Tech Data Corporation (TECD) CEO Bob Dutkowsky on Q1 2019 Results - Earnings Call Transcript

| About: Tech Data (TECD)

Tech Data Corporation (NASDAQ:TECD) Q1 2019 Earnings Conference Call May 31, 2018 9:00 AM ET

Executives

Arleen Quinones - Corporate VP, IR

Bob Dutkowsky - Chairman and CEO

Chuck Dannewitz - EVP and CFO

Rich Hume - EVP and COO

Analysts

Adam Tindle - Raymond James

Matt Sheerin - Stifel

Param Singh - Merrill Lynch

Jim Suva - Citigroup

Lou Miscioscia - Pivotal Research

Ananda Baruah - Loop Capital

Keith Housum - Northcoast Research

Sean Hannan - Needham & Company

Shannon Cross - Cross Research

Matt Sheerin - Stifel

Operator

Good morning. Welcome to Tech Data Corporation's Fiscal Year 2019 First 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, Vice President of Investor Relations. Ma'am, you may begin.

Arleen Quinones

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 2019. I am joined this morning by Bob Dutkowsky, Chairman and Chief Executive Officer; Chuck Dannewitz, Executive Vice President and Chief Financial Officer; and Rich Hume, Executive Vice President, and Chief Operating 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 www.techdata.com/investors. Unless otherwise specified, all growth comparisons made on today's call today relate 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 on this 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 acquisitions of Avnet's Technology Solutions business as well as our most recent annual report on Form 10-K which identifies 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 both GAAP and non-GAAP financial measures. Non-GAAP financial measures exclude certain items contained in our GAAP financial results. 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. We have provided certain estimates of pro forma sales growth rates based on combining the standalone operating results of Tech Data and Technology Solutions for the month of February 2017, prior to the acquisition date.

This pro forma information is provided for informational purposes only and does not represent what actual results would have been had the acquisition been completed at the beginning of the prior fiscal year, and it is not necessarily indicative of the results of operations that may result in the future.

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 Chairman and Chief Executive Officer, Bob Dutkowsky.

Bob Dutkowsky

Thank you, Arleen, and good morning, everyone and thank you for joining us today. Tech Data’s ability to respond and adapt to the realities of the market was on full display in Q1. As our teams capitalized on upside demand, prudently controlled costs and effectively managed new vendor program changes. This resulted in top-line growth and operating results that exceeded our expectations.

Our Q1 performance is a testament to the flexibility of our business model, our strong relationships with channel partners and to our team’s ability to execute and deliver a solid performance. Our company produced these results, while also achieving a significant integration milestone in Q1.

When we began this transformational journey more than a year ago, one of our major tasks was to migrate the TS IT systems into Tech Data’s IT infrastructure. During Q1, we accomplished this without a missing beat operationally. This is a tremendous undertaking and its flawless execution is a testament to the expert skills of our global technology team; our thanks to them for their tireless efforts, bringing us through this key accomplishment.

We continue to be very pleased with our progress in creating the new Tech Data, and our ability to deliver on our commitments. Our synergies are on track, regional go-to-market structures are in place, IT systems are essentially migrated and customer and vendor feedback continues to be very positive.

With just a handful of countries left to integrate and much of the heavy lifting behind us, we are now focused on leveraging the strengths of the new Tech Data and accelerating our strategic priorities of investing in next generation technologies, strengthening our end to end portfolio, transforming Tech Data digitally and optimizing our global footprint.

Our end-to-end solutions model has set the standard for IT distribution and we are prepared and excited to enter into the next chapter as the IT distributor of the future. Tech Data’s success story is built upon our ability over the years to evolve and transform with the IT market. By following this path, we ensure that we strengthen our role as the vital link in the IT ecosystem for our channel partners and in turn create value for our shareholders.

Now later in my prepared remarks, I will share some thoughts on our incoming CEO, Rich Hume and on my transition to the role of Executive Chairman. But now I’d like to turn the call over to Chuck, who will review our financial results for Q1, as well as our outlook for Q2. Chuck?

Chuck Dannewitz

Thank you, Bob. Good morning everyone and thank you for joining us today. In Q1 a good demand environment enabled Tech Data to produce solid top line growth and higher than expected non-GAAP operating income and earnings per share.

On a worldwide basis, our team has delivered sales of $8.5 billion, up 22% year-over-year. Adjusting for currency and an additional month of TS sales, we estimate that pro forma sales were up mid-single digits on a worldwide basis and in each of our regions.

For the Americas, on both reported and constant currency basis, sales increased 15% to $3.6 billion. And at a product level, notebooks, servers and storage performed well, while sales of tablets and security products declined.

In Europe, sales increased 26% to $4.7 billion on a reported basis, and 10% in constant currency. At a product level in Europe, sales of notebooks, servers and hyper-converged infrastructure were up, while sales of networking and security products declined.

In our Asia-Pac region, sales increased 48% to $268 million on a reported basis and 46% in constant currency. From a product perspective, servers and storage sales were up, while sales of networking products declined. Worldwide gross profit was $523 million, an increase of $66 million or 14% primarily due to the additional month of TS business and currency rates. Gross margin was 6.12% compared to 6.51% in the prior year quarter and generally consistent with our prior two quarters.

Worldwide non-GAAP SG&A expense, which excludes $23 million of acquisition related intangibles amortization expense increased $65 million or 20%. The increase in non-GAAP SG&A expense is primarily due to the additional month of TS and currency. As a percentage of sales non-GAAP SG&A expense decreased 8 basis points.

Worldwide non-GAAP operating income was $124 million up approximately 1%. Worldwide non-GAAP operating margin declined 30 basis points to 1.45%. On a regional basis the Americas non-GAAP operating income grew $7 million to $86 million, an increase of 9% and as a percentage of sales declined 12 basis points to 2.38%.

In Europe, non-GAAP operating income declined 1% to $44 million, as a percentage of sales Europe’s non-GAAP operating income was 0.94% compared to 1.19% in the prior year quarter. In our Asia Pac region non-GAAP operating income declined $4 million or 79% to $1 million. As a percentage of sales the region’s non-GAAP operating income was 0.4% compared to 2.87% in the prior year quarter.

The decline in non-GAAP operating income is due to a challenging operating environment in certain countries along with investments we were making in the infrastructure necessary to grow and operate our business in the region. Examples of our investments in the Asia Pac region include extending our global line card, building out our e-commerce infrastructure and launching our cloud marketplace.

Moving to other key items within our reported results, for Q1 stock-based compensation expense was $8 million and interest expense was $26 million. Our non-GAAP effective tax rate for Q1 was 26%. Non-GAAP net income was $71 million, an increase of 1% and non-GAAP earnings per diluted share were $1.84 versus $1.87 in the prior year quarter.

Turning now to some of our balance sheet and cash flow metrics, as we indicated on our Q4 earnings call we expected our cash conversion cycle to return to a more normalized range. In Q1 our cash conversion cycle was 24 days higher by 8 days sequentially and lower by one day compared to the prior year quarter. Please note that we have retrospectively adjusted our cash days to reflect the adoption of the new revenue recognition standard ASC-606.

We estimate this adjustment increased our cash conversion cycle by approximately 2 days, but it did not impact operating cash flow. During the quarter we used operating cash in the amount of $567 million and exited the quarter with a cash balance of $346 million. The use of operating cash during the quarter was primarily due to the sequential increase in our cash conversion cycle, partially offset by the sequential decline in sales.

For the trailing 12 months, we earned an adjusted return on invested capital of 11%. As Bob stated earlier we’ve made excellent progress on our integration efforts and we previously indicated we are on track to realize $50 million in annual cost savings during fiscal year 2019.

Turning now to our guidance for the second quarter ending July 31, 2018, we anticipate sales to be in the range of $8.6 billion to $8.9 billion and non-GAAP earnings per share to be in the range of $1.95 to $2.25. This guidance assumes $38.8 million weighted average diluted shares outstanding and an effective tax rate in the range of 25% to 27%. This guidance also assumes an average U.S. dollar to euro exchange rate of $1.18 to €1.

Before I turn the call over to Bob and Rich for additional comments, as most of you know, after more than 12 years of exceptional service and leadership, Bob has decided to handover the reign as CEO to Rich Hume and will transition to a role of Executive Chairman of the Board effective June 6. As CEO, Bob has been instrumental to Tech Data's success over the years, and he will leave an indelible mark on both our company and the IT distribution industry. His truly visionary leadership has firmly established Tech Data as a global end-to-end IT distributor with the broadest offerings and the most specialized skill sets in the industry. Bob, on behalf of our more than 14,000 employees around the world, we thank you for your leadership, for your countless contributions to our company and for your friendship over the years.

I will hand it back over to you Bob.

Bob Dutkowsky

Thank you, Chuck. It's been an honor and a privilege to lead the most talented team in IT distribution for the last 12 years. The new Tech Data with deep scales and domain knowledge and enhanced earnings power is poised to accelerate our investments in next generation technologies to capitalize on the opportunities they present and to help our customers navigate an increasingly complex technology landscape. I cannot think of a more ideal candidate to lead Tech Data and the channel on this journey than our incoming CEO, Rich Hume.

With over 20 years of experience in the channel, Rich brings a deep knowledge of the IT ecosystem from both the customer and a vendor partner perspective. He also understands both physical and virtual technologies as well as the value add services that support them, all of which will be key to helping our channel partners bring to market new technologies and delivery models.

Since joining the company in 2016, Rich has proven that he's the right leader at the right time for Tech Data. During his time as COO, in addition to overseeing our regional operations, he has led our integration efforts and was instrumental in creating our strategy. His vision, channel experience and proven track record make him the natural choice for CEO as we enter our next chapter.

Before I turn the call over to Rich to say a few words, I would like to thank my colleagues around the world for their dedication, loyalty and tireless efforts, which have been and will continue to be the key to Tech Data and our channel partner success.

With our global footprint, strong operations, end-to-end offerings and strategic focus on next generation capabilities, I believe this is the perfect time to make this transition and I'm confident that Tech Data will continue to thrive and create value for all our stakeholders.

As I transition to my new role as Executive Chairman, I also want to thank our investors and analysts for your interest in Tech Data, for your insight and for your support. You have challenged us to be better and it has truly been a privilege to work with you.

Finally, I would also like to extend by gratitude to Tech Data's outstanding customers and vendor partners for their long time support. I look forward to continuing our strong partnership for years to come. Rich?

Rich Hume

Thank you, Bob and good morning, everyone. As you all know, Bob has provided outstanding leadership and his bold moves during his tenure as CEO have positioned Tech Data for long-term success. Personally, he has been a true mentor and friends since I joined the company. I look forward to continuing to work closely with him in his role as Executive Chairman and we will continue to benefit greatly from his deep institutional knowledge of the company and the channel.

Over the past two years as COO, I have come to appreciate what a talented global team we have. And I look forward to leading this team as we build on our own momentum and continue to create value for our customers, vendor partners, employees and shareholders. With technology evolving at a faster pace than ever before, I believe this is the most dynamic and exciting time in our history.

And with Tech Data at the very epic center of the IT ecosystem helping our channel partners bring to market the technology the world needs to connect, learn, grow and advance. It makes our value proposition stronger than ever before.

I'm incredibly excited about the opportunities that lie ahead for our company and I'm truly humbled and honored to have the opportunity to serve as the next CEO of Tech Data. Over the coming months, I look forward to going on the road and to hearing from and getting to know all of you.

With that, we’d be happy to open the line for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator instructions]. Our first call today comes from Adam Tindle with Raymond James. Please proceed with your question.

Adam Tindle

Okay. Thank you and congrats again to both Bob and Rich. Just wanted to start on the fiscal 2019 framework given the better than expected profit dollar trends. I think prior to this it was low single-digit non-GAAP operating profit dollar growth and $50 million of synergies. If you could just maybe update us on these two areas, do you think the original mid-single digit growth in profit dollars that’s achievable? And I know you mentioned you are on track for the synergies but just how far through the $50 million of synergies are you now?

Chuck Dannewitz

Adam, this is Chuck. As we noted on our last conference call, we’re not going to be updating our annual guidance. We feel very good about our Q1 results and we’re giving you Q2 guidance. And as I indicated in my remarks already, we’re well on track for the $50 million for this year.

Adam Tindle

Okay, I had to try. Maybe one for Bob on gross margin, on a like-to-like basis, it was down. In the past you’ve talked about the competitive environment in vendor programs having an impact. Can you maybe just update us on these developments in those two areas versus 90 days ago?

Bob Dutkowsky

Yes, Adam. We -- as we said back at the end of the year conference call, that we saw those the competitiveness in the market and some changes in vendor programs as impacting our performance in the quarter and we said that we would begin to manage through those changes and I think the team did a really fine job of managing through those changes.

The competitiveness of the market continues to be a factor that we deal with in all geographies and all product lines and our marketplace has always been competitive. So we’re well positioned to compete and compete effectively.

Regarding the vendor programs, we -- when vendors tell us that they’re going to change programs, we instantly begin to renegotiate those terms with them and we had some successes in Q1 to change the dynamics of those programs. But at the same time we aggressively manage the SG&A that’s attached to a particular vendor that may deliver less profit and we did that very effectively in the quarter. And then the third lever that we can pull is to try to over achieve on sales and we did that in the quarter.

So, although vendors may change programs or competition maybe present in the marketplace, I think Tech Data did exhibited in this quarter the way that we respond to those challenges and the way that we can still deliver good results, even though the game is changing some.

And the last part, I’ll leave you with that on this that that those changes in things like vendor programs or competitiveness that’s the nature of the business we have been in for over 40 years and in this last quarter we handled those dynamics very effectively.

Adam Tindle

Okay. If I could just get one in for Rich, you’re now like about a year into the TS acquisition. Can you just maybe reflect upon how you measure the success of that acquisition and perhaps what you can learn for potential future targeted M&A? Thank you.

Rich Hume

Sure. So first, we’re very satisfied with the way the entire acquisition and integration process has gone. As Bob had commented in his prepared remarks, we basically have executed this thing on schedule and really have had a great experience for customers and vendors as we had moved through it.

We see bright future here for what we call our Advanced Solutions segment. There is a lot of opportunity in the next generation technology and I think it is worth noting as well that service and storage in all of our regions have grown here for the first time in a while. So, I think that we’re feeling really good about the acquisition overall, we’re feeling really good about our execution model as we move into the future.

Operator

Thank you. Our next question is from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin

Yes, thanks and good morning. Regarding the $50 million in synergies, and you're not giving -- I know you don't give specific guidance for quarter. But you just did the IT integration I know there were redundant and duplicative cost. So in terms of the savings and in terms of SG&A, would we see a significant step down in cost in this quarter because of that or that something that we're going to just see throughout the year?

Chuck Dannewitz

Matt, this is Chuck. I mean we've seen our TSAs our Transition Service Agreements wind down over the entire period, as we gotten off some of the services that Avnet has provided including IT. We have finalized that during this quarter. So you'll see some additional expense reduction, but we don't outline exactly the specifics for that.

Matt Sheerin

Okay, great. And just regarding -- just the operating profit increasing and you seem to be managing all the issues, whether it would be pressures from your vendors, rebates, pricing pressure from the channel, et cetera. You seem to be managing it well. This quarter couple of quarters ago you had some hiccups. What should investors think about in terms of visibility going forward and sustainability of the margins or continued improvements given that you've had some choppy quarters here in the last year.

Bob Dutkowsky

Yes, Matt, it's Bob. I'll try to answer that. I think the team has done a very effective job of managing as we always do around optimizing on profitability versus top line sales. And in the quarter we did a good job with that process as well. The market is relatively robust, and there are business opportunities that exist, but they may not deliver the kind of profitability that our model asks for.

And with the power of our IT systems and the capabilities of our sales and leadership teams, we're able to focus in on the more profitable pockets of opportunity. And I think we've done a good job at that and we'll continue to stay focused on that as a real hallmark of the way we run the company.

Matt Sheerin

Okay, great. Thanks so much.

Operator

The next question is from the line of Param Singh with Merrill Lynch. Please proceed with your question.

Param Singh

Hi, thank you for taking my question. So I just wanted to delve firstly into some of the regions here. I know you gave some clarity on Asia here. But -- so firstly on Asia, do you think that you can sustain or improve the margin from here on out, it's pretty low here. And then what's the timeline for that? And then getting back to a 2% plus margin. And then within Europe, your operating income is down year-over-year even though you're getting some FX benefits and synergy benefits here. So maybe you can give some color on what is the pressure still from rebate program or the competitiveness and can you expect that to alleviate through the course of the year?

Rich Hume

Yes, Param, this is Rich. Thank you for the questions. A couple of points, I think it’s -- on Asia-Pacific, it's first really important to point out that it's 3% of our total business profile from a revenue perspective. And as you can see in some of the backup slides the operating income is been low-single-digits. So it's not a large business relative to the entire portfolio.

That being said, we are very focused on growing that business and investing in that business. So you should think about a big piece of that profit decline if you will being related to our investments in adopting new vendor line cards and adding sales resources and taking our e-commerce platform into Asia-Pacific and taking our cloud platform name StreamOne into Asia-Pacific.

And we're going to continue to invest in the near-term till we get the capabilities. We think our customers and vendors deserve within that region. So we're -- it's small, we're patient, we know what formula we want over there and we're going to continue on the track that we’ve built there.

As it relates to Europe, as we had guided in the previous quarter, the margin profile due to competition had changed last year now that change had actually occurred over multiple quarters. And so as we move forward, you have a ramp relative to that lower margin profile overall. So I think that Europe will continue to perform well and consistent with our expectation moving forward.

Param Singh

Thank you. And then as my follow-up, you obviously take a big drive on cash flow this quarter as working cap normalized do you think -- will you be able to generate cash flow for the rest of the year, is there opportunity to generate some additional cash as revenue grows at a slower pace? And one other thing was do you still have any working capital adjustment payments to make to Avnet TS?

Chuck Dannewitz

Param, this is Chuck, I’ll address the second one first and that is there is a true up on the working capital that we’re still working through with Avnet and that’s in process. So there is a true up that will happen over this next year, the timing of that is uncertain. The second part of your question related to the cash flow for the year and that will really depend on the mix of our business and also our cash conversion cycle going forward.

We’re at the high end of our range, we had indicated the range was 18 to 22 actually 22 to 24 under ASC-606 we’re at the high end of that range and we anticipate our teams moving down toward the lower end. And we anticipate again a good Q4 with a velocity of our cash conversion cycle during that quarter. But it will depend on the mix of our business during that quarter and also our sales growth.

So if sales growth outpace the market becomes more robust, we would use some working capital, if it’s flat we would generate more. Just at a very high level on cash flow, if you look at it over a period of time and again I’ve indicated every quarter that it’s a snapshot in time. But if you look at it a more extended period of time you can expect our enterprise to generate cash flows equal to our net income plus the amortization of our intangibles, that’s just a high level rule of thumb that you can anticipate.

Param Singh

Understood, thank you so much for the color. Really appreciate it.

Operator

The next question comes from the line of Jim Suva with Citigroup. Please proceed with your questions.

Jim Suva

Thank you very much, and Bob you will be greatly missed. A question is regarding the year-over-year operating profit decline I assume a lot of that has to come at the integration. But the question I also had is now that the ERP switchover done, several quarters restructuring giving traction and the positive comments around it, are we at a point now where year-over-year operating margins could reach to that the region should be starting to improve or are there some similarities we should be aware of, of course this past quarter had one extra week [inaudible], can you walk us through a little bit around that aspect of things?

Chuck Dannewitz

Jim, this is Chuck. In regards to operating income percentages, I mean, we’re really focused on operating income dollars from the capital we use to generate that operating income. So as you know our various vender partners have different gross profit profiles, they also have different amounts of our SG&A that we need to use to serve that market. So we’re really looking at an overall mix of our portfolio and trying to generate the most operating income we possibly can at the right returns for our shareholders.

So that’s what we’re focused on.

Jim Suva

Okay, great. And then since you mentioned there were operating dollars, can you help us a little bit with the ERP transition done and now more normalized number of reach per quarter, how should we think about OpEx going forward are there any type of annual vesting for annual merit increases or lapping of the acquisition that we should be aware that may impact our operating expense dollar levels going forward?

Chuck Dannewitz

Jim, no I mean, this is basically we’re on our normal cycle for common merit increases and wage increases. So there’s really nothing that’s unusual going forward that we can anticipate.

Bob Dutkowsky

Yes, Jim, its Bob, also the same can be said around the care and feeding of that ERP system. You have to constantly invest in technologies and solutions that the market is asking Tech Data to bring. So for example, the StreamOne investments that we make to drive the cloud and marketplace, capabilities in the company, we don't see those ending. That's one of the real value propositions that we bring to the market is to respond to those demands and many of those demands are answered through our IT systems.

So, we carefully manage the investment in IT versus the return that we believe we can get. But I don't see it changing or ending, it think it's a -- it is our IT if you want to think about it that way. It is how we differentiate ourselves. So, we need to continue to invest there.

Jim Suva

Thanks so much for the details. And again thanks so much for your service throughout these years.

Bob Dutkowsky

Thank you, Jim.

Operator

The next question comes from the line of Lou Miscioscia with Pivotal Research. Please proceed with your question.

Lou Miscioscia

Hey, thank you. I guess if we look at the good results here and I know you called out notebooks, servers, storage did well. Maybe if you could just mentioned was that organic actually growth in demand as we are seeing in the market or you sort of method I think in your prepared remarks that there were assume maybe programs up to beat. Just trying to understand more or less if there is a consistency to this higher numbers throughout the coming year?

Chuck Dannewitz

I think demand was good and you can see that reflected in our PC vendor partners and as they announced their results, you’ve seen good PC growth across the board. So the demand for PCs in general is strong. And then we've been able to perform well in that marketplace, competing for the business that gives the right kind of metric back to us, whether that be operating income dollars or return on invested capital metrics. And again our team is selective where we go after those pieces of business and I think we manage that effectively in the quarter.

Lou Miscioscia

Okay. As we go back I guess 90 days on the last earnings call and you talked about having to renegotiate in competition, I guess, do you think that you gave conservative guidance because you were concerned that maybe you could renegotiate attractive terms and in the end you actually did get attractive terms. So, should we see those terms then hold for the rest of the year and I guess was the renegotiation of I guess above your expectations or was it just conservative guidance?

Chuck Dannewitz

No, I don't think it was conservative guidance, I think it was transparency in terms of what we believe the impact that the changes we were becoming aware of, we're going to have in the quarter. But as I said earlier, that is business as usual for distributor we -- our vendors present program terms and conditions and then we negotiate and we had good impact on the outcome in the quarter.

There are also -- Lou, there are also cases were changes in vendor programs benefit a distributor. And we were able to take advantage of a few of those changes as well in the quarter that we didn't necessarily see coming when we gave guidance for the quarter. So, it's just a natural give and take between a vendor and a distributor. And as we saw Q1 unfolding, we thought that it would have a much deeper impact and thus our guidance that we gave.

Bob Dutkowsky

The other thing that I would say, Lou, if you look at our results compare to the guidance, our top line was more robust because of the realities of the marketplace, right. Our teams captured additional top line growth that came through on gross margin dollars. And our team also did an excellent job of managing our cost structure. So those two things combined really helped us over achieve what we had said we’re going to achieve with our guidance.

Lou Miscioscia

Okay, great. And last quarter is just one competition and obviously I know you said a number of times and where we hear that it’s always competitive, but would you say that it's actually a normal level of competitors now as oppose to maybe an excessive one?

Rich Hume

Look, this is Rich. As we have said in the past and you said in the frontend of your remarks, the competitive environment ebbs and flows it’s not easily predicted, but I would say that it's been largely consistent over the last couple of quarters from what we have seen. So, we continue to make sure that we are providing the most productive business model in the industry, we continue to work on our productivity to make sure that we have the lowest expense structure to be able to service our vendors. And our fundamental feeling is that in the long-term that combination of good skill, good IT IP and lowest cost structure will allow us to sustain equal to or better than anyone else out there.

Lou Miscioscia

Okay, great. Well good luck on the upcoming year and congratulations on the quarter.

Rich Hume

Thank you.

Operator

Our next question comes from the line of Ananda Baruah with Loop Capital. Please proceed with your question.

Ananda Baruah

Hi, thanks guys for taking the question. Good morning, congrats on a good kind of snap back quarter. Bob congratulations we will miss working with you in this capacity and we look forward to working with you in your upcoming capacity and Rich we look forward to working with you in your new capacity as well.

Bob Dutkowsky

Thank you.

Ananda Baruah

I guess -- you’re welcome. I guess just a couple for me. It sounds like Bob with regards to the comments on upside demand or stronger than expected demand it sounds like it was both marketplace driven and an execution driven, but is that accurate and is there anything else in there that we should know about that contributed to that?

Bob Dutkowsky

I think our -- I think the demand was stronger than what we anticipated. And I think you’ve heard that comments through the reports of not only our competitors, but our vendor partners and our publicly traded customers that have reported their results, each of those spoke to strong demand. But all of them spoke to a more competitive marketplace.

And so, I think we responded really well to an opportunity to grow faster than we anticipated. But also to grow and manage profitability and return on invested capital against those opportunities and I think our team around the world did an effective job of that.

Ananda Baruah

And just sticking with the comments around competitive environment competition and you guys spoke to that last quarter as well. As I adjusted off my notes from last quarter and got it back into this quarter, I was under the impression that really the comments around increased competitiveness were really on a year-over-year basis, not necessarily a sequential basis. That seems to be consistent with the comments a few moments ago about sequentially there hasn’t been much of this change the last few quarters, it’s really on a year-over-year basis and the impact on profit. Is that accurate?

Bob Dutkowsky

Yes, Ananda if you go back and listen to our calls over the last year plus, you would have heard us start to talk about what appear to be a more competitive market back about a year ago or so. And there -- you understand the dynamics of what’s going on with some of our competitors and ownership, et cetera, et cetera. We have sense the more competitive market over the last year.

But in that year it remained competitive and we have been able to manage our way in that competitive environment we believe very effectively. But it’s not just this quarter, it began back more than a year ago and it first manifest itself in Europe and then -- it was really like around the middle of Q2 of last year, where really start -- we started to see it and we began to articulate it and it’s been consistent since then.

Ananda Baruah

Okay great, yes that’s helpful, I appreciate that. And last one for me is just, with regards to the rebate dynamic that you guys pointed out last quarter. Bob I think you mentioned that, that you’ve been successful in renegotiating some of that. Is there more of that that you have an opportunity to impact going forward here or you sort of through with that dynamic for now impacting it?

Bob Dutkowsky

Yes, it’s -- as I have said on a couple of different times, it’s the way of life in terms of the relationship between distributors and suppliers. And so there are always ups and always downs that we’ll deal with. In the case of -- in this quarter as we came into this quarter, some of our largest vendors are the ones that signaled changes. And so they had larger impacts on us than maybe they had in the past or even on some of our competitors. And so we needed to manage our way through that and I think we’ve done that effectively.

We haven’t gotten concessions on -- from every vendor, we’ve gotten a few concessions from a few vendors and you can see the way that it impacted our performance in the quarter. We’re always working on that that’s a never ending process of negotiation and it’s one of the kind of key skills that Tech Data has and its ability to have these very-very strategic relationships with our vendor partners where we can enter into dialog about the importance of the structure of those kinds of programs and they understand and they care that they’re done correctly.

Ananda Baruah

That’s great. That’s helpful, thanks so much, guys.

Bob Dutkowsky

Thank you, Ananda.

Operator

Our next question is from the line of Keith Housum with Northcoast Research. Please proceed with your questions.

Keith Housum

Good morning, gentlemen. I just want to explore a little more the revenue growth, if I think back to the prepared comments maybe you said excluding the acquisition and FX that growth was up mid-single-digits, can you guys provide a little bit more color in terms of the breakout between the Americas and Europe? And then I understand PCs were good and PCs were probably or [indiscernible] as well -- perhaps some of the drivers of the overall growth?

Chuck Dannewitz

Keith, this is Chuck. Yes, as I indicated the growth was consistent across all of our regions as mid-single-digit, currency ex-the one month of PL.

Keith Housum

Okay, got it.

Bob Dutkowsky

And it was primarily driven by PCs, servers and storage as kind of the base products that appeared to perform very well. And I think that validates the end-to-end model that Tech Data has. We get growth across our end-to-end portfolio products, Tech Data will deliver good performance.

Keith Housum

Great, I appreciate the color. And just trying understand little more we’ve heard from some of your competitors and some of the large resellers out there that devices have been driving obviously a lot of that growth it sounds consistent with you guys as well. But turning to the solutions side especially like your quality initiatives, can you provide a little bit color on the growth in the cloud and your strategy for that going forward in terms of expected growth?

Bob Dutkowsky

Yes, the cloud was up really solid double-digits again in the quarter. And as Chuck described we’re deploying our StreamOne capabilities on a more global basis and that’s creating opportunities for us to grow that cloud revenues and we continue to invest in that space. I’ve said this many times that the development of StreamOne is the single largest organic IT project that we’ve run in the 12 years I’ve been in the company. It’s a big investment, but it’s an important component of our long-term strategy and it’s where the market is headed.

Interestingly enough if you think about it, we had server and storage growth in the quarter and we had cloud growth in the quarter and it validates that what the world is going to look like in the long run is a hybrid model with the combination of cloud and on-premises driving the IT infrastructure. And that’s our performance in the quarter I think validates what the world will look like and we’re really well positioned to take advantage of that.

Keith Housum

Great, good luck to you Bob and congratulations both you and Rich.

Rich Hume

Thanks.

Bob Dutkowsky

Thank you.

Operator

Our next question is from the line of Sean Hannan with Needham & Company. Please proceed with your questions.

Sean Hannan

Yes, good morning thanks for allowing me to pop in here. So you folks called out some products in areas strengthen in the quarter, so if we reflect on April revenues fully above your guidance you’re sounding fairly confident on demand here. Can you update us perhaps with some modified perspective of some of the product portfolio you think could be key growth drivers here the rest of the year?

Particularly calling out what might be -- maybe a little bit more or a little less momentum than you may have thought few months back you obviously already referenced PCs and storage. So any further color would be great. And I have a follow-up if I could as well. Thanks.

Rich Hume

Yes, so strategically within the market we see strong growth in cloud, analytics, securities and we would anticipate us aligning with that growth going forward. In addition to that in the traditional datacenter we see really great opportunities in converged and hyper-converged systems. And I think that that is driving a lot of speculatively a lot of the server growth that we've been talking about on this call. And then obviously the flash area of storage is kicking in so there is going to great opportunities there.

The PC ecosystem portfolio is an interesting one. There are some dynamics that are playing that are providing growth based on component pricing. Some of the reports that I have seen have had unit growth either flat to down with really strong ASPs. And so, I -- from my perspective, that PC revenue trail will follow the commodity trail to some degree. And it's hard for any of us to predict when that will run out or not. So that's sort of how I would characterize it; traditional datacenter with hyper-converged and flash storage, the next generation technologies and then PC sort of following the commodity pricing.

Sean Hannan

That's great. Okay. And then shifting gears just a kind of broader question here, what's your sense so far in terms of more dialogue or evidence that the recent tax reform is helping to open up IT spending budgets? Any updated views on that or perspectives that would be really great. Thanks so much folks.

Bob Dutkowsky

Yes, look, we were actually talking about that this morning. We were discussing why the market was a bit stronger than we were anticipating. Of course, we don't have facts, but one speculation would be that the tax reform act is providing more investment dollars. It's really not -- it's just nothing more than speculations, but there is something underlying, I think greater strength than what we had anticipated. And frankly I think we see a lot of over performance in our market basket from a vendor perspective most recently as well.

Chuck Dannewitz

Sean, I think the other dynamic maybe not tax driven, but if you look historically at IT spending patterns when a particular platform pauses like server and storage has paused over the last three or four quarters. Eventually it needs to be refreshed. And so I think a part of the rebound is this refresh cycle is entering into the datacenter architecture.

As Rich said, some of that refresh is now happening with converged, hyper-converged and flash versus traditional platforms. That's one area where Tech Data's portfolio of products is exceptionally strong. So we should be able to take advantage of that. And I think we did in the quarter. And Pete there were a lull in PCs for a few quarters and now the PC has rebounded nicely. So I think it's driven by the refresh cycle mentality that exists inside IT.

Operator

Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Please proceed with your question.

Shannon Cross

Thank you very much for taking my question. I'll keep them quick. I guess the first one is just, you talked about PCs and benefit obviously from increased pricing. I think we've heard the same thing coming out of the server market and perhaps some in the storage market front, and some of it’s commodity and some of it's just the richer config. So I'm curious as you look at the products that you're selling again kind of getting back to how much of this revenue growth can be recurring overtime. Do you think these are sort of sustainable moves or is this more of sort of a onetime reaction to where DRAM and NAND have gone? And then I have a follow-up. Thank you.

Rich Hume

Yes, so really interesting questions. So without a doubt, the commodity costs are benefiting. But at the same time, we are seeing richer configurations. We're seeing a move more towards the higher end mobile and desktop products, we're seeing move I think driven by the converged and hyper-converged and the density of some of the data center now richer configurations in that regard.

So maybe stating the obvious the commodity piece will be what it will be and it will ebb and flow based on supply and demand. However, the richer config piece you could make a strong case to say that it's here to stay that people are valuing technology more and they're willing to step up and spend more for their phones, spend more for their notebook to get to some of more advanced functionality.

So long story short, I think the answer to your question is mixed commodity piece will ebb and flow and then the richer config my opinion is that that will sustain itself.

Shannon Cross

Okay, thanks. And then I'm curious as your success in cloud obviously on a ratable basis the StreamOne and then able to build and I think you’re seeing a bit more I believe of ratable pricing of devices to service effectively for data center hardware and perhaps PCs. Has there been any change in terms of customers interest in moving to ratable contracts versus transactional sales or is it still more sort of a push from the vendor standpoint rather than a pull on the customer side?

Rich Hume

Yes, so let’s put this dialog between call it enterprise or data center and then PC ecosystem. So as the cloud value proposition has evolved, I think that the industry now is behind hybrid is being the reality, so it’s going to be both. And each enterprise manages itself differently and has different architectures within their data centers.

And based on their needs they are going to push the things that require less securities, and things that have inconsistent capacity needs out to I used the word public cloud. And then they’ll keep the things that are more or less the crown jewels of their operations internal to their enterprise or data center.

And then some of the more consistent workloads with the advancement of hyper-converged, et cetera can be served at a cost point equal to or lower than the public cloud in many instances. So I think that that piece is sorting itself out you can argue that cloud has now been eight years old or there about. So it is sorting itself into having -- both areas having a good life and a good opportunity going forward.

When you get into PC ecosystem my opinion is that the device-as-a-service is just emerging, we’ll see where that goes the value proposition is quite attractive, the question will be the flexibility around the terms and conditions and the monthly pricing. It would require the traditional leases we all know to have to change term and condition wise pretty significantly. If that happens I think that that’s going to open up pretty broadly and quickly.

So we have built the capability to serve the market around device-as-a-service. The vendors are telling us that this is going to be a full steam ahead. So we are prepared for that, I think that if I were to characterize it, it would feel like the cloud felt five, six years ago in terms of movement. So we’ll see what happens on that one.

Shannon Cross

Okay, thank you that was really helpful. I guess just as a follow-up, I'm curious how educated do you think customers are in terms of -- I'm sure enterprise are, but just where does that cut off, in terms of understanding ratable data center versus cloud pricing. And how good are the systems to basically compare the two at this point? Do you feel like you’ve got the systems in place to help your buyers? Thank you.

Chuck Dannewitz

Yes, so long story short, they are becoming more and more educated as time goes on and we should absolutely presume that they’ll be fully educated within the near-term, within the next couple of years.

Second is there are tools that absolutely are emerging to help customers make decisions on buy versus paid up monthly bill, unequivocally that functionality and capability is there and it’s just going to get richer and richer and richer especially in the enterprise space. So I think that that train is running down the track and has been continuing to grow and it will be just the normal course of business in the very near future.

Rich Hume

And it’s one of the value propositions that we bring to our vendor partners as we can help the channel through that learning curve. And that’s why the relationships we have with 100,000 plus resellers they need to learn that cadence of the ratable world and they turn to us to help them understand that and build the models.

Shannon Cross

Great, thank you very much.

Rich Hume

Thank you, Shannon.

Operator

Our final question today is from the line of Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin

Yes, thanks. I just have a couple of follow-up questions. One, Rich you talked about investments in building out the vendor line cards and vendor relationships, I know there are some gaps particularly in software area and security area. So could you talk about those efforts and when do you think you will start to generate significant revenue from that?

Rich Hume

Yes, so obviously we have a lot of large relationships on a global basis, we’re working with each of those large relationships where we aren’t representing necessarily them in the Asia Pacific region to look for opportunities and that is as you would expect it’s not a consistent or easy situation, each one is different, you get as you run into things like for example of we have enough capacity within a region or there are -- we want you in particular countries, et cetera, et cetera. So we’re sorting that with each of our vendors.

We expected that that will be a ramp overtime and we see a solid business opportunity there, so we will continue to drive investment.

Matt Sheerin

Okay, thank you and regarding the IT integration. You talked about some costs savings, but could you also talk about other positives that come out from that, one, being cross selling opportunities, and then also more efficiency in terms of working capital managing margins and things like that.

Rich Hume

Yes, Matt, overtime there’s further synergy opportunities in the whole IT infrastructure. But keep in mind, as I said earlier, there is also the need to continue to invest in IT. So part of our strategy is to make kind of IT be a net neutral. We save and then we reinvest and that’s an important element of our long-term competitive strategy is to continue to differentiate ourselves with the capabilities of IT. That won’t happen without investments.

So we’re really comfortable with the lead that we have in the IT infrastructure across our ecosystem and we intent to maintain that lead.

Matt Sheerin

Does the integration enable you to basically really step up the cross selling opportunities between the two organizations or previous organizations?

Rich Hume

So Matt, I might take a bit of a different angle on the cross selling opportunity. Actually, the cross selling opportunity gets leveraged by the benefit of time in getting our sales go to market model, sort of aligns and settles in and that has been happening quite well. I use the Americas as an example, we learned a lot in the first year, Joe Quaglia who runs the Americas for us had really understood what the sales execution looks like in front of the customers. And he has moved to optimize the opportunity around cross selling, as we deployed our model this year.

So I think the biggest lever in cross selling is getting the formula right in terms of our go to market model. And having now been a year plus into the integration, we see that as a solid opportunity going forward.

Matt Sheerin

Got it. Okay, thanks a lot.

Operator

Thank you. This concludes Tech Data Corporation’s fiscal year 2019 first 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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