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Tech Data Corporation

F4Q08 Earnings Call

March 04, 2008 9:00 AM

Executives

Kristin Wiemer - Investor Relations

Jeffery P. Howells - Chief Financial Officer

Robert M. Dutkowsky - Chief Executive Officer

Ken Lamneck - President of Americas

Nestor Cano - President of European Operations

Analysts

Brian Alexander - Raymond James

Matt Sheerin - Thomas Weisel Partners

Min Park - Goldman Sachs

Bill Fearnley - FTN Midwest

Rich Kugele - Needham & Company

Ben Radinsky - Bear Stearns

Ananda Baruah - Banc of America Securities

Operator

Welcome to Tech Data Corporation’s fourth quarter and fiscal year 2008 earnings conference call. (Operator Instructions) Now I would like to turn the meeting over to Ms. Kristin Wiemer, Director of Investor Relations. Ma’am, you may begin.

Kristin Wiemer

Thank you. Good morning and welcome to Tech Data’s fourth quarter and fiscal year 2008 earnings conference call. Joining today’s call are Bob Dutkowsky, CEO; Jeff Howells, Executive Vice President and CFO; Nestor Cano, President of Europe; Ken Lamneck, President of the Americas.

Before we begin today’s call, I would like to remind the audience that certain matters discussed during today’s call may contain forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Please be cautioned that such forward-looking statements are based on the company’s current expectations that involve a number of risks and uncertainties and actual results could differ materially from such expectations. Risks, uncertainties and other factors affecting the company’s business are contained in our filings with the Securities and Exchange Commission specifically located in Item 2 of the company’s Form 10-Q filed on December 5, 2007.

Please be advised that the statements made during today’s call should be considered to represent the expectations of management as of the date of 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 Financial Officer, Jeff Howells.

Jeffery P. Howells

Thank you, Kristin. Many of the comments will reference the supplemental schedules which are available on the Investor Relations section of our website at www.techdata.com. Also during today’s call we will discuss certain non-GAAP financial measures. You may obtain additional information on these non-GAAP measures and a reconciliation to GAAP in Appendix A of the supplemental schedules or page 8 of today’s press release available at the Investor Relations section of our website.

Results for the fourth quarter of fiscal 2008 include a $1.4 million non-cash charge or $0.03 per diluted share after-tax for the loss on disposal of subsidiaries related to the company’s decision earlier this year to exit its operations in the UAE. The charge primarily relates to foreign currency translation losses recorded during the current year. In addition, both the fourth quarters of fiscal 2008 and 2007 include a $0.01 per diluted share non-GAAP tax benefit related to the application of different annual effective tax rates on a GAAP and non-GAAP basis for the respective years.

I will begin with the first two slides. Worldwide net sales reached a fourth quarter record of $6.48 billion. This is an increase of 5.9% from $6.1 billion in the fourth quarter of fiscal 2007, an increase of 9.5% as compared to the third quarter of the current fiscal year. On a regional basis, fourth quarter net sales in the Americas were $2.73 billion or 42% of net sales, representing growth of 8.4% year over year and a decline of 4.8% sequentially.

Fourth quarter net sales in Europe were $3.75 billion, or 58% of net sales representing year-over-year growth of 4.2% or a 7.4% decline in local currency. However, excluding the UAE and Israel operations which we exited during the year, the decline was only 4.7% in local currency. On a sequential basis, European sales increased 22.9% or 17.1% on a local currency basis.

Looking at slides 3 to 5, they summarize various components of our operating performance. Worldwide gross margin for the fourth quarter of fiscal 2008 was 4.95% compared to 4.84% in the prior-year fourth quarter. The year-over-year increase in gross margin was primarily attributable to continued improvements in the company’s inventory and pricing management practices in Europe, partially offset by competitive pricing conditions in the Americas.

Fourth quarter SG&A expenses were $247.3 million, or 3.81% of net sales compared to $230.9 million or 3.77% of net sales in the fourth quarter of fiscal 2007. The year-over-year increase in SG&A expenses was attributable to the stronger euro and related foreign currency translation impact. Expenses also increased year-over-year due to investments we’ve made to support sales growth in various strategic initiatives.

Non-GAAP operating income for the fourth quarter was $73.8 million or 1.14% of net sales compared to operating income of $65.5 million, or 1.07% of net sales in the same period last year, which also included a 6 basis point benefit related to a gain on sale of real estate in the Americas.

On a regional basis, non-GAAP operating income for the fourth quarter in the Americas was $42.7 million, or 1.56% of net sales compared to $45.7 million or 1.81% of net sales in the same period last year. The real estate gain I noted previously contributed 14 basis points to the Americas’ operating income in the prior year. Excluding the real estate benefit, the operating margin decline year-over-year was primarily related to competitive pricing conditions as well as the strategic investments I noted earlier.

Throughout fiscal 2008, the Americas’ quarterly operating income margin consistently exceeded our target of 1.5%. In Europe, non-GAAP operating income was $33.7 million or 0.9% of net sales compared to operating income of $22.2 million or 0.62% of net sales in the fourth quarter of fiscal 2007, representing a 28 basis point improvement. As a reminder, stock-based compensation expense is reported on a worldwide basis and presented as a separate line item in the company’s segment reporting.

Other financial highlights for Q4 include interest expense and other was $8.1 million compared to $14 million last year, due to improved cash and debt level management. The effective tax rate on a non-GAAP basis for Q4 was 23% as compared to an estimated tax rate of 30% to 32% in our fourth quarter business outlook. The difference is primarily attributable to a net benefit of approximately $4.2 million or $0.08 per diluted share for the reversal of a deferred tax asset valuation allowance for Brazil, offset in part by reserves established related to tax law audits in certain European jurisdictions.

For 2009 modeling purposes, we recommend using Tech Data’s fiscal 2008 quarterly and annual rates as a guide. Do keep in mind the FIN 18 accounting pronouncement which may cause forward effective rates to vary significantly depending on the actual operating results in our various tax jurisdictions.

Non-GAAP net income for the fourth quarter was $52.2 million, or $0.96 per diluted share based on 54.6 million weighted average diluted shares outstanding versus $37.1 million, or $0.67 per diluted share in the prior-year fourth quarter. We recorded $1.7 million of minority interest which represents our Brightstar Europe joint venture partner share of losses incurred during the fourth quarter. We began shipping products in August 2007, but the joint venture did not have a material impact on our results in the current fiscal year.

During the fourth quarter, we purchased 2.7 million shares of stock completing our $100 million stock buyback program announced in September of 2007. For Q1 FY09 modeling purposes, you can assume approximately 53.5 million fully diluted shares outstanding.

Turning to the balance sheet, please refer to slides 6 and 7. Accounts receivable total $2.7 billion and allowance for bad debt of $64.1 million. Our DSO was 37 days. Inventory totaled $1.6 billion yielding days of supply at the end of Q4 of 24 days, accounts payable was $2.3 billion; our days payable outstanding at the end of Q4 was 33 days yielding a cash conversion cycle for the fourth quarter of 28 days, a decrease of two days over the prior year period.

Net receivables sold under the company’s trade receivable purchase facilities that would have otherwise been outstanding at the end of the fourth quarter total approximately $296.4 million versus $338.1 million at the end of the prior fiscal year. Cash provided by operations during the fourth quarter of fiscal 2008 total $55.6 million. For the year we generated $357.4 million in cash from operations.

Total debt was $383.2 million compared to $443.2 million at January 31, 2007. The company continues to enjoy excellent liquidity and financial flexibility with a cash position of $447.3 million at January 31, net cash on-hand at January 31 totaled $64 million.

Total debt to total cap was 17% versus 21% at January 31, 2007. Funds available for use on our credit facilities total $753.1 million at the end of the quarter. Equity total $1.92 billion yielding a tangible book based upon the number of shares that I indicated would be outstanding on average in Q1 of just under $36.

Capital expenditures totaled $8.5 million in Q4, giving a total of $39.9 million for the year. The current plan for fiscal 2009 capital expenditures is approximately $40 million. Fourth quarter depreciation and amortization expense was $14.3 million.

On slide 8, you can see our product and customer classification. The company’s net sales by product segment in the fourth quarter was relatively consistent with prior periods. We estimate that peripherals account for 40% of sales; systems, 30%; networking, 15%; and, software, 15%. The company’s net sales by customer segment in the fourth quarter continue to be relatively consistent with prior periods also where VARs accounted for approximately 60% of sales, direct marketers 25% and corporate resellers 15%. In the past, Hewlett Packard was the only vendor that generated more than 10% of our net sales worldwide. In the fourth quarter, they represented 28% of our net sales, consistent with the prior year.

Turning to our business outlook, the statements I will make are based on current expectations and the company’s internal plan. These statements are forward-looking and as outlined in the company’s periodic filings with the SEC, actual results may differ materially. For the first quarter ending April 30, 2008 the company anticipates net sales to be in the range of $5.65 billion to $5.8 billion. This assumes mid single-digit year-over-year growth in the Americas and a low single-digit decline in Europe on a local currency basis.

I will now turn the call over to Bob Dutkowsky for his comments.

Robert M. Dutkowsky

Thank you, Jeff. Good morning, everyone and thank you for joining us on our fourth quarter and fiscal year 2008 conference call. We are extremely pleased to have completed the year with another solid quarterly performance. We demonstrated continuous improvement throughout the year, achieving record net sales for each quarter with improved profitability for the fiscal year.

We generated more than $356 million in cash from operations in fiscal year 2008, our highest in six years. This is a solid indicator of our improved working capital and royalty management efforts. Our accomplishments in fiscal year 2008 advance Tech Data another step forward towards improving our position for long-term market leadership. Our efforts include included adjustments to our sales structure, the exit of certain operations performing at levels below our requirements and strategic investments in strengthening our customer and vendor relationships. We also made great headway in selectively reducing our exposure to the capital-intensive retail segment in our European operation. I will touch on each of these initiatives and achievements in greater depth as I review the plan we put into action at the start of fiscal 2008.

At this time last year I identified Tech Data’s strategic building blocks that would set the stage for our improved profitability and market position. These include enhancing execution in every aspect of our business, prudently diversifying our customer, vendor and geographic operations, and continuing to invest in innovations that deliver competitive advantage or efficiencies.

Tech Data’s strength and execution was once again evident in Q4 and for all of fiscal year 2008. Starting with the Americas, we delivered a solid consistent performance in fiscal 2008, achieving our operating margin in line with our target of 1.5%, while still investing in growth and productivity enhancement initiatives. Our Canadian and Latin America operations delivered exceptional results during the year, contributing nicely to the Americas performance with double-digit net sales growth in both regions.

Turning to Europe, our solid execution drove noteworthy improvements in our operating performance. Fourth quarter European operating income totaled 90 basis points of sales, the highest in 12 quarters on a non-GAAP basis. Much of this improvement is attributable to better pricing and inventory management practices, the results of which are evident in our improved gross margin performance. It’s important to note that included in these improved results in Europe, we incurred the start-up costs associated with our Brightstar Europe joint venture.

As discussed throughout the year, we have been closely managing and improving our customer mix in Europe by exiting certain capital-intensive retail business and targeting the SMB sector. We significantly reduced our exposure to retail in Europe since beginning this portfolio management process in Q2 of last year. While we will always evaluate our profitability and the return on capital employed by customer and product segment, we have worked through the bulk of our targeted optimization efforts and expect to be substantially complete in Q1 of this current fiscal year.

Our efforts to expand SMB through focused marketing programs, targeted acquisitions and improved sales coverage are delivering gains in many of our European regions. We were pleased with the aggregate performance in six of our seven European regions, which underwent a significant turnaround in fiscal 2008, delivering operating income and cash metrics at or above our targets. Germany remains behind our targets, but the significant adjustments we have made in the management team, staff and daily processes are expected to deliver improved results in the long term as we leverage our established infrastructure.

Next we made several steps towards widely diversifying our business this year into new and adjacent product markets. As you recall, we launched the Advanced Infrastructure Solutions Division in the U.S. at the beginning of fiscal year 2008 with the mission to target and accelerate our entry in the fast-growing emerging technology products and solutions. Our AIS team has been instrumental in building a portfolio of next generation IT products that generally deliver accelerated growth and better margins.

We recently celebrated AIS’s one year anniversary with the addition of global virtualization leader VMware to our vendor portfolio. We are pleased to announce that we already have over 200 certified VMware sales professionals selling the VMware product set. Today, our AIS portfolio includes many leading-edge technology vendor partners including companies specializing in virtualization, blades and servers, storage, backup and other utility and consolidation solutions. Such advancements and changes in technology are beginning to change the channel as we know it and with the first mover advantage of our AIS Division, we are poised to capitalize on the opportunities and enhance our leadership position as the IT market continues to evolve.

Our Brightstar Europe JV announced at the start of fiscal 2008 clearly fits within our objective to diversify into adjacent markets and leverage our existing infrastructure in Europe. Along with Motorola, we have signed additional vendor partners including Samsung, Nokia, and LG in selective regions around Europe to support our multivendor distribution model.

While we got off to a slower start than originally planned due to our original single-vendor partner model, the European mobile and wireless device market continues to present solid growth rates and we look forward to building upon this greenfield operation. We expect the Bright Star strategic initiative to be close to breakeven in fiscal 2009 as we continue to expand our vendor distribution agreements throughout Europe and ramp up sales.

Last month at the Mobile World Congress we announced the new partnership between Brightstar Europe and Microsoft to deliver end-to-end mobility solution for SMB in Europe. Through this relationship, Brightstar Europe will promote, support and offer training for Windows mobile devices as solutions to Tech Data’s IT reseller network and Bright Star’s mobile resellers.

The acquisition of Actavis assets in Switzerland during the year provided Tech Data access to a solid customer base with greater coverage in the SMB space. The success of this acquisition is serving as a model for additional strategic consolidation efforts by Tech Data, like the agreement we announced just this morning to acquire certain assets of Nordic-based Scribona. This transaction will be a great fit, allowing Tech Data to better leverage our IT and logistics investments in Europe and to better serve customers and vendor partners with an expanded suite of hardware and software solutions and improved sales coverage and support throughout the Nordic region. We are targeting closing the transaction in Q2 and at that time we will supply you with more details.

Finally, innovation. In an industry that is constantly evolving and in an economic environment that presents uncertainty, it’s more important than ever to conduct business more efficiently and for Tech Data that means continually investing in innovation. The deployment of our SAP Warehouse Management System is well underway in North America, with half of our logistics centers already complete. By deploying WMS, we are able to better control costs and improve productivity and customer service while at the same time positioning us for future growth. With more than 80% of our orders booked via ecommerce in fiscal year 2008, we continue to invest in IT system capability and tools to more tightly connect us with our customers and vendor partners.

In the U.S., we began rolling out our internally developed one desk sales interface solution this past year allowing each of our various sales support systems to be accessed by our sales force from a single portal. This proprietary tool consolidates our sales process while optimizing the mix and profit potential of every transaction. One desk allows our sales teams to access previous customer orders, recommend alternatives and complementary products, and design optimal shipping routes from one screen.

As we noted last quarter, we opened an operation center in Costa Rica during the year to handle certain back-office functions for Latin America and service new customers and sales opportunities in the U.S. Our innovative approach allows Tech Data the opportunity to optimize our efficiency and cost effectively expand our coverage model. This insourced Tech Data model allows us to maintain high quality service levels for our vendor partner and customers.

Turning to the specifics of our Q1 outlook, there have been several broad indicators from the economy and specific to IT spending that suggests we are entering into what could be a challenging period to forecast IT demand. While we’ve seen some signs of demand softening in the near term, it’s difficult to estimate the magnitude and potential duration of what we and the IT market in general are experiencing. We will keep a watchful eye on the market as we maintain constant dialog with our vendor partners and customers. We are monitoring as diligently as ever our SG&A and capital spending and then once the slowdown intensifies we are not going to react in a manner that leads Tech Data falling short of our customer requirements in the long term.

We watch daily the same economic indicators that you do. From these indicators, combined with our insight into the markets, we believe that no matter how deep or great the slowdown, it will in no way resemble the days of the technology bust or when certain PC vendors aggressively switched their strategy towards direct coverage model. These direct changes affected all IT distributors and Tech Data to a large degree in our fiscal year 2002 and 2003. Those times were difficult, but Tech Data demonstrated competency to manage the unprecedented swings of the IT cycle. A change of pace in the economy may impact our performance in the short run, but we are in business for the long run and thus we will continue to carefully invest in our future.

Last quarter I noted the diversification of our customer base which spans across virtually every SIC code and industry sector. Combined with the fact that our customer profile is weighted heavily towards SMB, we believe we enjoy an inherent diversification that provides a buffer against industry specific swings in the market.

In light of the uncertainty surrounding the ultimate direction of the economic environment, we would be pleased to achieve earnings in the first half of 2009 that are in-line with the prior-year period with the potential to improve on our earnings performance in the second half of the year assuming that the demand environment does not worsen.

In summary, 2008 was a year of record net sales, improving European execution and profitability, strong cash generation and thoughtful investment. We believe our improving financial performance, strong balance sheet, diversified product, customer and vendor portfolio, and continuing investments in innovation will enable Tech Data to drive long-term shareholder value.

The Board’s approval of the $100 million stock repurchase program last September was a testament to our confidence in Tech Data and as Jeff noted, we completed the repurchase of 2.7 million shares during Q4, marking the completion of $300 million in stock repurchases over a three-year period.

I can say with confidence the fundamentals of our business remain extremely strong. We conduct business with tens of thousands of customers spread across more than 100 countries everyday and we enjoy strong relationships with the most powerful and innovative technology providers in the world.

Most importantly, we have a highly knowledgeable and experienced Tech Data team worldwide; one that executes with precision everyday. I thank them for their hard work and dedication in improving our execution and financial results. Our team delivered a great performance in fiscal 2008 and I’m very proud of their efforts.

With that, we are happy now to take your questions.

Question-and-Answer Session

Operator

Our first question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

The guidance that you gave for the first quarter for the revenue decline sequentially is pretty much in line with normal seasonality if you go back over the last several years and you talked about some early signs of softening in the business so I was just wondering if you could tie those two together. You are guiding to normal seasonality, but it sounds like you’re seeing softening trends yet your sequential decline relative to your normal seasonality is not as severe as what your major competitor guided to a few weeks ago, which was much worse than seasonal. So does that imply that you are more likely to go after share in what is a weakening market? Could you just comment on that?

Jeffery P. Howells

Brian, this is Jeff, I’ll start. First of all, I think if you look at our Q4 had there not been some weakening in the environment we would have most likely sold more in both of our regions. So, you would have had a decline off of a different number resulting in yet a different number, if you will. So, while mathematically the seasonal decline may be in the range of history, I think in reality had we not started to see some slowing down and read about the slowing, we might have had a even more robust sales outlook for the first quarter. But based upon what we see, what we experienced in February, that’s our best estimate of what we will be able to sell in the first quarter.

Robert M. Dutkowsky

Brian, this is Bob. I also think that compared to last year at this time our product portfolio is stronger. We have more products that are targeted at driving efficiencies into the data center, say for example VMware. VMware allows customers to get more work out of a comparable platform and so the addition of new products and new technologies gives us the opportunity to grow in other places and we’re taking advantage of them.

Brian Alexander - Raymond James

On the Americas region, solid growth but the operating income was down year-on-year. If you go back over the last couple of years, your contribution margin has been close to 1%, which is below your overall operating margin objective of 1.5%. Now obviously you’ve been investing a lot in the business; you also talked about some pricing pressure on this call.

My question would be as we go through calendar ‘08, how should we be thinking about and how are you thinking about incremental profits relative to incremental revenue? Should we start to see greater operating leverage? Are you going to continue to reinvest the upside in growth? Thanks.

Robert M. Dutkowsky

As we are tried to note through 2008 we made what we thought to be important investments in the long-term performance of the Americas; the automation and deployment of the warehouse management systems, the deployment of our one desk sales tool, the deployment of an upgrade of our financial systems here at corporate headquarters, and most importantly, the addition of sales coverage were substantial investments that you could say haven’t been made in the Americas over the last few years. So those investments were took away from the profitability performance of the Americas, but we think in the long-term position us to be able to deliver solid results.

Operator

Our next question comes from Matt Sheerin - Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

Bob, at the end of your opening statement you talked about you guys haven’t given specific EPS guidance, but you said that the earnings for the first half of the year will be equal to last year and last year you had a combined EPS of about $0.83. That’s significantly lower than what The Street is assuming where the numbers are out there. So, your revenue guidance looks like it’s in line with seasonality. Could you talk about what the disconnects there are? Are there more expenses coming on line?

Jeffery P. Howells

Basically we are making the decision that we are going to continue our spending, the investments that we began last year and the efforts will continue through this year and we think they will produce reasonable results for the year although they will be less than what we would have expected in the first half of the year if we look back six months ago.

So we are not going to cut back on our investments in our future. Our view is that if there is a slowdown in tech spending it will not be prolonged and we will still produce reasonable earnings power in the first half of the year and then have a better chance of exceeding the current year in the second half of the year.

So the difference between the models out there and the comments we have made today mostly like are the absorption of SG&A spend.

Matt Sheerin - Thomas Weisel Partners

So SG&A is going up or just kind of staying flattish and your volume not going up as much as you had previously budgeted given the economy?

Jeffery P. Howells

I wouldn’t give specifics on the dollar amount we would spend, but we are going to continue on at the rate that we have been spending in the most recent quarters; generally expenses peak in Q4, not only because of the incremental volume but also the exchange rate is impacting it. We may lose some short-term leverage on spending but we believe it is very important for the long-term health of the company and the market opportunities that Bob referred to in this comments.

Matt Sheerin - Thomas Weisel Partners

Regarding the demand picture, in North America you were down 5%, which is a little bit more than I had expected. Could you talk about linearity, do you see things get softer at the end of the quarter?

Jeffery P. Howells

I’m not sure I understood your math, you are saying we are down 5%?

Matt Sheerin - Thomas Weisel Partners

You were down 4.8% sequentially, right?

Jeffery P. Howells

That’s normal for us to be down sequentially in Q3 to Q4 in normal times because of the number of selling days and the combination of three holidays -- Thanksgiving, Christmas and New Year’s all in a quarter impacting our average sale. We had originally given a forecast of low double-digit growth and we turned in 8.4% or whatever the math was, so very close. Clearly we could have asked for and received another 2% or 3% growth in revenue, but we chose not to, to continue to focus on responsible growth, good revenue and good market opportunities.

But as far as where we could have sold more, we always could have. As far as the guidance, our achievement in Q4, we are very happy with that number. As far as what we are seeing, February is completely enclosed within the guidance we just provided. So based upon what we saw in February, we are happy with the guidance we provided this morning in both regions.

Matt Sheerin - Thomas Weisel Partners

Lastly, are you still shooting for that 1.5% operating margin target in North America?

Jeffery P. Howells

For the year, that would be our goal.

Operator

Our next question comes from Min Park - Goldman Sachs.

Min Park - Goldman Sachs

Could you please elaborate on your comments on heightened competitive pricing conditions in the Americas? Are you actually beginning to see increasing pricing over to Europe? Is pricing more broad-based or in particular product segments?

Robert M. Dutkowsky

First of all, I think the pricing pressures that we see are more acute in the Americas than they are in Europe at this point and they appear to be very much deal and opportunity driven. It appears that our competitors will go after a particular opportunity very aggressively and we have chosen to try to stay more balanced and to grow more responsibly.

So, there had been opportunities clearly as Jeff referred to in Q4 that we walked away from because they were not going to deliver the kind of profitability that we wanted to have as a company. Our competitors have chosen to take some of those deals. We are trying to stay true to that responsible growth.

Min Park - Goldman Sachs

On your comments about signs of a slowdown that you are seeing, again is that more broad based or is that again more deal driven? Are there more push outs or you think more cancellation of orders or is it just the comments you are hearing from your customers?

Robert M. Dutkowsky

As I said, it seems to us to be more deal driven. There are still opportunities out there and it’s part of the reason why, for example, we believe our investment in deeper sales coverage in the SMB market was the right choice because if you have more coverage you can compete for more opportunities and you can be more selective about the opportunities that you decide to win. So these investments that we’ve made position us for not only the short-term performance but for long-term growth and long-term responsible growth.

Operator

Our next question comes from Bill Fearnley - FTN Midwest.

Bill Fearnley - FTN Midwest

A quick question on Dell. Any updates on your thoughts on Dell here as Dell expands its channel footprint and gets ready to launch a more formal assault on the VAR channel? Can you guys give some sense of what the gives and takes on your business are, if any, with the recent moves by Dell? Do you expect it to affect your business in ‘09?

Ken Lamneck

Dell has been actively involved in the channel for many years. They have certainly taken an aggressive approach on the retail side and we expect that they’ll continue their approach that they have on the VAR side where they’ve been engaged for quite a few years. So at this point we haven’t seen that different an approach or a different strategy amongst Dell in the channel.

Bill Fearnley - FTN Midwest

Are they doing the same amount with two-tier distribution, do you think there might be some opportunities for you guys there in the upcoming year?

Ken Lamneck

There is no activity today with two-tier distribution as far as any two-tier distributors selling Dell in the Americas’ footprint. But, they are selling to the resellers and they had been for many years. So, we’ve seen that pretty much in a continued fashion and at this stage, not really seen any significant change to that approach.

Bill Fearnley - FTN Midwest

one of the knocks on Dell’s current channel particularly through retailers of limited assortment, have they given any indication that if they expand their assortment and expand the inventory investment in the channels that there might be an opportunity for them to do more business with you or is that pure conjecture on our part at this point?

Ken Lamneck

I think that’s really conjecture. I am not sure I would be able to comment on that.

Bill Fearnley - FTN Midwest

When you talk about buybacks you mentioned in your opening comments the completion of the buyback. How should we be thinking about buybacks going forward? Do you think there is another extension or approval possible here?

Jeffery P. Howells

I think we will continue as we have over the last four or five years evaluating them quarter by quarter with our Board of Directors. We have acquired or they have authorized three $100 million buybacks over the last three years. We completed them very timely. So, we’ll continue to give them the data on buybacks versus what we would call dry powder for acquisition opportunities versus the availability of capital out there in the markets and assess that quarter by quarter. But, there is nothing on the table as we speak today.

Robert M. Dutkowsky

One other comment. The board constantly trades off opportunities like buybacks versus acquisitions. The planned acquisition we announced this morning of the Scribona assets in the Nordics give us a good opportunity to better serve that customer set and better deliver more broad products into the Nordics region. In the long run, that positions our Nordics region for much better performance. So, the board could have taken that same money and authorized a stock buyback. In this case, they invested in the longer term growth of our operations and those are the trade-offs they make everyday.

Bill Fearnley - FTN Midwest

Bob, when you look at certainly some of the prices in the equity markets and if anybody had any plans on going public I am sure they have probably shelved them by now, do you think that there are more attractive acquisition possibilities for you now than there were six months ago then where there might be the incentive to keep more dry powder now than before?

Robert M. Dutkowsky

I think the opportunities are there and we are carefully analyzing a broad range of opportunities that go back to that strategy that I talked about. Can an acquisition help us execute, use our existing infrastructure more efficiently, like the Scribona acquisition? Can it diversify us into better market opportunities, or can it help us innovatively support our customers and partners more effectively? We are analyzing a broad array of opportunities that fit across all those strategic initiatives. You know, this Scribona opportunity is the latest one that we were referencing.

Operator

Your next question comes from Rich Kugele - Needham & Company.

Rich Kugele - Needham & Company

First on your acquisition that you announced this morning. Some of your competitors actually have been exiting the Nordics region, certainly on a physical basis in recent quarters. Can you just talk about the environment there, what made this attractive, and what you think you can do to keep that region going?

Nestor Cano

Certainly, Nordics has been a difficult market for many distributors and we believe it’s because there was over distribution and too much capacity for those specific markets. As we see people leaving and some acquisitions happening and seeing some consolidation, we expect to have a healthier market up here in the Nordics. That’s our strategy.

Rich Kugele - Needham & Company

Lastly you have made a lot of changes to your business mix, reducing your retail exposure in Europe for example and other outright exits. How should we view seasonality for fiscal ‘09 based on this new mix of business that you have? Any initial sense as to what we think it should roll out as?

Jeffery P. Howells

I don’t know if there will be any material difference in seasonality. I think you can take the seasonality reported in Q4 as kind of an indication of the tone. Europe probably didn’t pop up quite as much because we didn’t do as much retail business and that also impacted us in the back-to-school season in Europe in the prior quarter.

All that being said, I think our team has done a great job over there of balancing the mix and in fact on average throughout the year probably exited less retail than the high end of the range we had provided them. They did that by being able to demonstrate our value, in some cases, in some product lines, in some retailers, in some countries and renegotiate the deal so that they were beneficial for Tech Data Corporation.

I don’t think any material difference, and you’ve kind of got the stat via the current or the most recent fiscal year trend.

Operator

Our next question comes from Ben Radinsky - Bear Stearns.

Ben Radinsky - Bear Stearns

Can you talk about linearity in the quarter and the differential between sales growth in November, December, January and on to February?

Jeffery P. Howells

We don’t really go through month-by-month data. There are too many points country by country over 26 different countries that it wouldn’t be meaningful unless I rambled on for 30 minutes.

Ben Radinsky - Bear Stearns

Has it trended down? Has it decelerated?

Jeffery P. Howells

Again, we don’t really go through the month by month. There were ups and down depending on the country, depending on the month, but I don’t think there is any one particular trend up or down that would be particularly meaningful or representative of the average.

Ben Radinsky - Bear Stearns

On the acquisition front, I don’t think you’ve answered this directly, but what have you seen with multiples? I mean, I am assuming they’ve gone down, and your – and with the limited information in your press release, it would seem as if you paid essentially net asset value for the most recent acquisition. Could you just talk about multiples, what are people thinking, what are you seeing in the market place?

Jeffery P. Howells

This transaction wasn’t really valued in that manner. If you look through the recent history of Scribona they have been reorganizing over the last couple of years, moving out of some other business lines over the last few years. So the operating performance would not be such to put a traditional multiple on. So Nestor and our team work very closely with them to look at the assets and the potential and the opportunity and put together what we believe is I guess hard to say, but a win-win situation for both Tech Data and the shareholders of Scribona as they move forward into the next stage of their corporate life.

Robert M. Dutkowsky

Ben it also I think represents a win for the customers and the vendors that do business in those geographies. For example, Scribona had some product exhibits that Tech Data did not have and so by bringing Scribona into Tech Data we get the product exhibits and we get a talented workforce that understand those products. So it really gives us the opportunity to serve that market more effectively and would make the multiple analysis that you are referring to not less meaningful but not as important as the value that we got from this deal.

Ben Radinsky - Bear Stearns

Last question from me is if you were to look out over ‘09, I know that you don’t give full year guidance but just if we were to think about directionally working capital, do you think that it can continue to be a source of cash or do you think you will have to start investing more in working capital in ‘09?

Jeffery P. Howells

Well, our beginning plan would be that we would continue to generate cash. We have made incredible strides on our inventory and receivable management. However, we would always challenge our teams around the world for some more improvement, plus the positive operating results for the year. So, we would hope to continue to generate cash.

Ben Radinsky - Bear Stearns

So, where do you think the total cash conversion cycle could end up in the year or two from now?

Jeffery P. Howells

Well, I think it is very, very efficient right now. So, if our internal team is listening, we would challenge them for several days; in reality we will invest some days in some markets and give up some days in other markets. So, a day here and there per year net depending on what the situation is.

In our business we have to be very cautious of managing inventory too low because it’s just in time. If we don’t have it today, we have a high probability of missing the order and to the extent that the supply chain is not perfect between us and our vendor partners. Sometimes, there is delay in receipt of products especially products that are in high demand. So, we have to be cautious on that side. On the credit side, why, we are very diligent in the terms that we offer there are shifts and changes and sometimes supported by our vendors, sometimes supported in other manners and forms that go through our P&L in different ways.

So, a day here and there but the cash generated from the performance of the operation, but not a material amount to be pulled off the balance sheet in one year at a time.

Robert M. Dutkowsky

Over the course of the year, we highlighted some opportunities to invest more heavily with some particular vendors that have more product on the shelf and then we measured the sales growth and profitability opportunities that that represented, and those kind of projects I think very clearly represent the balancing act that this kind of business is. You very carefully balance between investing for growth and investing for profitable growth, and in 2008 we tried some things that were different than what we have done in the past, and some of them delivered good results and some didn’t; but through that process I think we are honing our execution model and delivering the kind of improving results that you see.

Operator

Our next question comes from Ananda Baruah - Banc of America Securities.

Ananda Baruah - Banc of America Securities

Just interested in getting your views on to the extent to which you may have gained share in the US vis-a-vis your competitors. Certainly, your year-over-year growth would suggest that. To what extent was it the result of new products in the portfolio or just you know executing more crisply in the traditional portfolio?

Robert M. Dutkowsky

I think first and foremost it’s improved execution across all of our businesses. Whether it be the purchasing side of the business or the sale side of the business or the collection side of the business or the service side of the business or the back office side of the business, we focused on improving execution and units of this magnitude when they execute more efficiently they perform better in the marketplace and I think you’ve seen that this year.

Certainly, the restructuring that Ken Lamneck performed on the U.S. sales organization allowed us to more acutely focus on customer opportunities and to grow and the results I think play that out in terms of our better performance.

Nestor did similar kind of processes with his European team whether it was around inventory management, cash, our coverage model, and that kind of execution improved our results as well. So, we feel like we’ve changed the model for Tech Data some in the last 12 months and you can see the kind of improving results, but we haven’t declared victory on any of that.

There is still a lot more work to be done, and as we hone our execution, we’ll continue to see improving results. All of that in light of a questionable economic environment that we are selling into. But, as we said in the call, we are not backing away from the opportunity to continue to grow and responsibly grow our profit.

Operator

Our last question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

A little bit more detail on Scribona to the extent you can provide it. Can you just talk about from a business model perspective major vendors, product set, just trying to get a sense for overlap versus complement on the vendor side, product side and customer side.

Robert M. Dutkowsky

Why don’t we to the extent we can? It’s not a closed transaction and there are other things. I would like Nestor to just give you a couple brief comments on that.

Nestor Cano

We believe that we have part of the business that is a nice complement on some parts that have an overlap. Clearly, Scribona for many years have been developing a business unit called Scribona Solutions that focuses on the midrange enterprise and products in UNIX and high-end of HP and IBM that complements our product portfolio.

Also, has a strong presence in Norway where we only have a small sales office that clearly gives us a full fledged organization. Also, they have some nice penetration on contracts that we don’t have around Xerox and around Apple and that means that those are a nice part of the business that we don’t have today. There is overlap and we will see how it evolves with sales.

Having said that, we still have to go through a lot of work in our integration and we need the authorization of the European authorities in terms of competition. We also have to go through labor consultations with trade unions and we need to get the shareholder approval of the Scribona. That means that we cannot do a deeper analysis because we are still competitors. When we get this approval, then we will have better information.

Brian Alexander - Raymond James

So, it’s probably too early to ask this based on your answer, but they haven’t made money in a while over the last couple of years at the operating line they haven’t made money. You talked about excess capacity in the region and some reorganization efforts that the company has been going through. I know you are not going to give us any financial targets but just conceptually once if and when this deal closes is there any reason to believe why this would be not be additive to earnings in the first 12 months out of the box?

Nestor Cano

As I said, we are not ready to disclose the information because obviously has to do with authorization with people. We will develop their business model and then probably at that stage we will disclose what is the impact. There are costs to develop the deal, they are system integrations and moves of offices. There is a little bit of work. That means depending on when it closes, it could be positive in the fiscal year or it could be negative. I mean, time is of the essence.

Brian Alexander - Raymond James

Just to kind of make sure I understand your depiction of the first half of the year, looking for flat EPS despite the fact that your share count is down, your interest expense is down due to better balance sheet management and you are looking for top line growth at least in the first quarter -- I know you haven’t guided revenue for second quarter. I guess the implication would be you are looking for a serious contraction in operating margin to keep overall earnings flat. Is that the right way you are thinking about the first half of the year?

Jeffery P. Howells

I would not characterize it as serious. I would characterize it as we have made a decision to maintain our relative headcount, CapEx budget, strategic initiative deployment in a period of time where six months ago we thought we would most likely be selling more in the first half of this fiscal year.

While we brought down our sales expectations, we are going to continue to do the things that were outlined over the last few calls and make this company more effective and efficient. We think it’s the correct thing to do. We will lose some operating leverage but I would not characterize it as significant at this point in time and it’s a stabilization of the tech spending question or environment by the second half of the year hopefully we can improve our leverage in the second half of the year.

Operator

This concludes Tech Data Incorporation’s fourth quarter and fiscal year 2008 earnings conference call.

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Source: Tech Data Corporation F4Q08 (Qtr End 01/31/08) Earnings Call Transcript
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