Colombia. We’re no longer in that country, so that goes away permanently just like as if we’ve had sold the operations.

In addition, I clarified in my outlook that last year we sold a $100 million in Q2, $50 million in Q3 and $20 million in Q4 in those two countries. So, that revenue is just out of the Tech Data profile going forward.

Richard Kugele - Needham & Company

Okay.

Jeffery P. Howells

And going tail to that is we anticipate selling some more export business into those two countries, but clearly we’ll have no relation to the quantity that we exited. However, we made the decision in the best interest of the Company and shareholders that business did not look like it would become and remain profitable on an ongoing basis.

Richard Kugele - Needham & Company

Okay.

Robert M. Dutkowsky

And Rich, that gives us the ability to – as we exit Brazil and Colombia, it gives us the ability to reinvest in other Latin American countries and maybe accelerate our growth and profitability in those countries. So, Tech Data has no less commitment to Latin America as a strategic and growth environment. It’s just we’re not going to execute that in Brazil at this point.

Richard Kugele - Needham & Company

Okay. And then just two last ones from me. It’s well known now that there were some delays in getting Romley-based servers out from some of the OEMs, just have you seen that impact any of your business, is there decent interest for the new Romley servers, have you seen consistent sales of the older servers, any thoughts on that?

Robert M. Dutkowsky

Yeah, I think the second half will tell the tale of the Romley impact. And throughout Q1, we had okay availability of products and I think the Romley availability will ramp up in the second half. So, again the beauty of our models, Rich, is that if the customer wants Romley, we’ll have it on the shelf, if they want it for the prior architectures, then the technologies will have that on the shelf as well. And so the market will decide what the opportunity is and we’ll fulfill those as the market determines.

Richard Kugele - Needham & Company

Okay. And then lastly just on PCs, the same basic question, are you seeing the SMB continue with their PC refresh or is that done and to the extent you think Windows 8 is a factor in the second half for your particular business?

Robert M. Dutkowsky

Yeah. As we said in our prepared comments, we saw good strength in SMB and PC contributed some of that strength as well as other product categories and families. And so, I think we had good balance performance in the SMB environment.

Regarding Windows 8, I think Windows 8 will be a second half of this year ramping into next year phenomenon. And I’d answer it the same way as the Romley question, if the customer wants a Windows 8 product, we’ll have it, if they want Windows 7 product, we’ll have that as well and the customer will decide and the market will decide. The beauty of our model is we’re prepared to fulfill whatever direction the market wants to go.

So, we don’t have to place as aggressive of bets as maybe other players in the ecosystem, but we get the benefit of the momentum that’s created in the market and we got to take advantage of that momentum.

Richard Kugele - Needham & Company

s

Okay, great. Thank you very much.

Operator

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

Ananda Baruah - Brean Murray, Carret & Co, LLC

Hey, good morning guys. Thanks for taking the question. So, Bob, it sounds like just to make sure or clearing it, it sounds like you didn’t really see any demand surprises as you move to the Q, is that an accurate assessment?

Robert M. Dutkowsky

Yeah, I think the quarter played out very much how we anticipated that it would in terms of demand, the opportunity, the strength and weakness at the country level, strength and weaknesses at the product category level. I wouldn’t say that there were tremendous surprises there. And we – at the end of the year we talked about the Brazilian impact and the Colombia impact. We gave our outlook for where we thought FX was going to land. So much of the quarter played out the way that we thought it would.

Ananda Baruah - Brean Murray, Carret & Co, LLC

Got it. And what were some of the weaker areas in the North American market, demand-wise?

Robert M. Dutkowsky

So, back to Richard’s comment earlier I think that the server market took a bit of a pause, and it was less than what we had anticipated. Categories, the peripheral categories slowed down as they would in any time you’ve an economy or a segment that’s under duress. So things like printers and consumables were lower than what they had been in the past. But again, our model tries to offset that with growth in areas like tablets and smartphones and software and digital signage.

So while some categories are down, others were up. And we try to balance that in a way that delivers responsible growth and strong return to the shareholders. I think that model, the strength of our model really played out in particular in this quarter. It was a quarter with geographies and governments that were challenged, therefore tech spending was challenged in some environments, but we were able to move our models quickly to the areas that were stronger growers and delivered good growth, we think with the market growth as well as very strong profitability.

Ananda Baruah - Brean Murray, Carret & Co, LLC

Got it. Thanks. And I guess as far as I think your growth relative to market, you’ve been pretty clear on what your expectations are in sort of in a flattish market, you guys have easier compares as you get into your third and fourth quarters, meaningfully easier compares. So, I guess, what’s the best way to think about for us, your growth in the second half of the year? Should we just sort of engage market growth as we go forward here and just sort of think of you guys doing a little bit better than that or should we take the easier comparison in the second half of the year into account as well?

Jeffery P. Howells

Hello, this is Jeff. I think as we’ve stated, our plan on a local currency basis is to be flattish on a year-over-year basis in both regions excluding the impact of the change in the presentation and the exit of the two countries in Latin America. Each and every quarter could vary, as we said last quarter, slightly up, slightly down. And we’re running the operation for improved profitability taking the right share, growing areas that are more profitable for our resellers and for Tech Data Corporation and letting the other revenue moderate.

So our plan also does not anticipate a second half uptick in sales or spending. So, I think that’s really important, should the market improve, should spending improve, we might have a different outlook as we update Q3 or go into Q4.

All that being said, in a flattish environment, our belief is we can maintain the Americas operating quality, expand the quality in Europe and expand the Corporation’s operating percentage and clearly earnings and the good operating performance, the capital structure changes we made last year on the debt side and then on the equity side the impact on the buybacks from last year and the first quarter and into the second quarter of this year.

So, long answer to a simple question, but I think we’re targeting the right revenue and follow cognizes of market growth, the measurement internally is growing the market share in the correct segments of the business, not overall, if it can’t lead to good profitability.

Ananda Baruah - Brean Murray, Carret & Co, LLC

Thanks, Jeff. And just one real last – one quick one from me, last one, any drive issues surprises on any of your products this quarter PC to server storage?

Robert M. Dutkowsky

No, it really didn’t have any impact in the quarter.

Ananda Baruah - Brean Murray, Carret & Co, LLC

Great. Thanks guys.

Operator

Our next question comes from Brian Alexander with Raymond James. Please proceed with your question.

Nabil Hanano - Raymond James & Associates, Inc

Hi, this is Nabil Hanano in for Brian Alexander. Just looking at the Brightstar joint venture was up pretty significantly year-over-year and I just wanted to know, it seems like it contributed more than 100% of the European profit increase. Is that right? And can you kind of talk about the underlying profitability trends within that country as the smartphone revenue still accounts for a relatively small portion of the overall revenue.

Jeffery P. Howells

Yeah, Nabil this is Jeff. Brightstar joint venture did – our mobility business in Europe did contribute nicely. It wasn’t quite that math, but it was close and it’s exactly what we’re anticipating from a diversification strategy. In other words last two years we acquired – we grew our organic business, we acquired MCC a subsidiary of Triad in the mobility business and AKL, and those businesses continue to grow clearly at a multiple of the market growth.

We also acquired over that same period of time consumer electronics businesses and that piece of the business is not growing at the same pace but the beauty of diversification is when the consumer spend comes back in Europe in those regions we anticipate that business being the shining star underlying all that is our traditional IT products. So yes, in a given quarter, in a given year, a different segment of our end-to-end business model will be the leader in adding to the profitability Brightstar clearly was – or the mobility joint venture in Europe was clearly on of those as Bob alluded to in his comments it exceed our expectations in almost every metric. So that business continues to be strong in Europe, it’s our mobility operation here in the Americas is picking up customers and so when you do well, sell a lot it does add to your profitability and we’re pleased that it did so.

Nabil Hanano - Raymond James & Associates, Inc

I guess, can you – what are your expectations for European profit improvement though excluding Brightstar, I mean is pricing competition gone to a degree where you’re expecting that portion of the business to actually see a decline in profitability for fiscal ’13?

Jeffery P. Howells

No, we’re actually anticipating – improving the operating performance as a percent of sales in euros on a local currency basis. So flattish sale, improved operating margin percentage by changing the mix of what we sell in Europe and having the appropriate cost structure. So we’re – as we’ve said repeatedly we’re not looking for sales or revenues that is not profitable, it doesn’t add to the bottom line, responsible growth and there will be changes in the mix of the business to continue to improve the operating income quality and quantity especially in this year where it’s a slower growth market, it maybe a market that grows a few percent and in key segments of our business we’re going to exceed that by multiples in the other pieces of our business we’re going to look to re-track the business and in the blend is what we’re looking for.

Nabil Hanano - Raymond James & Associates, Inc

Okay. And then my last question is, is it fair to assume that buybacks for the rest of the year will be relatively de minimis given that you just completed your $100 million buyback and will investments going forward be more focused on organic, are you still looking for M&A as a greater opportunity?

Jeffery P. Howells

We’re looking at M&A opportunities under the quarterly basis we’ll analyze with our board the opportunity to do incremental buybacks and then we do hope that organic growth will resume at a higher pace in the following couple of years, but M&A reviews – research continues, on a continuous basis and just because we haven’t completed anything in recent quarters it doesn’t mean we’re not looking. And even in this most recent quarter we thought our stock was a good value so we continued the buyback and depending on market conditions we’ll evaluate whether we want to approve and recommend an incremental buyback or wait, and when our board meets next they’ll review that as they have each and every quarter for the last seven years.

Nabil Hanano - Raymond James & Associates, Inc

All right. Thank you very much.

Operator

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

Benjamin Reitzes - Barclays Capital

Hey, how you’re doing? I wanted to ask a few questions if I might, just with regard to tablets you mentioned a big growth area et cetera, were your able to get enough to make a difference or is it still really small. Is Apple given you enough to kind of allow it to impact results?

Robert M. Dutkowsky

Yeah, Ben the tablet market continues to be a good strong grower, obviously the dynamics are visible in the market in terms of the acceptance of the tablet as a real content delivery device as well as playing out in the enterprise in a meaningful way. So in last year we sold almost over $1 billion worth of tablets. The year before we sold about $300 million worth of tablets. So you can see that those two data points give you a nice feeling for the growth of that market and obviously we have a lot of supply of product to be able to grow at those rates.

Benjamin Reitzes - Barclays Capital

Okay, great. And with regard to your Hewlett-Packard revenue it looks like they’re down in the mid-teens year-over-year based on the math and you mentioned printing was pretty weak and peripherals which they have particular exposure too, just any more color on that? And you’ve obviously a flexible business model, so rest of the Company without Hewlett-Packard was much better than the average or a little better than the average at least, so what picked up the slack?

Robert M. Dutkowsky

Our strategy as we’ve described is to diversify into the datacenter, into mobility products, into software distribution and into consumer electronics and to use the strength of our broad line engine to support those specialty areas along with the volume broad line business.

So, in a quarter where something, say for example, the printer environment is a little soft, our engine gets deployed more aggressively into the areas of the datacenter or mobility or software consumer electronics.

Clearly, printers were down and cell phones were up, and we were able to manage that with a consistent SG&A or even slightly lower SG&A. We executed a very solid quarter for the shareholders. That was kind of the story for Q1 from our vantage point.

Benjamin Reitzes - Barclays Capital

And how did you put your foot on the gas on the mobility side, were you able to give any of those new Samsung Galaxy 3 phones or were those not out during the quarter?

Robert M. Dutkowsky

They were announced in the quarter, but I don’t think that we had much supply of them. We sold a broad array of products from several cell phone manufacturers. We sell Samsung, we sell HTC, we sell Blackberry amongst others and we’re able to find the homes for those products in the marketplace very efficiently.

Benjamin Reitzes - Barclays Capital

Okay. Well then, I mean maybe mobility should have a big pickup this quarter with those Galaxy phones, though no? I mean, even though you did okay in the last quarter.

Robert M. Dutkowsky

If we get supply, we’ll sell them.

Benjamin Reitzes - Barclays Capital

All right. Then just a housekeeping, really quick, you mentioned on the call what we should model share count for the rest of the year in tax rate?

Jeffery P. Howells

Yes.

Benjamin Reitzes - Barclays Capital

What was it?

Jeffery P. Howells

The tax rate was 29% -- 28% to 30%. And share count, 40 million to 41 million shares outstanding.

Benjamin Reitzes - Barclays Capital

And you mentioned bad debt, what was it in the quarter versus last year and the prior quarter, the bad debt expense?

Jeffery P. Howells

Well, we provided the allowance at $52 million.

Benjamin Reitzes - Barclays Capital

And last year?

Jeffery P. Howells

I don’t have that handy.

Benjamin Reitzes - Barclays Capital

Okay. We’ll get it in the call back. Thanks a lot, guys.

Robert M. Dutkowsky

Thanks, Ben.

Operator

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

Osten Bernardez - Cross Research LLC

Hey guys, good morning.

Robert M. Dutkowsky

Good morning.

Osten Bernardez - Cross Research LLC

Would you be able to add more colors to how your datacenter business did, and [price] computing business did in Europe for the quarter relative to what you’re expecting?

Robert M. Dutkowsky

We don’t break it out specifically, but I’d say that our datacenter business was reflective of the results that you hear from our partners there, whether it would be HP or IBM or Cisco or VMware, those are the prominent vendors that buildup our datacenter practice, and so it’s safe to say that it was reflective of the way that they performed individually and as a group.

Osten Bernardez - Cross Research LLC

Okay. And you could help to clarify some comments regarding demand in the U.S, you mentioned sort of a flat market, your SMB – obviously your SMB customers are still spending, could you provide sort of what outlook you’ve for the overall market in the U.S. for your core distribution business?

Jeffery P. Howells

Well, I think our core business is pretty much inline with the last two or three quarters that we’ve reported and that has strengthened our SMB, the market that our vendors really vest to serve them in, it’s harder for them to access. And then, we’ve very small piece of our business and larger enterprise type customers depending on the day and the product category that may not be or the higher growth areas. But all that being said, if you adjust for everything, the three items, primarily that we just discussed …

Osten Bernardez - Cross Research LLC

Yep.

Jeffery P. Howells

… we grew 2% in the Americas in Q1. And that’s taking selected market share and not taking as we’ve in the prior quarter’s business that doesn’t lead to that correct long-term profitability of the corporation.

So, market is probably growing a few percent and we grew 2%. So, very much inline with our expectations, but we really want to emphasize in both markets, we grew 2% in Americas, 1% in Europe in euros, if you look at it on an operating sales basis it’s the quality of what we’re selling, that is driving the correct profitability leading to yet another record first quarter earnings.

Osten Bernardez - Cross Research LLC

Okay. And when you think of your – sort of your outlook for both regions, to what extent do you see your vertical solutions focused delivering – whether it would be above or just inline with what you’re projecting for the Company overall?

Robert M. Dutkowsky

Again, as Jeff described, we’ve to try to think of it as blending it all together in a quarter where let’s just say for example the Romley announcement maybe slow down the server market, we’re able to move our energy and our attention into the mobility market where there still appears to be good growth in certain countries and certain segments. And while peripherals may slow down, we’re able to grow our digital signage business.

So, categories have subcategories and the beauty of our model is we’re diversified enough by products, by vendors, by country, by segment that we can turn our attention to places where there still is profitable growth. And so the five broad categories that we constantly juggle as a business are the datacenter, mobility, software, consumer electronics and the strength of our broad line engine. All of that together allows us to deliver quarter like we did with at industry growth and we think very strong profitability.

Osten Bernardez - Cross Research LLC

Thank you very much.

Operator

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

Craig Hettenbach - Goldman Sachs

Yes. Thanks so much. Just following up on Europe, on the revenue side, that the comments of July quarter better than seasonal, can you just talk about whether its specific product categories or share gains or what’s helping to drive that performance despite what is weaker demand in Europe?

Jeffery P. Howells

This is Jeff. I think its just a diversification that like this quarter different pieces of our business, mobility, tablets, driving a good quarter and the fact that we’re – our geographic strength are right now happen to more align with where the strengths in the marketplace are.

So, while it’s a flattish quarter sequential basis versus being down, our teams are executing very well in the markets that are performing, the UK, the German market, the French market, some of our Northern countries also. And then we like others are experiencing the declines in the southern markets still and a little bit in the East, but we have very strong diversified operations, which I can’t emphasize enough that diversification being one of the reasons why we’re mixing to decent revenue and good operating performance in Europe.

Europe is not a bad place to be. Europe is not all negative. Europe has some very positive areas and we’re participating in those.

Craig Hettenbach - Goldman Sachs

Okay. If I could just follow-up with a quick one on you mentioned you continue to valuate M&A, any sense in terms of how the environment is today versus recent quarters on the M&A front?

Jeffery P. Howells

Yeah, I would say probably the number of sellers is increasing and the number of buyers remains very slim. So, I think there is many opportunities out there for companies of all sizes, small, medium and large and our goal is to analyze many and pick the right ones to continue to diversify our portfolio. But there is no lack of opportunity out there.

Craig Hettenbach - Goldman Sachs

Got it. Thank you.

Operator

This concludes Tech Data Corporation’s fiscal year 2013 first quarter earnings conference call. A replay of the call will be available in about one hour at techdata.com. Thank you for attending today’s conference call and have a great day. You may now disconnect your lines.

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