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Edited Transcript of TECD earnings conference call or presentation 29-Aug-19 1:00pm GMT

Q2 2020 Tech Data Corp Earnings Call

Clearwater Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Tech Data Corp earnings conference call or presentation Thursday, August 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arleen Quinones

Tech Data Corporation - Corporate VP of IR & Corporate Communications

* Charles V. Dannewitz

Tech Data Corporation - Executive VP & CFO

* Richard T. Hume

Tech Data Corporation - CEO & Director

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Conference Call Participants

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* Adam Tyler Tindle

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Keith Michael Housum

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Paramveer Singh

BofA Merrill Lynch, Research Division - Associate

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

* Zhen Yang

Citigroup Inc, Research Division - Assistant VP

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Presentation

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Operator [1]

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Good morning. Welcome to Tech Data Corporation's Fiscal Year 2020 Second Quarter Earnings Conference Call. (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, Corporate Vice President of Investor Relations. Ma'am, you may begin.

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Arleen Quinones, Tech Data Corporation - Corporate VP of IR & Corporate Communications [2]

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Good morning, and welcome to Tech Data's earnings conference call to review our financial results for the second quarter of fiscal year 2020. I'm joined this morning by Rich Hume, Chief Executive Officer; and Chuck Dannewitz, Executive Vice President, Chief Financial Officer.

On our website at techdata.com, you will find our earnings press release and financial highlights slide deck, which are intended to supplement prepared remarks made during today's call and provide reconciliations of differences between GAAP and non-GAAP financial measures.

All growth comparisons we make on today's call relate to the corresponding period of the prior fiscal year, unless otherwise noted. Today's call is being webcast live and recorded.

During the call, we will make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K and other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

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, Rich Hume.

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Richard T. Hume, Tech Data Corporation - CEO & Director [3]

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Thank you, Arlene. Good morning, everyone, and thank you for joining us today. We're pleased to report that Tech Data delivered an outstanding second quarter performance, marked by broad-based improvement across our geographies. A stable demand environment combined with strong execution by our teams resulted in a number of key achievements, including solid sales growth in constant currency, double-digit growth in operating income and earnings per share, positive cash flow and an industry-leading return on invested capital, all while continuing to advance our strategy, investing for the future and returning cash to our shareholders in the form of share repurchases.

Our worldwide teams executed exceptionally well, externally helping our channel partners to grow and transform their businesses and internally improving processes and enhancing productivity. There is always more work to be done in these areas, but in 2Q, our colleagues' hard work, rigor and discipline delivered a very strong and balanced quarter.

Every day, we're focused on simplifying complexity for our partners with end-to-end solutions that solve today's business needs. This critical role is driven by our 4-pillar strategy, which as a reminder includes: one, investing in next-generation technologies; two, strengthening our end-to-end portfolio; three, transforming Tech Data digitally; and four, optimizing our global footprint. And of course, all underpin and achieve through our people, our valued colleagues, who serve as the foundation of our strategy.

We summarize our strategy as moving to higher value. This means delivering higher-value solution offerings to our channel partners, providing our colleagues with enriching opportunities and creating value for our shareholders through an enhanced financial profile with emphasis on cash flow and return on invested capital.

Our 2Q performance validates our strategy and is a testament to the skills of our people, to our strong operational capabilities and to the broadest end-to-end portfolio in the industry. All of this enables us to aggregate solutions that deliver business outcomes to our customers in an increasingly complex and dynamic IT landscape. Our channel partners are responding favorably to our solutions-based approach, enabling us to win new business every day.

Let me share with you a simple example from our Endpoint Solutions business that showcases our solution aggregation capabilities made possible by our end-to-end portfolio. Recently, we provided a regional reseller a quote on several endpoint devices for PC hardware deployment. As our team learned more about the end-user needs, we presented a more holistic subscription-based solution that included devices, services and software to meet the end-user budget. They were delighted with the per-month offering, which allowed them to expand their technology by and secure better solutions that met their business requirements.

In addition, the new devices were preferred by the business users, which improved the user experience and enhanced their productivity. This solution-based proposal grew our reseller partners' overall profit dollars substantially in addition to significantly growing the total value of the deal. In this example, our Endpoint Solutions team served as an accelerator, moving our reseller partner and their end-user customer to a higher-value model where everyone benefits. This is just one example of the success we've had for quite a while in the small- and medium-size business market.

In fact, over the past 4 years, in our Americas region, our SMB sales division has grown by double digits every year. Our second quarter also marked a 1-year anniversary of our Global Business Optimization Program intended to accelerate our strategic priorities and enhance profitability. In addition to driving the productivity improvements, our GBO Program harnesses the skills and data-driven insights at our disposal to drive market share gains, profitable growth and improved partnerships across the organization. It includes a number of initiatives and work streams currently underway to enhance the customer experience, reduce complexity, automate process and develop our colleagues. In one short year, we've made great progress, and we continue to be on track to hit our goal of annual cost savings of $70 million to $80 million by the end of fiscal 2021, half of which will be reinvested back into the business to accelerate our strategic initiatives.

Also, throughout 2Q, we continued our portfolio optimization actions. As we move to higher value, portfolio optimization is designed to enhance our long-term profitability, deliver better overall returns and free up capital to invest in our strategic focus areas. And we are clearly seeing the benefits of these efforts in our results.

In summary, our move to higher-value strategy and the various global initiatives that support it are visibly working and played a key role in our strong first half performance. We remain confident in our team's execution and in our business model's ability to capture opportunities in the market. However, we are keenly aware of the global macroeconomic uncertainties that could present potential headwinds for the industry.

As we enter the second half of our fiscal year, we will continue to focus on our strategic priorities while pursuing higher-value opportunities that enhance our financial profile and deliver higher returns. Consistent with our goal to return value to our shareholders, today, we announced a $200 million increase to our share repurchase program. With today's announcement and the authorizations announced in October and March, we have the opportunity to return $500 million of cash to shareholders over the course of the programs.

I would like to thank and congratulate my Tech Data colleagues around the globe for delivering an exceptionally strong quarter and for their relentless commitment to serving our customers, vendors and each other at the highest possible levels.

With that, I will turn the call over to Chuck to review our 2Q financial results in greater detail as well as provide our outlook for 3Q. Chuck?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [4]

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Thank you, Rich. Good morning, everyone, and thank you again for joining us today. In summary, Q2 was an exceptional quarter with a strong and balanced performance across our regions. Our worldwide teams delivered higher-than-expected sales across our product portfolios, improved gross and operating margins and grew operating income and earnings per share by double digits.

In addition, we generated positive operating cash flow and earned an adjusted return on invested capital of 15%, tying a company record set in fiscal year 2011. A truly outstanding performance by all measures.

Now let me provide more detail on our Q2 results. Worldwide sales increased 2% to $9.1 billion. On a constant currency basis, sales grew 5%. The sales growth was primarily due to strong execution by our worldwide teams in a stable demand environment, partially offset by our portfolio optimization program actions.

Worldwide gross profit increased 7% to $562 million. In constant currency, gross profit increased 9%. Gross margin expanded 25 basis points to 6.18%, driven primarily by better mix of business.

Non-GAAP SG&A expenses, which excludes $21 million of acquisition-related intangibles, amortization expense, increased 5% as reported and increased 7% in constant currency. The increase is primarily due to normal operating increases, additional credit costs and investments in our strategic initiatives, partially offset by the savings generated by our GBO Program. As a percentage of sales, non-GAAP SG&A expenses increased 10 basis points.

Worldwide non-GAAP operating income increased 12% to $151 million. In constant currency, non-GAAP operating income increased 14%, which is nearly 3x our sales growth rate on a constant currency basis.

Non-GAAP operating margin improved 15 basis points to 1.67%.

Interest expense was $21 million, a decrease of $7 million. The decrease is primarily due to entering into financial instruments that gives the effect of converting a portion of our U.S. debt into a euro-denominated debt. As euro borrowings have lower interest rates than U.S. dollar borrowings, this resulted in approximately $3 million of benefit in the quarter. Q2 interest expense was further reduced by $2 million due to the receipt of interest related to a letter of credit refund. The decrease in interest expense also reflects lower term debt balances compared to the prior year.

Our Q2 non-GAAP effective tax rate was 23%, which included a favorable resolution of a tax matter. Excluding this, our Q2 non-GAAP effective tax rate would have been approximately 25%.

Non-GAAP net income was $99 million, an increase of 27% and an improvement of 29% in constant currency.

Non-GAAP earnings per share was $2.69, an increase of 34% and up 36% in constant currency.

Now let's look at the performance by region. The Americas team performed exceptionally well, delivering sales of $4.3 billion, an increase of 7%, both on a reported and constant currency basis. At a product level, the region's growth was driven by software, servers, networking, hyperconverged technology, PCs and security.

The Americas non-GAAP operating income increased 13% to $108 million, and as a percentage of sales was 2.5%.

Turning now to our European region. Sales declined 2% on a reported basis to $4.4 billion. On a constant currency basis, sales increased 2%.

Product categories that performed well in Q2 include servers, software, networking, notebooks, storage, PCs and security.

Europe's non-GAAP operating income grew 7% to $47 million and was up 11% on a constant currency basis. As a percentage of sales, non-GAAP operating income improved 10 basis points.

And in our Asia Pacific region, our team executed well with sales increasing 14% to $336 million, up 17% in constant currency. From a product perspective, servers, storage, hyperconverged technology and software posted good growth in Q2.

Non-GAAP operating income in Asia Pacific grew 71% to $4 million and as a percentage of sales improved 42 basis points.

Turning now to some of our balance sheet and cash flow metrics. Related to working capital, our team's continued efforts resulted in a cash conversion cycle of 18 days, consistent with the prior year period. In Q2, we generated $40 million of operating cash flows. Through the first half of fiscal '20, we have generated $103 million of operating cash flow as compared to a use of cash of $5 million during the first half of fiscal '19. We exited Q2 with a cash balance of $738 million. And for the trailing 12 months, we earned an adjusted return on invested capital of 15%, well above our weighted average cost of capital of approximately 9% and a significant improvement as compared to the 11% we earned in the year ago period.

During Q2, we purchased approximately 833,000 shares for $82 million at an average cost of $98 per share. At the end of Q2, the amount remaining on our share repurchase program was $75 million.

As Rich indicated, today, we announced an incremental $200 million share repurchase authorization, which demonstrates our Board's confidence in our strategy and financial performance.

Our capital allocation objectives remain consistent and include the following: maintain our existing investment grade credit rating, have optimal sources of liquidity to fund our growth, accelerate our strategy through selective M&A and return excess free cash flow to shareholders via buybacks. We'll continue to maintain a balanced approach in the use of our free cash flow and the mix and pace of which will vary depending on the opportunities available in the market.

As we indicated last quarter, we're closely monitoring developments concerning trade relations between the United States and China and related matters such as security risks and export controls that may affect the market for certain technology products. Our inventory of products that may be impacted by these developments was approximately 50% lower at the end of Q2 as compared to the end of Q1.

In summary, we are very pleased with our results and believe our Q2 performance reflects outstanding execution by our worldwide teams and our continued rigorous review of our capital structure to enhance shareholder value.

Turning now to our guidance for the third quarter ending October 31, 2019. We expect sales to be in the range of $9.2 billion to $9.5 billion and non-GAAP earnings per share to be in the range of $2.85 to $3.15. This guidance assumes an effective tax rate in the range of 24% to 25%. This guidance also assumes an average U.S. dollar to euro exchange rate of $1.12 to EUR 1.

As we enter the second half of fiscal year '20, just a few items for consideration as you perform your modeling. You may recall that we had an exceptionally strong performance in the second half of fiscal '19. Therefore, we anticipate year-over-year growth rates to moderate in the second half of fiscal '20. Also included in last year's third quarter results in SG&A was a $25 million benefit related to the collection of an account receivable previously deemed uncollectible, which will not repeat in Q3 of this year.

And lastly, through the first half of fiscal '20, the average euro to U.S. dollar exchange rate was 6% lower than in fiscal '19, and as you can see in our Q3 guidance, we expect currency headwinds to continue.

With that, we would now like to open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first call is coming from the line of Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2]

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Just first question regarding the very strong gross margin performance. You spoke in your opening comments about the fact that you are seeing a better mix there, but how much of that is a benefit from the optimization -- the portfolio optimization program or your deselecting business and -- versus mix? Or what other drivers have you been seeing in terms of the gross margin?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [3]

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Hello, Matt. Thanks for the question. It's really a combination of both of those factors. The team did a very nice job in executing, and we did drive a better mix of our business during this quarter as well as the portfolio optimizations. Both of those factors combined really drove the gross margin increase.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [4]

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Okay. And your guidance implies the gross margin depending on where SG&A shakes out, but at least flat to up year-on-year. So are you continuing to see the signs that this business mix will still be favorable for you?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [5]

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Yes. Again, as you know, in any given quarter, it really depends on our product mix and, again, our portfolio optimizations, and our gross margins will fluctuate from quarter to quarter. As we shared previously with you, the way we really think about our business is to focus on gross profit dollars and the SG&A spend and how we optimize that in order to grow our operating income dollars and then ensure that we have the right capital turns and capital structure to ensure we enhance our returns for our shareholders. So it's really a combination, and gross margin will fluctuate from quarter to quarter.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [6]

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Okay. And just lastly, regarding the demand environment, particularly North America, it sounds like demand is still holding up well relative to the softer tone that we're getting from several of your OEM suppliers really focusing more on enterprise. So is that a function of your focus on the SMB markets? And are you seeing still some tailwinds in terms of demand, PC upgrade cycle, other drivers of demand there in North America?

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Richard T. Hume, Tech Data Corporation - CEO & Director [7]

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Matt, this is Rich. Thank you for the question. Now as it relates to North America, you could see in the information we released, we had a 7% growth overall. So it's a bit stronger. And I think I had commented in our last earnings call, macro level, we had seen Europe weaken overall relative to last year perhaps, and we felt that the demand in the Americas was not as strong as last year, but at the same time reasonably robust. And I have to say that, I think there's 2 contributing factors. Number one is, as we had stated in the prepared comments, we have been really having good success within the SMB segment for the last 4 years where we had double-digit growth every year. So certainly that has helped. And my speculation is that there is a bit more strength in that SMB market than the overall enterprise market. It allowed us to take advantage of that.

And then candidly, I think having the breadth and depth of our portfolio, we've talked about this many times, allows our sales teams to move to where the demand is a bit more robust. And I think when things slow in the market, the benefit of having such a broad portfolio really benefits us. And when I reflect on that, I think about the decisions that we've made when we had done the TS acquisition and that just strengthened the overall frame of our portfolio and really serves us well in markets like this.

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Operator [8]

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Our next question comes from the line of Adam Tindle with Raymond James.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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I just wanted to start on the 15% ROIC you just posted. I think that's one of the highest returns on capital in tech distribution, but you're operating one of the lower-margin profiles. I think it's just particularly notable today given some of those higher-margin distributors are struggling, one just experienced a significant goodwill write-down, another is divesting large portions of their business. So Rich, I'm just hoping for some commentary on Tech Data's performance versus the higher-margin competitors. Is there something structurally changing on the relationship with vendors or customers that make sure lower-cost structure and more asset-like model particularly important today?

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Richard T. Hume, Tech Data Corporation - CEO & Director [10]

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No. My view, Adam, is that, again, it gets back to us having a very broad portfolio. If you take a look at the drivers of the return on invested capital over the last 3, 4, 5 quarters, you'll see that tax rate contributed about a 1/3 of that improvement and then 2/3 of that improvement were operational. And I think that when we talk about what we want to accomplish internally from a customer perspective, first, we have an unrelenting focus on making sure that we're providing them with the best value possible in terms of both our capabilities as well as the offerings that we bring to the market. And frankly, I think that our value proposition is resonating quite well with our customer set. And we're just staying focused on that.

The last thoughts that I'd offer, Adam, is that if you take a look at today's market and the fact that it's a bit less strong than it was last year, our journey has led us to have the execution that we've had. So just to recap, again, I think that the TS acquisition was a major step in sort of building a wide and broad foundation for our portfolio, which serves us well in a market like today. Second, it was a year ago when we said, hey, we need to take on a program to optimize our business and reinvest half and then offer half of the savings to profitability. And then the third piece is 9 months ago, we got on with our focus on the portfolio. And there are other contributing factors, but those 3 things, I think, are culminating in the result that we have right now, and that's what really has benefited us is to be proactive in preparing for where the market is today.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay. So do you see that number -- that ROIC number kind of stabilizing at this level? Does it start maybe shifting a little bit downward moving forward? Just help us understand how we can think about that number moving forward.

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Richard T. Hume, Tech Data Corporation - CEO & Director [12]

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Yes. So as you know, our weighted average cost of capital is about 9%. So we're interested in pursuing opportunities that are above our weighted average cost of capital. I think that the ROIC will ebb and flow. Honestly, I wouldn't see it continuing to get higher and higher. There is a point by which you start to maybe walk away from some business that would contribute very positively to our profile. So I see it as sort of a stable range, and I wouldn't have an issue with it dropping a couple of points, provided that we've got the right business and the right return for our business overall. We've been very focused. I think we've shared with all of you that ROIC is one of our primary metrics, and we build our entire business processes around making sure that all of the elements of ROIC are considered even at the transactional level when we go to market to execute. And I think that the management system that's deployed throughout Tech Data has naturally taken us to the financial profile that we've got right now.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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Okay. That's helpful. And maybe just one quick clarification. The Q3 guidance looks largely seasonal on a revenue basis and profit dollar basis sequentially adjusting for last year. But you also had some cautious commentary on the back half of the year. So I'm just hoping that maybe you clarify what that implies for Q4, what it means. And maybe one way to ask is you've talked about an EPS weighting in the first half versus second half typically at 35-65 weighting. Can we -- can you just maybe clarify how we can think about fiscal '20 in light of the comment?

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Richard T. Hume, Tech Data Corporation - CEO & Director [14]

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Yes. So let me first start with Q3. We believe that the guidance that we've provided is consistent with the way we've built our guidance in the past. As Chuck has commented on previous calls, it's sort of a bottoms-up call. So it sort of reflects the sentiment of the geography. That's point number one. Point number two is, I'd have each of you go back and take a look at our Q3 and Q4 last year. I'll give my opinion. My opinion is we had a phenomenal Q3 and Q4. The operating income growths were, from memory, nearing 20% or 20% overall. And so I remember last Q4 thinking, wow, this is really quite impressive. So we have the backdrop in Q3 and Q4 of harder compares relative to last year and, at the same time, a bit of a softer market. So as we provide Q3 thoughts, that's what we've included.

As it relates to Q4, number one is we have less and less visibility as you go through time. Number two is there is -- by definition of the time line, there is more and more risk. So it really is hard to project what's going to happen based on some of the trade and regulation things going on based on the fact that it appears as if more economies around the world are softening, et cetera. So that was the reason for our cautious tone overall. Not going to get into sort of proportionately how to think about first half, second half because of that uncertainty.

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Operator [15]

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

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [16]

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First one I wanted to ask was on the cash flow. It just seemed working capital was a bit of a drag this quarter compared to a big cash flow input in typical July quarters. Now I understand that revenue was much stronger, but it looks like accounts payable might have been a drag. So just wanted to get a sense of what drove the typical weakness to traditional free cash flow in the quarter.

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [17]

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Sure, Param, and thanks for the question. When you look at our cash flow for the quarter of $40 million compared to, let's say, a little bit over $500 million last year, you have to take the whole first half into consideration. Q2 of last year was really a catch-up of a negative over $500 million in the first quarter of last year. So if you look, the first half cash flow last year was about -- I think about $5 million compared to about over $100 million of cash flow for the first half of this year. So actually, we outperformed the cash flow profile from last year during this year.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [18]

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Right. And as my follow-up, we've heard of the cloud vendors in general starting to get a little more aggressive with pricing in the channel. Just wanted to get a sense of the healthiness of your cloud business. How is that performing? Has the margin structure changed in that business? And also, is there a typical rebate negotiation with the cloud vendors like you do see with your traditional OEMs?

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Richard T. Hume, Tech Data Corporation - CEO & Director [19]

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Yes, Param, this is Rich. I have to say that our cloud platform, as you know, StreamOne is our platform, along with the rest of the cloud modules, which surrounded -- has performed exceptionally well in the first half of this year. I would tell you that from a vendor perspective, like ourselves, they're all looking to build the capability throughout the channel. So there are times where special investments come into play, et cetera, et cetera, to go and drive that category. And we have the opportunity to take advantage of some of that. I'd say that from an overall financial profile, it's been rather steady.

What happens with any technology through time, there's big incentives that are provided upfront, and over the continuum when the business ramps, those incentives get taken down a bit at a time. I still think that we're sort of in the ramp phase of this thing, and we're making some big investments, and we have the opportunity to have our vendors participate -- help us through some of those -- that front-end cycle. And in time, you'll see some moderation. But to date, I'd have to say that we're very pleased with the financial performance of our cloud business.

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Paramveer Singh, BofA Merrill Lynch, Research Division - Associate [20]

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And the rebate structure of that business -- does it exist? Or is it different from the traditional OEMs?

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Richard T. Hume, Tech Data Corporation - CEO & Director [21]

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It's traditional. It's -- there's always different flavors out there in the market. So we deal with the different flavors like we do with any other software or hardware category. But yes, I'd say that it's pretty traditional.

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Operator [22]

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Our next question is from the line of Tim Yang with Citi.

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Zhen Yang, Citigroup Inc, Research Division - Assistant VP [23]

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Can you talk about your Huawei inventories in Europe? Do you still have roughly 4% of inventories in Huawei products? And how should we think about revenue and profit impact from those inventories? And I have a follow-up.

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Richard T. Hume, Tech Data Corporation - CEO & Director [24]

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Yes, Tim, thanks for the question. In Chuck's prepared comments, I think he had reflected that from the opening of the quarter to the close of the quarter that we had reduced our inventory by approximately 50%. So I think last quarter, we talked about it being 4% of the overall inventory, and you can go do the math from there. I would say that relative to our expectations, the demand for our mobile category in total has been -- especially for Chinese vendors has been quite good. So I think that we felt compelled to call that exposure out. Because of the uncertainty, certainly, there's lots of uncertainty as we move forward, but I think the reduction of the overall inventory was at a rate and pace that was accelerated relative to our expectation.

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Zhen Yang, Citigroup Inc, Research Division - Assistant VP [25]

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Got you. That's very helpful. And then your account payable declined sequentially in Q2, but I think in the past, you normally have account payable increase in Q2. So can you maybe talk about the reasons for the account payable decline?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [26]

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Tim, this is Chuck. Sure. It's just that whenever we pay our payables, it at a moment's snapshot in time, and you really need to look at our overall inventory and payables together and then our overall capital structure. So I wouldn't get too interested in the exact level of payables at the actual quarter end. There isn't anything significantly different or that is insightful to take away from that.

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Richard T. Hume, Tech Data Corporation - CEO & Director [27]

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Yes. And I think that the way we have a look at all the components, as Chuck had qualitatively talked about, is we use the cash day metric, which includes all of those variables. And if you take a look on a year-to-year basis, I believe our cash days were flat at 18 cash days. So we're pretty satisfied and, obviously, this rolls through to -- those elements are -- ultimately become part of return on invested capital and, obviously, we've performed favorably there. So that's sort of the way we think about it.

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Operator [28]

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The next question is from the line of Keith Housum with Northcoast.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [29]

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Congratulations on the quarter. As we think about the tariff environment, obviously, September 1 is coming up quick. And I think it's understood you guys are passive for the tariffs. But can you kind of comment on the environment right now in terms of, one, the ability of vendors to kind of increase their prices? And then second, in prior quarter, you guys had a benefit from being able to sell your inventory at higher prices when the prices were coming through. Is that built into our guidance for this quarter?

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Richard T. Hume, Tech Data Corporation - CEO & Director [30]

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Yes. So Keith, first, I would want to qualify this by saying I'm not a tariff expert. This thing moves so quickly that day-to-day things change. But from what I know as it relates to the new tariffs, there has been sort of a delay in terms of the implementation for another 90 days. So the first thing I would tell you is that tariffs had no to negligible impact on our Q2 results. Number two is, Q3 to date, there have been no known tangible or material tariff implications to our business. That being said, we'll watch to see how things unfold and then respond accordingly. To answer your question directly, our experience has been that if vendors want to increase prices based on any cost increments, they do so immediately and, concurrent with their price change, we flow that through our system. So as we've talked about multiple times in the past, under most circumstances, we would not be impacted by such moves. In fact as we've talked about, it could provide us with a bit of a financial benefit. But I would tell you that for our Q3 guidance, we're neutral relative to tariffs. So there's nothing built in assuming upsides or downsides associated with tariff or regulation.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [31]

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Okay. And just as a follow-up. I appreciate that. Chuck, in your guidance for 3Q, do you guys have any stock repurchases in your assumptions there?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [32]

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Keith, thanks for the question. No, we do not have any stock repurchases built into our guidance.

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Richard T. Hume, Tech Data Corporation - CEO & Director [33]

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Yes. Just one clarifying point to our last discussion, I think there are some tariffs that kick in on September 1, but I would remain back with what I said earlier. There is nothing built into our guidance related to tariff upside since who knows what will happen on September 1 given the ebb and flow of the negotiations.

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Operator [34]

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Our next question comes from the line of Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [35]

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I was wondering can you just give a little more color on what you're seeing in Europe when you're already in the quarter. I guess there's been so much commentary out of, again, your OEM partners and then others in the space. I'm curious as to whether or not you saw it weaken or strengthen during the quarter and what areas in particular are strong versus weak.

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Richard T. Hume, Tech Data Corporation - CEO & Director [36]

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Yes. So first of all, on the global scale, we certainly see Europe being weaker. We've talked about that previously. I think if you take a look at our Q2 results, then we actually at actual currency were minus 2 and at constant currency or constant euro, we were plus 2. I think that we were able to again use the leverage of our portfolio to move to where there was demand. I would tell you that, as you know, we think about 2 segments in our business, both endpoint and advanced, and both of those segments at constant currency actually had growth. So I think that we kind of see that -- if I were to describe Europe, I wouldn't say that we see weakness in one segment versus the other, but the overall macro IT segment as being weaker relative to what it was last year.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [37]

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Okay. And then any thoughts on acquisition strategy? You upped your share repurchase plan given, I think, the strong free cash flow year-to-date, maybe not in the quarter. But how should we think about where you're at, now that you've gone through so much of the integration of TS in terms of thinking about maybe incremental acquisitions? And where do you see potential, I don't know, holes in your portfolio, for lack of a better term?

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Richard T. Hume, Tech Data Corporation - CEO & Director [38]

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Yes. So thank you, Shannon, for the question. So what I would tell you is when you think about us in the long term, I get back to what we talk about in terms of our capital allocation strategy, and that is, we'll deploy 50% of our capital around acquisition opportunities and then 50% of our incremental capital around potential share repurchase. Now you shouldn't think about that on an annualized basis. Things sort of ebb and flow, but in the long term, they work out that way.

As it relates to our acquisition strategy, we absolutely are interested to pursue targets that align with our strategy. So we are interested in, obviously, getting back to our 4-pillar strategy. We're interested in geographic opportunities that help fill gaps. We're interested in technology capabilities in the area of cloud, analytics, security, et cetera. And I think that there are targets like that in the market, but we're very disciplined and careful as it relates to what is a good fit for Tech Data. But I will tell you that as those -- as we screen and look at those targets that we will find our way back to, in the longer term, the 50-50 capital strategy that we talked about.

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Operator [39]

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Your next question is from the line of Ananda Baruah with Loop Capital Markets.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [40]

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I appreciate the opportunity to ask a couple of questions here. I guess just to start, it doesn't sound like you're making a meaningful distinction between your SMB business and your enterprise business. Is that the case? And just would love any context in what you see in between the 2. And then I have a follow-up or 2.

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Richard T. Hume, Tech Data Corporation - CEO & Director [41]

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Yes. So Ananda, what I would tell you is Tech Data has traditionally been more skewed towards the SMB segment. And I would say that from a sustaining time line perspective, we are making a distinction in that SMB is an area that has provided very good growth for Tech Data over time. In particular, I had cited a metric in the Americas where we have had double-digit growth over -- every year for the last 4 years. Anecdotally, and I underline that word anecdotally, we think that the market is a bit stronger in that SMB segment relative to the large-scale enterprise segment currently. And so the market dynamics are playing to the strengths of Tech Data's customer set currently. And so that has been something that we've been working at for quite some time. Now who knows what the future holds as it relates to the segments in terms of strength or weakness? I think that overall, the economy is a bit challenged and maybe impacting some business segments greater than others. I think, again, anecdotally, that's what our view would be.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [42]

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That's helpful. And sort of your larger suppliers who are fairly prominent suppliers to you guys that have either missed and lowered or missed and lowered and some repeatedly -- who appointed specifically to large account activity. Can you give us any sense for -- as to what degree or under what context you guys would fulfill not specifically to the accounts you're talking about, but just to sort of that domain in general. I know that you do fulfill to many enterprise-level customers. And I just think it would be helpful -- any context you can provide, it will be helpful for us to think about sort of your positioning in enterprise relative to some of your larger suppliers who have actually been challenged the last couple of quarters in large enterprise. And then I have one last follow-up.

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Richard T. Hume, Tech Data Corporation - CEO & Director [43]

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Yes. So as you know, we serve approximately 115,000 customers globally. Again, the SKU in that portfolio is probably more towards those who serve -- those who don't serve large-scale enterprise. And so when I talk about the portfolio, I've been focused previously on the product portfolio, but again it's the diversity of that customer portfolio, I think, that allows us to differentiate ourselves a bit relative to the entire -- being painted with the same brush as the entire IT market. And our sales model is flexible enough to allow our sales resources to mine those opportunities that would exist from a product dimension as well as a customer dimension as we execute our business.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [44]

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And last quarter, you guys gave some metrics with regard to top line impact from your portfolio optimization initiative. That was helpful. Are there any metrics you could give this quarter with regards to portfolio optimization impact?

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Charles V. Dannewitz, Tech Data Corporation - Executive VP & CFO [45]

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Sure, Ananda, and thanks for the question and joining us today. The impact for Q2 as compared to last year was pretty consistent with the amount that we noted in Q1. So that's around $300 million of revenue related to the optimization program.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [46]

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That's really helpful. Congrats on the solid results.

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Richard T. Hume, Tech Data Corporation - CEO & Director [47]

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Thank you. The team has worked extraordinarily hard over the last year, and we appreciate the acknowledgment on the results. Thank you, Ananda.

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Operator [48]

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Our next question is a follow-up from the line of Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [49]

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Just a follow-up, Rich, regarding your opening comments. You talked about an example of working with a reseller selling into a large customer a solutions deal where it's as-a-service model as opposed to traditional model. And we're hearing that more and more from resellers, from OEMs. How fast is that type of business growing? And what is the changes or difference in revenue recognition for Tech Data versus the traditional model?

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Richard T. Hume, Tech Data Corporation - CEO & Director [50]

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Yes. So Matt, I'll give you my point of view. Number one is, I think the value proposition resonates quite well with the customer set. As it relates to the ramp of as-a-service offering setting aside software because we all know of that evolution going on, but I use the term technology-as-a-service, it's my impression that, that ramp has not been as bold and as significant a shift as some of the OEMs were aspiring to. That being said, it is a good value proposition, and we've validated that it does offer a very good profit opportunity.

As it relates to the annuity versus transactional, this also varies by relationship. So many times, there'll be, I'll use the word, bank/leasing company in the middle of this where they actually hold the paper and then the distributor and the reseller actually get paid transactionally. And then the annuity piece falls with the "bank." And then there are other arrangements where there truly is sort of an annuity for reseller and distributor. So it really varies. I think in time, there'll be one which will prevail over the other. Of course, we know that software as a category, software-as-a-service is more of the nonbank sort of transaction in my example. But the early thesis around physical things being bundled would lean more towards a bank "being involved."

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [51]

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Okay. That's quite helpful. And then just regarding the questions around tariffs. Just another question there regarding any signs of any pull-in from customers where -- particularly, in networking, I noticed your Cisco business was up significantly both sequentially and year-on-year. Are you seeing any of that where customers and resellers are pulling ahead of any potential tariff increases?

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Richard T. Hume, Tech Data Corporation - CEO & Director [52]

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Not as visible to management or senior management. Obviously, our presidents in the geographies are very close to the business and have a beat with the customers. And there is nothing that's emerged that there is pull-aheads occurring. So I would say that it's not a prevailing trend that we're aware of.

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Operator [53]

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Thank you. This concludes Tech Data Corporation's Fiscal Year 2020 Second Quarter Earnings Conference Call. A replay of the call will be available in about 1 hour at techdata.com. Thank you for attending today's conference call, and have a great day.