Operator: Good morning, ladies and gentlemen, and welcome to Tech Data Corporation's Fiscal Year 2016 Third 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. Thank you, ma'am.

You may begin.

Arleen Quinones: Thank you, Adam. Good morning, and welcome to Tech Data's earnings conference call and webcast to review our financial results for the third quarter of fiscal 2016. 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 third 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 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, specifically 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. 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. 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.

Robert Dutkowsky: Thank you, Arleen. Good morning, everyone, and thank you for joining us today. Continuing our positive first half momentum, I'm pleased to report that Tech Data delivered another solid quarter in Q3 of fiscal 2016. On a constant-currency basis, we posted good top line growth, improved non-GAAP operating income by nearly twice the rate of sales growth and grew non-GAAP earnings per share by 19% to a record Q3 level. For the first 9 months of the fiscal year and on a constant-currency basis, we grew non-GAAP earnings per share by 31%; generated $221 million of cash from operations; and for the trailing 12-month period, earned a return on invested capital of 12%, well above our weighted average cost of capital.

And as a demonstration of our commitment to returning value to our shareholders, during Q3, we completed the $100 million share repurchase authorization announced in June. In the first 9 months of the fiscal year, we completed a total of $147 million in share repurchases, bringing our cumulative stock repurchase to $1.3 billion or 46% of total shares issued. Turning to our regions. In Europe, our team continued to execute exceptionally well, delivering record Q3 sales and earnings. During the quarter, we gained share in many of our geographies and selected product areas, which contributed to our strong performance.

Our European teams are responding to the various levels of demand throughout the region, and we are realizing benefits from our efforts over the last few years to optimize our operations, realign resources and leverage our cost structure. In the Americas, a softer-than-expected market in Q3 resulted in sales that were slightly below our expectations, leading to lower operating leverage in the quarter compared to Q2. However, our team continued to execute well, outgrowing the market in a number of customer and product segments. As we indicated in Q1, in the Americas, we're mapping out and executing actions similar to those already deployed in Europe to optimize our operations. This process is still underway as we realign resources, broaden our sales coverage model and build out our capabilities in high-growth areas such as mobility, cloud, data center, integrated supply chain and value-added services.

The strength of our year-to-date worldwide performance has given us the confidence to invest more aggressively in high-return initiatives, including deploying more U.S. field sales resources, onboarding new vendors, consolidating our U.S. sales functions into Clearwater and expanding our business services suite of offerings in Costa Rica. We believe these investments will accelerate profitable share gains and enhance our ability to more effectively serve our customers and vendor partners. Our performance throughout the first 9 months of the fiscal year is a testament to our company's strength, namely our diversified customer and product portfolios, strong vendor relationships, our state-of-the-art global IT platform and our team's abilities to effectively respond to the realities of an ever-changing IT market.

Collectively, these strengths enable Tech Data to create value for our customers, vendor partners and shareholders. I'll now turn the call over to Chuck, who will review our financial and operational results for the quarters -- for the quarter and our outlook for Q4.

Charles Dannewitz: Thank you, Bob, and good morning, everyone. Worldwide Q3 sales declined 5% year-over-year on a reported basis to $6.4 billion. On a constant-currency basis and excluding from Q3 of the prior year sales generated by operations we exited in Chile, Peru and Uruguay, worldwide sales increased 5%.

Looking at our regions. Sales in the Americas decreased 3% to $2.6 billion. Adjusting for constant currency and sales generated last year in the Latin America countries noted previously, sales increased 2% year-over-year. Within the Americas, market demand in the U.S. was softer than we expected, but our team executed well and delivered above-market growth in several product areas, including data center solutions, namely storage and security, as well as consumer electronics and PCs.

From an end-market perspective, the U.S. experienced double-digit growth in SMB and the public sector verticals. In Europe, third quarter sales were $3.9 billion, down 6% on a reported basis but an increase of 6% in constant currency. Our European team executed well in the quarter in the vast majority of our trade regions, posting year-over-year sales growth in local currency. Numerous countries and trade regions grew by double digits, most notably Germany, Iberia and Italy.

At a product level, Europe sales were fueled by strong growth in mobility and broadline products, primarily notebooks, as well as solid sales in data center solutions, in particular, storage and networking. Worldwide gross profit for Q3 was $314.8 million, down approximately 6% year-over-year, primarily due to foreign currency headwinds, which was partially offset by higher sales volumes. On a constant-currency basis, gross profit increased approximately 3% year-over-year. Worldwide gross margin of 4.9% declined 5 basis points year-over-year, generally in line with recent quarters. Worldwide non-GAAP SG&A expenses, which exclude $5.7 million of acquisition-related intangibles amortization expense, were down 8% year-over-year primarily due to the impact of weaker foreign currencies.

On a constant-currency basis, non-GAAP SG&A expenses increased approximately $3 million or 1% year-over-year. As a percentage of sales, non-GAAP SG&A expenses declined 12 basis points as a result of improved operating leverage from higher sales and good expense management. Worldwide non-GAAP operating income was $70.9 million, essentially flat year-over-year. On a constant-currency basis, non-GAAP operating income grew approximately $6 million or 9%. Non-GAAP operating margin improved 5 basis points to 1.1% of sales.

On a regional basis, the Americas' non-GAAP operating income declined 4% year-over-year to $36.6 million, and non-GAAP operating margin declined 2 basis points to 1.42% of sales. In our European region, non-GAAP operating income dollars increased 4% year-over-year to $37.9 million despite significant currency headwinds. On a constant-currency basis, Europe's non-GAAP operating income grew $7 million or 19%. As a percentage of sales, Europe's non-GAAP operating income improved 9 basis points to 0.98% of sales. In Europe, the improvement in operating income dollars and margin percentage is due to operating leverage from higher sales as well as good expense management.

Our non-GAAP effective tax rate for the quarter was 29.8%. Non-GAAP net income was $45.2 million, essentially flat with the prior year, and non-GAAP earnings per share increased 8% to $1.28, the highest Q3 level in the company's history. On a constant-currency basis, non-GAAP net income grew approximately $4 million or 9%, and non-GAAP earnings per share grew 19%. Turning now to some of our balance sheet metrics. Our cash conversion cycle was 21 days compared to 24 days in the prior year Q3.

Cash used in operations for the quarter was approximately $82 million. We generated $221 million of cash from operations through the first 9 months of the fiscal year, and we exited the quarter with a cash balance of $586 million. During Q3, we completed our share repurchase authorization announced in June, purchasing approximately 600,000 shares of our common stock for $37 million at an average cost of $61.19 per share. Over the past 4 quarters, we have repurchased approximately 3.4 million shares of our common stock for $200 million at an average cost of $58.93 per share. This resulted in an outstanding share count of 35.1 million shares at the end of Q3, a reduction of approximately 8% of shares outstanding from the prior year period.

For the trailing 12 months, we earned a return on invested capital on a non-GAAP basis of 12%, well above our weighted average cost of capital, which is estimated to be approximately 9%. And finally, in Q3, 3 of our vendor partners represented more than 10% of our net sales. Apple represented 20%; HP, 19%; and for the first time, Cisco represented 10% of sales in the quarter. Turning now to the business outlook. Beginning this quarter, in addition to anticipated regional sales growth rates in constant currency, we're providing a worldwide sales outlook range in U.S.

dollars. We believe this will provide additional clarity to our sales guidance due to the numerous currencies in which we transact. For the fourth quarter ending January 31, 2016, we anticipate worldwide net sales to be in the range of $7.05 billion to $7.25 billion. This outlook assumes year-over-year constant-currency sales growth rates of mid-single digits in both regions and an average U.S. dollar to euro exchange rate of $1.07.

This outlook excludes approximately $78 million of sales from the previous year's fourth quarter due to our exit from Chile, Peru and Uruguay. For the fourth quarter fiscal '16, we also expect our gross margin percentage to be in line with the recent levels, and we estimate our non-GAAP effective tax rate to be 25% to 27%. I will now turn the call over to Bob for additional comments.

Robert Dutkowsky: Thanks, Chuck. Throughout the first 3 quarters of the fiscal year, I'm pleased with our execution and with our momentum going forward.

We continue to expand our strategic focus and offerings in the areas of data center, cloud, mobility, integrated supply chain and value-added services, all of which contributed to Tech Data's above-market growth in Q3.
The targeted investments we made in these areas have solidified our strong and strategic position in the IT ecosystem, and they position us well for the future. These investments are helping our vendor partners bring new products and services to market efficiently and simplifying the acquisition and deployment of technology solutions for our customers. To-date, cloud adoption through the channel has been slow and measured, for growth is beginning to accelerate, albeit from a small base. Over the last 12 months, Tech Data's cloud revenues exceeded $200 million despite significant currency headwinds, and our global Tech Data cloud business unit is currently growing at nearly 100% annually.

Earlier this year, we announced the appointment of Tech Data's Chief Information Officer, John Tonnison, to lead the strategic direction of the company's worldwide cloud business. A dedicated global leader for this strategic area reinforces our strong commitment to and continued investment in the cloud and to the success our partners -- on their journey to hybrid computing. Over the past several years, JT has overseen the development and implementation of Tech Data's StreamOne platform, which powers our cloud business. His deep understanding of technology and its real-world application make him an ideal fit to drive growth in this important part of our business. Further validating our commitment to the cloud and our capabilities in this emerging area, Tech Data was ranked 1 of the top 25 cloud service providers in the world by Talkin' Cloud in Q3.

As cloud services adoption accelerates and becomes a standard part of every new data center investment decision, we're committed to helping our SMB-focused resellers transform to meet this demand. Some of Tech Data's recent customer events throughout the U.S. and Europe demonstrate the vital role of distribution in the IT channel and the important role we play in educating and enabling our reseller customers and connecting them with key vendor partners. In October, we hosted our first European Cloud Summit in Barcelona, and earlier this month, we hosted Tech Data's Insider Exchange Conference in Florida. Both of these events brought together SMB-focused resellers, vendor partners and other technology executives to share strategies for profitably capitalizing on the demand for a wide range of cloud and data center solutions.

Our vendor partners also recognize the vital role that Tech Data plays in the IT supply chain. And in Q3, the company received the Microsoft Excellence Award and was named Dell Distributor of the Year in North America. Tech Data Europe was also lauded by Dell as Distributor of the Year - Best Newcomer. These awards recognize Tech Data's expertise, strong execution and the value we bring to the channel, reaffirming our strong partnership with the world's leading IT vendors. Finally, during the quarter, we announced the appointment of Beth Simonetti to the new role of Senior Vice President and Chief Human Resources Officer.

Beth joins Tech Data with more than 20 years of experience in human resource management with most of that experience in the distribution industry. Most recently, she served as Senior Vice President, Human Resources, at Baker & Taylor, an international book and entertainment distribution company that is in the process of evolving from distribution of physical to virtual products. For 12 years, she served in various HR leadership positions with Cardinal Health, one of the world's largest health-care distributors. As our global workforce evolves, Beth's experience will be invaluable in our ongoing effort to align our human capital with the strategic objectives of our business as well as the demands of our markets. Our employees are Tech Data's greatest asset, and we look forward to Beth's strategic leadership of this vital part of our organization and her contributions to the continued success of our company.

The geographic customer and product diversification of our business, together with our continued focus on the market and optimizing our operations, were instrumental in our improved earnings performance throughout the first 9 months of the fiscal year. As we approach the end of our fiscal year, we will continue this focus along with our never-ending emphasis on responsible growth and disciplined cost controls.
We are confident that doing so will enable us to achieve our financial objectives of growing sales by gaining share in selected product areas, improving earnings in local currency, generating significant cash flow and earning a return on invested capital above our weighted average cost of capital. We're encouraged by the generally stable demand for IT products throughout the geographies in which we operate, although the market environment varies by country, by product and by customer segment. However, we're even more encouraged by the strength of our worldwide operations and our team's abilities to respond effectively to the unique realities of each market.

As an example, in Europe, despite varying levels of economic recovery throughout the region, our multiyear optimization efforts are paying off. We've gained share in selected markets and improved overall profitability. In the Americas, although market growth has moderated somewhat, we are continuing to fine-tune our operations, and we believe there are ample opportunities for continued share gains and improved profitability. The momentum we have built is critical to a strong fourth quarter performance and positions us well in fiscal '17 and beyond. I'd like to extend a sincere thank you to our vendors and customers for their business and partnership and to my Tech Data colleagues for their hard work and dedication.

And with that, we'd like to open the call up to your questions.

Operator: [Operator Instructions] Our first question comes from the line of Matt Sheerin from Stifel.

Matthew Sheerin: First question relates to your comments on North America on some of the weakness you saw in the quarter. It sounds like you saw strength from SMB and government. Could you just talk about areas of weakness? And your guidance for mid-single-digit growth in constant currency implies, actually, seasonality, if not a little bit better, following a weak quarter.

So trying to -- I'm just trying to figure out what you're seeing specifically going into the January quarter.

Robert Dutkowsky: Yes, Matt, thank you. This is Bob. First of all, as we said in our prepared comments, we think the North American environment is -- growth is moderating. It's not as robust as it was earlier in the year or at the tail end of last year.

And I think you have to break that apart a little bit. The U.S. has a certain dynamic. Canada, certainly, with its dependency on oil, has a different dynamic. So I think the point is the markets, as they moderate and change, our ability to respond to that, to cover the correct markets, to have the right products through our relationships with the correct vendors, allows us to find those pockets of strong performance, and on the fly, deemphasize the areas that maybe aren't growing as quickly.

That's one of the -- I think the real hallmarks of the business model that we've built is our ability to respond. So clearly, the Americas -- the North American demand is moderating. And yet, there are still good pockets of opportunity. In the quarter we just reported, as Chuck described, SMB continued to be a strong area. We delivered double-digit growth in the Americas in SMB.

So there are pockets of strength. We're able to find them and deploy our resources quickly, and we have the broad array of products that the market wants so we can win in those spaces.

Matthew Sheerin: Okay. But the pockets of weakness, does that include -- you didn't -- you're not talking about enterprise as an area of strength. You talk about data center being strong in Europe.

So I'm trying to figure out where the pockets of weakness are right now.

Robert Dutkowsky: Well, I think if you look at the results that some of the larger resellers have already posted, you can see that at the higher end of the curve, growth is not that strong. But remember, that's a smaller part of Tech Data's business. We're predominantly an SMB-driven go-to-market model. So strength in SMB is good for us.

Weakness at the enterprise level doesn't hurt us as much as maybe other players.

Matthew Sheerin: But it sounds like on your guidance, you're more or less expecting seasonality then, right.

Charles Dannewitz: Matt, this is Chuck. In addition to that, we've made certain investments with a variety of vendor partners that we're getting some traction with, and we're seeing that come to fruition. And so that would -- that's also in our guidance.

Matthew Sheerin: Okay. And just a follow-up question. Obviously, lots of things going on with your vendors in terms of consolidation, the HP split. You've got Dell and EMC now. I know you're one of the few EMC distributors, and I know you've been strengthening your relationship with Dell.

So how do you see that relationship playing out? And are you seeing anything from the HP split here? I know HP was down year-over-year at a greater rate than your overall revenue. So I'm just wondering what's happening there.

Robert Dutkowsky: Yes. The HP split was a massive undertaking, not only for HP but for its partners all throughout the ecosystem. And so Tech Data dedicated a lot of resource and effort to help the HP split go smoothly in the channel, and I think it's been a success so far.

But keep in mind, Matt, for years, we managed HP as almost 2 different vendors. We had the EG side of the HP relationship, and we had the PC and printer side of the relationship. So it was not that complex for us to split it apart when HP split apart. But the change -- change typically represents opportunity for us in the marketplace. If there's confusion in the market, the resellers and VARs turn to Tech Data for clarity.

So the split created confusion. We were able to manage it very effectively. And I think the 2 smaller, more nimble parts of HP are going to create more opportunity for us going forward. Both Dell and EMC are important partners for Tech Data. EMC is one of our fastest-growing data center partners, as an example.

And we're not going to comment on whether the proposed transaction is going to happen or not, but we're strong and growing partners with both EMC and Dell around the world. And you could see Dell named us their Distributor of the Year. So we have a strong partnership with them.

Operator: Our next question comes from the line of Ananda Baruah with Brean Capital.

Ananda Baruah: Could you guys -- Chuck and Bob, can you give us -- well, maybe just give us a little help on thinking about how we should model the European operating margins.

There's a seasonality aspect. There's a business and the staff -- mix aspect. I know you guys obviously have been doing a good job on the structural side of things. I just want to make sure that we all have our arms around how we should think about modeling the European margins, and not just for the Jan Q. I know you're not going to give guidance -- half that, but just sort of what the mechanics are sort of generally speaking so we model appropriately.

And then I have a follow-up.

Charles Dannewitz: Sure, Ananda. This is Chuck. And as you know, we've produced significantly more operating income in Europe as we -- because it's our seasonally strong fourth quarter. And as you can tell from our model, as we get additional sales volumes, we get the leverage and it produces a very nice result.

I'm not going to get into exactly what our OpEx percentages are and our various reasons. We don't disclose that. But that's a starting point. We're looking at our margins being consistent with prior levels overall for the company. And we gave you our -- the midpoint of our growth rates.

So hopefully, that'll help you model for the Q4. And then we really don't get into our model for the future years.

Robert Dutkowsky: But I think -- Ananda, it's safe to say that over the last handful of quarters, we've talked about how we've been optimizing and -- the structures inside of our geographies. And the improvement that you see in Europe is a byproduct of that optimization process that has taken place over the last couple of years. It's both structural optimization, and then it's aggressively attacking market opportunities that we think we can profitably win at.

And that combination has led to the improved performance that you see in Europe. And as we've said, we started in Europe, and now we're deploying the similar game plan in the U.S. And so we have a proven path to be able to improve the performance, the operations and the profitability of an operating unit. And the model that you see that we deployed in Europe is the benchmark model that we're using.

Ananda Baruah: And is there any way to -- and maybe the answer is no, but I mean, is there any way to sort of balance how we can sort of framework -- I guess apply a framework to this? And the reason I'm asking is my -- so the European margins have been great, and it's been reflected in sort of that performance as manifested in stock performance, which you guys deserve.

Now my hunch is that for the October quarter, folks, including ourselves, sort of mismodeled the European margins. And while you're up year-over-year, I think we also -- we're all looking at some sort of Q-over-Q aspect. But even if that supposition is inaccurate, you were up sort of 9 bps year-over-year versus 23 bps year-over-year in the July Q. And so I'm just trying to get some -- and so I think we actually did, collectively The Street, is we basically manufactured a $0.10 miss on the EPS. I want to -- if there's any way to get our arms around managing more responsibly at that dynamic, I'd like to make sure that we're at least put in the position to do that.

And that's really the genesis of the question because while, I mean, it's commendable that you guys increased margins year-over-year in Europe almost 10 bps, you're probably not getting any credit for that today. And that's really the genesis of the question.

Charles Dannewitz: No, as -- Chuck -- Ananda, this is Chuck. As Bob indicated, we've worked very diligently over the past several years to optimize our operations in Europe. And we fully expect the increase in our operating margins there to accelerate further.

We don't provide operating expense guidance, but we are planning for that further acceleration in our performance in Europe. So...

Operator: Our next question comes from the line of Brian Alexander from Raymond James.

Brian Alexander: Let me just pick up on Ananda's question. So I know you guys manage the business for returns on capital, and profitability is obviously the bigger -- the biggest driver of that along with asset efficiency.

But your quarterly guidance is for revenue only and not for earnings. So I appreciate the specific revenue range that you're now giving as opposed to just growth rates. But given the variability in EPS estimates that we tend to see amongst the analysts, I was just wondering if you're thinking about revisiting the philosophy of guidance and providing EPS guidance as well, which is what your peer group does. So any thoughts on that? And then I have a follow-up.

Charles Dannewitz: Sure, Brian.

This is Chuck. When we look at the analyst models for this last quarter and where the variances were compared to our model, some of the biggest areas were in gross margin. So we provided additional guidance on the gross margin. We have decided not to give EPS guidance. We may revisit that in the future, but for right now, we're not going to provide that.

Brian Alexander: Okay. And I just think that would be helpful because I think, ultimately, that's what you guys are managing to. You're not managing for revenue. You're managing for earnings and returns. The follow-up is on Europe.

And overall sales trends in Europe have been pretty healthy for a while now in constant currency. I'm wondering, how much of your growth in Europe has come from mobility and specifically Apple? And I try not to ask questions about specific vendors, but they've risen now to 20% of revenue in the quarter, and I think most of that's from Europe. They were 16% a year ago. So what's your confidence level that European growth can continue into next year, particularly if there is a slowdown in iPhone sales, which most are expecting, and also now that the euro has moved back to $1.06, $1.07. I'm trying to get a sense for how concentrated the growth in Europe has been.

Or is there a lot more to the growth story beyond mobility and Apple?

Charles Dannewitz: This is Chuck. Clearly, we had robust growth again in Q4 with mobility, but we also had other vendor product sets that we also had very nice growth as well. Mobility is not the entire story on our growth in Europe. So as Bob indicated, we have a portfolio of vendors and product sets, and we go to where the market allows us to achieve that demand. So in the end, we've responded very nicely, and we've picked our spots.

And we believe we can continue to grow in this market.

Robert Dutkowsky: Yes, Brian, your comments on Apple are interesting. But keep in mind that the iPhone represents only about 1/3 of our Apple sales. Apple is performing very well in the desktop, in the laptop and mobile space. We sell the Apple TV.

We sell the Apple Watch. So this is not just an iPhone phenomenon that's being manufactured inside of our growth story around Apple. And just to give you some broad other data points, our storage business in the U.S. was up 21%. Our security business in the U.S.

was up 27%. I mean, this is not just Apple. There's a broad array of products that we sell. Apple happens to be one of the ones that there's good market demand on, and we're operating and executing against that demand very effectively. But there are other product areas that are growing, and we're operating and executing against those just as effectively.

Operator: Our next question comes from the line of Lou Miscioscia from CLSA.

Louis Miscioscia: Maybe if you could just get a little bit more granular with whatever you can on North America. I guess, understanding the soft Canada because of resources and oil weakness makes sense. But just why would the U.S. or North America be moderating? And also maybe if you could point to any specific areas where you're seeing most of the moderation.

Robert Dutkowsky: Yes, Lou, I can't explain necessarily why. There's a lot of dynamics why IT spending varies up and down inside of a quarter, inside of a year, inside of a decade. The average IT spending historically is 4% to 6%. I think if you look at the research houses right now, they're all saying that IT spending in the U.S. is below that 4% to 6% range.

So at Tech Data, we respond to the realities of the market. We don't make the market. We don't create the demand. We respond to the realities of it. And the realities are that IT spending is moderating in the Americas.

It's reflected not only in our results but in all of the results in the ecosystem. Our competitors, the vendor partners, we sell their products. And the publicly traded reseller customers that are ours all kind of point to the same place of some moderating demand in the Americas. So I don't think it's our role to explain why. It's our role to get -- to grow as much as we can profitably inside the market opportunity that exists and to be as efficient and as effective as we possibly can be to put products and services into the market and grow -- as we said in our prepared comments, to try to grow faster than the market where we can do that profitably.

So I mean, I wish I had the reasons why IT spending has slowed in the Americas, but that's not what we focus on. We focus on optimizing against the reality.

Brian Alexander: Okay. But a lot of our research in [indiscernible] have -- especially in -- we've been writing a lot about digital, and [indiscernible] has been that, basically, companies are trying to cut back on any legacy IT spending and invest that in the aggregation of analytics, mobile cloud and bringing new solutions out. Do you think that, that could be it? And then also, that would relate partially into your growth in cloud.

However, it seems, though, that cloud is still a very small portion of your total revenue. So maybe if you could talk about that and also talk about how fast from -- you gave a growth rate, but how fast from an absolute standpoint can you possibly start to increase that? That seems to be one of the biggest growth drivers, at least in my universe of coverage.

Robert Dutkowsky: Yes, yes. I think that there's obviously -- when there are alternatives that exist, that slows down the IT decision cycle. So if the historical decision is, Do I put this application on a mainframe? Or do I put this application on an industry standard server? That's -- pick one, A or B.

The decision cycle is not that long. When you now factor in converged infrastructure and on-prem versus cloud and then hybrid cloud, it just gives the IT infrastructure, the CIOs of the world, more alternatives to try to factor what's the best solution for their company. The good news is, at Tech Data, we sell all of those alternatives. We sell Intel-based. We sell proprietary servers.

We sell bare metal in the cloud offerings. We sell converged infrastructure. We sell the software that makes all of that work together efficiently. We sell the as-a-service offerings that our vendor partners have. So while the decision cycles and processes may be more complex from a Tech Data perspective, it's very important that we keep ourselves aligned with the vendor partners that are setting the IT agenda in the marketplace.

And we're very well aligned with the leaders in that space. And so we get to benefit from the realities of the market. Our $200 million performance in the cloud, I think, speaks to the reality of what's really happening in the cloud. It's a slow and measured deployment. There are opportunities there.

And our infrastructure and our set of offerings position us very well. As momentum builds in the cloud, we'll be -- we're prepared to be able to take advantage of that. Where the channel is today is very much in an awareness and education mode, trying to get the resellers to understand the cloud environment, get the resellers to understand the transitions their business models need to take and to get them to begin to transact there. And so that's why we talked in our prepared comments about these group sessions that we run where we accomplish that with many resellers. There's clearly momentum building, but the reality is Tech Data will sell much more on-prem technology in the next few quarters than we will cloud solutions.

And -- but we're prepared to sell both as the demand leads us there.

Operator: Our next question comes from the line of Osten Bernardez from Cross Research.

Osten Bernardez: Chuck and Bob, could you just, if you can, share if there are any verticals with respect to North America? Any vertical that you could point to where you think you saw some incremental weakness? I understand that the moderation in growth across may be broad based, but I'm just trying to understand whether there are any verticals or any technologies where you think you might be shifting some resources away as you look towards other areas of growth and optimizing your sales there. And also if you can highlight, I'm assuming whatever you saw during the quarter is continuing during the current fiscal quarter.

Robert Dutkowsky: Yes.

So, Osten, when you say vertical, I'm assuming you mean industry segments. And as Chuck -- and Chuck said in his prepared comments, health care and education, state and local were strong segments for us in the U.S. But that -- but we don't segment the market as discretely as you're describing at the industry level. We segment it at the size of the opportunity. That's why we talk about SMB or midsized businesses or enterprise businesses.

And then we also segment it by the solution category, whether it's mobility or data center or consumer electronics. So we're not in a position to tell you that there's a vertical that's gotten weaker in the U.S. That's just not the way that we cover the markets. And that's not what our vendor partners ask us to do either. So we can't give you much insight into that other than big verticals like health care and public sector and education, we have dedicated resources that manage the resellers that sell into those verticals.

And it's very clear to us the performance that exists there.

Osten Bernardez: Okay. Okay. I'll follow up later. And then secondly, could you just sort of highlight any -- whether there've been any changes in pricing dynamics in this current state of moderated growth, if you will, competitively when you look at the broader space?

Robert Dutkowsky: No, I -- my observation would be that -- first of all, as I've said, for the decade that I've been here, this is a very competitive business that we're in.

And I don't think it feels any different in either of our geographies this past quarter than it's felt in years gone by. There are very able competitors in our market space. We know them; they know us. And none of us are afraid of competing, but this doesn't feel any more competitive or any less competitive than it has in recent quarters.

Osten Bernardez: Okay.

And then just lastly from me. You stated in your opening remarks that you're looking into consolidating certain sales functions into your Clearwater offices. Could you just sort of just touch on why specifically you need to do this now? And what type of -- what areas do you see these selling resources serving going forward?

Robert Dutkowsky: Yes -- no, that's a very good observation. We had sales in Clearwater, sales in Toronto and sales in Costa Rica. And over the course of the last year or so, we've been in the process of centralizing all of our phone sales in Clearwater.

It does a couple of things for us. It allows us to get greater leverage of our management staffs. It allows us to more quickly do education and training in a dynamic market like we're in right now. It's very important that we keep our sales team current on the architectures and technologies and solutions that our partners are bringing to the market, and consolidating in one place allows us to do that more efficiently. And it also allows us to -- in a centralized fashion, to create headcount that we can then deploy in -- out in the field and in our customers' offices.

So by centralizing, it allows us to be smarter, execute better and have better coverage around the U.S. It's a process that we've begun to roll out. It's working very effectively, and we think, in the long run, it'll allow us to cover the market opportunity better and be more competitive.

Operator: Our next question comes from the line of Jim Suva from Citigroup.

Jim Suva: And I have a question for Bob and then also Chuck.

Bob, I think in your prepared remarks, you mentioned not only the consolidation of sales in Clearwater, but I think you also mentioned some incremental sales investments or some incremental investments. Can you help us understand, when you net that all out, are we looking at a couple quarter increase here in OpEx? Or does the consolidation make it a wash or some savings? And then I think the other question would be for Chuck is, you guys have done very well with your stock buyback. And while cash flow from operations was negative this quarter as it has been a lot of times this quarter seasonally, how should we think about capital deployment and priorities for cash going forward? And I'm thinking about whether it'd be M&A or stock buyback or the comments that Bob mentioned about the shift to Clearwater as well as some investments. Would those take up some cash that we should be aware of?

Robert Dutkowsky: Yes, thanks, Jim. I'll take the first part.

As I said earlier, by consolidating, that ultimately frees up some resource, some headcounts in SG&A that we can redeploy into field coverage as well as there are units inside of our team here in Clearwater that had been prior internally focused and now we're redeploying those resources to be out in the field in our customers' offices. So net-net, there'll be some increase in headcount, some decreases in headcount. I think in the final analysis, there won't be large increases in headcount in the Americas on this sales reengineering process that's taking place. But what our customers will see is more Tech Data coverage covering more customers both over the phone and in person in their customers' offices. And that's really the important part to our vendors, and that's where -- that creates the growth opportunities that we're searching for.

Jim Suva: Great. And the capital deployment?

Charles Dannewitz: And Jim -- sure. Jim, this is Chuck. In regards to -- you're exactly right in regards to our cash flow as we used a bit of cash as we ramp up for our seasonally strong fourth quarter in Europe. So that was not a surprise.

We commented on that in our last call. In regards to capital deployment, as we indicated every quarter, we meet with our Board of Directors and outside advisers and look through our 3 alternatives, which, as you indicated, would be a stock buyback, M&A opportunities and then, of course, organic growth. And there's really nothing new on that front. We continue to closely review our capital structure, and we're going to do what's best for our shareholders and the return to them. So really, nothing new to report in that regard.

Clearly, we have a flexible balance sheet, one that allows us to seize on opportunities as they present themselves. So that's the good news. We have a very strong balance sheet.

Operator: Our next question comes from the line of Param Singh from Merrill Lynch.

Paramveer Singh: Just want to take a step back to the performance this quarter, to begin with.

Your gross margin was impacted by negative product mix, as you mentioned. Can you delineate between different end markets that have that negative impact? It appears that mobility was much stronger, so that could have been one. And you did mention that notebooks is stronger within broadline. So what was weaker that could have impact your gross margin? And then I have a follow-up.

Charles Dannewitz: Yes -- no, Param.

This is Chuck. Again, our gross margins went down year-over-year by 5 basis points, which isn't all that significant. And there's lots of puts and takes to get to that decline. Clearly, mobility is -- was stronger this quarter, and it attaches a lower gross margin. But as we indicated earlier, it also attaches a lower amount of SG&A and a great capital turn.

So very nice investments. So a lot of puts and takes but nothing significant, and it's in line with our prior quarters.

Paramveer Singh: Okay. And then I know you're guiding gross margin to be flat next quarter. I would expect that to go up considering that data centers tend to be much stronger in the Jan quarter as it typically is.

What am I missing there?

Charles Dannewitz: It's our seasonally strong quarter in Europe, which we have a significant mobility practice. It goes across all of our product segments. So it really is, again, the puts and takes, and we model it from bottoms up. And we believe our gross margin is going to be in line with our prior quarters.

Paramveer Singh: And I know you're not guiding to the long term, but how much, I mean, incremental margin expansion do you think you can achieve in Europe? Or are you mostly done with that and it's all North America now? Operating margin [indiscernible] not gross.

Robert Dutkowsky: Yes, we continue to look for improved profitability opportunities in both geographies. It's not a one and then the other. It's -- Europe is further along in the process that we run to try to optimize its performance, but it doesn't stop. We continue to look for more profitable vendor partners, more profitable technologies and solutions. And as your question said, we still have to respond to the realities of the market.

And in the market today, mobility products are -- continue to be very, very fast-moving products. And that's an opportunity that we're responding to. We make every effort to try to balance that off with other more profitable parts of our portfolio. But they're driven by the demand opportunity that exists that we respond to.

Paramveer Singh: And the way your sales are incentivized -- I mean, your sales teams are incentivized, is that different across products? Or what are the key drivers for them for one or the other? Could you just elaborate on that a little bit?

Charles Dannewitz: I mean -- this is Chuck.

Yes, our sales teams incentivize a variety of factors, including sales growth, gross profit percentage growth and a variety of factors that drive our performance that are key to our success. So very much aligned with the rest of the team at Tech Data.

Paramveer Singh: I mean, do you -- is it ROIC-based first and then gross profit or operating profit?

Charles Dannewitz: No, there's really, really a good mix of financial metrics that we reward the team with. Return on invested capital is one of those metrics. But for the sales team, it's primarily sales, gross profit percentage, gross profit dollars and so forth as they control that -- that's most of what's under their control.

Operator: Our next question is a follow-up from the line of Ananda Baruah from Brean Capital.

Ananda Baruah: So just was wondering if you could just give us your thoughts on the recent movements in FX. And I'm sure that's baked into your guide. But just any high-level thoughts on how you're thinking about the impact of FX in the model? And I guess, the revenue adjustments, we can probably do on our own, but is there any currencies, in addition to the -- just to the euro that we should consider as impacting the European revenue and the pound? That would be helpful. And then any comments on the margin impact? And then anything on hedging?

Charles Dannewitz: Exactly.

As you indicated, there is a lot of different movements. We have significant operations in the U.K., the Nordic region and some other areas like the Swiss franc play in regards and -- in addition to the euro. The $1.07 peg is due to the recent movement by -- here in the U.S., expanding interest rates, and then overseas, they're looking at lowering interest rates and the pressure on the dollar. So we're guiding to what our bank consensus is telling us, which is $1.07. You should be able to get and will be able to get to the revenue in the various regions when you look at the Americas, which is primarily the U.S.

dollar. And with our guidance there and with the impact of exiting our Latin America operations, you should be able to be very close on that, and then the balance would be the European revenue level. So I think you can work through that and come out very closely when we gave you the actual revenue in dollars. We thought that would be a big help to have you be able to model it. The other thing was the miss in the models this last quarter was gross margin, and that's why we gave you that additional color.

Ananda Baruah: Got it. Just philosophically, what are the sort of the impacts to the margins sort of from the different FX movements? But I mean, it seems like it's been small in the past. But it seems like we're missing [ph] something.

Charles Dannewitz: No, in regards to gross margins, there's very little to no impact. And as you work down through -- when I say gross margin, that's gross margin percentages.

So FX does have an impact on our top line. As you go down through our income statement, though, as you get down to our operating income, the movement in FX is not going to have a significant impact at least from the current levels down to $1.07. I think you've seen most of the significant move over this past year is from very high levels down into the $1.10s. And now going from the $1.10 area down to $1.07 is not near as significant.

Ananda Baruah: I got that.

Okay, that's great. Okay. And then just lastly, anything on hedging that you guys are doing? [indiscernible] impact is minimal.

Charles Dannewitz: Sure. Well, from our balance sheet perspective, over 30% of what we buy in Europe is in nonfunctional-denominated currencies from our vendor partners.

And we hedge that. On an everyday basis, we hedge our balance sheet. So we're 100% hedged, have great systems to do that. We do not have much FX volatility at all on our balance sheet. In regards to our income statement, we do not enter into hedges as some of our vendor partners and other companies throughout the world do.

We've decided not to hedge our income statement. So that is not an impact on our reported results.

Operator: Thank you. Ladies and gentlemen, this does conclude Tech Data Corporation's Fiscal Year 2016 Third Quarter Earnings Conference Call. A replay of the call will be available in about 1 hour at techdata.com.

Thank you for attending today's conference call, and have a great day.