Q2 2020 Earnings Call
Good morning, welcome to Tech data Corporation's fiscal year, 2022nd quarter earnings Conference call.
At this time, all participants are in listen only mode.
After the presentation, we will conduct a question and answer session.
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Now I will turn the meeting over to Arleen can you honestly corporate vice president of Investor Relations.
Ma'am you may begin good morning, and welcome to Tech Data's earnings Conference call to review, our financial results for the second quarter of fiscal year 2020.
I'm joined this morning by rich him Chief Executive Officer, and truck Dannewitz Executive Vice President Chief Financial Officer on our website at <unk> Dot Com you will find our earnings press release and financial highlight like that which are intended to supplement prepared remarks made during today's call and provide reconciliations of differences between GAAP and non-GAAP financial measures all growth comparisons we make on today's call relate to the corresponding period of the prior fiscal year unless otherwise noted today's call is being webcast live and recorded during the call. We will make forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed in todays earnings press release in the comments made during this conference call and in the risk factors section of our Form 10-K , and other filings with the Securities and Exchange Commission, we do not take any duty to update any forward looking statement. In addition, this call is the property of tech data and may not be Rick.
<unk> or rebroadcast without specific written permission from the company I will now turn the call over to Tech Data's, Chief Executive Officer Rich Hill.
Thank you arleen good morning, everyone and thank you for joining us today.
We're pleased to report that Tech data delivered an outstanding second quarter performance.
Mark by broad based improvement across our geography.
A stable demand environment combined with strong execution by our team.
Resulted in a number of key achievement.
Including solid sales growth in constant currency.
Double digit growth in operating income and earnings per share.
Positive cash flow and an industry, leading return on invested capital.
All while continuing to advance our strategy investing for the future and returning cash to our shareholders in the form of share repurchases.
Our worldwide teams executed exceptionally well externally, helping our channel partners to grow and transform their businesses.
And internally improving processes and enhancing productivity.
There is always more work to be done in these areas, but into Q, our colleagues hard work rigor and discipline delivered a very strong and balanced corridor.
Every day, we're focused on simplifying complexity for our partners with and a lot of end to end solution.
That's all todays business needs.
This critical role is driven by our four pillar strategy.
Which as a reminder includes one investing in next generation technology too.
Strengthening our end to end portfolio.
Three transforming tech data digitally and for optimizing our global footprint.
And of course, all underpinned and achieved through our people.
Our valued colleagues to serve as the foundation of our strategy.
We summarize our strategy is moving to higher value. This means delivering higher value solution offerings to our channel partners, providing our colleagues with enriching opportunity.
And creating value for our shareholders doing enhanced financial profile with emphasis on cash flow and return on invested capital.
Our Twoq performance validates our strategy and is a testament to the skills of our people to our strong operational capabilities into the broadest end to end portfolio in the industry.
All of this enables us to aggregate solutions that deliver business outcomes to our customers in an increasingly complex and dynamic I T landscape.
Our channel partners are responding favorably to our solutions based approach, enabling us to win new business every day.
Let me share with you a simple example from our endpoint solution business that showcases our solution aggregation capabilities.
Made possible by our end to end portfolio.
Recently, we provided a regional reseller of quote on several endpoint devices for PC hardware deployment.
As our team learned more about the N. user needs, we presented a more holistic subscription based solution that included devices services and software to meet the end user budget.
They were delighted with the per month, offering which allowed them to expand their technology by and secure a better solution that met their business requirements.
In addition, the new devices were preferred by the business users.
Which improved the user experience and enhance their productivity.
This solution based proposal grew our reseller partners overall profit dollars substantially.
In addition to significantly growing the total value of the deal. In this example, our endpoint solutions team served as an accelerator moving our reseller partner and their end user customer to a higher value model, where everyone benefits.
This is just one example of the success we've had for quite a while in the small and medium sized business market in fact over the past four years in our Americas region. Our SMB sales division has grown by double digits every year.
Our second quarter also marked the one year anniversary of our global business optimization program intended to accelerate our strategic priorities and enhance profitability. In addition to driving productivity improvements RGB O program harness the skills and data driven insights that.
Our disposal to drive market share gain profitable growth and improve partnerships across the organization.
It includes a number of initiatives and work streams currently underway to enhance the customer experience.
Reduce complexity automate processes and develop our colleagues in one short year, we've made great progress and we continue to be on track to hit our goal of annual cost savings of $70 million to $80 million.
By the end of fiscal 2021.
Half of which will be reinvested back into the business to accelerate our strategic initiatives.
Also throughout two Q, we continued our portfolio optimization action as we move to higher value portfolio optimization is designed to enhance our long term profitability deliver better overall returns and free up capital to invest in our strategic focus areas and we are clearly seeing the benefits of these efforts in our result.
In summary.
Our move to higher value strategy and the various global initiatives that supported our visibly working and played a key role in our strong first half performance.
We remain confident in our teams execution and in our business model is the ability to capture opportunities in the market. However, we are keenly aware of the global macro economic uncertainties that could present potential headwinds for the industry.
As we enter the second half of our fiscal year, we will continue to focus on our strategic priorities, while pursuing higher value opportunities that enhance our financial profile and deliver higher returns.
Consistent with our goal to return value to our shareholders today, we announced a 200 million dollar increase to our share repurchase program.
With today's announcement and the authorization announced in October in March.
We have the opportunity to return $500 million of cash to shareholders over the course of the programs I would like to thank and congratulate my tech data colleagues around the globe for delivering an exceptionally strong quarter and for their relentless commitment to serving our customers vendors and each other at the highest possible level.
With that I will turn the call over to Chuck to review, our Twoq financial results in greater detail as well as provide our outlook for Threeq you.
Chuck.
Thank you rich good morning, everyone and thank you again for joining us today.
In summary, Q2 was an exceptional quarter with a strong and balanced performance across our region.
Our worldwide teams delivered higher than expected sales across our product portfolios improved gross and operating margins and grew operating income and earnings per share by double digits.
In addition, we generated positive operating cash flow and earned an adjusted return on invested capital of 15%.
Tying a company record set in fiscal year 2011.
A truly outstanding performance by all measures.
Now, let me provide more detail on our Q2 results.
Worldwide sales increased 2% to $9.1 billion.
On a constant currency basis.
Sales grew 5%.
The sales growth was primarily due to strong execution by our worldwide team in a stable demand environment.
Partially offset by our portfolio optimization program actions.
Worldwide gross profit increased 7% to $562 million.
In constant currency gross profit increased 9%.
Gross margin expanded 25 basis points to 6.18% driven primarily by better mix of business.
non-GAAP EPS, DNA expenses, which excludes $21 million of acquisition related intangibles amortization expense increased 5% as reported.
And increased 7% in constant currency.
The increase is primarily due to normal operating increases additional credit costs and investments in our strategic initiatives, partially offset by the savings generated by RGB O program.
As a percentage of sales non-GAAP SGN expenses increased 10 basis points.
Worldwide non-GAAP operating income increased 12% to $151 million.
And constant currency non-GAAP operating income increased 14%.
Which is nearly three times, our sales growth rate on a constant currency basis.
non-GAAP operating margin improved 15 basis points to 1.67%.
Interest expense was $21 million, a decrease of $7 million.
The decrease is primarily due to entering into financial instruments that gives the effect of converting a portion of our us debt.
The euro denominated debt.
As euro borrowings have lower interest rate than us dollar borrowings. This resulted in approximately $3 million a benefit in the quarter.
Q2 interest expense was further reduced by $2 million.
Due to the receipt of interest related to a letter of credit refund.
The decrease in interest expense also reflects lower term debt balances compared to the prior year.
Our Q2 non-GAAP effective tax rate was 23%.
Which included a favorable resolution of a tax matter.
Excluding this our Q2 non-GAAP effective tax rate would have been approximately 25%.
non-GAAP net income was $99 million an increase of 27%.
And an improvement of 29% in constant currency.
non-GAAP earnings per share was $2.69.
An increase of 34%.
And up 36% in constant currency.
Now, let's look at the performance by region.
The Americas team performed exceptionally well delivering sales of $4.3 billion, an increase of 7% both on a reported and constant currency basis.
At a product level. The reasons growth was driven by software servers networking hyper converged technology Pcs and security.
The Americas non-GAAP operating income increased 13% to $108 million and as a percentage of sales was 2.5%.
Turning now to our European region sales declined 2% on a reported basis to $4.4 billion.
On a constant currency basis sales increased 2%.
Product categories that performed well in Q2 include servers software networking notebooks storage Pcs and security.
Europe's non-GAAP operating income grew 7% to $47 million and was up 11% on a constant currency basis.
As a percentage of sales non-GAAP operating income improved 10 basis points.
And then our Asia Pacific region, our team executed well with sales, increasing 14% the $336 million up 17% in constant currency.
From a product perspective.
Servers storage hyper converged technology and software posted good growth in Q2.
non-GAAP operating income in Asia Pacific grew 71% to $4 million and as a percentage of sales improved 42 basis points.
Turning now to summer, our balance sheet and cash flow metrics.
Related to working capital our team's continued efforts resulted in a cash conversion cycle of 18 days consistent with the prior year period.
In Q2, we generated $40 million of operating cash flows.
Through the first half of fiscal 20, we have generated $103 million of operating cash flow.
As compared to a use of cash of $5 million during the first half of fiscal 19.
We exited Q2 with a cash balance of $738 million.
And for the trailing 12 months, we earned an adjusted return on invested capital of 15%.
Well above our weighted average cost of capital of approximately 9% and a significant improvement as compared to the 11% we earned in the year ago period.
During Q2, we purchased approximately 833000 shares for $82 million at an average cost of $98 per share.
At the end of Q2, the amount remaining on our share repurchase program was $75 million.
As rich indicated today, we announced an incremental $200 million share repurchase authorization.
Which demonstrates our board's confidence in our strategy and financial performance.
Our capital allocation objectives remain consistent and include the following.
Maintain our existing investment grade credit rating have optimal sources of liquidity to fund our growth accelerate our strategy through selective M&A and return excess free cash flow to shareholders via buybacks.
We will continue to maintain a balanced approach and the use of our free cash flow and the mix and pace of which will vary depending on the opportunities available in the market.
As we indicated last quarter, we're closely monitoring developments concerning trade relations between the United States and China.
And related matters, such as security risks and export controls that may affect the market for certain technology products.
Our inventory of products that may be impacted by these developments was approximately 50% lower at the end of Q2.
As compared to the end of Q1.
In summary, we are very pleased with our results and believe our Q2 performance reflects outstanding execution by our worldwide team and our continued rigorous review of our capital structure to enhance shareholder value.
Turning now to our guidance for the third quarter ending October 31 2019.
We expect sales to be in the range of 9.2 billion to $9.5 billion.
And non-GAAP earnings per share to be in the range of $2.85 to $3.15.
This guidance assumes an effective tax rate in the range of 24% to 25%.
This guidance also assumes an average us dollar to euro exchange rate.
Of one dollar and 12 cents to one euro.
As we enter the second half of fiscal year 20, just a few items for consideration as you perform your modeling.
You may recall that we had an exceptionally strong performance in the second half of fiscal 19.
Therefore, we anticipate year over year growth rates to moderate in the second half of fiscal 20.
Also included in last year's third quarter results in SG anyway.
It was a 25 million dollar benefit related to the collection of an account receivable previously deemed uncollectible.
Which will not repeat in Q3 of this year.
And lastly to the first half a physical 20, the average euro to US dollar exchange rate was 6% lower than in fiscal 19.
And as you can see in our Q3 guidance, we expect currency headwinds to continue.
With that we would now like to open it up for questions operator.
Thank you well now begin the question and answer session.
If youd like to ask a question. Please press star one on your phone you May Press Star two if you like to move your questions from the queue.
For participants are using speaker equipment, maybe necessary to pick up your handset before pressing the star one Keith when all please while we poll our first call.
Our first call is coming from the line of Matt Sheerin with Stifel.
Yes, Thank you and good morning, everyone.
Just first question regarding the very strong gross margin performance you spoke.
In the in your opening comments about the fact that.
You are seeing.
Better mix, there, but how much of that is it.
I have a benefit from the optimization of the portfolio optimization program, where you're de selecting business.
And versus mix or what other drivers have you been seeing in terms of the gross margin.
Hello, Matt Good morning, and thanks for the question.
It's really a combination of both of those factors the team did a very nice job executing and.
We did drive a better mix of our business during this quarter as well as the portfolio optimization as both of those factors combined that really drove the gross margin increase.
Okay and your guidance implies gross margin.
And depending on where SNA shakes out but.
At least flat to up year on year.
So are you continuing to see.
Hi, good signs that that bits of business mix will still be a favorable for you.
Yep.
Again as you know in any given quarter, it really depends on our product mix and again, our portfolio optimization and our gross margins will fluctuate from quarter to quarter.
As we've shared previously with you the way, we really think about our business is the focus on gross profit dollars.
And the SDMA spend and how we optimize that.
In order to grow our operating income dollars and then ensure that we have the right capital turns and capital structure to ensure we enhance our returns for our shareholders. So it's really a combination and gross margin will fluctuate from quarter to quarter.
Okay, and just lastly regarding the demand environment.
Particularly in North America, it sounds like demand is still holding up well relative to.
The softer tone that we're getting from several of your OEM suppliers.
Really focusing more on enterprise. So is that is that a function of your focus on the SMB markets and are you seeing still.
I still some tailwinds in terms of demand PC upgrade cycle other drivers of demand there in North America.
Yes, Matt this is rich good morning, and thank you for the question.
No as it relates to North America, you could see in the.
And the information we released we had a 7% growth overall, so it is a bit stronger and I think I commented in our last earnings call macro level.
We had seen Europe weaken.
Overall relative to last year, perhaps in.
We felt as if the demand in the Americas was not as strong as last year, but.
At the same time reasonably robust and.
I have to say that I think there's two contributing factors number one is as we had stated in the prepared comments we have been.
Really having good success within the SMB segment for the last four years, where we had double digit growth every year.
So certainly that that is health and my speculation is that there is a bit more strength than that SMB market than the overall enterprise market. It allowed us to take advantage of that and then.
Candidly I think having the breadth and depth of our portfolio. We've we've talked about this many times.
No allows our sales team to move to where the demand is a bit more robust and.
I think when things slow in the market the benefit of having such a broad portfolio.
Really really benefits us and it's a when I reflect on that I think about the decisions that we've made when we had done the Tcs acquisition.
Just strengthen the overall frame of our portfolio and really serves us well in markets like this.
Okay, Okay, great. Thanks for the answer.
Thank you Matt.
Our next question comes from the line of Adam Tindle with Raymond James.
Okay. Thanks, and good morning, I just wanted to start on the 15% ROI. So you just posted I think that's one of the highest returns on capital in Tech distribution, but your operating one of the lower margin profiles I think it's just particularly notable today given some of those higher margin distributors are struggling one just experienced a significant goodwill write down another is divesting large portions of their business. So rich I'm just hoping for some commentary on tech datas performance versus the higher margin competitors is there something structurally changing on the relationship with vendors or customers that make sure lower cost structure and more asset light model, particularly important today.
No.
My My my view, Adam is that again, it gets back to us having a very broad portfolio. If you take a look at the drivers of the return on invested capital over the over the last.
Three four or five quarters.
You will see that tax rate contributed about a third of that improvement and then two thirds of that improvement we're operational in I think that when we.
Talk about what we want to accomplish internally from a customer perspective first we have an unrelenting focus on making sure that we're providing them with the best value possible in terms of both our capabilities as well as you know the offerings that we bring to the market and frankly, I think that our value proposition is resonating.
Quite well with our customers.
And we're just staying focused on that.
The last thought that I'd offer Adam is that if you take a look at our at today's market and the fact that it's a bit less strong than it was last year.
Our journey has led us to have the execution that we've had so.
Just to recap.
Again, I think that the DS acquisition was a major step in sort of building a a wide and broad foundation for our portfolio, which serves us well in a market like today second it was a year ago. When we said hey, we need to take on a program to optimize our business and reinvest half and then offer half of the savings to profitability and then the third piece the nine months ago, we got on with our focus on the portfolio.
And there are other contributing factors, but those three things I think are culminating in the result that we have right now and that's what's really benefited us is to be proactive in preparing for where the market is today.
Okay. So do you see that that number that ROI see number.
Kind of stabilizing at this level does it start maybe shifting a little bit downward moving forward just help us understand how we can think about that number moving forward yet. So as you know our weighted average cost of capital is about 9%. So we're interested in pursuing opportunities that are above our weighted average cost of capital I think that the the ROI see will ebb and flow honestly I wouldn't see it.
Continuing to get higher and higher there is a point by which is start to.
Maybe walk away from some business that that.
No it would contribute very positive Pos positively to our profile. So I see it as sort of a stable range than.
It wouldn't have an issue with it.
Dropping a couple of points.
Provided that we've got the right business and the right return for our our business overall.
We've been very focused I think we've shared with all of you that.
Oh I see is one of our primary metrics and we build our our entire business processes around making sure that all of the elements of ROI see our are considered even at the transactional level when we go to market to execute.
And I think that the management system. That's deployed throughout tech data has that's really taken us too.
The the financial profile that we've got right now.
Okay. That's helpful. Maybe just one quick quick clarification.
The Q3 guidance looks largely seasonal on a revenue basis and profit dollar basis sequentially adjusting for last year.
But you also had some cautious commentary on the back half of the year. So I'm, just hoping that maybe clarify what that implies for Q4, what it means and maybe one way to ask it is you've talked about an EPS weighting in first half versus second half typically a 30 565 waiting.
Can we can you just maybe clarify how we can think about fiscal 20 in light of the comment yes. Thanks.
So let me first.
Start with Q3, we believe that the guidance that we've provided is consistent with the way we built our guidance in the past as Chuck is as as commented.
On previous calls it sort of a bottoms up call. So.
It started a refrac reflects the sentiment of the geography, that's point number one.
Point number two is.
I'd I'd have each of you go back and take a look at our Q3 and Q4 last year I'll give my opinion, Mike. My opinion is we had a phenomenal Q3 and Q4 the operating income growth were from memory, nearing 20, or 20% overall and so.
I remember last Q4 thinking Wow. This is really quite impressive. So we have the backdrop in Q3 and Q4 of of.
Harder compares relative to last year and at the same time.
A bit of a softer market. So you know as we provide the Q3 thoughts that thats what weve included.
No as it relates to Q4.
Number one is we have less and less visibility as you go through time number two is there is by definition of the timeline there is more and more risk. So it really is hard to project, what's going to happen.
Based on some of the.
So the trade in regulation things going on based on the fact that it appears that the more economies around the world are softening et cetera. So.
No.
That was the reason for our cautious tone overall, not going to get into sort of proportionately how to think about first half second half.
Because of that uncertainty.
Okay. Thank you.
The next question is from the line of Singh with Merrill Lynch. Please proceed with your question.
Hey, Thanks for taking my question. The first one I wanted to ask was on a cash flow. It just seemed working capital was a bit of a drag this quarter.
Compared to a big cash flow and but in typical July quarters, not no I understand that that revenue was much stronger, but it looks like accounts payable might have been a drag. So just wanted to get a sense of what drove the typical weakness to traditional got free cash flow in the quarter.
Sure Prom and.
Paramount.
And thanks for the question.
When you look at our cash flow.
For the quarter, a $40 million compared to let's say a little bit over 500 million last year, you have to take the whole first half in the consideration Q2 of last year was really a catch up of a negative over $500 million in the first quarter of last year. So if you look at the.
First half cash flow last year was about I think about $5 million compared to about over $100 million of cash flow for the for the first half of this year. So actually we outperformed the cash flow profile from last year during this year.
Hi.
And thanks for that and as my follow up.
We've heard of the cloud vendors in general starting to get a little more aggressive with pricing in the channel.
Just wanted to get a sense of the healthiness of your cloud business.
How's that performing has the margin structure change in that business and then also is there a typical a rebate negotiation or the cloud vendors like you do see with your traditional Oems.
Yes part of this is rich I have to say that our cloud platform. As you noted that freight one is our platform along with the rest of the cloud module, which surround it has has performed exceptionally well.
Then the first half of this year.
I would tell you that.
From a vendor perspective.
Like ourselves are all looking to build the capability throughout the channel. So you know there are times, where special investments come into play et cetera, et cetera to go and drive.
You know that category and we have the opportunity to take advantage of some of that I'd say that from an overall financial profile.
You know, it's been rather steady what happens with any technology through time is.
The other big incentive.
That are provided upfront than over the continuum when the business ramps.
Those those incentives.
Getting there get get taken down a bit at a time.
I still think that were sort of in the ramp phase of this thing and we're making some big investments and we have the opportunity to have our vendors participate to help us through some of those.
That front end cycle and in time, you will see some moderation, but to date I'd have to say that we're very pleased with the financial performance of our cloud business.
And the rebid structure of that business is it doesn't exist or is it different from traditional Oems.
That's that's traditional it.
There is always different flavors out there in the market. So we deal with.
The different flavor flavors like we do with any.
No other software or hardware category, but yes, I'd say that it's a pretty traditional.
Thank you so much for the color really appreciate it.
Thank you.
Arms, great to catch up.
Our next question is from the line of Tim Yang with Citi.
Good morning, Thanks for taking the question.
Can you talk about your hallway you much cruising grew up do you still have roughly 4% of units were seeing all way products and how should we think about revenue at a profit impact from those inventories and a follow up thanks.
Yeah, Tim Thanks for the question and Tux prepared comments I think he had reflected that.
From the opening of the corridor to the close of the quarter that we had reduced our inventory by approximately 50%. So I think last quarter, we talked about it being 4% of the overall inventory and you can go do the math from there.
I wouldn't say that relative to our expectation the demand for our mobile category in total.
Has has.
Ben, especially for Chinese CAD vendors has been quite.
Quite good so.
You know I think that we felt compelled to call that exposure out.
Because of the uncertainty certainly there's lots of uncertainty as we move forward.
But.
I think the reduction of the overall inventory was at a rate and pace that was.
Accelerate it relative to our expectation.
Got you that's very helpful. And then your accounts payable declined sequentially in Q2, but I think in the past you normally have account payable increase in Q2. So can you maybe talk about the reasons for the accounts payable declined.
Tim This is Chuck sure. It's just that whenever we pay our payables, it's as a moment snapshot in time and you really need to look at our overall inventory and payables together and then our overall capital structure, So I wouldn't get.
Too interested in the exact level of payables at the actual quarter end, there isn't anything significantly different or.
That is insightful to take away from that and I think that the way we have a look at all the components is that Chuck had qualitatively talked about is that we use the cash they metric which includes all of those variables and if you take a look on a year to year basis I believe our cash stays were flat at 18 cash days so.
We're pretty satisfied and obviously this roll through too.
Those those elements are ultimately become part of return on invested capital and.
Obviously.
Well Weve performed favorably there so.
That's sort of the way we think about it.
Great. Thanks for the color. Thank you.
Thank you.
The next question is from the line of Keith Housum with Northcoast.
Good morning, guys and thanks for the question congratulations by quarter.
As we think about like the tariff environment, Obviously September 1st coming up quick and I think if I understood. You guys are pass through for the tariffs, but can you kind of comment on the environment right now in terms of one.
The ability of vendors to kind of increase their prices and then second in prior quarter, you guys had a benefit from being able to say your inventory at a higher prices when the prices were coming through is that built into your guidance for this quarter.
Yes so.
Keith first I want to call.
Qualify this by saying I am not a tariff expert this thing moves so quickly that.
That.
Day to day things change, but from what I know as it relates to the new tariffs, there's been sort of a delay in terms of the implementation.
For another 90 days so the first thing I would tell you is that terrorists had.
No no to negligible impact on our Q2 results.
Number two is.
Q3 to date, there have been known known tangible or material tariff implications to our business.
That being said, we'll watch to see how things unfold in and respond accordingly.
To answer your question directly our experience has been that of vendors want to increase prices based on any cost increments.
They do so immediately and concurrent with their price change we flow that through our system.
So as we've talked about multiple times in the past.
No.
And under most circumstances, we would not be impacted by such moves in fact, as we talked about it could provide us with a bit of a financial benefit, but I would tell you that for our Q3 guidance.
We're neutral relative to tariffs, there's nothing built in assuming.
Upsides or downsides associated with terror for regulation.
Okay, and just as a follow up I appreciate that Chuck in your guidance for Threeq do you guys have any stock repurchases in your assumptions there.
Keith Thanks for the question and good morning, No. We do not have any stock repurchase built into our guidance.
Great. Thanks, guys appreciate it.
Yes, just one clarifying point to our last discussion I think there are some tariffs that kick in on September onest.
But I would remain.
Back with what I said earlier Theres nothing built into.
Our guidance related to tariff upside since.
Who knows what will happen on September onest, given the ebb and flow of the negotiation.
Our next question comes from the line of Shannon Cross with Cross research.
Thank you very much I was wondering can you give a little more color on what you're seeing in Europe .
Linearity in the quarter.
Yeah, there's there's been so much commentary on that.
Again, your OEM partners, and then others in the space I'm curious as to whether or not you cite weaken or strengthen during the quarter and what areas in particular strong, particularly thank you.
Yes so.
First of all.
On on the global scale, we certainly see Europe being a weaker we've talked about that.
Previously I think you take a look at our Q2 results in.
We actually at actual currency were minus two and a constant currency or constant euro we were plus two.
No I think that we were able to again use the leverage of our portfolio to move to where there there was demand I would tell you that.
As you know, we think about two segments in our business both endpoints in advance.
And both of those segments at constant currency.
Actually had growth so.
I think I think that we kind of see.
That if I were to describe Europe , I wouldn't say that we see weakness in one segment versus the other but you know the overall macro IP segment as being weaker relative to what it was last year.
Okay. Thank you and then any thoughts on acquisition strategy you upped your share repurchase plan.
Given I think the strong free cash flow year to date.
Maybe not the quarter, but.
How how should we think about where you're at now that you've gone through so much of the integration of Ts in terms of thinking about.
Now, maybe incremental acquisitions, and where do you see potential.
I don't know holes in your portfolio for lack of a better term. Thank you.
Yes so.
Thank you Shannon for the question.
So what I would tell you is when you think about us in the long term I get back to what we we talk about in terms of our capital allocation strategy and that is we will deploy 50% of our capital.
Around acquisition opportunities and then 50% of our incremental capital around.
Potential share repurchase now.
You shouldn't think about that on an annualized basis things sort of ebb and flow, but in the long term they work out that way.
As it relates to our acquisition strategy, we absolutely are interested to pursue.
Targets that align with our strategy.
So we are interested in and obviously getting getting back to our four pillar strategy. We're interested in in.
Geographic opportunities that help fill gaps we're interested in and in.
Technology capabilities.
In the area of cloud analytics security et cetera.
And.
I think that.
You know there are targets like that in the market but.
You know, we're very disciplined and careful as it relates to what is a good fit for tech data, but I will tell you that as those as as we screen and look at those targets that we will find our way back to in the longer term. The 50 50 capital strategy that we talked about.
Thank you.
Thank you.
The next question is from the line of Nada, Peru with loop capital markets.
Hi, Good morning, guys I appreciate the opportunity couple of questions here.
I guess just all right.
It doesn't sound like you are making a meaningful distinction between your SMB business in your enterprise business is is that the case and just would love any context, and what you're seeing in between that DNA well follow up with you.
Yes, so and what I would tell you is that type of tech data has traditionally been more skewed towards the SMB segment.
And I would say that.
From our.
A sustaining.
Timeline perspective, we are making a distinction in that.
SMB is an area that.
Has provided very good growth for tech data.
Overtime in particular I cited the metric in the Americas, where we have had double digit growth over every year for for the last four years.
Anecdotally and I under line that word anecdotally.
No we think that the market is a bit stronger in that SMB segment relative to the large scale enterprise segment currently and so you know the market dynamics.
Our playing to the strengths of Tech Datas customer set currently.
And so.
You know that that that has been been something that we've been working at for quite some time, now and who knows what the future holds as it relates to the segments in terms of strength or weakness.
I think that.
Overall.
The economy is a bit challenged and maybe impacting some business segment greater than others I think again anecdotally, that's what our view would be.
Yes, that's helpful and.
You know sort of year year larger suppliers, who are fairly prominent supplier you guys that have either I missed him lowered or missed and lowered in some repeatedly.
Who appointed specifically large account activity can you give us any sense for as to what degree year on year. What context, you guys would filled scale not specifically to the account you're talking about but just to say that domain in general I know that you do.
Total sales in Q, many enterprise level cost figures I, just think it'd be helpful. In any any context you can provide.
It will be heavily rotates to think about your positioning in enterprise relative to some of your your largest suppliers have actually been challenged the last couple of quarters and margin and then add one last follow up thanks.
Yes, so as you know we serve approximately 115000 customers globally again.
This view in that portfolio is probably more towards those who serve.
Those who don't serve large scale enterprise and so when I talk about the portfolio I've been focused previously on the product portfolio, but again, it's the diversity of that customer portfolio I think that.
Allows us to differentiate ourselves a bit relative to the entire.
Being painted with the same brush as the entire IC market.
And you know our our sales model is flexible enough to allow our sales resources to mine those opportunities that would exist.
From a product dimension as well as the customer dimension as we execute our business.
And last quarter, you guys gave some metrics with regard to topline impact on year portfolio optimization initiatives.
That was that was helpful are there any metrics you can give.
This quarter with regards to portfolio optimization intact.
Sure and then thanks for the question and joining US today the impact for Q2 as compared to last year was pretty consistent with the amount that we noted in Q1, so thats around $300 million of revenue related to the optimization program.
That's really helpful.
Thanks, a lot guys. Congrats on the solid results positive. Thank you. Thank you.
The team has worked extraordinarily hard.
Over the last year and.
We appreciate the acknowledgement on the results. Thank you Amanda.
Our next question is a follow up from the line of Matt Sheerin with Stifel.
Yes, Thanks, just a follow up rich regarding your your opening comments you talked about an example of working with the reseller selling into a large customer.
Solutions deal where is over the as a service model as opposed to true traditional model and we're hearing that more and more from from resellers from from Oems. How fast is that that type of business growing and what is the the changes or difference in revenue recognition for tech data versus the traditional model.
Yes, so Matt I'll give you my point of view number one is.
I think the value proposition resonates quite well with the customer set.
As it relates to the ramp of.
So as the service offering setting aside software because we all know that evolution going on but ill use the term technology as the service. It's my impression that that ramp has not been as as bold and as as as.
Significantly shift as some of the Oems were aspiring to.
That being said it is a good value proposition then we validated that it does offer a very good profit opportunity as it relates to.
You know the.
Annuity versus transactional. This also varies by relationship so many times they'll be.
You know I'll use the word a bank slash leasing company.
In the middle of this where they actually.
Hold the paper and then.
So the distributor and the reseller actually get paid transactionally.
And then you know the annuity piece falls with the quote Unquote Bank and then there are other arrangements, where there truly is sort of.
Hey.
Hey, annuity for reseller in distributor so it really varies I think in time.
There will be one which will prevail over the other of course, we know that software as a category.
Software as a service is more of the non bank.
Sort of transaction in my example.
But the early pieces around physical things being bundled with lean more towards a bank.
Quote unquote being involved.
Okay. Thanks, that's quite helpful. And then just regarding that.
The questions around tariffs.
Just another question there regarding.
And any signs of any pull in from customers were particularly in networking I notice your Cisco business was up significantly both.
Sequentially and year on year.
Are you are you seeing any that were customers and resellers are pulling ahead of any potential tariff increases.
Not not that's visible to management their senior management, obviously, our presidents and the geographies or very close to the business and have a beat with the customers and there's nothing that's emerged it said that there is there is pull aheads occurring so I would say that.
It's not a not a prevailing trend that we're aware of.
Okay, Okay, great. Thanks, a lot.
Thank you.
This concludes tech data corporation's fiscal year, 2022nd quarter earnings Conference call.
A replay of the call will be available in about one hour at tech data dotcom.
Thank you for attending today's conference call and have a great day.
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