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The Next Sea Change Is Cloud Computing

We've lived through the mainframeclient/server world and the Internet world and now, the next sea change is cloud computing

Tech Data Corporation (NASDAQ:TECD), today announced results for the third quarter ended October 31, 2009

Tech Data CEO Bob Dutkowsky said in an interview with CRN: "I've been at this 35 years and I've seen sea changes come and go. If you step back for a moment and look from a broad perspective, we've lived through the mainframeclient/server world and the Internet world. And now, the next sea change is cloud computing. The reality is that visionaries talk about sea changes before things change at the enterprise or SMB level. The way we look at the cloud is there's potential for sea change there, centralizing the capacity to lower costs and improved efficiencies. Yes, there will be change there. Is it going to happen overnight; that today we're in a world of data center solutions and tomorrow we're in the cloud? It's not going to work that way."

In May 2008, the Financial Accounting Standards Board issued a new standard which changes the accounting treatment for convertible debt instruments that require or permit partial cash settlement upon conversion. The provisions of this standard were effective for the company’s fiscal year beginning February 1, 2009 and require retrospective application to all periods presented. Further discussion is available in the company’s Form 10-Q for the six months ended July 31, 2009 filed with the Securities and Exchange Commission on September 1, 2009.

Net sales for the third quarter ended October 31, 2009, were $5.6 billion, a decrease of 8.1 percent from $6.1 billion in the prior-year third quarter, reflecting some moderation in the overall decline in IT spending. The strengthening of certain foreign currencies against the U.S. dollar positively impacted the year-over-year third-quarter net sales comparison by approximately two percentage points. Sequentially, net sales for the third quarter ended October 31, 2009 increased 8.8 percent over the second quarter. The stronger foreign currencies contributed approximately three percentage points to the sequential growth.

Operating income for the third quarter was $66.0 million, or 1.17 percent of net sales. This compared to operating income of $59.1 million, or .96 percent of net sales in the prior-year third quarter. Third-quarter net income attributable to shareholders of Tech Data Corporation increased 157 percent to $43.1 million, or $.84 per diluted share compared to $16.8 million, or $.33 per diluted share for the prior-year period. The prior-year period included a $23.5 million foreign currency exchange loss related to extreme foreign currency volatility in the third quarter of fiscal 2009 and the use of certain portions of inventory as a hedge against foreign currency exposures in accounts payable. As previously reported, the company recovered a significant portion of the foreign currency exchange loss through gross profit in the third and fourth quarters of last year. For the third quarter of fiscal 2010, the company recorded $1.0 million in foreign currency exchange losses.

“Tech Data continues to execute very well in a challenging environment. Our third-quarter results exceeded our expectations for the fourth consecutive quarter, validating the power of our business model and the strength of our leadership team,” said Robert M. Dutkowsky, chief executive officer, Tech Data Corporation. “The continued expansion of our IT solutions portfolio combined with disciplined pricing, cost control and working capital management practices delivered an improved operating margin and an exceptional return on capital employed of 14.5 percent for the quarter. Although the magnitude and timing of an economic recovery remain uncertain, there are clearly signs of an improving outlook. In our 35 years of serving the distribution channel, we’ve weathered many economic and IT spending cycles while continuing to invest in our business for the long-term. Our performance this year is a testament to our strength and Tech Data is well-positioned to continue to prosper in the future.”

Third-Quarter Financial Highlights

  • Net sales in the Americas (including North America and Latin America) were $2.46 billion, or 44 percent of worldwide net sales, representing a decrease of 10.9 percent over the prior-year third quarter. Net sales in Europe totaled $3.18 billion, or 56 percent of worldwide net sales, representing a decrease of 5.7 percent (9.0 percent decrease on a euro basis) over the prior-year third quarter. The decline in net sales in both regions was attributable to the softened demand environment.
  • Gross margin for the third quarter was 5.26 percent compared to 4.86 percent in the prior-year third quarter. The year-over-year increase in gross margin was primarily attributable to solid execution of the company’s inventory, pricing and freight management practices.
  • Selling, general and administrative expenses (SG&A) were $230.5 million, or 4.09 percent of net sales compared to $238.9 million, or 3.90 percent of net sales in the prior-year third quarter. On a dollar basis, the $8.4 million decrease in SG&A expenses was primarily attributable to prudent cost management actions including adjustments to headcount and the related reductions in payroll expenses partially offset by the translation impact associated with the strengthening of certain foreign currencies against the U.S. dollar year-over-year. As a percent of net sales, the increase in SG&A was primarily due to the lower level of net sales.
  • Considering the factors discussed above, operating income in the Americas for the third quarter was $39.3 million, or 1.60 percent of net sales compared to $38.8 million, or 1.41 percent of net sales in the prior-year third quarter. In Europe, the company generated operating income of $29.7 million, or .93 percent of net sales compared to operating income of $23.4 million, or .69 percent of net sales in the prior-year third quarter. Stock-based compensation expense is not included in the regional segment reporting results. These expenses are presented as a separate line item in the company’s segment reporting (see “Supplementary Information” table attached).
  • Cash provided by operations totaled $62.6 million for the third quarter and $588.2 million for the nine months ended October 31, 2009. The company continues to enjoy excellent liquidity and a strong financial position with available cash of $1.2 billion at October 31, 2009.
  • The company’s effective tax rate for the third quarter was 27.3 percent compared to 37.4 percent in the prior-year period. The year-over-year decrease in the effective tax rate was primarily attributable to improved operating performance in the European region.

Nine-months Results

Net sales for the nine-month period ended October 31, 2009 were $15.8 billion, a decrease of 13.9 percent from $18.4 billion for the nine-month period ended October 31, 2008. The strengthening of the U.S. dollar against certain foreign currencies negatively impacted the year-over-year nine-month period net sales comparison by approximately five percentage points. On a regional basis, net sales in the Americas represented 45 percent of worldwide net sales and decreased 14.5 percent to $7.1 billion from $8.3 billion for the prior-year period. Europe represented 55 percent of worldwide net sales and decreased 13.4 percent (6.3 percent on a euro basis) to $8.7 billion from $10.1 billion for the nine-month period ended October 31, 2008.

For the nine-month period ended October 31, 2009, the company recorded operating income of $169.6 million, or 1.07 percent of net sales, compared with operating income of $143.6 million, or .78 percent of net sales, in the prior-year period. The company recorded net income attributable to shareholders of Tech Data Corporation of $110.1 million, or $2.17 per diluted share, for the nine-month period ended October 31, 2009. This compared to net income attributable to shareholders of Tech Data Corporation of $60.3 million, or $1.16 per diluted share, in the prior-year period.

Business Outlook

Statements made regarding the company’s business outlook are based on current expectations and the company’s internal plan. Assuming the recent signs of improving IT demand continue, combined with the strength of certain foreign currencies against the U.S. dollar, net sales for the fourth quarter ending January 31, 2010 are anticipated to increase in the low-to-mid single digit range year-over-year.

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