Tech Data's (TECD) CEO Robert Dutkowsky on Q1 2018 Results - Earnings Call Transcript

About: Tech Data Corporation (TECD)
by: SA Transcripts

Tech Data Corporation (NASDAQ:TECD) Q1 2018 Earnings Conference Call June 1, 2017 9:00 AM ET


Arleen Quinones - Vice President of Investor Relations

Robert Dutkowsky - Chief Executive Officer

Charles Dannewitz - Executive Vice President and Chief Financial Officer


Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Adam Tindle - Raymond James & Associates, Inc.

Param Singh - Bank of America Merrill Lynch

Jim Suva - Citigroup

Michael Leshock - Northcoast Research


Good morning. Welcome to the Tech Data Corporation’s Fiscal Year 2018 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct the question-and-answer session. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the meeting over to Arleen Quinones, Vice President of Investor Relations. Ma’am, you may begin.

Arleen Quinones

Thank you, Melissa. Good morning and welcome to Tech Data’s earnings conference call and webcast to review our financial results for the first quarter and fiscal year 2018. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; and Chuck Dannewitz, Executive Vice President and Chief Financial Officer.

For a detailed look at our first quarter results, please review our financial highlights summary slide presentation posted this morning on the IR portion of our website located at Unless otherwise specified, all growth comparisons we make on the call today relates to the corresponding period of the previous fiscal year.

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 press release and in our filings with the Securities and Exchange Commission, including those filings related to our acquisition of Avnet’s Technology Solutions business as well as our most recent Annual Report on Form 10-K which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

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. Also, throughout this conference call we will reference those GAAP and non-GAAP financial measures from which we exclude from our GAAP financial results certain items.

A detailed reconciliation between results reported in accordance with GAAP and non-GAAP financial measures can be found in the press release and on the Investor Relations portion of our Company’s website. Please note that during today’s call we will refer to the Technology Solutions business acquired from Avnet on February 27, 2017 as Technology Solutions or as TS. In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the Company.

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

Robert Dutkowsky

Thank you, Arleen. Good morning, everyone, and thank you for joining us today. We are pleased to report an excellent start to fiscal year 2018. During Q1, we leveraged the breadth of our vendor and customer portfolios and the flexibility of our business model to deliver solid topline growth and excellent profitability.

Our regional teams executed well throughout the quarter, capitalized on market opportunities and surpassed their profitability goals. This enabled Tech Data to exceed our expectations on our key financial metrics, including sales, non-GAAP operating and net income, and non-GAAP earnings per share.

In addition, we generated strong operating cash flow and paid down a portion of our long-term debt, an important first step in our commitment to deleverage the Company. Tech Data delivered these strong results, while at the same time making excellent progress on integrating Technology Solutions, the largest and most transformative acquisition in our Company's history.

Since closing the transaction at the end of February, integration teams have been fully engaged across the Company and have been working diligently to bring our two companies together. The Company that we are building a winning combination of exceptional talent, comprehensive solutions and unmatched expertise creates a unique and truly formidable force in the IT industry.

In our first quarter performance, the first as a combined company is a testament to the outstanding execution capabilities of our operations, to the skills and talents of our people, and to the strength and diversity of our end-to-end portfolio of IT solutions. Our performance gives us confidence that the strategic and value creating benefits of this combination are truly compelling for our customers, vendors, employees and our shareholders. I will share some additional information on our operating model and our integration approach later in my prepared comments.

But now I'll turn the call over to Chuck who will review our financial and operational results for the quarter as well as our outlook for Q2. Chuck?

Charles Dannewitz

Thank you, Bob, and good morning, everyone. As Bob indicated, our strong Q1 performance, the first as a combined company is truly a testament to our people and our Company's focus on profitable growth. Our results clearly demonstrate the combined companies enhanced earnings profile and ability to deliver outstanding returns for our shareholders.

Before I review our financial results, I'd like to remind everyone that we completed the acquisition of Technology Solutions on February 27 and therefore our Q1 fiscal 2018 results reflect a stub period for TS for the months of March and April.

As Bob indicated, we are making excellent progress integrating the TS business. As part of our integration process, we are optimizing our vendor and customer relationships to ensure we have a strong coverage model with the right skill sets deployed. These are key steps to successfully combining the businesses, however they limit our ability to track and report legacy Tech Data and TS results separately.

For Q1 to provide investors a high-level view into how the legacy Tech Data and TS businesses each performed in the market, we are providing approximate TS sales and directional growth rates against the comparable two months stub period. However, moving forward as our integration activities accelerate, we will only provide consolidated worldwide and regional sales and growth rates.

Turning now to Q1, Tech Data turned on a strong performance that exceeded our expectations. On a reported basis worldwide sales were $7.7 billion, up 29% year-over-year. The increase is primarily due to approximately $1.6 billion or two months of sales attributed to the TS business. Excluding TS, Tech Data worldwide sales were up approximately 5% on a constant currency basis.

On a pro forma basis, we estimate that worldwide TS sales declined by mid single digits in constant currency when compared to the comparable two months period one-year ago. On a regional basis, the Americas delivered strong Q1 results, sales increased 45% to $3.5 billion and TS contributed approximately $1 billion to the regions topline.

Excluding TS, Tech Data Americas organic sales increased approximately 5% in constant currency. The Americas growth was fueled by solid sales of PCs, networking products and software subscriptions as well as sales of next generation technologies including cloud and security. This growth was partially offset by lower sales of tablets, legacy storage and consumer electronic products.

In the U.S., our Tech Data legacy public sector sales grew by double-digits and our legacy U.S. SMB sales division delivered its sixth consecutive quarter of double-digit growth. Our European region also turned in a strong Q1 performance. Reported sales increased 12% to $4 billion with TS contributing approximately $500 million of sales to the region.

Excluding TS, Tech Data’s Europe’s organic sales grew approximately 5% on a constant currency basis, growth was driven by sales of smartphones, security, networking and software subscriptions partially offset by lower sales of PCs, storage and traditional software products.

In our Asia-Pacific region, sales were $188 million for the month of March and April. Asia-Pacific results are attributable entirely to the addition of TS as Tech Data had no operations in the region prior to the acquisition. From a product perspective, networking and next generation products such as converged infrastructure and security were up, while sales of storage and servers declined in the region. Worldwide gross profit was $457.1 million, an increase of $158.5 million or 53%.

Gross margin was 5.96%, an improvement of 95 basis points. The increase in gross profit dollars and gross margin are due primarily to the addition of the higher margin TS business. Worldwide non-GAAP SG&A expenses, which excludes $18.7 million of acquisition related intangibles amortization expense increased $92.8 million or 39%.

As a percentage of sales, non-GAAP SG&A expenses increased 32 basis points. The increase in non-GAAP SG&A expenses was primarily due to the impact of two months of incremental TS related expenses. The higher non-GAAP SG&A as a percentage of sales is primarily due to the higher cost of the serve Technology Solutions more complex data center solutions business.

Worldwide non-GAAP operating income more than doubled to $123.2 million, increasing $65.6 million or 114%. Worldwide non-GAAP operating margin improved 64 basis points to 1.61%. The increases in non-GAAP operating income dollars and operating margin percentage are primarily due to the addition of the higher margin TS business as well as the operating leverage achieved from the higher sales generated during Q1.

On a regional basis, the Americas non-GAAP operating income grew $47.1 million to $78.5 million, an increase of 150% and as a percentage of sales grew to 2.26%, an improvement of 94 basis points. In Europe, non-GAAP operating income dollars increased $14.3 million to $44.1 million, an increase of 48% and as a percentage of sales improved 27 basis points to 1.1%.

In our Asia-Pacific region, non-GAAP operating income was $5.2 million or 2.76% of net sales. Q1 non-GAAP interest expense was $22 million, higher by $17 million primarily due to higher debt balances used to fund the TS acquisition. Our non-GAAP effective tax rate for Q1 was 30.9%. Non-GAAP net income was $70.1 million, an increase of $33 million or 89% and non-GAAP earnings per diluted share were $1.87, a 78% improvement.

Turning now to some of our balance sheet and cash flow metrics, our cash conversion cycle in Q1 was 22 days, up seven days compared to Q4 and unchanged from the prior year quarter. During the quarter, we generated operating cash flow of $224 million and we exited the quarter with a cash balance of $862 million.

Capital expenditures were $30.4 million in the quarter, primarily consisting of software licenses related to the integration of TS. For the trailing 12 months, we earned a return on invested capital of 13% reflecting our commitment to rapidly deleverage the Company, during the quarter we paid down $200 million of our long-term bank debt.

We will continue to use the combined Company strong cash flows to deleverage our balance sheet and expect to achieve a total debt to adjusted EBITDA ratio of approximately 2.5 times within the next 16 to 22 months. At the end of Q1, we had $2.5 billion of equity and a 48% debt-to-capital ratio. And lastly, in Q1 three of our vendor partners represented 10% or more of our sales. Apple represented 15%, HP Inc., was 11% and Cisco was 10%.

Turning now to our business outlook. As we previously stated and it's clearly demonstrated by our Q1 results, we expect the combination of Tech Data and Technology Solutions will be significantly accretive the Tech Data's non-GAAP earnings per share in the first year after closing. We are making excellent progress on our integration efforts and have already achieved cost savings by absorbing TS corporate overhead costs through Tech Data's existing support organization as well as the elimination of certain duplicative functions.

With the actions taken and identified to-date, we are confident we are well on track to achieve $50 million in annual cost savings in the first 12 months after close and another $50 million by the end of year two for a combined annual cost savings of $100 million in the second full-year.

Last quarter, we indicated that we expect the cost savings to be more heavily weighted towards the second half of the year. However with the actions taken to-date, we now expect cost savings to be spread more evenly throughout the remaining quarters of fiscal 2018. Also we continue to expect to incur one-time costs to achieve these savings of approximately $150 million. Please note this estimate excludes one-time transaction costs related to the acquisition.

Turning now to our guidance for the quarter ending July 31, 2017, we anticipate sales be in the range of $8.55 billion to $8.8 billion. This guidance assumes an average U.S. dollar to Euro exchange rate of $1.10 to €1. We anticipate non-GAAP earning per diluted share to be in the range of $1.95 to $2.08. This guidance assumes stock compensation expense of approximately $7 million and interest expense of approximately $26 million. This guidance also assumes $38.5 million weighted-average diluted shares outstanding and a non-GAAP effective tax rate in the range of 31% to 33%.

As you update your fiscal 2018 financial models for the consolidated business, please keep in mind that for both Tech Data and TS greater leverage is achieved and thus more earnings power is anticipated to be realized during the second half of the fiscal year. We expect the seasonality of the combined businesses to approximate historical levels.

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

Robert Dutkowsky

Thanks, Chuck. While we’re extremely pleased with our Q1 performance, we are even more excited about the future of our business and the promise of exceptional talent, skill sets, and unmatched capabilities that our new Company brings into the market. As a combined Company, we are laser focused on operating the Company and delivering differentiated value to our channel partners while also effectively managing the integration process and synergy attainment.

To accomplish all of this and to minimize disruption, we've separated our activities inside Tech Data into two autonomous work streams. Our operational teams are dedicated to driving the business and preserving the long standing relationships we have with our customers and vendor partners.

In parallel, the integration teams are focused on leveraging the strengths of both organizations and applying the best of both companies. Our strong performance in Q1 show that collectively our eyes on the ball and it gives us confidence that the dual work-stream model that we’ve implemented to integrate our two companies is the right approach.

With a broader portfolio of IT solutions and a wide array of opportunities to pursue immediately after closing, we began refining and implementing our regional go-to-market strategies and shaping the new business organizations to support them. This process is well underway and our combined teams across the Company are not only competing they are winning in the marketplace.

In Q1, Tech Data gained share in several of our major countries and across a number of key product categories and delivered significantly improved profitability as a result of our combined operations. Retaining talent and skills within both companies is critical to the long-term success of the new Tech Data. I'm pleased to say that we've been highly successful in retaining key people at Technology Solutions with many TS Executives accepting senior leadership roles across the new organization.

We’ve recognized that an integration of this size and complexity is a multi-year journey and we have tremendous amount of work yet to do. But I'm extremely proud with the great progress we made on our integration efforts and look forward to providing updates on additional integration milestones in future quarters and at our Investor Day scheduled to take place in New York City on October 10.

We are committed to building a next generation distributor, one with the breadth and extensive capabilities to effectively and efficiently serve the market. As workloads migrate away from traditional technologies towards new computing environments like solid state architectures, converge platforms, software defined solutions, a myriad of endpoint devices, or even to the cloud, Tech Data’s broad end-to-end portfolio, deep domain knowledge, world-class efficiency, and flexible business model is uniquely positioned to exploit these transitions.

Clearly, the pace at which these transitions are occurring is accelerating. Therefore over the next few years, we will continue to invest to drive our growth in these next generation technologies and services that support them. We will leverage the deep skills and capabilities of the new Tech Data to enhance our position with new and emerging vendors and technologies such as cloud, converged, hyper converged infrastructure, mobility, security, big data and analytics.

In the cloud space for instance the combination of our two companies provides immediate breadth and scale as our cloud infrastructures are extremely complimentary to each other with minimal vendor overlap. Our cloud business remains one of our fastest growing segments and is currently on a $500 million annual run rate. In our view, the cloud is a true end-to-end environment with solutions designed to serve the consumer all the way up to the most complex data center applications.

Once fully integrated, Tech Data is ability to provide the right mix of cloud solutions, coupled with our end-to-end portfolio in deep expertise new and emerging data center technologies will distinctively position us as the cloud market leader in the channel. Another example of our combined strength is the integrated security practice that we announced earlier this week in the Americas.

By leveraging the best of the best between Tech Data and Technology Solutions, we have created an industry leading security portfolio that provides our partners with the products and services they need to develop a successful security practice. As our fiscal 2017 and Q1s fiscal 2018 performance show, our Company is executing extremely well. As a team, we delivered strong results in our first quarter as a combined company while making solid progress on the integration front.

Moving forward, we will continue to implement our integration plans while continuing to optimize our core businesses, maintain discipline cost controls and gain profitable market share in key geographies and segments. At the same time, we will continue to accelerate the expansion of our capabilities in next generation technologies.

We believe that focusing our efforts in these areas will enable us to grow faster than the industry in selected markets, improved non-GAAP operating income dollars and earn a return on invested capital well above our weighted-average cost of capital. We are committed to maintain operational excellence and to continue to deliver strong results for our shareholders.

We extend our thanks to our vendors and customers for their business and continued partnership. And I would also like to express my deepest gratitude to my Tech Data colleagues around the world, whose hard work and dedication contributed to a highly successful first quarter as a combined company. It's an exciting time to be part of Tech Data and partner with Tech Data, and we look forward to continuing to deliver our commitments to all of our shareholders.

Before I turn the call over to the operator for questions, as you may know, Tech Data’s long time Chairman, Former CEO and our friend, Steve Raymund is retiring from the Tech Data Board of Directors next week after 36 years of service. Steve's father Ed founded Tech Data, but it is Steve whose foresight and visionary leadership built the Tech Data we know today. He's left an indelible mark in the IT industry, on our Company, on our employees, and on our community.

Personally, I'm deeply grateful for Steve's guidance and collaboration throughout the years. So on behalf of my more than 14,000 Tech Data colleagues around the world and our Board of Directors, I thank him for his resolute dedication in measurable contributions to our Company and wish him all the best for many happy and healthy years that come.

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

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matthew Sheerin

Yes, thanks. Good morning. Just a couple questions just regarding the guidance on the EPS and operating income, which obviously shows really nice progress in both sides of the business. It looks like the gross margin was a little bit better than we had expected, I know that the mix – the Avnet business certainly helped, but with a full quarter here and the July quarter, what should we be thinking about gross margin percent and SG&A percent to get to that operating margin number?

Charles Dannewitz

Matt, this is Chuck. We really don't disclose our margin profiles or SG&A expense in our guidance. So again you can expect similar type margins. You are 100% correct in that the TS business is a higher margin business. And as I had in my prepared remarks, it also takes additional costs to serve that more complex data center solutions practice. So our guidance takes all of that into account.

Matthew Sheerin

Okay, that's fine. And so you talked about the integration going a little bit better than expected, you instead of being sort of backend loaded that $50 million, it's evenly spread, I mean that's coming from SG&A, so should we expect on a run rate – full quarter run rate basis incremental $10 million to $12 million a quarter in savings there?

Charles Dannewitz

Yes, we're not disclosing the exact amount of our savings. You are 100% correct in that. We absorbed the back office – quite a bit of the back office operations of the TS already on day one. We also had some duplicative other functions that realigned and we'll continue to do that throughout this year, but we didn't get off to an excellent start with our synergies. And so therefore, you will see them spread more – the $50 million more spread evenly throughout the year than what we originally anticipated.

Lot more work to do on synergies, we will be dependent on the pace of our IT rollouts and so forth, but an excellent start by the team and we're very confident, we're going to hit our projections.

Robert Dutkowsky

As said in the prepared comments, it's important that we also continue to invest because as the IT – ecosystem moves very rapidly. We have to continue to make investments in skills and capabilities to be able to serve the market and stay in front of the market. So while we're working the synergy side on the stream of the integration process, we're also on the operational side and the day-to-day side focused on continuing to enhance skills and capabilities, so we will save and we will spend at the same time.

Matthew Sheerin

Okay. And just a question on the TS business, I know you talked about it being down mid single-digits in constant currency year-over-year, which was not a surprise. But as you go forward in terms of growth or declines in that business and also any market share changes you've got competitors out there talking about targeting $300 million plus revenue opportunity from the combined Tech Data Avnet business. Where do you stand in terms of market share in retaining or maybe growing that market share within that Tech Solutions business?

Robert Dutkowsky

As we said in our prepared comments, in the quarter just reported in selective geographies and in selective segments, Tech Data gained share. And I think you can look at the growth rates that we published versus the growth rates of other companies and you can see Tech Data performed very, very well in both the – in the advanced side of the business, the former TS business combined with Tech Data’s data center practices, but also in the broad line business. So it was a strong performance in the quarter for Tech Data and one that we would stack up against our competitors probably.

Going forward Matt, the play that we're continuing to run is to diversify inside of the whole computing environment. Our belief is that it's not just the data center, it's not just the desktop, it's not just the mobility environment, it's the end-to-end environment and the ability to serve the end-to-end environment will distinguish a distributor in the long run.

So we're building a distributor that doesn't care where the workload moves, whether it moves to the cloud, whether it moves on-prem, whether it moves to a mobile device, whether it's executed on traditional technologies or merging technologies like solid state and flash and converged, we will be the end-to-end player to serve all of that market and will be the distributor that therefore the reseller wants to turn to and the vendors want to turn to because they know their products will be brought to market in a solution environment, not in a point environment, very different approach and one that we think differentiates us significantly in the market.

Matthew Sheerin

Okay. Thank you very much.


Thank you. Our next question comes from the line of Adam Tindle with Raymond James Financial. Please proceed with your question.

Adam Tindle

Okay. Thanks and good morning. Just had a couple clarification to start, Chuck you mentioned seasonality of the combined business approximating historical levels. I think a little over 60% of EPS has historically been generated in the second half. So this would imply about $10 of EPS for fiscal 2018, so just making sure I understand that comment correctly? And you talked about absorbing TS corporate overhead cost, is that permanent and is the $50 million cost synergy per year for the next two years on top of this or included in this?

Charles Dannewitz

First I’ll address the EPS comment we’re giving you directionally. We're not giving you guidance the $10, we're just trying to frame it to where you might be more comfortable and coming up with your estimates for Tech Data, TS combined. But you're correct about 40% of their earnings power has historically been in the first half and 60% in the second half. So we thought that that would be helpful as well as we gave you some ideas on stock comp and interest expense that we normally don't do, just try and frame it, so you can get a better estimate of the combined earnings power of this operation.

In regards to synergies, the back office for example there's one CFO, there's one Board of Directors, there is a lot of functions that were duplicative that didn’t come over, those are permanent and they will continue on and that is included in the $50 million estimate and then the $100 million estimate, so it's a go forward expenses, not on top of that.

Adam Tindle

That’s helpful. And one quick one for Bob, can you talk about the linearity of TS results in the quarter and do you think the momentum is leading to a point where we could see year-over-year revenue and operating profit dollar growth in TS in fiscal 2018? And just any color on what's driving that? Is cross selling picking up? Is Tech Data organic benefiting from sales to new customers that were previous Avnet customers and vice versa? Thank you.

Robert Dutkowsky

Yes. So we won't comment on the linearity inside the quarter. I think it's pretty well documented what that linearity of a data center business looks like. But again we're trying to diversify that business away from just pure data center to end-to-end solution orientation and without a vent to where the workload goes, whether it goes to the desktop, whether it goes to mobile devices, whether it goes to the cloud, whether it goes to the on-prem, whether it's a hybrid cloud, hybrid data center solution, that's what we're driving towards Adam and in order to do that it's a business and transition.

We have to support the current architectures and technologies and you can see that we sold those very successfully in this quarter, but we also have to position ourselves through those next generation technologies. And so it's recruiting new vendors, building new skills inside Tech Data, taking those skills to enable the channel and then enabling the channel to be successful in new architectures like converged or solid state or software defined computing, very different environments and the environments that we're leveraging and investing in.

So some of the historical data that you're trying to compare, I'm not certain in the long run is going to be that valuable. The data center is in transition and we are transitioning the business along with that transition. And in some regards, we think we're leading it because we're able to select architectures and technologies that give us advantage in the marketplace and deselect ones that are slowing down.


Thank you. Our next question comes from the line of Param Singh with Bank of America Merrill Lynch. Please proceed with your question.

Param Singh

Hi. Thank you for taking my question. If I look at your July quarter guide, the implied operating margin is flat from the current quarter. And given your difficult seasonality where you see better margins in the July quarter, A. B, I mean, one more month of Avnet TS. And C, that you're progressing your integration efforts at a faster pace like why wouldn't we see a better operating margin performance in your guide versus what’s you actually did this quarter? And then I had one more clarification.

Charles Dannewitz

Param, this is Chuck. As we build up our model for Q2, we reach out to all of our regions, we do a bottoms up thorough look at it and the results and the guidance that we're giving is a result of that process, so we thoroughly look at the margins and the opportunities that present us a mix of the products we're going to be selling and that's reflective in the guidance we're giving you.

Param Singh

I mean that would imply that the mix was slightly worse in the July quarter. What are the moving piece? I mean, between broad line mobility if you could probably help me out there a little bit what's probably moving at a faster pace what's not?

Charles Dannewitz

Yes, so we do not provide that granularity on our guidance.

Param Singh

All right. And as my clarification, the $200 million in debt that you paid down was that part of the $350 million bond [in December] or in addition to that?

Charles Dannewitz

No it was not related to the $350 million bonds, those are still outstanding on our balance sheet. It related to our bank term debt. We paid down $200 million a portion and one of the three-year tranche and another portion in the five-year tranche. We took down our bank term debt and we also will be paying down the $350 million of public debt which is due in September of this year.

Param Singh

Could you probably tell me what’s your U.S. cash right now? Was it offshore? And then do you think you have enough U.S. cash to pay that all down or would you need to draw some of the revolver for that?

Charles Dannewitz

We will have – some of the cash will be here in the U.S. and we also have the ability to repatriate some from overseas, so the mix of what cash we're going to use is not been determined yet, but a significant portion of our cash is offshore.

Param Singh

Got it. All right. Thanks so much.


Thank you. Our next question comes from the line of Jim Suva with Citi. Please proceed with your question.

Jim Suva

Thanks very much. You had very good organic growth rate of 5% you’d mentioned which is good. Can you talk about that the two or three areas that you felt really drove that area. I think if I heard correctly on your prepared remarks, you said PCs and converged or the newer age storage.

And then on the flipside of that question for the TS business being down mid single digits year-over-year, do you view that due to the transition from Avnet to Tech Data due to realignment, how should we think about and the exact actions you're doing to kind of cause that organic growth decline to the stock going forward, what are you doing about that business that you just acquired is it newer to your Company?

Robert Dutkowsky

Jim, it’s Bob, I'll try to take a shot at your questions. From a growth perspective, I think you've seen the market was surprised by PC strength, you can see the vendors that we support as they announced their results, they were surprisingly good and Tech Data was able to scale up its efforts in the broad line side and take advantage of that growth that that the market presented in the quarter.

We had I think the two areas that aside from products that I would call out is we had strong performance in the federal sector and for the six quarter in a row, we had double-digit growth in SMB and that's a reflection of the investments that we made in the coverage model, more sales capability targeted towards resellers that sell into the Fed's space and a much more aggressive deployment of resources targeted at SMB customers that took place four or five quarters ago.

If you go back into the transcripts of the calls, we talked about investing in our coverage model well over a year ago and those investments are yielding and I call those out as examples because when there is a market opportunity, federal SMB and Tech Data makes investments in skills and coverage we're able to grow in those spaces.

So when we talk about as we look to the future, we'll invest in the areas where growth is apparent to us and as we've called out, we see growth opportunities in converged, in hyper converged, in the cloud, in mobility, in big data and analytics, and in security. And so we'll invest resources skills and coverage in those areas.

In my prepared comments, we talked about how we announced the security practice in the Americas to focus on that higher growth area. So the deployment of resources and skills, and talents are the way that we grow, and I gave you a few good examples of where our actions have lead to grow.

Jim Suva

Great, and then a follow-up, can you help us a little bit about kind of interest rate or interest expense assumptions we should do and you mentioned you paid down some debt on the closing balance sheet. Was that pay down of debt already included or was that subsequent of the close – of the balance sheet, which was just reported in? There's just a lot of moving parts with your debt balance sheet. So we calculate interest expense more accurately?

Charles Dannewitz

Yes, sure Jim. This is Chuck. The pay down of the debt, the $200 million was right at near the quarter end. So it will impact interest going forward. And then you need to take into account of course the $350 million debt pay down that will make in September going forward. All the rates on our bonds and is public. So you can model that pretty easily and so – and we gave you what interest is for this next quarter. So you should be able to model it fairly accurately.

Jim Suva

Great, thanks so much for the details, that’s greatly appreciate.


Thank you. [Operator Instructions] Our next question comes from the line of Michael Leshock with Northcoast Research. Please proceed with your question.

Michael Leshock

Thanks for taking my question. So on Cisco’s recent earnings call, I know that they noted a lack of uncertainty or a lack of visibility surrounding the federal budget impacting their business. I was just wondering if you're seeing any of those same challenges in terms of federal spending.

Robert Dutkowsky

Yes, as Michael's spot as we said we had good performance in the quarter in Fed. We don't sell a lot of high-end routers and switches into the Fed space that that I think is the places where Cisco said that there was some Fed weakness. So again the diversity of our coverage model and the diversity of our portfolio of products allows us to kind of skim off the opportunities that will generate the best profitability and we exhibited that not only in the Fed space, but across our whole business in the quarter.

Michael Leshock

Okay, and then in terms of the integration of the Technology Solutions business so far, have there been any surprises either positive or negative that you can share?

Robert Dutkowsky

Any time that you take two big enterprises like Tech Data and TS, and put them together, you're going to find things that are positive upsides and areas you need to work on. I would say the most pleasant surprise in quotation fingers, the most pleasant revelation we've had is how culturally complementary our two organizations are together, both organizations have a long history of caring about the customer, both organizations understand how to have a relationship with a strategic vendor.

And so therefore the kinds of people that both companies hired are very, very similar. So when we try to put those two cultures together, they seem to be aligning very nicely and the new Tech Data wakes up in the morning thinking about customers and vendors and creating value in the marketplace both organizations have that deep in their DNA and we've seen that already manifest itself in the marketplace.

Michael Leshock

Okay, great. Thanks for the color.

End of Q&A


Thank you. We have come to the end of our questions. This concludes Tech Data Corporation's fiscal year 2018 first quarter earnings conference call. A replay of the call will be available in about one hour at Thank you for attending today's conference and have a great day.