Tech Data Corporation (TECD) Q3 2018 Earnings Conference Call Transcript

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Tech Data Corporation (NASDAQ: TECD)
Q3 2018 Earnings Conference Call
Nov. 27, 2017, 5:00 p.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. Welcome to Tech Data Corporation's fiscal year 2018 third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, please press *1. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the meeting over to Arleen Quiñones, Vice President of Investor Relations. Ma'am, you may begin.

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Arlene Quiñones -- Vice President of Investor Relations

Thank you, Matt. Good afternoon and welcome to Tech Data's earnings conference call and webcast to review our financial results for the third quarter of fiscal year 2018. I am joined this afternoon by Bob Dutkowsky, Chairman and 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 afternoon on the IR portion of our website located at www.techdata.com/investor. Unless otherwise specified, all gross comparisons we make on this call today relate to the corresponding period of the previous fiscal year.

Before we begin, I would like to remind all listeners that today's press release and certain matters discussed in today's call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations and are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in our filings with the Securities and Exchange Commission, including those filings related to our acquisition of Avnet's Technology Solutions business, as well as our most recent Annual Report on Form 10‑K, which 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, which exclude certain items contained in our GAAP financial results. 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.

Please note that during today's call, we will refer to Technology Solutions business acquired from Avnet on February 27, 2017, as "Technology Solutions" or as "TS." We have provided certain estimates of pro forma sales growth rate and product performance based on combining the stand-alone operating results of Tech Data and Technology Solutions for the periods prior to the acquisition date. This pro forma information is provided for informational purposes only and does not represent what actual results would have been had the acquisition been completed at the beginning of the prior fiscal year. And it is not necessarily indicative of the results of operations that may result in the future. 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 Chairman and Chief Executive Officer, Bob Dutkowsky.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Thank you, Arleen. Good afternoon, everyone. Thank you for joining us today. We're pleased to report Q3 results that were in line with our expectations and that continue to highlight the enhanced earnings power and cashflow profile of the new Tech Data. For the first time in Tech Data's history, quarterly sales surpassed $9 billion. Through pricing discipline and strong cost controls, we delivered solid non-GAAP earnings per share. In addition, we generated $70 million of cash from operations, paid down $350 million of our debt, reflecting our strong commitment to deleverage the company, and we earned an adjusted return on invested capital for the trailing-12-month period well in excess of our weighted average cost of capital.

You will recall that our Q2 earnings missed our expectations due primarily to three factors that impacted gross margins: product and customer mix, underperformance in our global computing components business, and a competitive market environment in Europe. In Q3, our teams executed better and both optimizing our customer and product mix, as well as negotiating and obtaining vendor rebates. In the quarter, demand for endpoint devices exceeded our expectations, while demand for advanced solutions was less than we planned. However, by leveraging our end-to-end portfolio, our teams responded quickly and capitalized on the actual demand in the marketplace.

During the quarter, we also aligned the hedging policies within our global computing components business and sold through much of the inventory on hand at the end of Q2. Therefore, we do not anticipate issues related to hedging practices in our component business to significantly impact our results in Q4 and beyond. And finally, the market continues to be highly competitive throughout our regions. However, in Q3, our teams executed well, being selective in the opportunities we pursued, and walking away from unprofitable business. Overall, I feel very confident about the progress we've made to get our execution back on track, and that we have addressed the issues that we can control.

Now before I turn the call over to Chuck for more color on our regional performance and financial highlights, I'm pleased to report that since our last earnings call, we reached a number of integration milestones, including the integration of two of our larger European countries and further alignment of key policies and practices. We also introduced the new Tech Data and our new global brand to markets around the world. Our refreshed brand, which includes a new look, as well as a new purpose, mission, and vision, reflects a modern, global leader in technology distribution. The distributor of the future that connects the world with the power of technology. Tech Data's unmatched end-to-end portfolio of products, solutions, and services and highly specialized skills positions, positions us perfectly to meet our channel partners' evolving needs.

In addition to uniting Tech Data under one common brand, we've also changed the way we describe our end-to-end continuum of IT products and service offerings. We recognize that as workloads shift from the data center to the edge and beyond, the lines that historically defined technology are blurring. In addition, many of the new technologies are virtual and borderless. Consumers don't think in terms of broadline or value products. They think in terms of solutions that deliver business outcomes, making the old nomenclatures obsolete. Therefore, we've grouped our offerings into two primary solution portfolios -- endpoint solutions and advanced solutions.

Endpoint solutions, previously known as the broadline category, primarily includes PC systems, printers, peripherals, supplies, endpoint software, and consumer electronics, as well as mobile phones and accessories. Our advanced solutions portfolio includes primarily more complex data center technology, such as storage, networking, servers, data center software, and converged and hyper-converged infrastructure. Next generation technology such as cloud, security, analytics, IoT, as well as our specialty and service offerings, span across both endpoint and advanced solution portfolios. We believe this more intuitive and solution-oriented naming convention will help customers more easily interact with Tech Data's broad-coverage model, will facilitate cross-selling, and will better leverage the strength of our end-to-end portfolio to deliver specialized outcomes into the marketplace.

I will share some additional information on our company's strategy later in my prepared remarks. But now I'll turn the call over to Chuck, who will review our financial and operational results for the quarter, as well as our outlook for Q4. Chuck?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Thank you, Bob. Good afternoon, everyone. As Bob indicated, our solid Q3 results continue to demonstrate the enhanced earnings power and cashflow profile of the new Tech Data and our ability to deliver strong returns for our shareholders. I'll now provide you with a more detailed view of our Q3 consolidated and regional results. On a reported basis, worldwide sales were $9.1 billion, up 41% year-over-year. The year-over-year increase in worldwide and regional sales is primarily due to the addition of Technology Solutions. On a pro forma basis, we estimate that worldwide sales were up low single digits in constant currency. On a regional basis, sales in the Americas increased 53% to $4 billion on a reported basis, and 52% in constant currency. On a pro forma basis, we estimate Americas' sales increased by mid-single digits in constant currency.

During the quarter, power and network outages caused by Hurricane Irma impacted our Florida and Georgia facilities. Thanks to the tireless efforts put forth by our IT, facilities, and sales teams, we quickly resumed operations. The Hurricane's impact on Q3 sales is estimated to be between $40 to $60 million. This experience reinforced the unwavering dedication of our employees, as well as the strong loyalty of our vendors and customers, whose support helped to mitigate our sales losses. At a product level in the Americas, PCs and software subscriptions, as well as next-generation technologies, including cloud and security, performed well during the quarter, while storage, networking, and traditional software products declined.

In the U.S., sales to resellers serving public sector end users showed strong growth and sales in our U.S. FMB sales division grew by double digits again in Q3. In Europe, Q3 sales increased 25% to $4.8 billion on a reported basis and 19% in constant currency. On a pro forma basis, we estimate Europe's sales were approximately flat year-over-year in constant currency. At a product level, smartphones, notebooks, software subscriptions, security networking, and storage performed well, while computing components, printer supplies, and traditional software products declined.

In the Asia-Pacific region, sales were $297 million. Our Asia-Pacific results are entirely due to the acquisition of TS, as Tech Data had no operations in the region prior to the acquisition. From a product perspective, networking and servers were up, while sales of storage and security declined. Worldwide gross profit was $526.1 million, an increase of $210.2 million, or 67%. Gross margin was 5.76%, an improvement of 89 basis points. The increase in gross profit dollars and gross margin are primarily due to the addition of the higher margin TS business.

Worldwide non-GAAP SG&A expenses, which excludes $26.4 million of acquisition-related intangible amortization expense, increased $155.7 million, or 66%. As a percentage of sales, non-GAAP SG&A expenses increased 65 basis points. The increase in non-GAAP SG&A expenses was primarily due to the addition of TS. The higher non-GAAP SG&A as a percentage of sales is primarily due to the higher cost to serve TS's more complex, advanced solutions business. Worldwide non-GAAP operating income was $135.7 million, up $54.6 million, or 67%. Worldwide non-GAAP operating margin improved 24 basis points to 1.49%. The increases in worldwide and regional non-GAAP operating income dollars and operating margin percentages are primarily due to the addition of the TS business. On a regional basis, the Americas' non-GAAP operating income group's $43.1 million to $85.5 million, an increase of 101%, and as a percentage of sales grew to 2.14%, an improvement of 52 basis points.

In Europe, non-GAAP operating income grew $11.2 million to $53.4 million, an increase of 26%. As a percentage of sales, Europe's non-GAAP operating income was 1.1%, compared to 1.09% in the prior year. In our Asia-Pacific region, non-GAAP operating income was $3.9 million, or 1.32% of net sales. Despite higher sequential sales, the region's profitability declined from the prior quarter, primarily due to product mix, competitive market pressures, and higher operating expenses.

Stock base compensation expense was $8.3 million in Q3, which includes $1.2 million of acquisition and integration-related expense. Interest expense in Q3 was $26 million, higher by $16 million, primarily due to higher debt balances used to fund the TS acquisition. Our Q3 non-GAAP effective tax rate was 30.9%. Non-GAAP net income was $76.7 million, an increase of $25.8, or 51%, and non-GAAP earnings per diluted share were $2.00, a 39% improvement.

Turning now to some of our balance sheet and cash flow metrics. Our cash conversion cycle in Q3 was 21 days, which was consistent with Q2, and favorable by one day compared to the prior-year quarter. During the quarter, we generated operating cash flow of $70 million, bringing our year-to-date cash flow from operations to $440 million, and we exited the quarter with a cash balance of $563 million. Reflecting our commitment to rapidly deleverage the company, during the quarter we paid off our $350 million senior note that matured in September. We will continue to use the combined company's strong cash flows to deleverage our balance sheet and to expect to achieve a total debt-to-adjusted EBITDA ratio of approximately 2.5 times within the next 11 to 17 months.

Capital expenditures were $172 million in the quarter, which includes $156 million related to the purchase of facilities in the U.S. previously leased under a synthetic lease arrangement, which we terminated in October. For the trailing 12 months, we earned an adjusted return on invested capital of 12%. At the end of Q3, we had $2.7 billion of equity and a 41% debt-to-total-capital ratio. And in Q3, three of our vendor partners represented 10% or more of our sales. Apple represented 16%, while HP, Inc., and Cisco each represented 10% of sales. As Bob stated earlier, we're making excellent progress on our integration efforts. With the actions taken identified to date, we are confident we are on track to achieve $50 million in annual cost savings this fiscal year, and another $50 million by the end of fiscal year '19, for a combined annual cost savings of $100 million. Also, we continue to expect to incur a one-time cost to achieve these savings of approximately $150 million, exclusive of one-time transaction cost related to the acquisition.

Turning now to our guidance for the fourth quarter ending January 31, 2018, we anticipate sales to be in the range of $10.25 billion to $10.8 billion. We anticipate earnings per share to be in the range of $2.39 to $2.69, and non-GAAP earnings per share to be in the range of $3.35 to $3.65. This guidance assumes $38.5 million weighted average diluted shares outstanding, and an effective tax rate in the range of 29 to 31%. This guidance also assumes an average U.S. dollar to Euro exchange rate of $1.18 to 1 Euro. I will now turn the call over to Bob for additional comments.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Thanks, Chuck. We remain highly confident and excited about the future of our business and the promise that the new Tech Data brings to a rapidly transitioning IT market. We are building the IT distributor of the future, one with breadth, specialized skills and extensive capabilities to help our channel partners capitalize on growth opportunities across the total computing continuum. To accomplish this, the strategy we outlined in our investor day last month has focused on investing in next-generation technologies, strengthening our end-to-end portfolio, optimizing our global footprint, and visualizing transforming Tech Data.

It's clear that the IT market of the future will be built on next-generation technologies and delivery models such as cloud, hybrid cloud, hyper-converged infrastructure, edge devices, solid state storage, software-defined solutions, analytics, security, and the services that will support the entire end-to-end IT ecosystem. The new Tech Data, with its deep domain expertise, value-added skillsets, and enhanced earnings profile is positioned better than ever to invest in and accelerate our growth in these areas. These investments will complement what we believe is the most comprehensive end-to-end portfolio of products, solutions, and services in the industry.

As customers have moved beyond buying just products to purchasing business outcomes or solutions, IT distributors now and into the future must possess broad and deep end-to-end capabilities, from endpoints to legacy technologies, to next-generation IT, regardless of how the technology is delivered or where the workloads migrate. Therefore, we will continue to strengthen our portfolio of offerings from legacy and emerging vendors to help our customers create robust, tailored solutions that create better business outcomes for their customers.

We will continue to optimize our global footprint by investing selectively and strategically in our geographies in order to grow profitably. Today, we operate in 40+ countries, each of which can be optimized in one way or another. For example, there are countries where we are underinvested, with the opportunity to expand by adding new technologies or vendors. In other countries, we need simply to improve productivity and become even more efficient. Global scope and local expertise are a powerful combination, and we're focused on further strengthening our position in the regions where we operate.

Finally, over the last few years, we've invested in building out our digital footprint. Today, we execute over half of our sales and procure greater than 95% of our inventory through digital channels. In addition, we've delivered over 3 million software-as-a-service seats in the marketplace on behalf of our vendor partners. While we've already made good progress in our digital transformation, there's opportunity to digitize Tech Data even further. The pace of change is accelerating. To keep pace with this change, we are investing in automation, advanced analytics and digital marketplaces, all of which will lead to a superior customer experience while also reducing operating expenses and enhancing our efficient, variable low-cost route to market for our vendor partners.

To sum things up, our year-to-date results clearly demonstrate the significantly enhanced earnings profile and cash generating power of the new Tech Data. The new Tech Data is differentiated by our broad and rich portfolio of endpoint, advanced, and specialized solutions and services, that together with deep skills and domain knowledge enable our channel partners to bring to market the technology the world needs to connect, learn, and advance.

As we enter the final quarter of our fiscal year, our teams continue to be focused on operations and integration. Operationally, we are executing our strategy while maintaining disciplined cost controls and optimizing profitable market share in key geographies and segments. Our integration teams are progressing as planned. We are on track to deliver our synergy and debt-reduction targets. All of this we believe will continue to improve our financial profile and deliver strong results for our shareholders. I'd like to extend our thanks to our vendors and customers for their business and continued partnership, and to my Tech Data colleagues around the world for their hard work and dedication. With that, we'd like to open the call to your questions.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. If you'd like to ask a question, please press *1 on your telephone. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. One moment, please, while we poll for questions.

Our first question is from Adam Tindle from Raymond James. Please go ahead.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. Thanks and good evening. I just wanted to start to better understand the challenges and opportunities in Europe, specifically from a margin perspective. The trend did improve a bit from last quarter, but operating margin was flat year-over-year, despite adding in the accretive TS business. Maybe you could start by helping us understand the drivers of this and what you see as a realistic, longer-term target for the region. And I have a follow-up, please.

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Adam, this is Chuck. In terms of the synergies that we expect to realize in the European region, it's slower than it is in the other regions due to us rolling our the IT systems country by country by country. As we noted on previous calls, those synergies will be realized over the 2-year period and will be more toward the back end versus the front end.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. Maybe one for Bob then. One of your major competitors is still showing double-digit revenue growth and gross margin declines. This trend actually accelerated on a year-over-year basis in the third quarter. You alluded to pricing discipline and a competitive environment in your prepared remarks. I'm just hoping that you can provide us with some updated thoughts based on what you have seen. Has this trend expanded beyond Europe and do you see any timeline for this to settle down?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, Adam. The market clearly is competitive. The competitiveness that we saw in the European market in Q2 has extended across our whole footprint now. I think we did a really good job in the quarter of remaining disciplined, pursuing the pieces of business that delivered the proper profitability and use of capital, and also helping our customers with projects that were strategic to their customers. I think we did a good job. I think we landed in the sweet spot of the growth market. We projected that we would be in the low single-digit growth range and we delivered growth into that range, which I think validates the idea that our execution has continued to improve.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. Just one quick clarification because you were talking about organic investments in the prepared remarks. Does the mid-single-digit growth in operating profit dollars X synergies for fiscal '19 that you talked about at the analyst day include any of these planned organic investments?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Adam, this is Chuck. We, as we indicated at investor day, the organic investments were included in the operating income growth.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay, thank you very much.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, and Adam, it's Bob again. As we continue to progress on the integration of the two companies together, what becomes really obvious to us is the depth of the skills that we have across the board, but also the places that where with targeted investments we can offer even better service to our customers and our vendors. And so as time progresses, our view of those very targeted organic investments are improving and we're executing against those.

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Adam, this is Chuck again. To be clear, we're not updating guidance that we gave on the analyst day. We'll thoroughly review our annual offering plan, as we usually do, and we'll give guidance when we release our earnings for the end of the year.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay, thank you.

Operator

Our next question is from James Suva from Citi. Please go ahead.

James Suva -- Citigroup -- Analyst

Thanks very much. It's Jim Suva here from Citi. My first question is, it now appears that last quarter, the challenges were one-off and this quarter you came back with strength across the board, which is great. As you were to look back now, say three or four months later, look back at the last quarter, can you maybe let us know the few either changes in behavior you did or lessons you learned or how exactly you circumvented it so it didn't reoccur this quarter, so we can be confident that it doesn't reemerge again?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, Jim, at Tech Data, we pride ourselves on excellence and execution. As I tried to describe in the prepared remarks, our teams executed at a high level in Q3 and delivered against the expectations that we had as a business. That excellence and execution are in the fabric of the company. It's in the DNA of the company. I think you saw in Q3 the power of that execution with the results that we posted.

James Suva -- Citigroup -- Analyst

Okay. And in doing so, did you change incentives across the entire company? Did you sit down and have management come to terms with what the strategy is? Or what changed from last quarter to this quarter for those of us on the outside who just can't see the actions that you did inside.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, we didn't change our management system one bit. We review every one of our operations twice a quarter. In the eleven years that I've been here, that process has existed every single quarter. Fundamentally, none of those underpinnings of the management system changed. We didn't change compensation systems. We didn't reorganize the business at all. We turned our attention toward execution. Jim, we're really good at looking at where the best practice exists in our company around the world.

Over the course of Q1, 2 and 3, what we've learned is there are best practices that had a Tech Data heritage and there are best practices that had an Avnet TS heritage. Those processes are becoming more mature in our execution every single day. We're beginning to see the benefit of that enhanced execution against a broader footprint with more vendors and more customers. So we're pleased with the way we executed in Q3, and we have plans in place to continue to execute into the future.

James Suva -- Citigroup -- Analyst

Great. Thanks for the details and clarifications. Congratulations on the results.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Thanks, Jim.

Operator

Our next question is from Param Singh from Merrill Lynch. Please go ahead.

Param Singh -- Merrill Lynch -- Analyst

Hi all. Thank you for taking my question. Guys, if I look at your guidance for next quarter, you typically see a decline in gross margin in the fourth quarter, especially as mobility and other endpoint solutions pick up. If I look at your guidance, it's implied that your op ex level would come down from the October quarter. Is there a reason why that dynamic would play out?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Param, this is Chuck. We're actually not giving gross margin or op ex guidance. Purely the sales range and the EPS. The range we give takes into account the variety of margins that we can earn depending on the various product sets and customer sets that we're going to sell to. As you know, Q4 is a large data center practice for us. Historically both for us and the TS business that we acquired. It's also a very large mobility practice for us. We'll just have to see how those two business segments come in for Q4. That's built into our guidance.

Param Singh -- Merrill Lynch -- Analyst

Got it. Thank you. What was the reason for the decline in the APAC margin sequentially and what would be a normalized level for that?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Again, APAC is a very small region. It represents less than 3% of sales, so a very small change in cost can impact the operating margin significantly. As we noted on the call we had, we sold a variety of lower margin, mixed-type products and we incurred a little bit more in operating expenses for the region. So that was the main reason for the decline.

Robert Dutkowsky -- Chairman and Chief Executive Officer

It's very much the law of small numbers in play there, Param. But the one thing that we're focused on is how to profitably continue to grow the Asia-Pacific business. As Chuck said, it's small today, but over time we'd like to see it get larger and mirror more of the overall performance of the company, particularly focused on the advanced solution side of the business.

Param Singh -- Merrill Lynch -- Analyst

Got it. One last one really quickly. What have you guys seem from a mobility demand so far in the quarter? I know it's better in your guide, but is it something you've seen with typical seasonality? Is that part of the business picking up a little stronger so far? Any clarity would be great.

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Param, we don't give guidance within the quarter on what we're seeing currently. We wouldn't comment on the mobility piece of the business.

Param Singh -- Merrill Lynch -- Analyst

Understood. Thanks a lot, guys. Appreciate it.

Operator

Our next question is from Matthew Sheerin from Stifel. Please go ahead.

Matthew Sheerin -- Stifel, Nicolaus & Co., Inc. -- Analyst

Yes, thanks. Good afternoon. A couple questions from me. First, Bob, in your commentary you talked about the strength of the endpoint client devices versus relative weakness on the solutions side. Is that a trend that you've seen continued here into Q4 or do you expect the typical budget flush on the enterprise side there? Because if you look at your revenue guidance, it looks like it's in line with seasonality. Although as you just pointed out, there's a lot of moving parts with the ramp of the smartphone products versus the data center stuff. So just trying to get a sense of what you expect there. Then just in line with that, it looks like, despite that weakness, your gross margins were more or less in line with expectations, which means that you managed your vendor rebate programs and just trying to figure out how that's going.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, you asked a few questions in there, Matt. Let me see if I can sort them out. First of all, not only Tech Data, but I think the whole industry has been surprised and pleased by the endpoint demand. Quite frankly, the demand in the quarter was stronger than what we planned. This is another example where our execution was very strong. We were able to acquire product from our vendor partners, acquire the correct products and the right SKUs, and then cover the market and take advantage of those sales opportunities in the endpoint space. When a market opportunity is greater than what we planned, it tests the execution and we did very, very well there. As Chuck said, we don't give forward guidance, so we're not going to talk about how those products are performing in Q4. I'm trying to think what were the other questions that you asked.

Matthew Sheerin -- Stifel, Nicolaus & Co., Inc. -- Analyst

Just in terms of those cautious trends. Are you hearing from your retailers? You obviously gave some pretty good revenue guidance. So I'm not asking for specific guidance, but has that trend continued or not?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, when we build our plans, it's bottoms up. We start at the country level and we roll the countries up to the regions and then we aggregate all of that together on a worldwide basis. The guidance that we give is what we see in the marketplace. We're comfortable that the ranges that we gave are the proper ranges given all of the moving parts, as you said in your question, underneath that. The amount of products that are going to be available, the life cycle. There are some products that are new in the life cycle that we really don't know how much product we'll have access to.

Historically, the market realizes a budget flush in the data center in Q4. We really don't control that. We respond to the realities of that. Again, one of the reasons that we're really excited about the new Tech Data, it has the breadth to be able to be flexible and respond to the realities of those markets better than Tech Data stand-alone or better than Avnet TS stand-alone was able to do. We're comfortable and confident as we look at the bottoms-up view of the quarter that we're going to be able to deliver on what we see is a good opportunity.

Matthew Sheerin -- Stifel, Nicolaus & Co., Inc. -- Analyst

Okay, great. Just as a follow-up, just changing topics and looking at the cross-selling opportunities with Avnet TS. You've talked about that, not just geographically, but in terms of your product and vendor base. I know part of that success will come post-the ERP or IT integration. Are you expecting to see results before that integration or is that going to make a big difference and what's the timetable for that as well?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, we're already seeing cross-selling opportunities. But Matt, keep in mind that in many cases, Tech Data sold to a customer that Avnet TS also sold to the customer. Patrick Zammit, our European president I think said that about 40% of the European customers already buy from both the legacy Tech Data and the legacy TS. So the cross-selling opportunities are clearly already underway, but we haven't pursued it aggressively in all of our geographies as we build out or organization and understand our coverage model and our competence. So over time, there are more opportunities for cross-selling, but I don't want to leave you with the idea that it's not already taking place.

Matthew Sheerin -- Stifel, Nicolaus & Co., Inc. -- Analyst

Okay, great. Thank you.

Operator

Our next question is from Sean Hannan from Needham & Company. Please go ahead. I'm sorry. Sean, your line is live. Perhaps it's muted on your end. We'll go with the next question from Louis Miscioscia from Pivotal Research Group. Please go ahead.

Louis Miscioscia -- Pivotal Research Group -- Analyst

Okay, thanks. Hey, Bob, could you go into a little bit more detail about the competition in the sense of you mentioned that it was very tight or aggressive in Europe last quarter, but then you said that it's now gone global. It seems like your results are pretty decent here, so happy about that. But would you say that it's very aggressive in comparison to historic levels? Or just more of a bit of a wave?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Lou, I think the whole IT segment is a very competitive market to start with. And so competition ebbs and flows over time. We take a very long-term view of our position in the market. We try to build a value proposition that's attractive to our customers and attractive to our vendor partners and we roll that into the market and then we compete with that with vigor. Surveys have been done asking resellers what are the criteria that they're interested in, in terms of value from their distributors and quite frankly, price is way down the list. It's competence, it's skills, it's product availability, it's breadth of line card, it's coverage, it's relationship. Price is in there someplace, but in very few cases is price the No. 1 criteria. So competition is much broader than just price.

And so as we talk about the capabilities of the new Tech Data, the breadth, the end-to-end capabilities, the depth of skills, the scope of the footprint, we are very, very confident of our competitive position in the marketplace.

Louis Miscioscia -- Pivotal Research Group -- Analyst

Let me try to ask the same question in a little bit of a different way. Are we entering a new phase of higher competition or just more the typical waves that distribution has seen and we're not going to a whole new level?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Again, it's always been competitive. I've been here for 11 years, Lou, and it's always been competitive. It is a competitive market. If you don't like competition, don't get into IT distribution. It is a competitive game and we compete on the breadth and capabilities of our company and we're very, very confident we're well positioned to compete.

Louis Miscioscia -- Pivotal Research Group -- Analyst

Okay. Now switching around to when -- thanks for explaining how you've been able to resolve the issues of last quarter. I think that they sort of caught you by surprise. I guess I'll ask you a difficult question. What is out there now as it looks like this quarter reported was good and guidance is good, that you're most worried about? Obviously, a lot of not just yourselves, but many distributors have run into issues when they're trying to combine or launch new IT. Would it be the integration of the IT that could cause a problem? Or what would be the top three things as you look out over the next three to six months that you would be worried about?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Lou, I'll give you two. But I'm going to caveat it with I'm not losing sleep over either of these. But the two things that we've been focused on since the day we announced the transaction with TS was a focus on operations and a focus on integration. As I said in my prepared comments, we have teams of people that are focused on each of those. I think in Q3 you can see where both the operational excellence, and as we talked about, the progress we made in the integration, both tracks of the company are progressing along very nicely.

So those are the two areas that we're focused on -- operating the company, serving the customers, making sure that we're delivering the value and coverage that our vendors expect from us, investing in the growth of that engine, and then achieving the targets that we've set out built around the integration of the two companies, and ensuring that as this new Tech Data enters into the marketplace, that the strengths of TS and the strengths of Tech Data come together to build a better company. Those are the two things we're focused on.

We've been focused on those since the first day we announced the deal. We still have a way to go. As Chuck described, some of those actions in Europe won't take place until later next year. So we said from the very beginning the process was a 2-year process, and we're 7 months into a 2-year process. But as we reported, we're very confident and comfortable with the progress we're making on both fronts.

Louis Miscioscia -- Pivotal Research Group -- Analyst

Okay, good. Thank you.

Operator

Our next question is from Shannon Cross from Cross Research. Please go ahead.

Shannon Cross -- Cross Research -- Analyst

Thank you very much. I was wanting to go back to some of your commentary on the weakness you saw in your advanced solutions, the data center business. I'm curious what the customers were saying. Was this a response to perhaps some higher prices that some of the vendors have put in place because of those component cost increases? Or was there some weakness there just because people weren't able to actually access the component? I'm just looking for a little more color on what you say during those quoted quarters. Thank you.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, it's Bob, Shannon. I think that first of all, the data center performance in the ecosystem, not Tech Data's data center performance, but in general, the data center demand has been relatively soft. I think the best reflection you can get of that is to look at the primary data center vendors and their performance. You'll see some numbers that are up slightly. You'll see some numbers that are down. Our view of that is just overall demand in the data center was mixed. Then secondly, the data center is clearly in a period of transition, as both technologies move from legacy technologies to new modern, next-generation platforms like converged and hyper-converged, solid state storage, software-defined networking. Then the impact of the cloud and hybrid cloud has on all of that. So the data center is a bit of a dynamic marketplace.

And so when a company like Tech Data sits down and tries to call the demand in the data center, it's several different dynamics that we need to look at all at the same time. Our customers are telling us that there continues to be activities and interest for opportunities in the data center, but they are taking different shapes and forms. Traditional dialogue about server storage and networking now might be a dialogue about converged or hyper-converged. A replacement of a storage farm now might be a dialogue around solid-state storage. Just to give you a couple of examples. So, therefore, what's really important for a distributor is to have deep skills in those new, emerging technologies. The combination of TS and Tech Data has a very strong portfolio of skills and talents and services wrapped around those products.

Shannon Cross -- Cross Research -- Analyst

Okay, that's helpful. Then maybe just, again, trying to understand the trajectory, I guess, of the change of what you've seen. If you think about what you sold during the prior quarter in terms of the percent or, I don't know, weighting toward a solution sale or a hyper-converged sale with some of the newer technologies versus say a year or two ago, I'm curious as to -- it's obviously a lot more a part of the conversation, but I'm also curious just from a percentage standpoint of the deals you're signing, what you're seeing there. Then I had one follow-up. Thank you.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, we don't break it out by those types of platform dialogues, Shannon. But suffice it to say that every quarter that goes by, there's more and more activity in the advanced and third platform technologies. The one that gets all the visibility is the cloud, which we continue to have strong cloud performance in the quarter, but it's much broader than that. You hear us keep describing this shifting and migration of workloads. Workloads are moving out of the data center into the cloud, out to the desktop, into mobility. Those shifting workloads are really one of the primary strategic drivers for the new Tech Data as our end-to-end portfolio of products and services allows us to work with our customer as they work with their customer and let the customers decide what types of products and services and solutions they want to build out. Tech Data can deliver virtually all of that. We're not trying to steer the migration of workload. We respond to it. We've done a good job of building a team that's able to do that.

Shannon Cross -- Cross Research -- Analyst

Okay, great. That's helpful. Then just with regard to the integration, what are the key sort of initiatives that you think will happen in say the next 6 months? I understand a lot will happen in Europe next year. What are the milestones we should look for? If you could just talk about when you come back next quarter in terms of some of the integration steps? Thank you.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, Shannon, it's Bob again. We have, as I've said many times, we have a team of dedicated people that are focused on the integration process. There are workstreams and milestones that are managed every single day inside the integration team across all of our geographies and we'll continue to stay focused on the plan that's in place. Chuck and I both articulated we're on schedule in terms of where we're trying to be to accomplish those integration milestones. Several of those milestones are regulation oriented. We have to work with the workers' councils in some of the European countries to get approvals to be able to change job descriptions or compensation plans or all the things that we need to do.

We're driving the process of integration as aggressively as we can. And again, we feel like we're on schedule for where we thought we would be at this point in time.

Shannon Cross -- Cross Research -- Analyst

Thank you very much.

Operator

Our next question is from Keith Housum from Northcoast Research. Please go ahead.

Keith Housum -- Northcoast Research -- CPA, Analyst

Good afternoon, gentlemen. Thanks for taking my question. Bob, earlier in your comments, you addressed the execution issues you had last quarter and those should be pretty much complete going into the fourth quarter. What kind of headwind did that present to you, I guess on gross margin level and perhaps the bottom line this quarter versus say the prior quarter if they weren't there?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, I guess, Keith I would answer your question this way. In that those types of challenges in operations and execution exist all the time. That wasn't just a single quarter phenomenon, it just happened that in that quarter, a few of those phenomena worked to our disadvantage. As I said earlier, one of the things we're really good at is to do the diagnostics of what we did well and what we didn't do well and then turn our attention to improving the places we didn't do well, learn from the best practices from the breadth of our footprint because I can assure you somewhere in our footprint, one of our countries did well and another country didn't do well, and we can learn from that.

We use that learning capability as part of our management system. So in Q2 where a few of the big execution areas didn't work as well as we needed them to, I think we've tried to articulate to you that in Q3 we feel like we fixed much of that, that we have control of. There are pieces of that whole backend rebate process that we simply don't control. We don't control the real demand in the marketplace. We respond to the real demand in the marketplace. We've done a good job of learning and adjusting and moving forward.

Keith Housum -- Northcoast Research -- CPA, Analyst

Okay. A follow-up question for you. You noted the headwind that the hurricane had to you in the quarter of $40 to $50 million. Did you have any one-time cost that wasn't covered by insurance or anything that we should consider for the quarter?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Keith, this is Chuck. We had minimal one-time costs that were not significant to the quarter and would not be, of course, incurred going forward. But nothing significant to really call out for you.

Keith Housum -- Northcoast Research -- CPA, Analyst

Gotcha. If I could sneak one more in here. Interest to expense for the next quarter, did you guys give any guidance on that as you're paying down that $350 million this quarter? Can you give any color to those expectations?

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

No. I mean, we really don't give additional guidance on interest expense for the quarter. You can look at our public filings and know what the interest rate was for that $350 million senior note that we paid off. You could model it from there.

Keith Housum -- Northcoast Research -- CPA, Analyst

Okay, fair enough. Thank you.

Operator

Our next question is from Ananda Baruah from Loop Capital. Please go ahead.

Ananda Baruah -- Loop Capital Markets -- Analyst

Hey, guys. Congrats on a solid quarter. Hey, just a couple for me, if I could. Bob, in the prepared remarks, you spoke to improved mix in both products and customers. What underpinned that if anything other than just strong execution? Then I have a couple follow-ups. Thanks.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, Ananda, I think we did a good job of responding to the reality of the demand in the marketplace. And that both are from customer segments. Did we cover the right customers with the right resources? We've talked about in the past how we've deployed more field sales. In particular in the Americas. If you're not engaged with the customer, you're not going to have the opportunity to respond to the demand.

And with our new Tech Data, in particular in the Americas, we have more field resource close to the customer and we think that has helped us respond to the customer demand. Then the product profile and the demand, as I said earlier, I think the whole industry is a bit surprised by the strength of the endpoint solution demand. We were able to respond to that with the right products and the right service levels and the right skillsets to be able to help customers take advantage of those products. So it's more of executing properly against the demand and the coverage and we did a good job with that in the quarter.

Ananda Baruah -- Loop Capital Markets -- Analyst

Got it. Is the continuation of that dynamic, is that staked into your long-term model that you provided at the analyst day? Is there any way that could happen in a pronounced enough manner that maybe you weren't able to account for in the long-term model?

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, I think as we gave the outlook at the analysts' day, that coverage model, that dynamic of the opportunity and the demand is all part of what we do to try to determine what we think is the outlook.

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Ananda, this is Chuck. The modeling we gave you at analyst day was a high-level estimate and was really for assistance for you in modeling going forward. It wasn't guidance, per se.

Ananda Baruah -- Loop Capital Markets -- Analyst

Got it.

Robert Dutkowsky -- Chairman and Chief Executive Officer

But I'll give you one more piece of color, Ananda. As we look out into the market, as an example, we see security as a growth area. We know we need to strengthen the depth of our practice in all of our geographies around security. So that's when Chuck was referring to organic investments. That's the kind of thing we're hiring people with deep security skills, and we're recruiting a broader line card in the securities space from vendor offerings to be able to be ready for that demand over the next period of time. Those are examples of organic investments based on the market research and the opportunity work that we do to try to determine where we want to be positioned in the long term.

Ananda Baruah -- Loop Capital Markets -- Analyst

Got it. Very good. Thanks for that context. Then just I think one of the remarks you made just after, the improved mix remark. Bob, with regard to rebates improving for the quarter, can you give us a context around that on some of those executions? Were any of the rebates altered? Like that, that would be great, thanks.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Yeah, we negotiate those quarterly plans with our primary vendors every single quarter. Again, it's not a unique thing for us to work through with our vendors to match up the rebates with the real opportunity in the marketplace. Then once those rebates are set, then we turn all of our attention to serving the demand in the market, serving our customers, delivering our vendor partners' products into the marketplace. That's not dissimilar to what we've done here at Tech Data forever. The IT space has worked with the back-end incentive program kind of go-to-market model and we've worked this since the beginning of time. So it's not any different than what we've done historically.

Ananda Baruah -- Loop Capital Markets -- Analyst

Got it, great. Thanks so much. Congratulations again. Solid quarter. Thanks, guys.

Robert Dutkowsky -- Chairman and Chief Executive Officer

Thank you.

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. This concludes Tech Data Corporation's fiscal year 2018 third quarter earnings conference call. A replay of this call will be available in about one hour at techdata.com. Thank you for attending today's conference call and have a great day.

Duration: 57 minutes

Call participants:

Arleen Quiñones -- Vice President of Investor Relations 

Robert Dutkowsky -- Chairman and Chief Executive Officer

Charles V. Dannewitz -- Executive Vice President and Chief Financial Officer

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

James Suva -- Citigroup -- Analyst

Param Singh -- Merrill Lynch -- Analyst

Matthew Sheerin -- Stifel, Nicolaus & Co., Inc. -- Analyst

Louis Miscioscia -- Pivotal Research Group -- Analyst

Shannon Cross -- Cross Research -- Analyst

Keith Housum -- Northcoast Research -- CPA, Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

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