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Edited Transcript of TECD earnings conference call or presentation 8-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Tech Data Corp Earnings Call

Clearwater Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of Tech Data Corp earnings conference call or presentation Wednesday, March 8, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arleen Quinones

Tech Data Corporation - VP of IR

* Bob Dutkowsky

Tech Data Corporation - CEO

* Chuck Dannewitz

Tech Data Corporation - EVP & CFO

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Conference Call Participants

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* Matt Sheerin

Stifel Nicolaus - Analyst

* Adam Tindle

Raymond James & Associates, Inc. - Analyst

* Param Singh

BofA Merrill Lynch - Analyst

* Jim Suva

Citigroup - Analyst

* Shannon Cross

Cross Research - Analyst

* Keith Housum

Northcoast Research - Analyst

* Rich Kugele

Needham & Company - Analyst

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Presentation

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Operator [1]

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Good morning. Welcome to the Tech Data Corporation's FY17 fourth 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, Vice President of Investor Relations. Ma'am, you may begin.

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

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Thank you, Melissa. Good morning and welcome to Tech Data's earnings conference call and webcast to review our financial results for the fourth quarter and FY17. I am joined this morning by Bob Dutkowsky, Chief Executive Officer, and Chuck Dannewitz, Executive Vice President and Chief Financial Officer.

For a detailed look at our fourth 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/investor. Unless otherwise specified, all growth comparisons we make on the 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 in today's call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current expectations and are subject to risks and uncertainties.

These risks and uncertainties include but are not limited to those factors identified in the press release, and in our filings with the Securities and Exchange Commission. Including those filings related to our acquisition of Avnet's Technology Solutions business, as well as our most recent annual report on Form 10-K which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

Please be advised that the statements made during today's call should be considered to represent the expectations of Management as of the date of this call. The Company undertakes no duty to update any forward-looking statements to actual results or changes in expectations.

Also, throughout this conference call, we will reference both GAAP and non-GAAP financial measures from which we exclude from our GAAP financial results certain items. A detailed reconciliation between results reported in accordance with GAAP and non-GAAP financial measures can be found in the press release and on the Investor Relations portion of our Company's website located at techdata.com/investor.

In addition, this call is the property of Tech Data and may not be recorded or rebroadcast without specific written permission from the Company. I will now turn the call over to Tech Data's Chief Executive Officer, Bob Dutkowsky.

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Bob Dutkowsky, Tech Data Corporation - CEO [3]

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Thank you, Arleen, and good morning, everyone, and thanks for joining us today. Our strong Q4 results capped an historic year for Tech Data, a fiscal year of significant strategic progress and strong financial performance.

In FY17, we achieved all of our primary financial objectives. We gained share in key geographies, gained share in selected product categories and with key vendors. We also improved our non-GAAP operating income, and delivered our highest non-GAAP earnings per share in the history of our Company.

In addition, we generated more than $650 million of operating cash flow, and earned a return on invested capital of 14%. A 100 basis point improvement over the prior year, and well above our cost of capital.

Tech Data accomplished all of this despite a dynamic global, geopolitical and economic environment, a significant vendor consolidation, and an evolving IT consumption model. On top of this, we recapitalized the Company and entered into the largest, most transformative acquisition in our Company's history, which we completed last week.

Our FY17 performance clearly validates our strategy and speaks to the strength of our operation, the quality of our management Team, and the exceptional talent and hard work of our employees. Our strong Q4 and fiscal year results are also a testament to the strength and diversity of our end-to-end portfolio of IT solutions, which continues to enable us to navigate an ever-evolving IT landscape. Our scale and breadth allows us to capitalize on market opportunities while delivering differentiated value to our channel partners.

Now, with the addition of Avnet's Technology Solution business, Tech Data will be capable of delivering even more differentiated value. The new Tech Data is perfectly positioned at the epicenter of the IT ecosystem, with breadth and people to reach more markets and serve more channel partners with more solutions than ever before. We are confident that the strategic and financial benefits of this game-changing combination are compelling for our customers, vendors, employees, and our shareholders.

I will share some additional thoughts on the strategic advantages technology solutions brings to Tech Data later in my remarks. But now I'll turn the call over to Chuck who will review our financial and operational results for the quarter and the fiscal year. Chuck?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [4]

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Thank you, Bob, and good morning, everyone. Let me begin by saying that I very much share Bob's enthusiasm about the completion of the Technology Solutions transaction.

It is truly a transformative acquisition, and one that provides breadth in terms of both [detailed] main knowledge and skill sets, as well as a greatly enhanced earnings and cash flow profile. All of which will enable us to capitalize on a number of market opportunities, including those in emerging technologies. It is for these reasons that we are confident that the combination of our two companies will create significant value for Tech Data shareholders.

As Bob indicated, our fourth quarter and FY17 financial results highlight our Company's ability to deliver outstanding returns for our shareholders despite a muted demand environment, disruptive technologies, and various external factors. In FY17, our strategic financial focus on growing operating income dollars while deploying the right level of capital to generate those dollars enabled Tech Data to deliver double-digit growth in non-GAAP earnings per share, generate excellent operating cash flow, and earn an industry-leading return on invested capital.

During the latter part of FY17, we also transformed our capital structure to finance the acquisition of Technology Solutions. We added a combination of $1 billion of new term loans, upsized our revolving credit facility by $500 million, and issued $1 billion of public bonds. We believe these changes to our balance sheet will continue to provide us with financial strength, and the optimal capital structure to deliver strong returns to our shareholders.

Let me now review with you our results for Q4, which was an excellent quarter and marked a strong end to a historic year for Tech Data. On a reported basis, worldwide Q4 sales of $7.4 billion declined 1% year over year, but on a constant currency basis were up 2% from the prior-year quarter. The currency impact is due primarily to a decline of 16% in the British pound to the US dollar average exchange rate from the year-ago quarter.

At a regional level, sales in the Americas were $2.7 billion, flat on both a reported and constant currency basis, in line with our expectations. In the US, sales to resellers serving the public sector, primarily the education, federal, and healthcare verticals, and sales to large national accounts were strong.

Also in the US our S&B sales division delivered a fifth consecutive quarter of double-digit growth, validating our decision to consolidate our S&B sales function in Clearwater during the last fiscal year. This strength was offset by lower sales to large value-added resellers, and by lower sales to less profitable products into the retail channel.

At a product level, the Americas experienced solid sales growth in broadline products, namely notebooks and desktops. Software subscriptions were also up in the quarter, as well as next-generation technologies, including cloud and security. This growth was offset primarily by lower sales of tablets, networking, storage, and consumer electronics products.

In Europe, sales were $4.7 billion, down 1% on a reported basis and up 3% in constant currency, better than the relatively flat sales we expected as we entered Q4. Several countries posted strong year-over-year sales growth in local currencies, including Switzerland, Italy, and Iberia, and our UK operations turned in another exceptional quarter delivering strong double-digit sales growth and the highest sales in local currency in its history. At a product level, the European sale region sales growth was driven primarily by mobile phones, notebooks and software subscriptions, partially offset by lower sales of tablets, storage, and traditional software products.

Worldwide gross profit was $371 million, an increase of $16.4 million. On a constant currency basis, gross profit grew approximately $27 million, or 8%.

Worldwide non-GAAP SG&A expenses, which excludes $5.1 million of acquisition-related intangibles amortization expense, increased $11 million or 5%. Primarily due to higher expenses resulting from our ongoing strategic investments, offset slightly by the impact of currency.

As a percentage of sales, non-GAAP SG&A expenses increased 17 basis points. On a constant currency basis, non-GAAP SG&A expenses increased $17 million or 7% from the prior-year quarter. Worldwide non-GAAP operating income was $122.1 million, up $5.3 million or 5%.

On a constant currency basis, non-GAAP operating income improved $9.9 million or 8% year over year. On a regional basis, the Americas non-GAAP operating income grew $8.5 million to $47.4 million, an increase of 22%. And as a percentage of sales, grew to 1.75%, up 31 basis points from the prior-year quarter.

These outstanding operating results in the Americas region were due to several factors. Including selling the right products to the right customers, which enhanced vendor partner incentives, excellent inventory management, as well as strong overall execution by the entire Americas team.

In our European region, non-GAAP operating income dollars declined $3.8 million to $77.7 million. On a constancy currency basis, Europe's non-GAAP operating income grew by $900,000 or 1% over the prior-year quarter. As a percentage of sales, Europe's Q4 non-GAAP operating income was 1.65% compared to 1.7% in the prior-year quarter.

Our non-GAAP effective tax rate for Q4 was 25.2%. Non-GAAP net income was $87 million, an increase of $6.1 million or 8%, and non-GAAP earnings per diluted share were $2.45, a 7% improvement over the prior year. On a constant currency basis, non-GAAP earnings per diluted share improved 11% compared to the prior-year quarter.

Turning now to some of our balance sheet and cash flow metrics. Our cash conversion cycle in Q4 was 15 days, down 7 days compared to Q3 and 5 days from the prior-year quarter.

In Q4, cash generated from operations was approximately $445 million, bringing our year-to-date operating cash flow to $657 million. During the fiscal year, we continued to work strategically with our vendor partners and secured mutually beneficial payment terms that resulted in stronger-than-normal cash flow generation during Q4.

In terms of total cash, we exited the quarter with a cash balance of $2.1 billion. This includes approximately $1 billion in proceeds from our recent public debt offering, which was utilized last week to partially finance the acquisition of Technology Solutions. Capital expenditures were $8.4 million in the quarter, and for FY17 were $39 million.

For the trailing 12 months, we earned a return on invested capital of 14%, well above our weighted average cost of capital which is approximately 9%. At the end of Q4, we had $2.2 billion of equity, a 39% debt-to-capital ratio, and access to approximately $1 billion of bank debt facilities.

We plan to use the combined Company's strong cash flows to deleverage our balance sheet, and expect to achieve a total debt to adjusted EBITDA ratio of approximately 2.5 times within 18 to 24 months. And lastly, in Q4, two of our vendor Partners represented 10% or more of our sales, Apple represented 24% and HP Inc., was 12%.

Turning now for a few comments related to Q1 guidance and our expectations for the impact of Technology Solutions. As many of you know, for the last two quarters, Avnet has provided limited commentary on Technology Solutions' operating results, reporting this segment of their business as a discontinued operation. Until the closing last week on February 27, we had very limited visibility to Technology Solutions' detailed operating results and their financial forecasts.

Given the short time frame between closing and reporting of our Q4 results, we will not be providing financial guidance for Q1 of FY18. We plan to resume guidance for the combined Company when we report our first-quarter earnings.

We also plan to hold an investor day in the fall of 2017 where we will present detailed operating and financial models for the new Tech Data. We want to be clear that we are confident in the Technology Solutions business in both the financial and strategic benefits of the transaction.

As we stated when we announced the acquisition on September 19 of this last year, we expect the transaction to be significantly accretive to Tech Data's non-GAAP earnings per share during the first year after closing. We expect to achieve approximately $100 million of cost savings within 24 months, with $50 million in the first 12 months and another $50 million in the second year for a combined cost savings of $100 million in the second full year. Also, as originally stated, we expect to incur one-time costs to achieve these savings of approximately $150 million.

As you build your FY18 financial models for the consolidated business, please keep the following in mind. First, the historical seasonality of our businesses. At both Tech Data and Technology Solutions, greater leverage is achieved and thus more earnings power is anticipated to be realized in the second half of our FY18.

Second, our Q1 FY18 results will include a stub period for Technology Solutions that excludes the month of February. And finally, we expect the first-year synergies of approximately $50 million to be more heavily weighted towards the second half of our fiscal year. I will now turn the call over to Bob for additional comments.

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Bob Dutkowsky, Tech Data Corporation - CEO [5]

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Thanks, Chuck. While we're extremely pleased with our Q4 and FY17 accomplishments, we're even more excited about the future of our business and the talent, skill sets, and capabilities that Technology Solutions brings to Tech Data. The team of outstanding executives we put in place to lead the new Tech Data represents the best of the best from our two companies.

Last week, in conjunction with the closing, we announced my direct reports, an exceptional team of executives who will support our global operating model. We also announced the executive leadership of our regions reporting to Rich Hume, our Chief Operating Officer.

Patrick Zammit, who formally led Technology Solutions business on a global level for Avnet, has been appointed President of our European region. Graeme Watt, who formerly led Europe for Technology Solutions, will now lead our European value business.

In Europe, where Tech Data is already the leading value distributor, there is tremendous opportunity to leverage the strengths of both organizations. And when combined with the strengths of our broadline, mobility and software practices, will enable Tech Data to deliver unparalleled end-to-end value across the European continent.

William Chu formerly ran Asia-Pacific for Avnet Technology Solutions has been appointed President of our new Asia-Pacific region. Establishing a footprint in APAC is one of the more strategically appealing aspects of acquiring Technology Solutions, and we're enthusiastic about the opportunities for growth its addition presents for us and our vendor partners.

We are also very excited about the talent, expanding capabilities and extended geographic reach Technology Solutions brings to our Americas region. Joe Quaglia will continue in his role as President Americas, and Jeff Bawol, who formerly ran Technology Solutions business in the Americas will lead our value business in the region. With Technology Solutions, our Americas region will now have the scale and scope necessary to deliver superior technology services, software, hardware and solutions across the data center.

Technology Solutions also provides us with the opportunity to re-enter Latin America, but now with a focus on the data center, a more specialized and profitable business than the one we exited a few years ago. With expanded reach into several countries in Latin America, Tech Data can continue to grow these markets through the delivery of new technology that drive and complement the data center.

Along with our regional businesses, we also announced three new global executives reporting to Rich Hume. The computing component's business of Tech Data and Technology Solutions will be combined and led by Jaideep Malhotra, who has been appointed President Global Computing Components.

Michael Urban, who formerly ran Tech Data's broadline business in Europe, has been appointed Corporate Vice President of Strategy, Transformation and Global Vendor Management and will also lead our cloud computing business on a global basis. And finally, Els Demeester, who formerly ran Tech Data's Benelux region has been appointed Corporate Vice President Integration, leading our global integration efforts.

I could not be prouder of this outstanding leadership team. And I am confident that they will accelerate the Company's strategic momentum, will build on our strong execution capabilities, and will be at the forefront of transforming not just our Company, but also the IT distribution industry.

There continues to be tremendous energy and enthusiasm around expanding relationships with the new Tech Data. In particular, our channel partners have shown overwhelming support of the combination, as they see multiple benefits from our larger geographic footprint and expanded capabilities.

Vendor partners see how our enhanced capabilities will help them reach new, more diversified customer sets and help accelerate their growth in third platform technologies. Our customers recognize the broader end-to-end portfolio of IT solutions, and a deeper set of services, skills and education we can now offer to help them grow their businesses and capture opportunities in new and emerging technologies.

Fundamental to our confidence in this transaction is that we believe technology will continue to proliferate and computing will continue to grow. However, as work loads increase, they are not migrating to one particular platform. Rather, they are being distributed across an increasingly broad array of platforms, from smart phones and smart devices in the home to PCs in small private data centers, to the cloud, all the way up to world-class, high-performance servers. This migration is disrupting legacy IT markets, and creating new opportunities in the IT market place.

As we look out over the next few years, much of the growth in IT spending is expected to take place in the next-generation technologies and the services that support these environments. Such as converged and hyper converged infrastructure, cloud, mobility, security, and big data and data analytics. We came to the conclusion that continuing on an organic path would not get us where we need to be fast enough.

Technology Solutions gives us deeper skills, and accelerates our position with new and emerging vendors in these areas. Over the next decade, as workloads are optimized across platforms, these capabilities and value-added services in both the broadline and data center businesses will be critically important and will be the key to delivering the end-to-end solution portfolio that we believe will be a true differentiator in the market. As we like to say, from the data center to the living room.

We look forward to sharing additional information with you about Technology Solutions business on our first quarter earnings call. In the meantime, we're focused on integrating the two companies and achieving the strategic and financial benefits of the acquisition with minimal disruption. We will leverage each other's strengths, learn from each other, and apply the best of both companies.

In FY18, we see an overall flattish growth environment. We will continue to optimize our core businesses, maintain disciplined cost controls and gain profitable market share in key geographics within select product categories and with leading vendors. At the same time, we'll accelerate our activities in expanding our capabilities in next-generation technologies.

We believe that focusing our efforts in these areas will once again enable us to grow faster than the industry in select markets, improve non-GAAP operating income, and generate industry-leading returns on invested capital. We're committed to maintaining that level of operational excellence to continue to deliver strong results for our shareholders.

In terms of capital allocation, our first priority is debt reduction. While we will continue to consider all value-adding create opportunities for our shareholders, our principal focus for the next 18 to 24 months will be to deleverage our balance sheet in order to retain our investment-grade ratings.

We extend our thanks to our vendors and customers for their business and continued partnership. I would also like to express my deepest gratitude to my Tech Data colleagues around the world, whose hard work and dedication contributed to an extraordinarily successful year for our Company. And we welcome the former Technology Solutions employees to the Tech Data family.

This is the beginning of an exciting new chapter in our Company's history. We're immensely proud of our achievements in FY17, and highly optimistic about our future. With that, we'd like to open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

Our first question comes from the line of Matt Sheerin with Stifel. Please proceed with your question.

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Matt Sheerin, Stifel Nicolaus - Analyst [2]

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Yes. Thanks and good morning. Just a couple of questions. Just one on the $100 million in synergies. Just to clarify, you're still sticking to the target of $50 million this year and an incremental $50 million next year? The press release was a little bit confusing, talking about $100 million in the second year, but I'm assuming that means a run rate of $100 million, is that correct?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [3]

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Matt, this is Chuck. Actually, the $50 million and $100 million that we're referencing are not run rate numbers, they're actual savings that would be achieved and would reduce our SG&A during those respective periods. So I think that's important to note. Giving an example --

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Matt Sheerin, Stifel Nicolaus - Analyst [4]

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So it's $150 million total then?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [5]

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No, it's not. We're going to achieve $50 million of savings in year one, that's full savings. In year two, we would add another $50 million to get to a combined $100 million in the second year.

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Matt Sheerin, Stifel Nicolaus - Analyst [6]

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Got it. Okay. And just -- and I appreciate that you're not giving guidance given that you just closed the deal next (sic) week, but when we think about sales synergies or potential losses of business due to the acquisition, there's some competitors out there talking about taking share from Avnet in the neighborhood of several hundred million dollars as far as look to diversify their distribution base. At the same time, you're looking at opportunities to expand your sales activities in Asia and then obviously cross sell into the existing Avnet reseller base. So, what should we be thinking about for revenue both from an Avnet standpoint and a Tech Data standpoint?

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Bob Dutkowsky, Tech Data Corporation - CEO [7]

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Yes, Matt, it's Bob. I'll try to answer your question. As you called out, we only closed on the TS acquisition last week. So for us to be able to do much planning at the territory level or at the customer level has not been possible, and we're just entering into those dialogues now with our new colleagues. I can tell you, from the Tech Data perspective, we're very comfortable with where we're positioned and our competitive win rates that we're realizing in the geographies where we work.

This is an interesting business. There are opportunities to win and lose every single day, and you can see from the year that we just posted or the quarter that we posted where we've had strong improvements in profitability, we've been able to pick and choose the opportunities where we want to win. They deliver good bottom-line performance and they utilize our capital very efficiently. So top-line sales, Matt, I would suggest that, that's just one metric of a well-operating distributor. It's not always the most important one. We like to focus on operating income dollars and we like to focus on return on invested capital, and those are the metrics that we'd stand up with anybody else in the industry.

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Matt Sheerin, Stifel Nicolaus - Analyst [8]

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Okay. And just lastly, when we think about the synergies, I know Avnet has been talking about some shared-services agreement where Tech Data will be compensating Avnet for certain costs until you actually pull some of the operations out of Avnet. Would that be incremental to the savings that you're talking about?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [9]

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Actually, the savings that we're talking about takes into account when those transactional service agreements roll off as well. So, clearly we're relying on Avnet to produce certain IT services for us, accounting services, back office services, as we transition to our own teams, and we entered into those agreements with them, and as those roll off that will all factor into our synergy targets.

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Bob Dutkowsky, Tech Data Corporation - CEO [10]

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Part of the integration activities that are taking place now inside the new Tech Data are streams that manage the roll-offs of those transitional services, and there are teams of people that are focused on executing against those plans as aggressively as they can. In parallel, Matt, there's also a large team of people that are focused on driving the business and not disrupting the market, not disrupting the relationships with our customers and our vendors. So this kind of divide-and-conquer approach that we have to the integration is one that we think is really well designed, and we're executing against it very efficiently so far.

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Matt Sheerin, Stifel Nicolaus - Analyst [11]

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Okay. All right, thanks very much.

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Operator [12]

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

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

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Okay. Thank you and good morning. Bob, obviously as you mentioned, it hasn't been long since you closed the TS acquisition, but hoping you can start by just speaking to anything that you've learned since perhaps getting more visibility into this business, anything that has surprised you?

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Bob Dutkowsky, Tech Data Corporation - CEO [14]

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Yes. So, Matt -- Adam, I'm sorry, it's only been less -- just a little bit over a week since we closed it and what I've seen so far, and I think my colleagues around the world would echo this, is the enthusiasm that the Technology Solutions team has towards joining Tech Data and the enthusiasm that exists around that extended ecosystem, whether it be Tech Data customers or TS customers or Tech Data vendors or TS vendors. The whole ecosystem I think can see the value of what we're going to create when we complete the integration process.

The ability to have a distributor that can move with these migrating workloads that are happening every single day and have vendor relationships and skills and competence that can lead the channel to wherever the workload needs to go. The channel is myopically focused on the cloud, but I would contend that equal amounts of workload are shifting across other platforms every single day. And so, to be an effective distributor in the next few years and for the next decade, we believe you have to have that ability to be end to end. And I think the market, the channel, the customers, and certainly the people of Technology Solutions and Tech Data appreciate that and see the opportunity to be part of building this next-generation distributor, and I think there's a degree of excitement around that concept everywhere that we look.

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Adam Tindle, Raymond James & Associates, Inc. - Analyst [15]

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Okay. Maybe just trying to corral expectations a little bit here. You made a comment that you were anticipating a flattish growth environment in FY18. Was that a comment for both Tech Data and TS? And if we just take your comments more broadly, all the pieces that you've given us, I think we can get an incremental $5 of EPS over your [630] number that you reported this year, with the full synergies. Is that the right way to think about earnings power, and maybe half of this incremental earnings in FY18?

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Bob Dutkowsky, Tech Data Corporation - CEO [16]

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Adam, let me take the first part and then Chuck will handle the second part. My comments were trying to say that we think the environment is going to be flattish, that IT spending will be flattish, not that Tech Data will be flattish. Remember, we didn't offer guidance for the quarter. So that's a view of what we think spending is going to look like. Obviously, Tech Data performs above the market in some segments and below the market in other segments. And as the year unfolds we'll resume guidance in Q1 and, as we said, we hope to hold an analyst day later in the fall and map out what we see as the real opportunities for this new Tech Data going forward.

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [17]

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Adam, this is Chuck. In regards to the earnings power, you are correct, it's significantly accretive to Tech Data. We are not giving guidance for full year, we're not giving guidance for Q1, as we noted. It's just been a week since we've actually acquired TS and we'll give guidance for Q2 when we release our Q1 earnings. But you are correct, it is significantly accretive to Tech Data. If you model out what they have from a legacy's business, you add on the incremental debt load and we've spelled out exactly what the debt and the interest rates are so forth in regards to that debt. You add that on and you add on the synergies, it is significantly accretive.

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Adam Tindle, Raymond James & Associates, Inc. - Analyst [18]

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Chuck, could you just give us a quick idea for quarterly run rates or interest expense? Is what we saw this quarter the right way to think about it?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [19]

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No, this quarter does not include the full debt load. The term loans were funded as of the acquisition debt -- acquisition date, so you'd need to add that on. So, actually you need to go through and add in the interest expense on our public bonds, which you have that interest rate, and our term loans are at normal bank rates with our normal LIBOR on top of -- a normal spread on top of the LIBOR rate. So you should be able to model fairly effectively a good range for interest expense.

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Adam Tindle, Raymond James & Associates, Inc. - Analyst [20]

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Great. Thank you.

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Operator [21]

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

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Param Singh, BofA Merrill Lynch - Analyst [22]

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Hi. Thank you. So, Chuck, maybe for you. Wanted to break down what was in that $100 million synergy number. Obviously part of it you mentioned was a shared-service agreement, but how much of it is operations, consolidations on the distribution side, and how much it is back-office people, and how much of it is sales? If you could give some clarity, that would be great. And what do you expect from an IT integration standpoint?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [23]

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Right. In terms of the $100 million, it's important to note that we are not including any synergies in regards to sales. That is purely cost savings and they're primarily coming from a combination of items, including our technology platforms, putting two platforms together, selected front and back-office functions and, again, duplicative administrative functions. So it really is cost savings from primarily personnel and tool sets versus any kind of synergies from sales.

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Param Singh, BofA Merrill Lynch - Analyst [24]

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Actually, what I meant was sales personnel cost synergies, so is that part of the $100 million or not?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [25]

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The sales synergies or dissynergies are not part of the $100 million. This is purely cost savings driven from duplicative back-office and front-office costs.

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Bob Dutkowsky, Tech Data Corporation - CEO [26]

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But sales coverage is included. The duplicate sales coverage that we're working our way through right now is included in that.

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [27]

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Correct.

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Param Singh, BofA Merrill Lynch - Analyst [28]

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Okay. Got it. And on the IT integration side, what do you expect? You both are on SAP but what do you expect to do, what's the time line for that? Any clarity there?

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Bob Dutkowsky, Tech Data Corporation - CEO [29]

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Yes. That's one of the areas where we were able to work more aggressively prior to the closing to map out a strategy around converging our two SAP systems together. Just from a high level, the Tech Data SAP system was generated and grew up to support broad-line business, and the Avnet SAP system was generated to support the value business. And so, by combining the best of both of those systems, we'll clearly build the most functional world-class IT system that will support a global IT distributor like Tech Data is today. So, we have an awful lot of functionality to choose from, as opposed to functionality we have to build in, and that represents a lot of -- an area that we get very excited about when we think what our IT capabilities will look like.

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Param Singh, BofA Merrill Lynch - Analyst [30]

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Got it. Now, on the share gains that you talked about, obviously Dell EMC is coming back into the channel, how much incremental revenue do you expect from that? And then, can you highlight some of the wins that you recently got? Because what we heard from the retail channel was that one of your competitors was becoming more aggressive in that particular retail channel with broad line, so any comments there?

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Bob Dutkowsky, Tech Data Corporation - CEO [31]

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Yes. So referring to the Dell EMC consolidation, Tech Data was uniquely positioned in that we sold both Dell and EMC and VM ware, and so when the EMC consolidation happened, we were in a good spot and obviously we've announced that we'll be a distributor of the broad array of products from Dell Technologies. Avnet also had a strong practice around EMC and some Dell platforms, and so there's a case clearly where one plus one can equal more than two, as we put the two pieces together. Again --

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Param Singh, BofA Merrill Lynch - Analyst [32]

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How do you quan -- ?

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Bob Dutkowsky, Tech Data Corporation - CEO [33]

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No, we don't quantify it. Param, we haven't quantified it because we've only been together now for less than 10 days. So we'll be back to you with more detail about the metrics around the opportunities. Today, we simply don't have the answer to that question.

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Param Singh, BofA Merrill Lynch - Analyst [34]

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Got it. And then one last one really quickly. The $150 million one-time cost, do you expect to exclude that from non-GAAP numbers?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [35]

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Yes, we do.

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Param Singh, BofA Merrill Lynch - Analyst [36]

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Okay. Great. Thank you. I'll get back in line.

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Operator [37]

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

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Jim Suva, Citigroup - Analyst [38]

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Thanks very much. If I heard your comments correctly, I believe you mentioned a flat IT spending environment. I believe you're referring to the industry [as opposed to] for Tech Data for this year and if that is correct, is that a deceleration of what you're seeing because what we see is cloud and even global GDP that's growing faster than flat. And so can you just help me kind of bridge that and, indeed, was that more of a comment on industry and why would it be flat in undergrowing GDP?

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Bob Dutkowsky, Tech Data Corporation - CEO [39]

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Jim, I think that, that -- as we tried to say, that's more of our view of where IT spending is right now. IT spending fluctuates over time. There are periods of time where it accelerates, the end user acquires more capacity than what they might be able to absorb, and then in follow-on quarters spending may go down as they absorb the capacity that they have. All in all, when we look at the IT spend, we see it as kind of a flattish market. That doesn't mean that there's not pockets of growth, like the cloud, like security. And as we said in our comments, we performed very well in those areas in the quarter we just announced, and we anticipate we'll continue to perform well in those areas.

But, Jim, I think if you just looked at the benchmark performance of the key vendors in the IT space, and then look at the performance of the vast majority of our competitors, you'll see -- and average it all together, you'll see it's going to turn out to be about flattish. And so that's a big piece of the data that we use to do our forecasting, and that's where we see -- we think, over the next handful of quarters, we don't see tremendous upside in spending. But, again, I want to emphasize, there are pockets inside of that spend that represent really good opportunity for us, and we're investing to grow in those opportunity areas.

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Jim Suva, Citigroup - Analyst [40]

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Great. And then, switching gears for the acquisition to integration, you'd mentioned that you guys are both sides on SAP. Does that make it easier and, if so, are you able to switch the two systems onto exact same systems faster? Or do you roll it out region by region? Or how should we think about the rollout of the IT systems, as sometimes in the past the industry has had some issues with turning on IT systems?

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Bob Dutkowsky, Tech Data Corporation - CEO [41]

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Yes. So clearly we believe combining two SAP systems will be easier than combining our SAP system with any other alternative that might exist in the market place. And, quite frankly, it was one of the reasons that TS was attracted to Tech Data, is because it was fully operational on SAP. So the motion to build a world-class SAP system inside the new Tech Data, we believe, is a process that, A, we'll be successful at and, B, will create distance between our competitors with the capabilities that our system will have.

Keep in mind that Tech Data implemented SAP over 20 times as we rolled out our global footprint, and so we like to think that SAP deployments are a core competency of our Company. And we're very impressed with the deployment of SAP that TS brings. And as I said earlier, it has functionality in their system that they built into their system that we didn't have in our SAP system. So we're going to get to pick and choose the best of those functions and create an IT system that we think will serve our customers, vendors, and create value for our shareholders for a long period of time.

Our plan is to do that as quickly as we can and as thoughtfully as we can. And, as you said, it will be a regional deployment. We'll do pieces at a time and learn as we go so that, that deployment is as non-disruptive as we can possibly make it.

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Jim Suva, Citigroup - Analyst [42]

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Great. Thank you so much for your detail. That's great. Appreciate it. Thank you.

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Operator [43]

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

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Shannon Cross, Cross Research - Analyst [44]

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Thank you very much. I was just curious if you could talk a bit about, from a customer perspective, what you're seeing in terms of demand? You talked from a product perspective, but maybe on a vertical basis, public, et cetera, if there's been any changes during the quarter or any changes that you've seen since the election in terms of enthusiasm for potential spend? Thank you.

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Bob Dutkowsky, Tech Data Corporation - CEO [45]

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Yes. I think we said in our prepared comments that education, federal, and healthcare all had double-digit growth in the quarter. They were very strong. And we're particularly happy with the performance of our SMB segment. Those are small resellers that sell to small business, and that also had double-digit growth I think we said for the fifth quarter in a row. So, those are segments that, inside of the Tech Data business, are growing very effectively.

One of the things that was attractive to us about Technology Solutions is they have more of a vertical approach to the markets, and that vertical approach includes more skills and industry knowledge around verticals than what the traditional Tech Data go-to-market model includes. So, we see the opportunity to enhance our coverage, to enhance our vertical approach to the market, and to bring more value to our resellers around the globe.

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Shannon Cross, Cross Research - Analyst [46]

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No, I understand what you said on the call during the prepared remarks. I'm curious as to when you look forward to 2017, in terms of this calendar year, if you're expecting sort of similar trends within those segments or if there are any signs of changes within what you saw during the most recent quarter? Thank you.

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Bob Dutkowsky, Tech Data Corporation - CEO [47]

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Yes, Shannon. I think the whole world is watching to see what the political decision process generates in the United States in terms of things like tax rates, and all of that has an impact on how businesses large and small decide to budget spending on IT. And so there's, I think from my point of view, there's a bunch of open switches that are open and now need to be closed and when those closures happen, then decisions will be made. Until then, businesses large and small, consumers, government agencies all continue to consume IT products. They don't stop buying waiting for tax rate decisions, and you can see in the quarter that we just announced that we sold $7.4 billion worth of products.

There is consumption that's happening every single day that -- we believe our strength is the breadth of our offering sets, so that even if the data center takes a bit of a slowdown as workloads migrate to other computing platforms, Tech Data offers those other computing platforms as well. So we can weather the storm of down segments. A few quarters ago, the PC segment was down, yet we continued to have strong results, as those workloads migrated to other platforms and Tech Data delivered those other platforms into the market. So we're very comfortable that our ability to span the whole spend opportunity gives us the chance to compete, no matter where the workload moves.

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Shannon Cross, Cross Research - Analyst [48]

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Okay. Great. And then just one last question. Given the strength in notebooks and computers you saw this quarter, I'm curious as to what your thoughts are with regard to the PC market overall, or what your customers are telling you. Do you think this is a sign of a more stabilizing market overall, or is this just near-term benefit from Windows 10? Just any color you've heard from some of your customers. Thank you.

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Bob Dutkowsky, Tech Data Corporation - CEO [49]

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I think -- Shannon, I think this is a reflection on an aging install base as businesses took a pause buying PCs back over the last couple of years and eventually the technologies need to be replaced. And, coupled with that, our vendor partners have reinvested in innovation in the PC platform, whether it be the form factors, the two-in-ones, different performance, bringing different touch capabilities enhanced by Windows 10, all of that combined has helped refresh the PC market and the energy around the PC market. In the long run, the PC market will be a replacement market, and that will represent low-single digit -- flat-to-low single-digit growth opportunities, and Tech Data can perform very well in that space with our low-cost, low SG&A. And we believe that gives us a competitive advantage in that market.

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Shannon Cross, Cross Research - Analyst [50]

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Great. Thank you very much.

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Operator [51]

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Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Please proceed with your question.

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Keith Housum, Northcoast Research - Analyst [52]

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Good morning, gentlemen. If I could just ask for a little bit of clarification. If I go back to your guidance on the Avnet TS acquisition, it sounds like a lot of the synergies and whatnot are consistent with what you guys had previously said. But I think you've also said previously that you expect the post-acquisition synergies that you expect the net income will double compared to where you were previously. Is that also consistent with what you're saying today?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [53]

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What we provided when we gave the information related to the acquisition, we gave you the pro forma what it would have been at their last fiscal year that they closed in the same period of time for us, and we're not updating that guidance or giving any guidance going forward at this time.

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Keith Housum, Northcoast Research - Analyst [54]

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Okay. Thanks. And if I could just drill down a little bit more on the vendor consolidation. Obviously there's been a lot of that going on in the technology industry these days. Do you guys see yourselves as perhaps a net winner or a net loser in that vendor consolidation? And could you provide some color in some industries or areas that you might be one or the other?

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [55]

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In terms of vendor consolidation, we have a lot of vendors that are making acquisitions to some of those smaller emerging technologies. And so, since we have existing relationships, if we did not have those vendors on our line cards, those smaller vendors, that's a net win for Tech Data. So we see it as a net positive as our major vendor partners make those acquisitions.

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Bob Dutkowsky, Tech Data Corporation - CEO [56]

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Yes. We like to think of ourselves as one of the preferred route to markets. Whether you're a large established vendor or a up-and-coming vendor, with our breadth and our position that we'll have post the integration, we have a goal to be the first distributor that any vendor calls when they want to think about coming to market in the IT space. And we think that the combination of our two companies together gives us the opportunity to establish that distributor.

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [57]

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Yes. I would echo Bob's comments. One of the tenets of Tech Data is to be a very low-cost, variable route to market, so even for the smaller vendors that are just up and coming, this is a great way for them to have the breadth and reach the sales opportunities they could not invest in on their own. So both small and large is good for Tech Data.

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Keith Housum, Northcoast Research - Analyst [58]

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Okay. Great. Thank you.

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Operator [59]

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Thank you. Our next question comes from the line of Rich Kugele with Needham & Company. Please proceed with your question.

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Rich Kugele, Needham & Company - Analyst [60]

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Thank you. Good morning.

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Bob Dutkowsky, Tech Data Corporation - CEO [61]

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Hey, Rich.

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Rich Kugele, Needham & Company - Analyst [62]

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Hi. So I can appreciate not providing guidance, given the newness of the deal, but can you at least qualitatively talk about how the Avnet Technical Solutions business performed most recently? There's always the risk that there's some type of leakage of their own, even before the deal closes. We just want to make sure that it was as you were expecting heading into the actual close. And then I have a follow-up.

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [63]

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No. Rich, as you can imagine, there was very limited financial disclosure from Avnet as they reported as a discontinued operations as a competitor. We had no visibility into their earnings other than what you saw on the public calls, and it's way too early for us to give you visibility going forward. So, we'll give you a full highlight on Q2 earnings power when we release our Q1 earnings.

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Bob Dutkowsky, Tech Data Corporation - CEO [64]

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Yes, Rich, again, up until and including just 10 days ago we were giving competitive bids to Avnet customers. They were a competitor of ours. So for us to be able to suddenly leap to the other side and understand everything about their business so quickly, we just felt we weren't ready for that. But we were competing with vigor a week ago, as we should have been.

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Rich Kugele, Needham & Company - Analyst [65]

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Okay. And then I guess strategically just to understand how you're thinking about the sales force. Because they are different product areas to some degree, how are you aligning the sales force so that you don't have people just moving in mass to the highest margin even at the expense of top-line sales? Or will you even -- looking at it another way, will you go and use it as an opportunity to walk away from some lower-margin business, and so perhaps we shouldn't be thinking about revenue synergies as much as just operating profit growth? Thanks.

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Chuck Dannewitz, Tech Data Corporation - EVP & CFO [66]

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Yes. I think, Rich, a couple of thoughts on that. The first is, obviously, we're not in Asia Pacific, so the TS business becomes the Tech Data business. There's no overlapping synergies or coverage models. In Europe, both of our businesses have similar profiles. There's some customers that we shared, many customers that we didn't share, and so, by country by country, we're building a rational coverage model to cover the new customer base and the new vendor base that the combined company will have.

And then in the Americas, there really was a distinction pretty clearly drawn between the TS customers and the Tech Data customers. And so, again, the overlapping nature of the markets are not that much. But we're rationalizing everything from our coverage model to the model that we used the coverage, the relationship we have with vendor partners, and then the way that we manage the businesses.

We've announced the top of the Company and we're announcing the cascading management structures as we go down, all with the goal of minimal disruption at the customer level, minimal disruption at the vendor level. That's our stated objective as we roll out the integration, and we're aggressively pursuing that. Your comment about de-selecting some less profitable revenue, I think we've shown in the performance of the Company over the last handful of quarters that, that's business as usual for us. We're constantly looking at opportunities to improve the operating income of the Company, dollar-wise, and to improve the way we use our capital. And so that selection process happens every single day inside Tech Data, and it's part of the way we deliver our results quarter over quarter.

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Rich Kugele, Needham & Company - Analyst [67]

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Understood. Thank you.

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Operator [68]

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Thank you. And with that, this concludes Tech Data Corporation's FY17 fourth-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.