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Executives

Robert Dutkowsky – Chief Executive Officer

Jeffery Howells – Executive Vice President, CFO

Tech Data Corporation (TECD) Barclays Capital Global Technology, Media and Telecommunications Conference May 22, 2012 12:45 PM ET

Moderator

Okay. I think we need to get started. We are delighted to have Tech Data here with us today. We’ve had coverage of Tech Data for a while. They are good friends of ours in the industry. They have an exciting story to tell as well as some very good execution of late.

With us today is the CEO, Bob Dutkowsky and Jeff Howells, the CFO. Bob is going to go through a presentation for a little bit and then we’ll get into Q&A. So with that, Bob?

Robert M. Dutkowsky

Thank you, Ben. Good morning everyone. Thank you for your interest in Tech Data. My goal this morning is to quickly give you a snapshot of our Q1 results which we announced yesterday. And then give you a quick view of our strategy in terms of where we are headed as a company and I may make some forward-looking statements in this presentation. So I’d ask you to check with our filings with the Securities and Exchange Commission, as well as our Investor Relations website.

As I said, we announced Q1 yesterday. It was a very good quarter for Tech Data. It was a quarter that delivered record first quarter operating income, record net income and record EPS. Net income grew 6%. EPS grew 20% and we had a return on invested capital metric of 15%, which we believe is the best in the industry in our organization in our class. Sales grew actually 1%. We reported a minus 7%, because there were three actions that took place in the quarter. You’ll recall that we announced and left our operations in Brazil and Colombia at the end of Q4 and so we had that revenue in the comparison this quarter. Foreign currency exchange impacted the top line by about $230 million. And then we changed the presentation of some revenues for Warranty and Fulfillment contracts and that impacted the top line by $200 million, but had no impact below that. And so that’s how 1% sales growth translated into 7% decline. So, solid quarter for the company. We believe we grew with the industry in Q1 and we delivered exceptionally strong performance at the profit line and the return on invested capital line.

Question we always could ask is what products were hot, what segments were hot and which ones were cold in the quarter? So we built a little green arrow, red arrow chart that you can see. You could see from a geography perspective, although everyone talked about how poor and how soft the European economy is, three of our best performing countries in the quarter were European countries, Germany, the UK and France, as well as Peru in Latin America. Softer, Southern Europe as you would expect. Spain, Portugal and Eastern Europe showed up for the first time on this list in several quarters.

Strong segments at the end-user market. Predominant strength in SMB, that is our preferred market space and the Consumer continued to be soft in both geographies. And from a product point of view, anything that had to do with mobility, whether it would be cell phones or tablets were exceptionally strong. Software and Digital Signage were areas where we continued to see strength and Printers and Suppliers and Consumables were our weakness in the quarter.

Just to give you a quick highlight. Remember Tech Data has two major footprints, the European footprint and the Americas footprint. Our European business, excluding all the items that I talked about earlier, was up 1% in sales for the quarter and delivered the highest operating income for Q1 in our history.

The Americas business, again excluding the items, was up 2% in the quarter. Very strong operating margin performance and we had the highest first quarter operating income in 10 years. So very strong performance both from the top line and the bottom line both in the Americas and in Europe.

We have a very disciplined –a very strong balance sheet and a very disciplined approach to how we use our capital and our cash. We completed the latest $100 million buyback authorization in the quarter. We bought about $42 million worth of stock in the quarter. That brings our aggregate buyback over the last six years to $1 billion. 24.5 million Shares we bought about 38% of the available stock and that $1 billion in purchase is under $41 a share on average. So we believe that we’ve used the shareholders capital very efficiently from a buyback perspective. In that same timeframe, we bought 14 different companies that have helped us grow our footprint, diversify us into other business areas and bring in very important human capital to specialize in areas that we didn’t have the skill set to be able to support.

As you look into the future, we see the same process for our capital allocation. We’ll continue to look at share buyback as appropriate. We’ll continue to do targeted M&A and we’ll continue to fund organic growth.

The company built a very strong base supporting the desktop ecosystem. The company is approaching its 40th year in business and it really grew up supporting that desktop space, the PC and printer environment. And in order to be successful in that environment, you have to have a set of sales and marketing skills, you have to have a very strong credit management infrastructure to be able to fund our customers, to be able to place products into the market place and you obviously have to have a strong logistics engine.

To give you a feeling of the capacity of that engine, we sell $100 million of technology a day, our average order size is around $1000 a day or around $1000. If you order from Tech Data by 5pm, 99% of the time that product shipped that day and arrives in a day or two. That’s kind of the ante to be in the IT distribution business today. It’s a very strong competitive barrier to entry that we built up over the years.

But the world has changed, and the world of – the strength that we saw in the desktop, we believe that we could deploy into other areas. And so over the last five years, we’ve built practices in the Data Center, in Software, in Mobility and Consumer Electronics, and we’ve recently added a practice around integrated supply chain services. Part of the reason why we decided the reposition our revenue on our balance sheet was that addition of the services’ business into our portfolio businesses.

These businesses really make Tech Data the most robust end-to-end distributor in the IT space. From the data center to the living room and all points in between, we offer one stop shopping for our customers to come and get products all the way from large end serves and storage and networking products, all the way down to printer cartridges and television sets. And those practices are real vibrant businesses today. This is as of the end of the year, our data center business was $7.5 billion in revenue, our software business was $4.6 billion in revenue, our mobility business was approaching $2 billion and our consumer electronics business was over $3.5 billion. So more than half of Tech Data’s revenues today are now in these specialty businesses, and we continue to use our Broadline engine, that highly effective engine to support these businesses as well as the commodity business that we run.

From a strategic outlook and our set of goals, we drive the company to these metrics. We are on track to achieve the best majority of these metrics. You know in any given point in time, you are going to be on track for some and have work to do on others. But we feel good about our ability to drive to these metrics and we are tracking to be able to achieve, in the quarter we just announced fell squarely into these seven metric.

So that’s the Tech Data story. That’s our strategy and our tactical performance. We have a clear strategy that we are executing in the market place. We built a very vibrant collection of specialty businesses. This is not your father’s Tech Data any longer. It’s a very different company than the one that you may have known over the last 25 years. We have superior financial performance in the industry. We believe that our metrics stuck up very effectively against our competitors. We have a strong and flexible capital structure that allows us to finance the tactical and strategic moves that have been able to grow the company and we have a very stable and experienced management team that understands this environment and is mobilized and executing very effectively.

So with that highlight, we’ll turn it back to Ben for questions. And we’d love to answer your questions as well.

Question-and-Answer Session

Moderator

Great. I’ll referee some Q&A. We have plenty of time. Bob and Jeff, can you just talk a little bit more about your exposure to Southern versus Northern Europe? You, in any given quarter have roughly 60% of sales almost coming from Europe and you’ve executed pretty well there. You grew 1%. So can you talk about the puts and takes in the region that allow you to be rather stable?

Jeffery P. Howells

Well, you start with Southern Europe and the extent of the question, but Southern Europe, we saw very significant decline last fiscal year especially in the second half of the year of the economy went into disarray. Unemployment reached 22%, 25% in Spain for example. And it’s actually about what the market went down in the second half of last year in Spain.

So we adjusted our cost structure, realigned our workforce, took recourses out of the South. So that at the lower level, it can produce a reasonable result for this current year. It will be back at some point in time. But Spain, Portugal and then the East are the regions that are still declining some. My guess is that way of decline will sunset in the second half of the year. Again that’s when it started escalating last year and so the year-over-year decline may neutralize. But we are able to hold our own and hopefully make a little bit of money in that region for the entire fiscal year.

We’d like to say though is Europe is not what you see on CNN. It’s a whole variety of economies. The Germany economy is incredibly strong, 5% unemployment, one of our strongest countries in the quarter, good growth, good operating performance. The UK has continued to be a strong performer. In fact they’re always a good performer and in Q4 of last year they had the best Q4 I think in the history of our UK operation. The Benelux region is doing very well. France is doing well. Not as well as Germany or the UK, but doing fine.

So I think the diversity of countries we have is allowing us to produce good results, then the diversity in the products because had we not diversified three or four years ago into more data center and mobility products, we wouldn’t have been able to leverage the infrastructure in this current mixed environment I’ll call it. And we also have made some investments in consumer, which aren’t the highest performer as one would expect, yet that’s a business that it will have its day also in the next year or two if the consumer comes back in Europe. So the averages are serving us well at this point in time.

Moderator

And the northern part is way bigger percentage of revenues than the southern and Eastern Europe I assume?

Jeffery Howells

Well, clearly in the last two years it’s even become bigger. The southern has declined in the array of 25%. But yes and as far as our operation, while we don’t give country by country, it’s kind of matched with the size of the country and Germany being quite significant to UK. I’ll say though our Nordics business, since we are clearly the largest in the Nordics is a very good sized business, the Benelux region also. In the Benelux we have the most complete portfolio of products, all of it Bob had on the slide. That is the one region, Benelux. We have each and every one of them and it’s serving us very well to have that diversification.

Robert Dutkowsky

Ben, just one other thought. When economies get challenged, oftentimes that plays into the strength of a distributor. Think about it. The vendor that has a direct sales force in a country that’s declining in sales, the vendor may decide to downsize their direct sales force. Therefore they have to turn to distribution to cover more of the market opportunity. And so in down markets the vendors’ dependency on distribution often times goes up. So if you look back at 2009 which arguably was one of the worst tech spending environments any of us had seen, we were able to decline less than tech spending overall and we delivered record earnings in the year and that’s because more of the work moved towards our model and we were able to hold our own and keep our cost structure in line and support the vendors requirements and also grow the business at the appropriate rates against the market opportunity.

Moderator

Interesting. One thing Bob you and I were talking about earlier today is we were talking about growth areas and obviously troubles areas and in your quarter you mentioned printers and servers. Printers especially seem to have some real fundamental issues, but servers maybe a pause ahead of Romley, but also seeing increased virtualization and then PCs. If you listen to Intel but if you listen to us they’re pretty weak and then you’re also expanding rapidly in tablets and storage. So could you just talk about like how sort of like in countries, but how when some areas go down you have access to the growth areas and in particular what you’re doing in tablets and storage to make up for these two or three weak areas?

Robert Dutkowsky

Sure. If you looked at the specialty areas that I highlighted on the charts, think about it. If you take the data center, you take mobility, you take software and you take consumer electronics and you extend out three or five or 10 years and say where are the next big speed changes going to happen in tech spending? They’re going to happen in one of those four areas. And so today Tech Data has practices built around those segments. We have P&Ls. We have executives in charge of the profitability of those businesses and they have responsibility to make sure they have relationships with the vendors that are setting the agenda in those spaces. And so as products get energized or products lose energy in the market, our management system is in place to be able to quiesce the slower ones and invest more rapidly in the ones that are growing. The perfect example is the tablet market. Is it a consumer device? Is it a computing device? Is it a mobility device? Is it all of that? We have people who are focused on making sure that we have the right relationships and we’re driving the tablet space across that whole continuum.

So as I was describing to Ben, you could argue that printing is declining and people are printing on mobile devices like tablets. The documents you used to print and carry in your briefcase, they’re now in a digital form on your tablet or on your phone or on your Ultrabook or on your PC or on your laptop. So as the secular changes happen Tech Data – I don’t want to say we’re immune to them, but you understand what I’m trying to say is we’re able to morph with those very quickly and seamlessly so that when printing goes down and tablets go up we benefit from that. When servers – when virtualization goes up and server volume goes down we’re able to grow our virtualization business and subset maybe what we lost in server volume. We’re in a very unique position in that we cover that whole spectrum and so as long as we have the right relationships, the right focus and the right business model to look at those segments, we’re able to move very quickly and seamlessly across those environments.

Moderator

Did you find in the latest quarter – you mentioned that the M ware was still pretty strong and you mentioned the tablets were still pretty strong. Do you feel like you had flattish sales up a percent excluding everything? Do you feel like they pretty much offset each other?

Robert Dutkowsky

Yes. I think again if you kind of mix all that together, our view is that tech spending in general today is less – is a flattish environment. Maybe low single digit growth. Tech Data reports 1% growth worldwide. So we think that we mix underneath the surface of printer decline and tablet increases, server pausing, PCs, maybe waiting for the next generation of Windows 8 or whatever. Those pauses and our ability to find hotspots we’re able to grow at around the market rates and we think that we executed that very well in this past quarter.

Moderator

And you’ve been expanding in mobility and that was one area that grew in the quarter. Can you just talk a little bit about how big that business could be and there are some Smartphone cycles picking up and potential pickup. So what’s your exposure to that?

Robert Dutkowsky

Last year, fiscal year we sold 1.8 million of mobile devices in Europe. Prior year it was more like a million and that growth was organic plus the result of the acquisitions we did of a company called MCC and AKL. So very good business, good returns, very profitable for us and that business will grow again this year. Some number well above market as we take share both from some of the locals and regional, but also from the device manufacturers serving customers for them that they may have served directly. We also launched the mobility business in the US primarily, but that business is taking Smartphones to the bar and doing a bunch of services including activation and dealing so that the bars can own the devices in small business.

So example, rather than 12 lawyers going to four different carriers to get phones and all these files being out there in maybe a secure, non-secure environment, the reseller can come in and say I will give you four devices on a secure network and I will be responsible for them always being on and working. You call me and I’ll make sure that everything is working and they’ll send you one bill per month. So we’re expanding that. So in both regions we think that’s going to continue to grow and no matter what if you talk any application people are going to be connected in multiple ways. One on their Smartphone, one on their tablet, they want on their desktop slash PC. So it just adds to this whole phenomena of being always on, always connected. Bring your own device, whatever the buzz words are out there.

Moderator

And to be clear, on the phone side you have a lot of Samsung exposure but not Apple on the tablet?

Robert Dutkowsky

Correct. Apple primarily only in a few countries well outside the Americas, North America and Europe. Samsung, HTC, Nokia, LG, RIM. We have all the platforms.

Moderator

Okay, great.

Robert Dutkowsky

And one last final on that, Ben. Again it’s important when you think the next step later this year the Windows 8 tablets will be launched. They’ll be LTE compatible. What that means is they need to be activated. They need to be managed and so it’s not like you just walk into a store and buy a tablet and hook it up to a Wi-Fi and off you go. There’s going to be another step and that step equates the complexity and air and process and with our engine that we built that Jeff described in the Americas, we will be go to site for the activation of LTE tablets. We’ll be the one channel referring to and that’s an example of being ready for what’s next in terms of the way the company has been structured and organized. We’re good at what’s here and now but we’re also positioning ourselves to take advantage of what’s next.

Moderator

You think Windows 8 and Romley are catalysts? Or do you think they’re just, allow the rolling cycles to continue?

Robert Dutkowsky

I think Windows 8 could be a catalyst. I think it’s a late this year, early next year phenomena. I think Romley will pick up steam like every generation and chip does. It will cause a bit of a pause and then it will pick up a natural energy and it will carry on. So I don’t see Romley as much of an impact as I think Windows 8 can do.

Moderator

And Windows 8, do you think more on the traditional PC side, you’re not thinking about it from the Tech Data that the new tablet distributor?

Robert Dutkowsky

I think the Windows 8 tablet will find a home in the enterprise. I’m not going to tell you how much share it’s going to take from the incumbent, but again remember we don’t really care. We’ll have Windows 8 tablets and we’ll have the iPad and we want the market to decide. When the market decides we’re there to fulfill that demand. So we don’t have to pick a winner and a loser. We just have to make sure that we have the right products on the shelf at the right volume and our people are prepared to support us in the environment in the market and we win on both sides of the equation.

Moderator

Guess who I think wins?

Robert Dutkowsky

I think I know who you think is going to win.

Moderator

We’ll take some questions. Sir, can you wait for the microphone? It’s coming.

Unknown Analyst

Hi. Could you just update us on what you saw on the drive front in terms of pricing and availability? And more importantly looking forward, now that there’s been a lot of consolidation in the drive business, do you see any indication or recent hope that that will be more rational marketplace for you guys going forward?

Robert Dutkowsky

Yes. So part of our diversification strategy was to diversify away from commodities like drives. And so several years ago we brought our drive business down dramatically compared to our competition who have very vibrant drive businesses. So when the HPD Taiwan or Thailand issue happened, it didn’t impact us nearly as much as it did some of our competitors. In the quarter that we just announced, we really had as much supply of most products as we cared to have. There weren’t issues on supply and so our view is that that issue has settled down and its reached its rightful proper level.

Moderator

Great. Time for maybe one more quick one? The break out here is going to be in Liberty 3 by the way. Liberty 3. Any more questions? Okay. Well, gentlemen thank you so much for being here. Appreciate it.

Robert Dutkowsky

Thank you.

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