Good morning. Welcome to Tech Data Corporation's Fiscal Year 2016 First 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.

Thank you, Jessie. Good morning, and welcome to Tech Data's earnings conference and webcast to review our financial results for the first quarter of fiscal year 2016. I am joined this morning by Bob Dutkowsky, Chief Executive Officer; Jeff Howells, Executive Vice President, Chief Financial Officer; and Chuck Dannewitz, who will assume the role of CFO upon Jeff's retirement on June 5. We have prepared supplemental schedules to go along with today's call. The schedules can be found on Tech Data's investor relations website located at www.techdata.com/investor. Unless otherwise specified, all growth comparisons we make on the call today relate to the corresponding period the previous fiscal year. Before we begin, I would like to remind all investors 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, specifically our most annual -- our most recent annual report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Please be advised that the statements made during today's call should be considered to represent the expectations of management as of the date of this call. The company undertakes no duty to update any forward-looking statements to actual results or changes in expectations. Also throughout this conference call, we will reference both GAAP and non-GAAP financial measures from which we exclude from our GAAP financial results certain items. In the first quarter of 2016 -- of fiscal 2016, these items include a benefit of $38.5 million related to the receipt of an LCD legal settlement and expenses of $363,000 related to a loss on disposal of subsidiaries. In the first quarter of fiscal 2016 and 2015, these items include expenses of $618,000 and $12.2 million, respectively, related to restatement and remediation efforts. These items appear on separate line items on our income statement. A detailed reconciliation between results reported in accordance with GAAP and non-GAAP financial measures can be found in the press release and appendix of the slide presentation. In addition, this call is a 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.

Thank you, Arleen. Good morning, everyone, and thanks for joining us today. I'm pleased to report an excellent start to Tech Data's fiscal year 2016. In Q1, Tech Data delivered solid year-over-year improvements in non-GAAP net income and double-digit non-GAAP earnings per share growth, despite facing significant currency headwinds and a shortfall in our Americas region. In addition, we demonstrated strong cash flow and earned a return on invested capital of 11%, well above our cost of capital. On a regional basis, strong execution by our team in Europe, supported by better-than-expected IT demand, led to record Q1 sales and to record non-GAAP operating income in euros for the region. In Europe, we continue to see positive results from our efforts to realign and reallocate resources to higher growth, more profitable business. We prioritize these efforts. First in Europe, beginning a couple of years ago, and they've only been under way in the Americas for about a year. There is clearly more work to be done in both regions, but the benefits of this transformation have not materialized as quickly as expected in the Americas. However, we remain committed to reallocating resources while continuing to evolve customer and product portfolios in order to gain profitable share and improve our operating performance in both regions. Tech Data's Q1 results are a testament to our broad geographic footprint and diversified customer and product portfolios. Our scale and scope enable the company to successfully navigate today's rapidly changing IT market as well as choppy economic markets and still deliver strong results to our shareholders. To advance our strategy of investing in more profitable value-add businesses, yesterday, we announced an agreement to acquire the assets of Signature Technology Group. STG is a leading provider of data center and professional services throughout North America. They…

Thank you, Bob. Good morning, everyone. As usual, my comments this morning will reference the supplemental schedules that are available on our website. Beginning with the fourth slide, first quarter worldwide net sales declined 12% to $5.9 billion. Adjusting for the weakening of certain foreign currencies against the U.S. dollar, net sales increased approximately 2%. Turning now to sales by region, beginning on Slide 5, the Americas first quarter net sales decreased 6% to $2.3 million. As previously announced on March 18, we announced our exit from Chile, Peru and Uruguay, excluding from both periods the sales generated in these countries as well as the impact of weaker foreign currencies against the U.S. dollar, namely, the Canadian dollar and Mexican peso, adjusted sales decreased approximately 1% from the prior-year quarter. Sales in the U.S. came in slightly lower than expected, primarily due to lower broadline products sales, particularly desktop PCs and tablets as well as a decrease in software sales. This was partially offset by a strong growth in data center products, namely, networking, storage and security as well as higher consumer electronics sales resulting from a recent product win and strong television sales. Turning now to Europe on Slides 6 and 7. Our European region's first quarter net sales were [indiscernible] billion dollars or $3.5 billion, a decrease of 17% in U.S. dollars or an increase of 5% in euros to a record Q1 level. The region performed exceptionally well in the quarter with the majority of our trade regions posting year-over-year sales improvement in local currency. Iberia and Italy were standouts with strong double-digit growth, and France also reported solid growth. In addition, every European trade region posted above-planned earnings for the quarter. At a product level, Europe sales were fueled by strong growth in mobility and broadline…

Thanks, Jeff. As we enter the second quarter, I'm pleased with the momentum of our business. Tech Data's capabilities and strategic position in the IT ecosystem are stronger today than ever before, and we are well-positioned to do what we do best that is to help our customers and vendor partners navigate a complex and transitioning IT landscape. Over the last several years, we've aggressively made investments in the data center, cloud and mobility to ensure that we have the capabilities, vendor relationship, and depth in product and services to respond to the dynamic IT market. These investments are paying dividends that are clearly differentiating us in the marketplace. With cloud adoption increasing and cyber attacks making headlines almost every day, the management and securing of data is forefront in the minds of CEOs, corporate Board members as well as every CIO and small and medium-sized business owner. To provide vendors with a broad and efficient route to market for their cutting-edge products and give our resellers access to a broader array of solutions optimized for their SMB customers, we continue to align ourselves with best-in-class security and storage vendors. Last week, we announced the broad distribution agreement with Barracuda Networks, a leading provider of cloud-connected security and storage solutions tailored to the SMB community. Barracuda represents the kind of disruptive, high-growth vendor that Tech Data seeks to partner with, and their products are a welcomed addition to our comprehensive array of security and storage solutions in the U.S. To further bolster our cloud-connected security offerings in the Americas, last week, we announced that we will now support managed service providers in the U.S. and Canada to grow their businesses through the Intel security MSP specialization program. Combining this program with our TDCloud platform powered by StreamOne enables us to…

[Operator Instructions] Our first question is coming from the line of Matt Sheerin with Stifel.

Just want to start by congratulating Jeff on your retirement. I've certainly enjoyed working with you the last several years. My first question just regarding the gross margin, which was down quarter-on-quarter. And it sounds like the mix is working in your favor, particularly North America, where broadline products were weaker, data center was stronger. Is that a function of stronger broadline products in Europe? Just trying to get a sense of how we should think about gross margins as we get through the year.

Yes, Matt, this is Jeff. First of all, thank you for your comments. Secondly, it's a combination of mix and a strong broadline and mobility business in Europe. And then, actually, if you do the math, it has to do with the currency, the devaluation of the euro against the dollar by 20% on a year-over-year because our margin -- our gross margin profile is higher in Europe on a composite basis than Europe -- than in the U.S. And so if you had the numbers and you adjusted it, it would be several basis points higher and we'd actually have an increasing gross margin percentage for the year by the good gross margin management in both regions. So it's another optical illusion of the currency impact on our results. When you get to operating income, it ends up being within a basis point as a percent, but it has an impact on SG&A and gross margin.

Okay, that's helpful. And just second question for Bob. Just your comments about trying to turn around North America, get margins back to where they were a couple of years ago. I know mix is a part of it. But could you give -- be a little bit more specific about initiatives that you're taking and what kind of timelines should we expect to see gross margins start to improve on a year-over-year basis?

Yes, Matt. As we said in the prepared comments and we've said consistently over the last few years, that we have been -- we've been tuning our operations in both geographies, primarily focused around our coverage models, our resource deployments and the scale capabilities necessary to transition to this new portfolio of offerings that we have. We prioritized Europe. We launched those activities over 2 years ago. And we believe you can -- you're beginning to see the impact now of those changes that our European team made. The Americas actions really only began within the last year. And so the Americas is a bit behind, but it's basically running the same play that we ran in Europe. It's reallocating resources to higher growth, more profitable areas, whether that's customers or vendors. It's reducing our focus on customers and vendors that can't deliver acceptable profit. It's honing our coverage model to make sure that we're calling on the right customers with the right skilled people. And then it's continue to leverage the strength of our IT infrastructure that we have now covering over 95% of our worldwide revenues. So when you put all of those actions in motion, it's a lot of moving pieces. And as I said, Europe is ahead, and we have confidence that running that similar play in the Americas will deliver the kind of results that we want to see.

Okay, that's helpful. And just a quick last question, if I can, regarding the acquisition you announced yesterday. Could you tell us the revenue run rate? And since it hasn’t closed, I assume that it's not in your guidance, right?

Yes. We'll give you more information after it closes. But STG is really a very, very important addition to the Tech Data portfolio of offerings. First of all, it's important that you note that STG is a partner-led company. They deliver their value into the channel. In fact, a few of our competitors use STG in their solution bundlings that they take into the market. So it's a partner-led offering, and it has a broad array of value-add services that we think are going to be the benchmark for what a distributor should deliver into the market in the future, whether it be efficient and effective data center, deployments and operation, all the way through to cloud assessments and cloud deployment. So it's an important addition to us. It's one that we've had our eye on for a while. And it's also interesting to note, as I said in the prepared comments, STG has made the list of fastest-growing companies in America now for several years. So back to your earlier question about how do we stimulate growth in the Americas, we do that by adding different types of values that run and grow at different rates and deliver profit at different rates, and STG is an important step for us in that process.

Our next question is coming from the line of Jim Suva with Citigroup. We will move on to our next question, which is coming from the line of Lou Miscioscia with CLSA.

Bob, in Inc.com, they did rank STG as one of the fastest-growing companies. But in 2013, they only had, really, $18 million of revenue. Could you help us out? Have things changed a lot since then? Because it's nice that they're strategic, but how could you ramp it up to, obviously, it being more meaningful for a company of Tech Data's size?

Sure. So we'll give you more details about their real size after we close the transaction. But think about the value proposition that STG has developed over the years, the model that they have to deploy these value-added resources through the IT channel into the marketplace, and then couple that with Tech Data's breadth and scale. And so we think that the model is extendable. We think that the model can grow. And we're excited to have our scale and scope have access to that model as we go into a partner-led model with STG.

Let me touch back on Europe for a second. Obviously, congratulations on good results there. Do you see good organic demand there as you look out for the year? It does seem that a new life has been finally emerged in Europe, probably given some of the stimulus things that they've done. So it feels like that's coming through. And do you think that has legs besides your own good results there?

Yes, Lou, I think it's -- I think our results in Europe are a combination of a couple of factors. First, the restructuring work and the tuning of the resourcing and the model and the coverage that the team has been embarked on for the last couple of years is clearly paying dividends. We're operating and executing better than we have in a long time. Secondly, the European market is strengthening. Both new and evolving technologies, new and emerging technologies as well as just pent-up demand that existed from the down period that existed in Europe over the last couple of years as their economy struggled. And then, thirdly, we have renewed strength in geographies that have historically been slower growing, less profitable territories for us. You heard Jeff comment on the strength of Italy and Iberia, if you turn back the clock a couple of years ago, we were always saying that our slow areas were Southern Europe. Now they're performing really well, both economically and Tech Data. And when you couple those 2 things together, you can assume therefore that we're performing very well against the market opportunity as well as against our competition in those countries.

Our next question is coming from the line of Ananda Baruah with Brean Capital.

And Jeff, congrats. Will absolutely miss working with you. Good luck with whatever you get into and, hopefully, we can stay in touch. I guess, a few things for me. The first is with regard to the European margin. A couple of years, I think there's been 2 years, 2013, 2010, sort of since the recession, where you had -- we had European margin in the April quarter at 1% or greater. And I know the mix is sort of shifting around here. But as you continue to reap the benefits of the actions that you've taken, Bob and Jeff, is there -- can you give us some sort of sense of where they might be able to get to? Is 1% sort of a reasonable aspiration in the immediate term? And I guess, when we think of them as being normalized, whatever point that might be, can they normalize at a higher high than they had in the past? And I have a couple of follow-ups.

Yes, I'll start. I mean, I think in Europe last year, especially in Q2 and 3, we had very strong results. Of course, capped off by our Q4 results. So we're still dealing with the fact that we are taking or enjoying the market growth. And I think you have to back up a second and just look at the leverage. The incremental revenue that was available to us in Europe in the quarter gave us the leverage and the counter was in the Americas, where we thought the market for profitable business was a little more robust than we are able to enjoy. So beauty is we're diversifying those 2 key geographies. More was available in Europe. We gained a leverage. Significant improvement on a year-over-year basis. And the counter impact was in the Americas, where we could have asked the team to go for an extra $100 million or $150 million of revenue. But it would have been at a very tight margin and very little contribution. So the discipline remained in place. To answer your question specifically on Europe without giving guidance, I think we performed very well in Qs 2 and 3 last year, with all the impacts going around. And I'm talking as a percentage of sales. Of course, the dollars go down, but the euros could remain strong, especially with a mid-single digit growth we're estimating. So don't over extrapolate improvement on a year-over-year basis. Q1 last year was good, but the following quarters were better. I think the key is the trend has continued. And after that, I'd be giving more guidance that we feel comfortable with.

And at what point, Jeff, do you guys feel -- like where do you feel that you are in the process of reaching what a normalized margin state would look like in Europe half-length? Are you sort out halfway through, or you're 1/3 of the way through, that kind of thing.

Yes, I think the answer is, as we stated over a year ago, FY '15 and '16, we're going to build on the progress that we exited on FY '14. We had that strong Q4 in FY '14 in Europe. And we continue to build on that leverage infrastructure, and we were going to spend time reallocating resources. We had numerous questions each and every quarter. And do we need to do a restructuring program? We said no. We said that the team had a game plan, and it was going to play out over a couple of fiscal years. We're into the fifth quarter, completed the fifth quarter of that 2-year period subsequent to FY '14. And so it'll play out in the remaining 3 quarters. And we think it will position us for further improvement in FY '17 as other factors or reallocation of resources is more complete. We don't provide guidance for where FY '17 or '18 is going because we then have the impact of economies, the euro and competitors. And we've seen others provide guidance that hasn't been able to be fulfilled. So -- but suffice to say, we think the team is on a good track to have a strong FY '16. But the real goal has been and continues to be to set it up for improvement in FY '17. And as Bob said in his remarks, the Americas is a year behind the starting point. So we really started that process 4 to 5 quarters ago versus 9 quarters ago. So the Americas is moving forward. Suffice to say, though, the Americas performance would have been better this quarter had the market grown at the more robust pace that we had anticipated. We and you, I think, both expected a more robust market in the Americas and a less robust market in Europe. We have actually seen in our business, our profile of customers and vendors a better robust market in Europe and a slightly less robust market in the Americas. So leverage is still available in both regions.

Great. That's really, really useful. Just last quick one for me. On the guide, the FX guide, just the context around sort of choosing $1 to $1.05 as the exchange rate, when the exchange rate is just higher than that. It hasn't been really in that range yet. Just the thinking there.

Yes. No, we actually polled the consensus of the same banks we poll on a continuous basis. And the exact number was $1.06 for Q2, $1.04 in Q3 and 4. The last time we polled it a few days ago to update the forecast, we did internally. We realized that our average for the March -- the month of March to date has been a little north of $1.10, maybe a $1.11 -- May -- I'm sorry, May has been a little north of $1.10. And the other day, it moved to $1.08 and there's a shudder in the stock market. So we're only using bank guidance on that number, and the exact number was $1.06. We planned our entire year at $1.05, and that appears to be about where the market is estimating. And clearly, that could be a potential upside to us in Q2 if it remains at the exchange equivalent that it is now. But that's exactly how we did it.

Our next question is coming from the line of Brian Alexander with Raymond James.

This is Adam Tindle in for Brian today. Just wanted to circle back to the STG acquisition. Could you talk a little bit more about what drove the decision to more directly expand your data center services capabilities? And is this part of a broader initiative to add more discrete services offerings to the portfolio?

Yes, sure, Adam, this is Bob. We've been building our data center practice in both geographies now for almost a decade, and obviously, as an IT distributor, the fastest, quickest route to the data center for us was through hardware sales through our partners. So we built the server, the storage and the networking practices up very aggressively. Over the years, we've layered in the value-added software that makes those components perform in the data center. And what our customers -- what we saw through the eyes of our customers often is that they were not able to compete for deals at the end-user level because they didn't have the full portfolio of services capabilities inside their own companies. So we started a few years ago to add some services capabilities, again, partner delivered. We have the capabilities, but the partner bids and manages the project. And we saw our customers beginning to win more. And so we've been on the hunt for more of these value-added services that we could add to our portfolio of products that we list on our line card that our partners take to the market. And STG has a broad array of those services, scanning everywhere from data center implementation to cloud assessments. Very unique practices that they're able to deploy through a partner-led model, and so that was why it led us to bring them into the Tech Data business. As the earlier question called out, we think that we can leverage those practices very efficiently with our scale and scope and size. So the -- we think that the IT distributor practice of the future will have a broad array of hardware and services -- hardware and software and services, and STG helps us fill in that portfolio of offerings.

Okay. And just to be clear, Tech Data will not offer these services directly to end customers, only through existing retailers?

No, it's a partner-led model, and that was why it was attractive to us.

Okay. And just one second question there. I know you talked a little bit more about strength in Europe. Any indication that demand is being pulled forward ahead of price increases? Or is this just healthy IT demand that you're expecting to continue?

Yes, I think it's a combination of both. Clearly, the demand is, as Jeff said, was stronger than what we anticipated in the quarter. As we plan the year and plan the quarter, European demand was stronger, and some of that was this pull-ahead phenomenon that you're describing. But we don't think that it's, by any stretch of the imagination, a majority of the overachievement. It's just a piece of it. And it also implies that we made the right buying decisions from an inventory perspective to have the inventory on the shelves to be able to address the demand. So there's a lot of different components that come into leveraging a unique moment in time like the one that exists, and our execution has excelled in that area.

Our next question is coming from the line of Osten Bernardez with Cross Research.

To begin, I just wanted to just gain greater clarity with respect to your performance in the Americas. If you could highlight sort of what spots or segments you think were underperforming relative to your expectations? And how do we parse through sort of the sales performance there from an end demand versus, I guess, execution standpoint with related to how you're repositioning some of your selling resources?

Yes. As I tried to describe earlier, it's a combination of things. We're trying to hone in on the customers and the product portfolio that can generate the best return on invested capital that's necessary for us to compete for those different types of business. Over the last year or so, the Americas has run an aggressive program to de-select vendors and customers. And so some of the decline in year-over-year revenues that you see were very much the planned process by the team. The plan also implied that we would backfill that revenue with more profitable revenue. Some of that didn't materialize over the course of the last quarter. So while we stepped away from some revenue that was less attractive, our plans to backfill that with more profitable revenue haven't gone as fast as we had hoped. Some of that is driven around our -- the way we've deployed our coverage models and the teams, as I mentioned, were tuning our coverage model in the Americas as we speak to be able to address the real opportunities more effectively. So it's a combination of factors. It's not one single area. And we're confident that the plans and programs that we have in place will deliver results similar to what you've seen in Europe. It takes some patience to get there, and we're confident that plans are correct.

So for the first quarter, Bob, I guess what I'm trying to understand is sort of do you think that your people were appropriately positioned for the first quarter, and it just so happen that, that growth that you're expecting from certain segments, broadly speaking, just was not there across multiple end products?

Yes, this is Jeff. I'll try and explain that. As I said in my prepared comments, the Americas saw more of a decline in broadline business, PCs and tablets, where in Europe, we had stronger-than-expected sales in notebooks and peripherals. So one might assume our customers, our market, the PC refresh had some slightly extended legs in Europe and maybe a little shorter demand in the Americas than we anticipated. We still expect to sell PCs, notebooks and tablets every day of the year no matter what the market is, but there was a difference between the demand in those 2 geographies. And also, in the Americas, we saw a decline in our software sales, which was twofold: One, the expiration of the Microsoft license last year saw some strength in that category, one that we didn't discuss as much because software is a smaller piece of our business. And then also, there have been some competitive bids that in that process that we've talked about for the last 3 quarters, where we're not accepting business that's below our standard, there were some bids on software products that with some corporate resellers that, quite frankly, competitors took at cost. And we don't believe that's good business. So we had it at a reasonable contribution. So others took it at cost. So we're remaining disciplined. And if someone can make money selling something at cost, so be it.

Got it. And then following up on the -- on STG, could you sort of just highlight for us whether you think the pace of growth that it’s been at can continue? What is the overlap with your -- with some of your competitors? And I'm assuming that, that portion of that business will probably erode over time. And how many employees do they have?

Yes, it's a partner-led business model. So it's a model that scales. As opposed to how many employees it's how does the model scale that really impresses us. And we'll give you more detail after the transaction actually closes. The percentage of business that's done with our competitors is relatively small. But we did see it, in some cases. And in fact, there was even a case where we lost a bid to one of our competitors because they used STG services through their partner to win. And so I think that was the one that really caught our attention as to the value that STG could bring to what a data center distributor needs to look like in today's world. One that has value to add, not only in the deployment of technologies, but also all the way through the cloud migrations and cloud assessments.

So I'll also add that we already, just like our competitors, sell services like this, provided by others. And now by using our own infrastructure, the profile for like-kind services could add to a better contribution margin going forward.

Our next question is coming from the line of Rich Kugele with Needham & Company.

And Jeff, good luck in the retirement and hope to stay in touch. Just a few questions PC- and server-related. Windows Server 2003, I understand from your prepared remarks that you had some offerings that you were launching in the most recent quarter. Can you just talk about the interest level for those? Were people already in the process planning stage? Because it sounds like it's actually a pretty complicated switchover to go to Windows Server 2007. And so where are we in that cycle? And then in terms of Windows 10, do you anticipate a pause ahead of that? And there were some concerns that Dell expressed at their analyst day this week about inventory of laptops still being extended here in the channel.

Yes, the Server 2003 process is complex, as you described. The customer has to decide, do they want to just replace like-for-like servers? Do they want to put in large servers and virtualize them? Do they want to switch where the application runs, either make it a mobile app or make it a cloud-based app? So it -- when the XP transition happened last year, it was pretty clear. You were either going to buy a new Windows machine or you were going to buy an Apple machine, maybe a Chrome cast type product, or a Chrome product. But basically, the choices were clear. This time around, the choices are much more complex. And so that's why it's important that we've announced the initiatives that we assist our customer in leading their customer through these choices. And Rich, we've been in this now for almost a year in conjunction with our vendor partners, who have used us as one of the conduits to get this transition process running. I think that it's been slow, namely -- mainly because it is complex. And so the rate and pace, I think, will pick up over the second half of the year as CIOs and virtual CIOs, as in VARs make these choices for businesses and then begin the deployments. And we're prepared to assist in the choices. We're prepared to assist in the deployment of the technologies. We're in a very good position as the server refresh unfolds. Regarding Windows 10, it's conceivable that there would be a bit of a pause between customers buying existing technologies and software versions and waiting for Windows 10. The good news is we'll have Windows 10 on the shelf the day that it's available, and we'll be able to assist customers in both the deployment of existing Windows applications and operating systems and migrations to Windows 10.

Any thoughts on the inventory side of things?

No. I don't think it's anything unnatural that we're seeing.

Ladies and gentlemen, we have no additional questions at this time. This does conclude Tech Data Corporation's Fiscal Year 2016 First Quarter Earnings Conference Call. A replay of the call will be available in about one hour at techdata.com. Thank you for attending today's conference call, and have a great day.