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Call End: 07:32

Tech Data Corporation (NASDAQ:TECD)

Q2 2013 Earnings Conference Call

August 21, 2012, 09:00 AM ET

Executives

Bob Dutkowsky – CEO

Jeff Howells – EVP and CFO

Néstor Cano – President, Europe

Murray Wright – President, The Americas

Arleen Quinones – Director, IR and Shareholder Services

Analyst

Brian Alexander – Raymond James

Ananda Baruah – Brean Murray

Ben Reitzes – Barclays

Matthew Sheerin – Stifel, Nicolaus

Lou Miscioscia – CLSA

Osten Bernardez – Cross Research

Robbie Wilkins – Goldman Sachs

Operator

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

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

Arleen Quinones

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

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

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

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

Bob Dutkowsky

Thank you, Arleen. Good morning, everyone, and thank you for joining us today. After reporting several consecutive quarters of record results and a solid first quarter, our second quarter earnings fell short of our internal expectations than last year's results.

Our worldwide net sales of approximately $6 billion came in slightly ahead of plan and our European region posted record Q2 sales and earnings. Our growth margin was impacted by product and customer mix as well as competitive pricing pressures on both regions.

The growth margin pressure was compounded by our implementation of certain modules of SAP in the United States during the quarter. These factors combined reduced our operating leverage and our profitability in the Americas regions in the quarter.

Managing the mix of products and customers as well as operating in a competitive pricing environment are part of the normal course of business and our challenges we faced and we manage every day. However, as we've indicated over our last several quarterly earnings calls, we are continuously investing in and enhancing our IT systems with the goals of strengthening our competitiveness, increasing our productivity to improve the quality and timeliness of the data necessary to drive decision making and to better serve our customers and vendor partners.

During Q2, by implementing the sales, inventory and credit management modules of SAP in our United States operations, we've substantially completed the US implementation of essentially the same SAP ERP systems used in our European operations, the system that is successfully running over 50% of our business.

Q2 marked a culmination of a multi-year effort that entails the staged deployment of various modules of SAP, including warehouse management, business warehouse and analytics, financial and human resource systems throughout our North American operations.

Thanks to the exceptional efforts of our team and our extensive experience installing the same core system in Europe, systemically the cutover in implementation went well. During the quarter, we processed more than 1 million orders in the United States clearly demonstrating that the sales order management and procurement aspect of the system were successful from day one and that the system works.

Where we fell short was on margin management, specifically managing the front end or the price at which we sell products and managing the back-end [attainment] or the rebate dollars we earned from vendors for achieving certain sales volumes. Our frontend pricing challenges resulted largely from the use of new processes, tools and reported. Clearly changes in the flow of information impacted our ability to make critical margin management decisions.

The backend underperformance resulted from a combination of factors including selling a higher mix of lower rebate products, growth goals established by the vendors and slightly lower sales due to the systems changes. In addition, while we were able to efficiently process high volume, lower margin business such as tablets and software in the new system, our ability to configure complex, higher margin orders such as servers, storage and networking products took more time impacting our productivity (inaudible) our earnings in the quarter.

As with any other system changes, some US customers were not impacted at all while others experienced a drop in the service levels they are custom to receiving from Tech Data. We are actively monitoring all aspects of service performance and we continue to refine and fine-tune our use and understanding of the system, while making weekly enhancements to ensure a return to our previous levels of consistency.

We hope that by explaining the reasons for our margin shortfall this quarter, we're able to provide our customers, vendor partners and investors with the level of comfort knowing that our systems works and that we've made tremendous progress identifying and fixing various issues. I want to assure you that we know what needs to be fixed and we know how to fix it.

You've heard us say before that execution is the core competency of Tech Data and it is the bedrock of our strategy of execution, diversification and innovation. For us, execution includes buying the right products at the right prices and in the correct volumes. In many cases stocking just the right number of products in the right locations and then selling the right volumes at the right prices to the right customers to yield acceptable margins.

And while Tech Data makes all that look easy, these are a series of inner related complex processes, interactions that we execute thousands of times a day, every day with the help of our IT systems. This past quarter in the US, we did not execute these steps with our normal precision, because we changed some of the core systems and processes that normally make all these interactions work so efficiently. We stumbled a bit on our execution in the US in Q2, but we are confident that over the next couple of quarters, we'll improve our profitability.

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

Jeff Howells

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

Beginning with slide 1 and also looking at slide A-1, net sales for the second quarter ended July 31, 2012, were $5.96 billion, a decrease of 8% from $6.45 billion in the prior-year second quarter. The weakening of certain foreign currencies against the US dollar negatively impacted the year-over-year net sales comparison by approximately 8 percentage points.

In the first quarter of fiscal 2013, we prospectively revised our presentation of sales of vendor warranty services and certain fulfillment contracts, such as they are now reflected on agency basis as net fees as opposed to net sales and cost of products sold.

These items would have contributed approximately $191 million in net sales in the second quarter, which negatively impacted the year-over-year net sales comparison by approximately 3 percentage points. The change had no impact on gross profit dollars, operating income dollars, net income dollars, or earnings per share in any period reported, but positively impacted the gross margin and operating margin percentages in the second quarter of fiscal 2013 by approximately 15 and 3 basis points respectively.

Also included in the prior-year net sales is approximately $102 million related to the in-country operations of Brazil and Colombia, which the Company exited at the end of fiscal 2012. Excluding these factors, the net sales increased approximately 5%. Supplemental information is summarized on slide A-1.

Second quarter net sales in the Americas were $2.4 billion or 40% of worldwide sales, a decrease of 11% from the prior-year second quarter. The change in presentation of vendor warranty services and certain fulfillment contracts reduce the Americas second quarter fiscal 2013 net sales by approximately $94 million.

Including the Americas prior-year net sales is approximately $102 million related to the in-country operations of Brazil and Colombia, which the Company exited at the end of fiscal 2012. Excluding the effect of these factors as well as the translation effect of certain foreign currencies, Americas net sales decreased by approximately 3%.

Net sales in Europe totaled $3.56 billion or 60% of worldwide net sales, a decrease of 5% from the prior-year second quarter in US dollars and a 9% increase on a euro basis. The change in presentation of vendor warranty services and certain fulfillment contracts reduced Europe's second quarter fiscal 2013 net sales by approximately $97 million or €78 million. Excluding the impact of this change, net sales were grown 2% in US dollars and 12% on a euro basis.

Slide 2 shows year-to-date worldwide net sales of $1.9 billion, a decrease of 7%. Looking at Americas region, Americas net sales declined 9% and European sales decreased 6% in US dollars, but increased 4% in euros on a year-to-date basis. However, year-to-date after adjusting for the prospective change to sales, the exit of Brazil and Colombia in foreign currencies, our worldwide sales year-to-date have grown 3%, the Americas is flattish or down 1% and Europe is plus 6% in both dollars and euros.

Slide 3 summarizes our operating performance in the quarter. Worldwide gross margin for the second quarter was 5.05% compared to 5.28% in the prior-year second quarter. The change in presentation of warranty services and certain fulfillment contracts positively impacted gross margin by approximately 15 basis points. The year-over-year declines is attributable to product mix, customer mix and competitive pricing pressure in both regions as well as the implementation of the sales, inventory and credit management modules of SAP in the US during the quarter.

SG&A expenses were $242 million or 4.06% of net sales compared to $262.1 million or 4.06% of sales in the same -- in the prior-year second quarter. This decrease in SG&A expenses was primarily attributable to a weaker euro and lower expenses resulting from the exit of in-country operations in Brazil and Colombia in the end of fiscal 2012. The change in presentation of warranty services and certain fulfillment contracts increased SG&A as a percentage of net sales by approximately 13 basis points.

Operating income in the second quarter was $59.3 million or 9.99% of net sales compared to $78.1 million or 1.22% of net sales in the prior second quarter. The year-over-year decline in operating income is attributable to the impact on gross margins, product mix, customer mix and competitive pricing pressure both regions as well as a negative effect on gross margin and operating leverage in the Americas due to the implementation of the sales, inventory, credit management and modules of SAP in the US in the quarter.

On a regional basis, operating income in the Americas for the second quarter was $29.5 million or 1.23% of net sales compared to $47.6 million or 1.77% of net sales in the prior second quarter. The change in the presentation of warranty services and certain fulfillment contracts increased the Americas operating income as a percent of net sales in the second quarter by approximately 5 basis points. The year-over-year decline is attributable to product mix, customer mix and competitive pricing pressure as well as the implementation of the sales, inventory and credit management and modules of SAP in the US during the quarter, which impacted both gross margin and operating leverage.

Operating income in Europe for the second quarter was $33.7 million or 0.94% of net sales compared to $33.9 million or 0.9% of net sales in the prior-year second quarter. The change of presentation of warranty services and certain fulfillment contract increased Europe's operating income as a percent of net sales in the second quarter of fiscal 2013 by approximately 2 basis points.

Interest expense for the quarter was $3.4 million compared to $8.1 million in the prior-year second quarter. The decrease in interest expense is primarily attributable to the repayment of the $350 million convertible senior debentures in December of 2011, which represented $4.9 million of the interest expense in the second quarter of the prior fiscal year.

The Company's effective tax rate for the second quarter was 30% compared to 27% in the prior year. As noted in previous quarters, in accordance with FIN 18, quarterly effective tax rates may vary significantly depending on the actual operating results in our various tax jurisdictions. For fiscal 2013, we expected effective tax rate of 28% to 30%.

Slide 4 shows our operating highlights for the first six months of the fiscal year. Worldwide gross margin was 5.24% compared to 5.28% in the prior year. SG&A expenses of $481.3 million or 4.06% of sales compared to $519.8 million or 4.07% of net sales in the prior-year period.

Operating income for the six months was $140.1 million compared to $154.4 million in the prior year. As a percentage of net sales, operating income for the first six months was very consistent with the prior year's at 1.18% compared to 1.21% in the first six months of fiscal year '12 and 1.22% in fiscal year '11.

Slide 5 summarizes our key metrics including net income and earnings per share. Net income attributable to shareholders of Tech Data for the second quarter was $34.5 million or $0.88 per diluted share, based on $39.1 million weighted average diluted shares outstanding. This compared to $50.1 million or $1.10 per diluted share in the prior-year second quarter based on $45.6 million weighted average diluted shares outstanding. The year-over-year decline is attributable to the aforementioned decreases in gross margin and operating leverage.

On slide 6 we summarize the share repurchase activity. During the second quarter of fiscal 2013, the Company repurchased approximately 2.9 million shares of common stock at a cost of $143 million completes the $100 million share repurchase programs authorized in November 2011 and May 2012. Since 2005, the Company has repurchased $1.1 billion or 26.7 million shares which represent 41% for the total shares issued.

Turning to the balance sheet, look at slide 7 and 8; some highlights. Our cash position in the quarter was $278 million, the allowance for bad debt of $50 million. Our days sales outstanding was 40 days consistent with the prior-year period. Our days of supply at the end of Q2 were 29 days compared to 28 days in the prior-year period and 32 days at the end of Q1 (inaudible). Our days payable at the end of Q2 were 46 days compared to 43 days in the prior-year period.

Our cash conversion cycle for the second quarter was 23 days compared to 25 days in the prior-year period. Cash used in operations during the second quarter totaled $4 million. Our total debt was $92 million. Our debt to capital was 5% and our funds available for use in our credit facilities were approximately $1.1 billion at the end of the quarter.

Accumulated other comprehensive income, which consists of currency translation net of applicable taxes was $202.2 million at the end of the second quarter compared to $311.4 million at the end of the first quarter of fiscal 2013, a sequential decrease of $109.2 million.

At July 31, 2012, the Company has 37.8 million shares outstanding and a $140 million of goodwill and acquired intangibles, which resulted in a tangible book value of $43.78 per share. Capital expenditures totaled $8 million in Q2, and we continued to plan for expenditures totaling $40 million in the current fiscal year. Our second quarter depreciation and amortization expense was $13.2 million.

On slide 9, you will see our product and customer mix for the 12 months ended July 31, 2012 which remained relatively consistent. In Q2 we had two vendors that generated more than 10% of our sales on a trailing 12-month basis. HP represented 20% of our sales in the current quarter compared to 25% in the prior-year second quarter. Apple represented 12% of our sales in the quarter compared to 7% in the prior-year second quarter.

Turning to our business outlook. For the third quarter of fiscal 2013, we expect year-over-year sale growth of mid-single digits in euros in Europe and a mid-single digit year-over-year sales decline in the Americas. We also expect some sequential improvements in gross and operating margins. For modeling and year-over-year comparison purposes, we estimate the change in the presentation of warranty services and fulfillment contracts to reduce worldwide net sales by approximately $200 million in each of the remaining quarters of fiscal 2013. On a regional basis the amounts each quarter are estimated to be 4% of the Americas sales and 3% of Europe sales in euros.

Including the prior-year sales for Brazil and Colombia by quarter of approximately $50 million in Q3 fiscal '12 and $20 million in Q4 fiscal year '12. Therefore in the current quarter, we're estimating the Americas after looking at these adjustments to be flattish, in Europe to be sales in the mid high-single digit growth on a year-over-year basis in euros.

We also assume an average U.S. dollar to euro exchange rate of $1.23 to €1 for the remainder of fiscal 2013.

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

Bob Dutkowsky

Thanks, Jeff. I will quickly provide some regional highlights and then we will open the call up for your questions. At a regional basis, our European operations turned in a strong performance in the quarter, posting 12% sales growth in euros excluding the change for warranty services and fulfillment contracts, to its highest level of second quarter sales in the region's history.

Seven out of our nine trade regions reported year-over-year sales growth in local currencies with double-digit growth in the UK, Benelux, Germany and Italy. Despite growth margin pressures due to product and customer mix and a competitive pricing environment, (inaudible) operating expense leverage yielded operating income growth in euros of 15% year-over-year, also to the highest second quarter level in the region's history.

The enterprise and SMB end markets remain solid, offsetting weakness in some consumer sectors in certain countries. From a product standpoint, mobility products including handsets and tablets along with enterprise software were among the region's leading product categories on a sequential basis.

Our European mobility joint venture turned in another strong performance in Q2, posting double digit sales growth and once again exceeding its plan. Out team continues to take share in the European mobility distribution market adding new vendors in several countries and expanding our three (inaudible) offerings to new customers.

Last month, we announced an agreement to acquire our joint venture partner's 50% interest in the Brightstar Europe JV. The transaction is currently under regulatory review and is expected to be completed in September. We thank Brightstar Corporation for its partnership and expertise in helping us establish and develop the business to its position as a mobile distribution market leader in Europe.

Turning to the Americas, our Latin America export business delivered double digit sales growth and Canada posted above market sales growth helping to offset lower sales in the US. While a decline in US sales was anticipated, the change in product and customer mix and its impact on gross margins did not match our expectations. Let me be clear.

We believe we made the right decisions throughout the quarter to focus on servicing our customers which allowed us to achieve our sales plan. However our focus was diverted from something we typically do successfully day-in and day-out and that's optimizing our selling margin to maximize the back-end rebates from our vendors. Had we done this as planned, we would have achieved better operating leverage.

Again, we're confident we have the plans in place to improve profitability in the US in the next couple of quarters. The region's top growth products on a sequential basis included tablets and software. As Jeff highlighted in his remarks, Apple products represented 12% of our sales in the quarter clearly underscoring the importance in distribution of having access to the hot selling products and strong relationships with key vendors that are changing the technology landscape.

In summary, let me say that while we're disappointed with our operating results in the Americas, we are equally proud of our European performance. In Europe, in what is arguably one of the most economically uncertain times in recent history, our teams focus and their diversification efforts to higher grow more profitable specialty businesses are paying off.

Tech Data Europe grew sales at a solid rate, gained share in select markets, managed costs effectively and delivered improved results in what is historically one of Europe's slowest seasons. And in the Americas, specifically in the US, our teams successfully completed the implementation of the final core SAP modules. My thanks to the team for all the hard work and sacrifices that went into this effort. Thousands of man hours were spent coding, testing and training to deliver a system that will make Tech Data US a smarter, faster, more efficient, more productive, and a more competitive company.

Yes, we failed to deliver the results we expected in the quarter but that can and will be fit. While our Q2 earnings performance makes our stated three-year operating margin goal before stock compensation expense of 1.55% less likely to be achieved in fiscal '13, we expect our operating results in the second half along with our capital structure changes to still deliver the planned double digit earnings per share growth for the fiscal year.

Finally, I'd like to extend my thanks to our vendors and customers for this business and for their continued support, and to my Tech Data colleagues for their continued hard work and dedication

With that, we'll open up the call to your questions.

Question-and-Answer Session

Operator

We'll now begin the question-and-answer session. (Operator Instructions). Our first question comes from Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander – Raymond James

Thanks. Good morning, guys.

Bob Dutkowsky

Good morning.

Brian Alexander – Raymond James

Jeff, how much of the margin shortfall would you attribute to the systems implementation either directly or indirectly? I'm just trying to get a sense for how much of the pricing issues that you cited, particularly in North America were exacerbated by the SAP implementation such that the vast majority of the margin shortfall is really self-inflicted, for lack of a better term, versus competitive?

Jeff Howells

Sure. As you all know, Brian, there's no way to precisely allocate that. However, if I look at the sequential decline of about 40 basis points, I think about half of it is worldwide basis related to competitive pricing conditions and product mix. There clearly is quite a change in our product mix in this quarter with -- as we indicated Apple becoming 12% of sales and a decline in our HP sales. Can you break down between product mix and competitive? Maybe, maybe not, but maybe it's 50/50.

But just to be clear, those elements especially the product mix evolved on a worldwide basis. In Europe, as you can see, we are able to very well manage the product mix change by the availability of the incremental revenue to produce the leverage of our expenses and deliver the offering performance. The remaining part of the SG&A or the gross margin decline, let's say half of it, relates to the implementation of the various final SAP modules in US. Clearly, I can't allocate it precisely.

And then there's the interaction between the market and the implementation in the achievement of back-end rebate calls. There are some back-end rebate goals that we were very far from, and there were some that we are very close to, to earning and have we had a better line of sight on some of those during the quarter, like we do in our normal business, like we do in Europe using our SAP tools, we could have had better achievement on those. So that's the best I could allocate, hopefully I gave you some idea.

Brian Alexander – Raymond James

Yeah it does. Thanks Jeff. Just the revenue outlook assumes the Americas rebounds pretty strongly on a sequential basis, up about 10%, which is well above seasonal. So just talk about what gives you the confidence in that bounce back and how much of that is related to the resolution of the systems issue, where maybe you had some backlog exiting the quarter, or how much of that is a step-up in price aggression, to regain some of the lost market share?

Jeff Howells

I think it relates to productivity and execution. So it's becoming more familiar with the system. Clearly, the market has shown, if you look at the data from our competition in what others are seeing out there, we lost some share in the quarter. It won't take pricing to regain it, it will take crisper execution and more familiarity with the system to be able to process incremental orders at a more efficient pace, and we believe that will – has begun to happen, as we exited the quarter, and will continue into the – and throughout the current quarter.

Brian Alexander – Raymond James

Just to clarify, Bob, did you say that EPS would still be up double digits in this fiscal year, and if so, what base are you comparing to for last year, because I know there was a lot of reconciling items a year ago, I just want to make sure I am using the right base to draw the comparison?

Jeff Howells

Yeah, I will answer that, Brian. The base that we would compare to is our earnings last year, excluding the closure of Brazil and Colombia, the Q4 costs related to that. So off the top of my head, I think it was a little over $5 a share, you exclude that. We consider the $11 million expense in Q4 to do the realignment of our resources that are normal costs of doing business, just compressed in the one quarter, so that's the base that we are discussing.

Brian Alexander – Raymond James

So that would basically put you at where the consensus is for fiscal '13?

Jeff Howells

Yes it would.

Brian Alexander – Raymond James

Okay. Thanks.

Jeff Howells

I would just add one other color on the SAP impact. As I said in my prepared comments, we have over 1 million orders in the quarter. The system works and it works well, but right now, it takes some brute force to make it work, and so we have had to allocate resources that would traditionally be focused outwardly to pursue additional business, to make the business that we have on the table to get processed. Every day that goes by, we get more efficient and more effective and more productive, and so as the days go by, we could see the opportunity to redeploy our resources back over the market opportunities.

I think the other thing to support the point out is, the system that we are deploying in the U.S., is the same system that's delivering the strong leveraged performance in Europe. So the tools and the capabilities and the productivity that's available, and on display at Tech Data Europe is our goal here in the U.S. So in the long run, the U.S. will be a better run, better managed, more productive company.

Operator

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

Ananda Baruah – Brean Murray

Hi guys. Thanks for taking the question, and good morning as well. I was just wondering if you could share with us, I guess, some of a similar color on demand [tone], in both of the region, and maybe comment on, why you guys think the European execution was so strong at the topline, and then may be give us some sense of how linearity was through the quarter? Thanks.

Bob Dutkowsky

Well, clearly one of the strengths of our European operations is the strength of our IT systems. We have said that consistently over the last handful of year, that that toolset gives us, we believe, the competitive advantage in the market. So, our execution in Europe has been very strong and was on display again in Q2 as one of our strengths. The market opportunity, clearly there are sales opportunities in the European market, and our team has pursued those and selected the right opportunities to deliver the leverage that we showed you in Q2.

The Southern region continues to be challenged, but we have done a good job of matching our cost and expense in those countries, to be able to continue to operate profitable businesses. The opportunity in the Americas, I would say is equally available for us. There has been more opportunity that we have been able to pursue, that are the lower margin bulk opportunities, because of our limitations around our ability to process the more complex business. And Jeff tried to describe the change and the effect that those opportunities have had on our back end in his comments. In the quarter there were tremendous sales opportunities for the lower margin – for the lower margin technologies, that we have pursued those aggressively, and we were therefore able to deliver our topline results.

So as we look into Q3, we think there is good business opportunities in both geographies, and we will continue to pursue the selective opportunities that we believe will improve our margin performance going forward.

Ananda Baruah – Brean Murray

Thanks Bob, that's helpful. Have you guys picked up on any tone change from your customer base, one way or another as you move through last quarter into this quarter, and did you see anything abnormal about linearity as you move through the quarter?

Bob Dutkowsky

I think it's probably too early to hear a tone change, as we exit August and completing the vacation season, both in Europe, and even in the U.S., as the back-to-school fees, or actually people getting back to work is just starting to happen. But as usual, I don't think we get any read and tone from this September, when people are back to work to make new incremental decisions. All that being said, it's business as usual, there are countries that are open in selling, and there is countries that are still very quiet. I don't think there is any news out there, one way or another, positive or negative that has come to our attention.

Ananda Baruah – Brean Murray

Great. Thanks a lot.

Operator

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

Ben Reitzes – Barclays

Thanks. I just want to clarify one thing from Brian's question, I mean, talking about EPS up 10% year-over-year, I mean that implies very significant gross margin improvement in the next two quarters. I mean, can you just help us hash that out a little bit in terms of what we should be modeling, because I mean, if we just – how do we put the extra 40 to 60 basis points back in there to get that number?

Jeff Howells

I think, first of all Ben, we consider every basis point significant, you are considering 40s on the significant. I think (inaudible) P&L and work your way back up, based upon, what we have done with our shares, the share count is down dramatically, our interest expense is down, and my comments also leave our acquisition remaining cap of our joint venture, sort of out of the conversation this point in time. So I am talking of business that we own today. So if you back your way up the P&L, to try and approach that number and believe in our ability to continue to manage our costs, and what we just gave is some idea on the sale for some moderation in the U.S. dollar decline on a sequential basis, and our normal strong finish in Europe, in good times and bad, meaning good times for the European economy and bad times that you can get there, without resuming the gross margin that – as adjusted basis were reported in Q1.

Ben Reitzes – Barclays

Got it. So my numbers, the 40 to 60 is way too high, it's something closer to like a 30. I think it's what you are trying to say. And then just with regard to the mix shift, could you talk about that a little more, I mean, in the quarter, we are seeing almost 60% growth in Apple, it looks like – mid 20s decline at least in the Hewlett-Packard business, I mean, just seems like a major business in margin from the tablet business for Apple, versus whenever you are foregoing at Hewlett-Packard, and could you just talk about that. How do we not get a feeling that that's permanent, because obviously, in all our research you can't really figure out how PCs, this tablet PC shift is nothing but permanent, so how do we get your margins back in that kind of backdrop would be a [secular] shift in your business, where Apple grows 60% and Hewlett is declining 25, and then (inaudible) margins back up. So the thing we discussed in the first part of my question?

Jeff Howells

Ben, I think if you just look to our European operation, you get your answer, and I am not sure that I have seen such a quick and rapid change in our product mix since the early 90s, and as Bob indicated in his comments, the success is predicated on having the right access to the right vendors at the right time, and for our European operation, using it as example, the Apple product line and our mobility product lines, because that's where the market is moving today, is in the right place at the right time, and you can see, even with competitive pricing pressure and a mix shift in Europe, our European operation was able to leverage their expenses by exceeding their sales goals.

The sales goal, the sale materialized from our vendor partners bringing to the marketplace in the right quantity and right supply, products to people in good times and bad, were looking to buy. So, I think it's a perfect example of the ability of Tech Data to execute and to address market share and produce the operating results. So we are not necessarily concerned about what our exact quality percentage is in gross profit, whether it's 5.2, 5.5, or 5.7, what we are interested in is the whole composite of what are we selling, what kind of costs attached to that, so we can deliver on a consistent basis, operating income dollar growth, but at the right quality, a reasonable quality. Europe gave an answer to that question, they delivered on all aspects, executed in a competitive market.

In the Americas on the other hand, we didn't have the tools to execute in a competitive market and with the change in the mix, and if you compare our growth in our Apple products versus some of our decline in HP, selling some of those HP products to certain customers to help grow their business, is what we would call back-end rich, in other words, it gives us the ability to grow and earn more for helping them grow in certain customer segments. We weren't able to execute as well on that this quarter, and we don't believe that's the end of the story though, we believe that we will execute better, as we go forward, and help address that market, with that particular vendor, and other vendors where we fell short.

Ben Reitzes – Barclays

Got it. So you are basically saying the SAP issue, hence the execution issues were much bigger factors in the mix, than I am talking about?

Jeff Howells

Well as I said, it was mainly about 50-50. 50% SAP and other worldwide results, and then 50% mixed in the competitive environment. It's very hard to delineate exactly between all those. But as we said in our opening comments, we can manage mix in a competitive environment. That's what we do every day, that's what we have done for years, that's what we will do going forward. Maybe, a little flux here and there in a given quarter, if we can't manage it precisely, but we are pretty good at that, and we are pretty good at installing SAP. In fact, I would question whether anybody has had such a successful installation of few modules of SAP in generating the million plus orders that went through our system in this quarter, and it works. There are some bugs here and there, we have a few customers that we could have done better with, that we have many within those (inaudible), could have done better on managing our margin, we got it. But to turn that on into an entire legacy system, or the final pieces of the legacy system here in the U.S., it went well.

Ben Reitzes – Barclays

Thanks a lot guys.

Operator

Our next question comes from Matthew Sheerin with Stifel, Nicolaus. Please proceed with your question.

Matthew Sheerin – Stifel, Nicolaus

Thanks. Good morning. So a couple of follow-up questions on the whole SAP issue. Help us understand the timing of that, was that something that you saw in the middle of the quarter, throughout the quarter, and it sounds like, on the mix issue, where you talk about some issues related to SAP, where you could get a bit more complexity as you couldn't get it done. It sounds like, talking about your margins and revenue growth, it sounds like you are more confident, that that should not be an issue in the next quarter, is that correct?

Bob Dutkowsky

The SAP project and the implementation of the apps that we put into the U.S. was an effort that started literally a couple of years ago; and we targeted the second quarter of this year as the time we wanted to turn it on. I think to give you more color to Jeff's comments, we picked that day two years ago, and the project was on time and on budget, which you don't hear very often about major SAP deployments. So we picked this timeframe, and we thought that it would be a good time to move forward. Let me remind you, when we picked it, tablet didn't exist. Right. So I mean, that's how complex the project is and the impact that I had on the overall flow of the business.

Your comments were – I think were right on the mark. One of the pieces that the deployment of SAP in the U.S. impacted us, was our ability to manage complex business opportunities, to configure servers and storage and networking and software, and to do that in a timely fashion. We can still execute those kinds of business opportunities, but it has impacted our productivity, and so we were able to handle as much of that business, and to do it as efficiently as we were able to do with our other systems.

Obviously, when you look forward, our European business does that very efficiently, and effectively. The tools can meet the demands of the market, and the skills of our staff have to catch up, and as I said earlier, we are getting better and better every day in that environment.

So the end product, when the applications and our staff all come together, you will see us perform like we have historically, and you will see us get the leverage that Jeff describes in the European model. Today, we are not able to deliver on all elements of that, but we are improving every single day, and the places where the system has weaknesses, we are also aggressively fixing those, so that our customers see the kind of service levels they have become accustomed to receiving from Tech Data.

Matthew Sheerin – Stifel, Nicolaus

Okay. Sounds like, so you are seeing some progress, but certainly not where you want to be in terms of operating margins the next quarter, (inaudible) North America?

Bob Dutkowsky

Yeah, that's what, at least we are going to need a couple of quarters to bring – to get operating margins to an acceptable level.

Matthew Sheerin – Stifel, Nicolaus

SG&A, it sounded like you talked about a 15 basis point impact on SG&A due to costs related to S&P. So that $6 million, $7 million or so, does that carry over to next quarter, or does that go away at some point?

Jeff Howells

Well, I am not sure what you are referring to?

Matthew Sheerin – Stifel, Nicolaus

You talked about costs related to – OpEx costs related to – maybe I misunderstood, but related to the SAP integration issues?

Jeff Howells

Nothing significant.

Matthew Sheerin – Stifel, Nicolaus

Okay. No incremental costs this quarter?

Jeff Howells

No.

Matthew Sheerin – Stifel, Nicolaus

Based on your cost cutting programs in the past, is there any incremental OpEx that goes away next quarter or so?

Jeff Howells

No.

Matthew Sheerin – Stifel, Nicolaus

No. Okay. Just a question, unrelated to SAP regarding the Brightstar pending acquisition as a joint venture. Now that you are independent, you own that business outright. Talk about your strategy around mobility, not just in – you obviously have a very strong base and skillset, but in North America?

Bob Dutkowsky

So we will be, as you said, independent when the regulatory approval happens and we close the transaction. We continue to grow the business there, adding new customers, adding new vendors, and adding new service opportunities and wins at the customer level. So we have good momentum in Europe and we continue to believe strongly in that business, and that's the reason why we did the transaction that we announced.

In the U.S., we continue to have our mobility joint venture with Brightstar and that business, remember that's an initiative targeting mobility products to the [VAR] channel and that business was launched at the beginning of this year, and it continues to gain momentum, and we are pleased and excited about the opportunity that it represents in the U.S.

Operator

Our next question comes from Lou Miscioscia with CLSA. Please proceed with your question.

Lou Miscioscia – CLSA

Thank you. Maybe if you could help us a little bit more in terms of details coming from the bottom of the income statement backdrop, maybe what share count would be next quarter, and then maybe what you are expecting interest expense to be?

Jeff Howells

The interest expense we have said at the outset of the year that we are looking for $15 million, $16 million decline on a year-over-year basis, I figured all depending on the rates, but all that being said, that should be in that line, our interest expense kind of maps by quarter, with the (inaudible) of the business, in the same ballpark. The share count, probably we said at the end of the quarter, we had about 38 million shares outstanding, that's a pretty good estimate. So those are the two key numbers you just talked about.

Lou Miscioscia – CLSA

That's helpful in getting to this 10% EPS growth, then just from an absolute standpoint, I guess, would you expect revenue in the fourth quarter to be just down slightly, when you add everything back up?

Jeff Howells

Well, we will get to the fourth quarter when we get there and give you our best thoughts as we enter the third.

Lou Miscioscia – CLSA

Okay, great. You gave us some color on products, just which were the ones – you mentioned some of the ones were doing well. Which were some of the ones that were on the software side of things?

Jeff Howells

I mean, I guess the answer would be the normal commodity type products. Certain consumer products, absent tablets and mobility products, but there was more commoditization and some of the softness across notebooks, desktops and servers. Now, I don't think we are a proxy this quarter for that answer though, because we could have served certain vendors better, and please don't take, for example, our share of HP at 20% of our sales as a proxy for them. Part of that is us, part of it is the market, probably part of that is the various product lines, but we expect to do better with them, certain other vendors as we go forward.

Lou Miscioscia – CLSA

Last question, Apple was 12% this quarter. What was it last quarter, and thank you?

Jeff Howells

Last year, same quarter it as 7% of our sales.

Lou Miscioscia – CLSA

How about last quarter?

Jeff Howells

We didn't disclose that, but it was – this is the first quarter that on a trailing 12, it reached 10% of our worldwide sales. So it has continued to build over the last few quarters.

Lou Miscioscia – CLSA

Okay. Thank you.

Operator

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

Osten Bernardez – Cross Research

Hey there, good morning and thanks for taking my question. To start, would you be able to provide sort of what long term return or benefit you assume to -- you believe you will be able to gain from that SAP, is that being done and if so, on an annualized basis what type of improvement do you foresee in the Americas?

Bob Dutkowsky

Well this is Bob. I think the way we like to think of it is, look at the operational expenses that our Tech Data European team has. Their ability to manage the complexity of a multibillion Euro business across multiple countries with hundreds of vendors and tens of thousands of customers. The toolset that allows them to do that is SAP and that's the same SAP toolset that we are finishing up the implementation here in the U.S. Although we don’t quantify it the way I think you are asking the question, we believe that when we finish the implementation here in the U.S., Tech Data U.S. will be smarter, faster, more productive and able to serve our customers and vendors more efficiently and that in a distribution business leads to the kind of gross margins and profitability that we believe are the aspirations of the company.

So this was an important step. It was an expensive step. It was a well thought out, long plan step by our team and we wouldn't go through this, if we didn’t think we would be able to serve our customers, vendors and shareholders more efficiently.

Jeff Howells

Let me just add to that, that this is an important step to just remain competitive, be competitive, take advantage of new opportunities like handling supply chain opportunities more efficiently, and just like in the past with our legacy systems, we are never done improving this solution. We are continuously rolling out improvements in new applications and new tools in our European operation, as well as in our U.S. operations in the modules that are already existing, installed and operating in our business.

The beauty of what we have now is, while we have been on this path for 10 years, is it allows us to reap the benefits worldwide in our operations of an improvement that one geography versus the other launched sooner than the other. So there are things happening at a different pace in Europe, we allocate resources to designing and implementing those and there is opportunities that move at different pace in the Americas, we allocate resources to do those. But the other [theater] gets the benefits of the work on both sides, on this one template. This one worldwide system running on Tech Data Corporation today and we would say clearly, having the most state of the art systems that differentiates us. But I just wanted to make sure that we will continually make this even better as we do our telephony systems and our CRM systems and the other tools that make our staff more effective and efficient.

Osten Bernardez – Cross Research

So when you consider the improvement needed to be made on both, the front end and the back end over the next several quarters, you expect both sides to sort of improve and sort of (inaudible) that you will be focusing on one end versus the other?

Bob Dutkowsky

Now that’s a US only. European staff know how to use the tools within the system very effectively and efficiently. They know to manage margins. They know how to price. They know how to use the tools to watch how they are going forward and advancing towards back end goals. Do they do it precise each and every day and each and every quarter? No. There is opportunities for improvement, but in the normal scheme of things, you have 17 or 18 countries, one improves one quarter and then someone slips (inaudible) and that's the beauty of having a portfolio.

Osten Bernardez – Cross Research

But my question was specific to the US and the improvements necessary over the next couple of quarters?

Bob Dutkowsky

Yes. I mean that's where the focus is, and that's where understanding the tools, developing some reporting out of the data warehouse that is more in tune with how the US team wants to manage their business versus a European country, those are the steps that we are taking today.

Osten Bernardez – Cross Research

Got it. And then my last question is just with respect to the Brightstar transaction and the funding of that, I believe that that will be or your plan is to have that be a cash transaction if I'm correct. Where do you see yourself, I guess, from a balance sheet perspective? Do you expect to -- obviously you have the cash to do that, but do you see yourself perhaps raising any capital or where do you see leveraging in your model going forward?

Bob Dutkowsky

Yeah. First of all, that is a cash transaction and where we'll use our existing cash and available funding. Within a quarter, we borrow incrementally and use our cash, i.e. while we have interest expense. So that transaction will be funded with our available facilities and internally when we don't need to raise any capital for that specific transaction. While people look at our cash and see our cash position come down, cash is our more inefficient asset we have on our balance sheet.

So in a perfect world, we would have zero cash because we're investing cash at 20 basis points, somewhere in that ballpark and maybe less to be secure. So if we could have zero cash every day of the week and have completely fluctuating debt balances, we would have the most efficient utilization of our balance sheet in a world that we live in and we always end up with some cash and many like the cash position, the security.

But I can tell you the day that we ran Tech Data, the absolute most efficient were the days when we had zero cash and very, very variable debt. We have a variety of alternatives in front of us to fund our future growth whether organic or acquisitions including our available facilities and the ability to put in place some type of a debt facility because our debt to cap still at 5% is very low. So we don't need to use equity for any of our near-term ideas about growing the Company.

Osten Bernardez – Cross Research

Thank you.

Operator

Our last question comes from Robbie Wilkins with Goldman Sachs. Please proceed with your question.

Robbie Wilkins – Goldman Sachs

Thank you. Just one follow-up on the cash levels. Given this significant buyback in the quarter and kind of where they are at today, what can we expect going forward for the share repurchases?

Bob Dutkowsky

We do not have any current authorization to continue share repurchases. As we say every time we exhaust one, we review the alternatives with our Board considering more share repurchases, acquisition opportunities that maybe in the pipeline looking out one to 12 months and then organic growth opportunities, so no current authorization.

Robbie Wilkins – Goldman Sachs

Okay, thank you. And then secondly I know you touched on this a few times but on the competitive pressures that you're saying, I was wondering if you can [give that] (1:02:38) a little bit deeper and to product category, anything your seeing there and maybe contrast what you're seeing in North America versus Europe, the strength you're seeing there?

Bob Dutkowsky

Robbie, I don't think that the two environments are that different. It's a competitive market that we're in. But I think the quarter certainly displayed that there are sales opportunities out there available for us, and our ability to choose the right ones and to serve the customers and vendors that we pick have a big impact on the margin and profitability of the Company.

The market and the opportunities are all competitive. That's the nature of the business that we're in and we think we know how to manage the competitive markets efficiently and we know how to manage the mix issues that exist very efficiently, and we look forward to compete in both markets.

Robbie Wilkins – Goldman Sachs

All right, thank you.

Operator

This concludes Tech Data Corporation's fiscal year 2013 second quarter earnings conference call. A replay of the call will be available in about one hour at techdata.com. Thank you for attending today's conference call and have a great day.

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