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Tech Data Corp. (NASDAQ:TECD)

F1Q09 (Qtr End 04/30/08) Earnings Call

May 22, 2008 9:00 am ET

Executives

Kristin Wiemer Bohnsack - Director of IR

Bob Dutkowsky - CEO

Jeff Howells - EVP and CFO

Néstor Cano - President of Europe

Analysts

Min Park - Goldman Sachs

Brian Alexander - Raymond James & Associates

Matt Sheerin - Thomas Weisel Partners

Ananda Baruah - Banc of America Securities

Gaurav Rege - JPMorgan Cazenove

Bill Fearnley - FTN Midwest

Operator

Good morning and welcome to the Tech Data Corporation's Fiscal 2009 First Quarter Results Conference Call. At this time, all of the participants are in a listen-only mode. After the presentation we will present the question-and-answer session. (Operator Instructions). Today's conference is being recorded, if you have any objections you may disconnect at this time.

Now, I will turn the meeting over to Mrs. Kristin Wiemer, Director of Investor Relations. Ma'am you may begin.

Kristin Wiemer Bohnsack

Good morning and welcome to Tech Data's first quarter fiscal 2009 earnings conference call. I am joined by Bob Dutkowsky, CEO; Jeff Howells, Executive Vice President and CFO; Néstor Cano, President of Europe; and Ken Lamneck, President of the Americas.

Before we begin today's call, I would like to remind the audience that certain matters discussed this morning 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 filing with the Securities and Exchange Commission, specifically located in ITEM 1A of the Company's Form 10-K filed on March 28, 2008.

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'll know turn the call over to Tech Data's Chief Financial Officer, Jeff Howell. Jeff?

Jeff Howell

Thank you, Kristin. Many of my comments will reference the supplemental schedules which are available in the investor relations section of our website at www.techdata.com. Also, during today's call we will discuss certain non-GAAP financial measures for the prior year first quarter. You may obtain additional information on these non-GAAP measures and reconciliation to GAAP in page 8 of today's press release, available at the investor relations section of our website or Appendix A of the Supplemental Schedules.

For comparison purposes non-GAAP results for the first quarter of fiscal 2008 exclude an $8.8 million loss on disposable subsidiaries related to the company's closure of its operation in the UAE, and a $0.01 per diluted share benefit from an adjustment for previous recorded restructuring accruals.

Beginning with the first slides, worldwide net sales reached a first quarter record of $6.07 billion, an increase of 12.3% from $5.4 Billion in the first quarter of fiscal 2008. On a regional basis, first quarter net sales in the Americas were $2.7 billion, or 44% of net sales; representing growth of 8% year-over-year.

First quarter net sales in Europe were $3.37 billion or 56% of net sales; representing year-over-year growth of 16%, or growth of 0.2% in local currency, which was actually 2.3% growth in local currency, if we exclude the Israel operations we exited in Q2 of last year.

Slides two to three summarize our operating performance. Worldwide gross margin for the first quarter of fiscal 2009 was 4.86%, compared to 4.72% in the prior year first quarter. The year-over-year increase in gross margin was primarily attributable to improvements in the company's pricing and inventory management practices, partially offset by competitive pricing conditions. In addition, the first quarter of fiscal 2008 included higher inventory costs related the closure of the UAE operations.

First quarter SG&A expenses were $252.3 million, or 4.16% of net sales compared to $217.2 million, or 4.02% of net sales in the first quarter of fiscal 2008. The year-over-year increase in SG&A expenses was attributable to the stronger foreign currencies and the related translation impact, continued investments to support the company's sales growth and strategic initiatives, as well as consulting and integration costs related to our acquisition of certain assets of Nordic-based Scribona AB assets.

Operating income for the first quarter was $42.4 million or 0.70% of net sales. This compared to operating income of $38.1 million or 0.71% of net sales in the same period last year on a non-GAAP basis. Consulting and integration costs related to the Scribona acquisition negatively impacted the operating margin by approximately seven basis points in the current quarter.

On a regional basis, operating income for the first quarter in New America was $40.7 million, or 1.51% of net sales compared to $38.5 million, or 1.54% of net sales in the same period last year. We continued to deliver operating margin performances in New Americas in line with our annual target of 1.5%.

In Europe operating income was $4.3 million or 0.13% of net sales, including the impact of the consulting and integration costs, which were approximately 12 basis points. Non-GAAP operating income in the prior year first quarter was $2.3 million, or 0.08% of net sales. Europe's prior year operating income was negatively impacted by 17 basis points, due to a $5 million operating loss in UAE.

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. Net interest expense was $5.1 million. The effective tax rate for Q1 was 40.7%. For the second quarter of fiscal 2009, we estimated an effective tax rate in a range of 37% to 39%.

As noted in previous quarters, in accordance with FIN 18 accounting pronouncement, our quarterly effective tax rate may vary significantly depending on the actual operating results in the various tax jurisdiction. The annual effective tax rate is currently estimated in the range of 30% to 32%.

Net income for the first quarter was $23.0 million, or $0.43 per diluted share based on 53.1 million weighted average diluted shares outstanding. This compared to non-GAAP net income of $18.2 million, or $0.33 per diluted share in the prior year first quarter.

We reported $1.3 million of minority interest during the quarter, which represents our Brightstar Europe joint venture partner share of losses incurred during the first quarter.

Turning to the balance sheet, please refer to slides 4 and 5. Accounts receivable totaled $2.8 billion. The allowance for bad debt was $66 million. DSO was 42 days. Inventory totaled $1.8 billion, yielding days of supply at the end of Q1 of 27 days. Accounts payable was $2.5 billion. Our days payable outstanding at the end of Q1 was 39 days. The total cash conversion cycle for the first quarter was 30 days, consistent with the prior year period.

Net receivables sold under company's trade receivable purchase facilities that would have otherwise been outstanding in the first quarter, and totaled approximately $208.9 million. Cash provided by operations during the quarter totaled $33.4 million. Total debt was $420.9 million compared to $383.2 million at January 31, 2008.

The company continues to enjoy excellent liquidity and financial flexibility with our cash position of $520.7 million at April 30th. Net cash totaled $99.8 million at the end of the first quarter. Total debt to total cap was 17%. Funds available for use on our credit facilities totaled $768.9 million at the end of the quarter.

Our equity exceeded $2 billion on the tangible book value of $37.75. Capital expenditures totaled $8 million in Q1. The current plan for fiscal 2009 capital expenditures is approximately $42 million. First quarter depreciation and amortization expense was $14.1 million.

Turning to our product and customer classifications on slides 6, the company's net sales by product segment in the first quarter were relatively consistent with the prior periods. We estimate that peripherals account for approximately 40% of net sales; systems, approximately 30% of net sales; networking, approximately 15% of net sales; and software, approximately 15% of net sales.

The company's net sales by customer segment in the first quarter continued to be relatively consistent with prior periods also. VARs account for approximately 60% of sales; direct marketers, 25%; and corporate resellers, 15%.

As in past quarterly periods, Hewlett-Packard was the only vendor that generated more than 10% of our net sales worldwide. In the first quarter HP represented 30% of our net sales compared to 29% in the prior year period.

Turning to our business outlook, the statements that I will make are based on current expectations and the company's internal plan. These statements are forward-looking and are outlined in the company's periodic filings with the Securities and Exchange Commission. Actual results may differ materially.

The second quarter ending July 31, 2008, the company anticipates net sales to be in the range of $6 billion to $6.2 billion. This assumes flat year-over-year net sales in the Americas and mid-to-high single-digit growth in Europe on a local currency basis, including incremental sales associated with the acquisition of certain Nordic-based Scribona AB assets.

We expect to incur approximately $4 million in consulting and integration costs with no tax benefit related to the acquisition during the second quarter. As noted in Monday's release, including acquisition and integration costs, we anticipate the acquisition of Scribona to be minimally dilutive to earnings in fiscal 2009.

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

Bob Dutkowsky

Thank you, Jeff. Good morning, everyone, and thank you for joining us on Tech Data's first quarter fiscal 2009 conference call. We are very pleased with our performance for the first quarter, particularly amidst in the times turbulent environment.

We exceeded the high end of our sales target with help from somewhat better-than-anticipated growth in the Americas and the continued strength in the Europe. Our momentum remained solid, and we are more than doubled the GAAP net income year-over-year, delivering earnings per share of $0.43.

On a strategic note, we entered into an agreement during the first quarter to acquire certain assets of Nordic-based Scribona. On Monday, we announced the completion of this acquisition, paving the way for Tech Data to become the largest IT distributor in the Nordic region. I will touch more on the details of this deal in a few minutes.

We generated over $33 million in cash from operations during the first quarter. And our financial position is one of our strongest, with a net cash position of $100 million at the end of the quarter. Along this line, we've targeted sort of the market conditions and credit concerns, and we are carefully watching the performance of our customers as well as our vendor partners.

With more than three decades of experience in IT distribution and managing the swings of economic cycles, Tech Data has developed best-in-class credit knowledge evaluation tools and prophecies that help ensure we manage these financial risks. So let's look at our performance by a region.

Starting with the Americas, we've once again met our operating income goal with a first quarter margin of 1.51% on sales growth of 8%. We grew our top line, while continuing to invest in growth and productivity enhancement initiatives designed to strengthen our position and customer offerings in the Americas marketplace.

Our Latin America operations grew nicely year-over-year, as our team continued to benefit from strong IT products and services demands in the region. While we still perform well, our Canadian operations felt some of the effects of the mixed market conditions during the first quarter.

Our investments in sales tools and the adjustments to our sales structure last year are delivering returns, as we grow our Americas SMB business approximately 10% year-over-year. The rollout of our proprietary one-debt solution continues, and the majority of our sales force in North America will be up in running on one desk by summers-end. This solution further streamlines our prophecies and most importantly, it allows our sales force to optimize the mix and profit potential of every transaction.

In terms of product growth in the Americas, systems and networking grew at double-digit rates with software right behind in Q1, offsetting the somewhat flattish growth in peripherals. While we are seeing some shifts among product categories within our regions, as Jeff noted, the product groups as a percentage of sales remained fairly consistent on a consolidated basis.

On the vendor partner front, we continue to diversify our product offerings into emerging and higher growth areas. During the quarter, for example, we expanded our existing agreements with high definition IP-based video conferencing provider LifeSize to encompass our entire Americas region, adding Canada and Latin America. Since the start of our relationship in 2007, we've helped LifeSize take their products to a growing list of SMB customers throughout the USA. LifeSize places Tech Data in a leadership position, offering video conferencing products that are customized and priced for the SMB market.

We also diversified our software portfolio by adding many of the industry's leading virtualization developers, strengthening our foothold in this ever-revolving market. As we announced in February, we added VMware to our portfolio and then we recently filed that up with the announcement of parallel software solutions joining our line up. These robot solutions are a great complement to our roaster virtualization software developers including Virtual Iron, XenSource and soon Microsoft, and puts Tech Data in a leadership position in this rapidly growing market.

We also recently added five more vendor partners to our Security SBU, giving our customers access to a broader array of physical and data security solutions, an area that we continue to see increasing channel demand.

Turning to Europe, we achieved our sales targets on a local currency basis and generated operating income of $4.3 million in the first quarter. I am also pleased to report that we achieved our plan in Germany. In fact, we exceeded both our sales and operating plan two quarters in a row as we continue to gain better traction in the German marketplace.

Our Brightstar, Europe JV, also achieved its first quarter operating plan. We completed our planned exit of certain capital in terms of retail business during the first quarter, laying the framework for a more optimized customer portfolio in Europe and continued improvements in profitability and return on capital employed.

In addition, ongoing improvements in the execution of our pricing and inventory management continue to deliver better gross margins with the majority of our regions showing measurable improvement over the last year.

Now, let me adjust the announcement we made on Monday when we completed the acquisition of certain assets of Nordic-based Scribona. This is an important step for Tech Data in our strategy to drive growth and leverage our infrastructure in the European region. Through this acquisition, we added new value-added product solutions to our portfolio and an experienced team of distribution employees that significantly strengthen our organization in the Nordic.

We expect to add approximately $900 million in incremental annualized sales, with a minimally dilutive impact to fiscal 2009 earnings, including acquisition and integration costs. While larger in scale compared to our asset acquisition of Actavis in Switzerland last year, we approach this purchase with a similar strategy, whereby we acquired only the desired assets and blended them into our existing infrastructure. We did not assume any significant liabilities.

As noted in Monday's release, we will incur approximately $11 million in integration costs this year including consulting assistance to help ensure a successful integration process. We're taking our more integration efforts in costs upfront to ensure we create a more efficient operation sooner and a stronger, more focused organization for the long-term.

To that end, we've already incurred $4 million in integration costs in the first quarter to prepare for the transition. When we opened for business in the Nordic on Monday morning, we already moved the inventory and the employees as well as transitioned the business to our IT systems.

Our European team has been instrumental in making this acquisition happen, and I am confident we will complete the final steps of the integration with great success, significantly improving our results in the region. As the validation of this integration strategy is in action, the addition of Actebis Switzerland and quick actions to integrate that business into our existing operations is already delivering positive results.

We've already begun leveraging our expanded presence in the Nordics marketplace. On Monday, we also announced with Oracle a major vendor agreement, providing for Tech Data to become an Oracle value-added distributor throughout the Nordics region. This agreement, effective the 1st of June, demonstrates our commitment to the Nordic market and the leverage opportunity now available to Tech Data in this important market.

Turning to specifics of our Q2 outlook, while clearly there is uncertainty surrounding the economy and IT buying intentions, the environment appears mixed. And as we discussed with you last quarter, it's difficult to precisely estimate the magnitude and potential duration of what the IT market in general is experiencing.

We are constantly monitoring the factors that we can control, including SG&A and capital spending, and have made some targeted headcount and spending adjustments in response to slowing conditions, while ensuring Tech Data continues to exceed our customer expectations.

Demand in the SMB space, a market that represents more that two-thirds of our customer portfolio, continues to be consistent with the cautious, but still growing environment we were seeing going into the first quarter. And we are certainly encouraged by that opportunity.

In terms of our sales outlook, we are expecting flat sales in the Americas year-over-year. While there are continued signs of softness, and we are certainly considering that in our outlook, keep in mind too that last year's Q2, we performed ahead of the market with over 16% year-over-year growth, making the comps in the Americas difficult from the year-over-year perspective.

In Europe, we expect mid-to-high single-digit growth year-over-year in local currency, which includes modest growth in our existing operations as well as incremental growth related to the addition of Scribona in the Nordic.

While the economic uncertainty has softened our growth expectations, it's the pricing environment that concerns us more. It's the most challenging pricing environment I've seen yet, particularly in large deals in North America since I joined Tech Data. We've seen some aggressive initiatives on the part of our competitors, and we're taking a cautious approach in our evaluation of all opportunities, placing an even greater focus on our pricing and inventory management practices.

If we see May's pricing environment continue throughout the quarter, we could experience pressure on our second quarter gross margin performance on a consolidated basis.

In summary, our first quarter results were a confirmation of our ability to execute. In recent months, we've all heard the mixed demand reports in the marketplace from our competitors, customers and vendors. Even industry groups like Gartner and IDC are offering varying outlook.

We believe good opportunities remain in the market and the diversity of our customer base positions us well. We offer compelling value proposition. And as the variable cost route to market solution for our vendor partners, we offer an even more compelling channel solution when the economic environment is tough.

We have proven our ability to manage our business through many industry and economic cycles and believe this cycle will be no different. Great companies remain stronger during challenging times, and we're committed to enhancing our position.

As we move forward in the coming quarters, we will continue to thoughtfully invest in our business, maintaining a close watch on our cost structure, keeping it aligned with current and future market opportunities. We will execute on every front and pursue opportunities that appropriately leverage our infrastructure for the continued long-term success of our organization.

With that, we'd like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Min Park with Goldman Sachs. Please go ahead with your question.

Min Park - Goldman Sachs

Yes, thank you. Just a couple of quick questions please. First, last quarter, you noted that pricing was getting a bit more aggressive in Americas, but your operating margin in the region came in pretty solid. And then I guess this quarter you are suggesting that as pricing continues, that it might actually hurt your consolidated gross margin. Is it actually getting worse or is it that you are having less leverage to mitigate the similar kind of pricing pressure you saw last quarter?

Jeff Howells

Min, this is Jeff. I'll start with that. And I think what Bob was saying is that in May, especially North America, large deals became even more competitive than we had seen. So, as we exit the quarter, and entered this new quarter, there is more aggressive pricing than we had seen in quite a while.

Min Park - Goldman Sachs

Okay. And then can you just help us understand why your operating expenses are outpacing your revenue growth? Or you are just making more incremental investments in Europe apart from the Scribona acquisition?

Jeff Howells

Well, as a percentage of sales, it has gone up, as we have invested in various things, primarily in the Americas versus Europe. Not that Europe didn't go up as a percentage of sales. One, because of the $4 million in incremental acquisition costs, but some select investments because that market is proving very strong for us. Ex-Israel, we grew 2% year-over-year in local currencies. And we think there is pretty good opportunity ahead, so we are making selective investments. But more of the dollar increase relates to what we've been spending over the last three or four quarters in the Americas.

Min Park - Goldman Sachs

Great. Thank you very much.

Bob Dutkowsky

And Min, I think it's important to note, the company made a lot of investments in Europe over the last three or four years, and so we had some catching up to do in the Americas in terms of modernized systems, both the one desk system that we talk about as well as the some back-office accounting systems.

And we also have invested heavily in our sales coverage model to try to achieve better performance, better penetration and better growth in that strategic SMB market. And in the quarter that we just reported, we grew SMB at over 10% in the quarter. So the investments are strong, but they're beginning to yield the results.

Min Park - Goldman Sachs

Great. Thank you for the added color.

Operator

Our next question comes from the line Brian Alexander with Raymond James & Associates. Please go ahead with your question.

Brian Alexander - Raymond James & Associates

Yeah. I just want to pick up on the pricing pressure comments, based on what you just said, it got worse in May. And Bob, I know you've been there for only a couple of years, maybe a little less, but Jeff, you've been in the company for a lot longer, so maybe you could just help us think, when was the last time you saw this kind of pricing pressure? Are there any correlations you can draw to previous down cycles in terms of magnitude and duration, so we can get a better sense for how much of an impact this might have going forward?

Jeff Howells

And I am not sure there is ever a true correlation to another or a different cycle or pervious cycle. I think it starts, as we've mentioned, on a previous call, the last two in particular, that one of the bigger risks when demand is uncertain sometimes vendors, customers and distributors in the middle get more aggressive on pricing looking for better deals, and are concerned about the next order opportunity and that's normal business.

What we are trying to say is that in May on larger bids, we've seen aggressive pricing, especially in the Americas, North America that is at a higher level than we were talking about in the last call, the aggressiveness of the pricing. So it could be because of lack of growth in some of the other distribution entities out there. There could be changes in their desire for certain customer sets. We don't know what it is, but if this continues, it would have some downward pressure on our gross margin in this quarter.

Brian Alexander - Raymond James & Associates

Would you say that it's across product lines? And you said it's focused more on large deals which make sense, but is it across product categories or is it more strategic aligned with certain categories? And do you see it coming from multiple competitors or maybe just one competitor?

Jeff Howells

Its customer based, so it would cover any product categories that they are acquiring from us. And I think it's not one individual competitor out there, of course, there is varying degrees from various competitors.

Brian Alexander - Raymond James & Associates

Okay. And I guess just one question on the fact that you've been exiting retail and you've been very public about that, and I thought one of the reasons you were doing that was given the high working capital intensity of that customer base. But if I look at your receivables and DSOs, they continue to rise as you walk away from that customer base. So I am sure there's other puts and takes that are driving that. I just wanted to see if you could help us, if you could explain that.

Jeff Howells

Yes. First of all, we managed our sales out of certain retail customer accounts over the last four quarters in Europe. This first quarter of this fiscal year was a combination of that effort. It doesn't mean we exited retail in Europe. It exited certain retail customers to balance our portfolio and to help us withdraw some capital from Europe.

As far as the number of days, receivables, actually I think our portfolio is clean as ever and I would point to that being the picture versus the entire quarter. If you look at our interest expense, you can see very clearly how we manage inventory payables and receivables throughout every day of the quarter and the teams did very good jobs.

So the day or so incremental of DSO, compared to the prior year, was balanced with an increase in our DPO. So whether we use vendor financing for inventory or receivables, we're relatively indifferent. But to be clear, we still do have some retail in Europe and we're very happy with our receivable position, yes, [probably] to be a day, day or two last. But if I gave you the report card five days earlier or five days later, it would be a different number also. So, really no concerns with that number.

Jeff Howell

Brian, our retail strategy is a more visible manifestation of what we are trying to do with all of our customer sets across our geographies. We are constantly monitoring the profitability of our customers. We are monitoring the effectiveness of the ROCE that we get from products that we sell to certain customers and customers that take certain products. And although retail is a big chunk of that, we are managing that portfolio consistently across all of our customer segments. And in some cases, that means we raise prices, not lower prices.

Brian Alexander - Raymond James & Associates

Okay.

Jeff Howell

To position a customer with a product to allow Tech Data to receive considerable profit.

Brian Alexander - Raymond James & Associates

Got you. Just one last question on Scribona. Jeff, you were clear that it would be, I think you said, minimally dilutive, including the $11 million or $0.20 of integration cost. Could you give any more color on what the --?

Jeff Howells

Brian, did we lose you?

Operator

Yes, we did. Brian if you could just press "star 1" one more time please? Brian if you could press "star 1" one more time please? Thank you.

Brian Alexander - Raymond James & Associates

Can you hear me?

Operator

Brian, you are back live.

Brian Alexander - Raymond James & Associates

Right. They must have dropped me. Jeff, I don't know how much you got of that, but just the question is on Scribona, your comments being that it's minimally dilutive. That includes $11 million of charges or $0.20 of integration cost. Can you give us any more color on what the dilution or accretion of Scribona would be on an annualized basis if you were to back out those one-time charges? Thanks.

Jeff Howells

Yes, just reverse it. Excluding the integration cost, we anticipate Scribona be minimally accretive this current fiscal year. So, I guess you're looking for the definition of minimally. I don't know that we can give any exact number, because the way we acquire the company and are moving it into our operations, but minimally, if I look at censuses numbers for the year, probably means 5% or less either way.

Brian Alexander - Raymond James & Associates

Thanks. That's helpful.

Bob Dutkowsky

It's important to note that we took a different approach to integrating Scribona. It's the same approach we modeled when we integrated Actebis in Switzerland, and that is to do more of the work upfront versus announce that we did the deal, put the two businesses together and try to fix the problem that results.

We're trying to anticipate, manage and invest in what we anticipate could be issues and get them done first. So, by spending a little bit more, we believe in the long-run will be much better off, but in the short-run, we'll offer a smother transition to our new customers in the Nordics and our business partners and vendors. And that will allow us to accelerate our growth.

Brian Alexander - Raymond James & Associates

Thank you, Bob.

Operator

Our next question comes from the line of Matt Sheerin with Thomas Weisel Partners. Please go ahead with your question.

Matt Sheerin - Thomas Weisel Partners

Yes, thank you. I just wanted to just clarify a little bit about your profitability goals for the next quarter. I know you don't give specific EPS guidance. You did give revenue guidance. I mean in the first quarter call, you said that you expected income in the first two quarters and aggregate to be flat year-over-year. Of course, you're well ahead of that, off a strong first quarter.

So, should we expect because of that higher base that you should be up year-over-year in aggregate for the first two quarters or lower because of pricing, I mean even excluding the integration cost for Scribona because of pricing and the investments in the rest of your business?

Jeff Howells

Yes, Matt, this is Jeff. We gave that guidance in Q1 that kind of set the stage. We also did the same on the tax rate. We've been providing more guidance on what is the bottom line. Of course, if I gave you that number now, the difference between the two would be the exact EPS. So, I might as well print guidance. So, we would just stay with the color that we are putting around the quarter. The revenue guidance, you can see what our spend rate is.

And we'll let you know that our biggest concern the quarter is current pricing environment that's been experienced in May. And after that, we are going to work through this quarter day-by-day and try and do the best we can for our shareholders, we think, in Europe where we have certainly the extra work by the extra upside of the Scribona transaction in North America. We've already alluded to the fact that we are coming off of a great year-over-year or great year in the prior year of 16% and 17% growth.

So, we are looking for flattish by and large. Deals, the pricing is getting very competitive out there. So, we will decide whether we take those, don't take those and it will levelly compete. So, I wouldn't give you any more specific color on the exact earnings potential.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thanks. That helps. And then just in terms of the pricing environment in Europe, it sounds like most of that is isolated in North America, but the growth rates and spending environment, it looks like it's slowing in Europe as well. Are you also seeing pricing pressure more than normal there?

Jeff Howells

I don't think we're saying in Europe at this point in time, and certainly, Europe sometimes follows the patterns. But we think that considering what was going on our company in delivering 2% growth in local currency on a year-over-year basis in the relatively uncertain economy, hitting our goals for two quarters in a row in the German market, hitting our plan with our investments in our Brightstar joint venture, I think we classify Europe as a very positive good market for us right now.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thanks. And just lastly, just changing the subject to Brightstar and your wireless device initiatives, it sounds like that's going to plan. Could you just elaborate a little bit more on how that's going? When do you expect that to be profitable? And then, are you looking outside of your ventures in North America or other areas?

Jeff Howells

Yeah. We think the Brightstar JV will exist the year at a profitable level or that we should realize a profitable business next year. And over the course of the next three quarters, we continue to invest in both our coverage for the Brightstar JV as well as initiating vendor relationships that broaden the set of product that JV can bring to the market.

And then lastly, finding opportunities for the logistics engine that the JV represents to potentially reach out to other carrier opportunities that are bigger and broader than what we even envision when we started the JV. So, although the JV is made its plan for the quarter, it still has a lot of work to do. But we're pleased with the progress that it's making and the presence that it's beginning to gain in the wireless based.

We have not looked at expanding it beyond the European market. Today, we're really focused on improving our execution on the JV in Europe and there are other opportunities for us to expand it. We would consider that. But right now, our energy and focus is on Europe and the JV.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thank you.

Operator

Our next question comes from the line of Ananda Baruah with Banc of America Securities. Please go ahead with your question.

Ananda Baruah - Banc of America Securities

Hi, guys. Thanks for taking my question. Just a couple, if I could. The strength you've seen in the Americas -- or the anchor of the strength I guess was incremental to your expectations that you saw in the Americas. Could you just talk about where you saw that and maybe how it was acquired?

Jeff Howells

I think the key there -- as we said early our strength in SMB. We grew it over 10% at our SMB business in the Americas. And that backs up the investments in SG&A that you've seen us make over the past three or four quarters. The only way you get it in the SMB business is to have the right coverage model and credit. And those investments we've made are beginning to yield results. So, I would say that the base of our business performed about at the plan that we anticipated and the SMB business grew slightly faster.

Ananda Baruah - Banc of America Securities

And then the pricing pressure that you'd say you're seeing in larger deals. Does that include larger SMB deals as well?

Jeff Howells

Just by definition, SMB typically doesn't deliver large deals. It's a small company that buys five laptops, two printers and a wireless infrastructure. And those are businesses, usually deals that our buyers are out there, cultivating and fighting for every day. It's the bigger deals that have big chunks of revenue that seem to being more aggressively priced and the ones that we're watching very, very carefully.

Ananda Baruah - Banc of America Securities

Would that include government as well?

Jeff Howells

Yeah, the government buys in big chunks. So, yes.

Ananda Baruah - Banc of America Securities

And just touching base on the source of the pricing pressure, once again, I guess it's been my understanding that your suppliers actually control the majority of pricing in how those things tend to work. So, I guess, could you maybe talk a little bit about how much of the pricing pressure is coming from the suppliers and sales versus maybe some of your competitors?

Jeff Howells

We all sell the same products. We source the same products from the same vendors. We get the products, relatively speaking, at the same prices. Its then how we want to take that product into the market and how much profit we want to try to generate when we take it into the market. That's where we see the pressure point coming. It's not from the vendor side.

Ananda Baruah - Banc of America Securities

Guys, that's very helpful. Thanks.

Operator

Our last question comes from the line of Rege Gaurav with JPMorgan Cazenove. Please go ahead with your question.

Gaurav Rege - JPMorgan Cazenove

Hi, guys. This is Gaurav Rege from JPMorgan Cazenove. Just a couple of questions focusing on Europe. I was wondering if you could highlight any regions within Europe that you saw were particularly difficult in this quarter.

Bob Dutkowsky

Néstor, do you want to address that?

Néstor Cano

Yeah. The economies are running at different GDP growth rates. And also, the pressure of declining average selling price and it's different, because we are related all to the dollar. But the competition is different. And I believe that in the northern part of Europe, we saw less growth in the marketplace. Maybe we gained some market share in those areas, and we compensated. But more in the north is where we started to see some pressure on the market growth rates, not in terms of unit growth, but in terms of Euro growth.

Gaurav Rege - JPMorgan Cazenove

And in Southern Europe?

Néstor Cano

In Southern Europe, so far we saw a better demand.

Gaurav Rege - JPMorgan Cazenove

Hewlett-Packard yesterday reported 6%, I think, constant currency growth in Europe for the three months ending April. I understand there are probably product line differences and differences in terms of countries covered. But is there anything that suggests that the distribution channel is losing share in Europe in maybe direct sales?

Néstor Cano

No, not at all. I mean, actually the indirect channel is growing compared with the rest of the marketplace. That means our model is gaining space. The major difference when you compare against some of our vendors is the footprint. We are represented in Western Europe and in Central Europe, and we are not represented in emerging markets, in Africa or Middle East.

And the growth rates are in some cases 1 to 3 or 1 to 4. If you would have the breakdown of some of these vendors, you would see flattish market growth in Western Europe, and I'm just kind of thinking about all the vendors together, and maybe 20%-ish, 30%-ish in the emerging markets. That's what makes the big difference when you look at EMEA versus our European footprint.

Gaurav Rege - JPMorgan Cazenove

Right, great. And my last question. In terms of acquisitions, what do you feel is the optimal financial leverage for your business going forward? How much more are you willing to acquire through additional debt?

Jeff Howells

This is Jeff. I'm going into that. We look at acquisitions very specifically. And our primary interest in the near term would be like we just completed the two acquisitions in Europe, Scribona and Actebis Switzerland. Acquisitions that we acquire are specific assets, probably non-entire enterprises. And that leverages the investments that we've made over the last five years in our IT logistics infrastructure as well as our management teams throughout Europe; so, no specific quantification.

They have to make good sense. They have to leverage our infrastructure. They have to improve our operating performance and as well as have a reasonable return on the capital. We would put into those acquisitions.

Gaurav Rege - JPMorgan Cazenove

Jeff, are there any markets and specific markets in Europe that you'd ideally like more exposure to?

Jeff Howells

We are pretty happy with our existing footprint. So, we would be most interested in leveraging the operations we have in existing countries.

Gaurav Rege - JPMorgan Cazenove

That's great. Thanks very much.

Operator

Our next question comes from the line of Bill Fearnley with FTN Midwest. Please go ahead with your question.

Bill Fearnley - FTN Midwest

Good afternoon, Jeff. Can you here me?

Jeff Howells

Yes, sir.

Bill Fearnley - FTN Midwest

Thanks. Just a couple of questions, if I could, on the micro environment versus competition, given the market conditions, are you guys gaining any share do you think? And if so, against whom, and do you see any smaller players leaving the business here and an opportunity to gain share there? And then I have a couple of follow-ups.

Bob Dutkowsky

Bill, this is Bob. You can look at the growth that we just reported versus what all of our competitors reported and draw your own conclusions about our gain of share. We are pleased with the way our organization is executing in the geographies and the countries we are focused on. And we think that we are performing well.

In terms of who potentially we are gaining that share from, there are hundreds of distributors around the world, and we compete with on a different front in virtually every country in Europe. We compete with specialty distributors and broad-based distributors in the Americas. So, there is a lot of opportunity for us to take our value propositions to customers and earn their business. And we think the results that we just reported to you say that we are doing pretty well at that.

Bill Fearnley - FTN Midwest

You mentioned that there are a lot of players. Do you see any guys just getting out of the business, either just packing it up or do you see any acceleration in M&A activity or that they might be putting themselves up for sale, Bob?

Bob Dutkowsky

No. Just in the last two quarters, we announced two acquisitions in Europe. So, there are opportunities there. But we have 8,500 people in the company roughly that are focused on serving customers and growing the business, and we have a small team of people in the company that are focused on other opportunities.

And so, we wake up in the morning thinking how we are going serve our customers and grow our business. And we look for those opportunities to diversify ourselves, to improve our footprint or leverage our infrastructure as Jeff was describing. They are there, but that's not the primary focus of our organization. The focus of our organization is to serve our customers and create value for our shareholders. And we think the quarter we just announced showed that we are moving and continuing to move in the right direction on both those fronts.

Bill Fearnley - FTN Midwest

Okay. And then one question, if I could, on the pricing environment. Just a follow up here on North America, do you have any concerns that the pricing environment might spread into the SMB sector in North America as well, if so, why or why not? I mean, I understand you folks of taking great pains to talk about the defect in large deals, but do you think there is any threat that "It could spread in to the SMB sector" as people just press or double-down to try to go after growth?

Bob Dutkowsky

Usually, the SMB sector has different dynamics. The little small business that desperately needs the bar as their virtual CIO, buys product in small quantities, and needs the value-added services that the bar brings. So, of the total price of the solution that the bar puts into an SMB business, hardware is just one component of that. When you get up in to the enterprise in the big deals, hardware becomes a bigger component and it's easier to isolate the price of it, and therefore, change the price of it.

So, the pricing in IT industry ebbs and flows the more value you can put around hardware, the more of the price is protected. And that's why quite frankly, you see us enhancing some of the more specialty sides of our business like virtualization, like security, like software, because if we can close hardware with those other technologies, we can price protect ourselves a little bit more.

Bill Fearnley - FTN Midwest

So the bottom line is you think the SMB still has the immunity from the pricing pressure at this point?

Bob Dutkowsky

More or less -- those are your words, not our words.

Bill Fearnley - FTN Midwest

Okay. Thanks guys.

Operator

Our next question is a follow-up question from the line of Brian Alexander. Please go ahead with your question.

Brian Alexander - Raymond James & Associates

Forgive me for beating at that horse, but I think it's an important topic related to pricing again, you grew faster than your competitors in the first quarter in the North America and I think you've been growing faster for a while. Your guidance for the second quarter is above seasonal sequentially and implies you'll continue to grow faster than your competitors, albeit, with the -- in spite of a very difficult comp. And that's in spite of pricing pressure.

Your gross margin was fine in the first quarter, but you're heading it to go down in the second quarter. I guess the way I look at this it seems like your competitors are just responding to your recent share games and that you're suggesting you aren't willing to grow. Is that what you're saying, and if it is, why not walk away from somebody's larger deals? In other words, why are these customers so strategic to Tech Data given that they seem to be outside of your core SMB focus?

Bob Dutkowsky

Brian, there are some customers that we have broad relationship with, that we sell all of those four key categories that Jeff reported. We sell all those products to them. And so there are some that we make more profit on and some that we make less profit on and we portfolio manage that relationship with all of our customers.

If pricing gets difficult in one sector or another, one solution set or another, we have to make the strategic decision whether we want to compete and maintain that business or not. And that's what we do every day. I mean, that's the secret source of distribution. It's to have the right product, price the right way with the right coverage model and the right credit.

And we constantly balance all of those every single day. If we see one of those four levers getting pulled down more aggressively than others, mainly price. It obviously stands out to us and we could see it very clearly. And that's why we called it out today.

Brian Alexander - Raymond James & Associates

Okay.

Operator

Our last question is a follow-up question from the line of Rege Gaurav. Please go ahead with your question.

Gaurav Rege - JPMorgan Cazenove

Hi there. Just one last question on the pricing, you've obviously highlighted the pressures you are seeing in North America. And if I try to perhaps get more detail on what's happening in Europe and what the likelihood of a similar pattern faring in Europe is. If you sort of try to focus on the economies which are coming under some pressure already in Europe, perhaps in Spain, I believe, you have a fairly strong market position. Do you see the sort of pricing pressure in Spain as you have seen already in North America?

Néstor Cano

Hi. This is Néstor from Europe. And pricing in the market is a lot more fragmented, and we would need to go to a level of detail that we generally don't disclose. And we don't see the same pressures across the board. We are just strengthening our pricing and our growth as we go.

The big question marks are which are the growth rates for the end of the year, and then we have to be very careful with our cost in our infrastructure and because what we lack is enough visibility on what's going to happen in terms of growth rates. And in the Spain, we have a good position. We are gaining market share. Actually, we are controlling our cell phone being more aggressive in some of these situations. I mean there are more deals than what we are deciding to take nowadays.

Gaurav Rege - JPMorgan Cazenove

So, do you feel that in previous balance cycles, you have perhaps, a leader point in the downcycle, seeing more aggressive pricing from the vendors rather than the competitors?

Néstor Cano

There is a pressure on the average selling price, and this pressure on the average selling price is not necessarily because the vendors are having a fight among them. It's because the origin of the products is against the dollar, and someone is adjusting the price and they have to follow. I don't. It's an intention of an open price war. It's just following the exchange rates. And sometimes, there is a delay because the major products are coming by both, and then it doesn't react exactly in the same way. But these exchange rates, that is creating that average selling price going down. I don't think it's necessarily [aggressivity] of all the vendors fighting for their last percentage of market share.

Gaurav Rege - JPMorgan Cazenove

Good. But do you expect to see more aggression from the vendors going forward, if the downcycle continued?

Néstor Cano

Not necessarily. I mean there is pressure on the consumer market. If you look at the retailer sales for all the products, you will see that the consumers are a little bit more cautious. And we have been exiting that marketplace and concentrating a lot more in the SMB where we see better run rate sales. And this maybe is where we got an advantage and we gained some of the market share. They focus on the different customer segments.

Gaurav Rege - JPMorgan Cazenove

Thanks very much.

Operator

This concludes Tech Data Corporation's fiscal 2009 first quarter results conference call. A reply of this call will be available in about one hour at techdata.com. It will remain available until Thursday, May 29th at 5:00 p.m.

Thank you for attending today's conference call. Have a great day.

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Source: Tech Data Corp. F1Q09 (Qtr End 04/30/08) Earnings Call Transcript

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