Tech Data CEO: Credit Stream Will Keep Flowing

Tech Data reported its third-quarter earnings Tuesday, but during a Q&A with analysts, CEO Bob Dutkowsky seemingly fielded as many questions about credit than about the company's product sales. Credit was also a big topic for channel executives at last week's Raymond James & Associates IT Supply Chain Conference. Dutkowsky talked Tuesday with Everything Channel Assistant News Editor Scott Campbell about credit and other issues facing the channel.

You mentioned on the call with analysts that you aren't concerned about a major credit crisis developing for your solution providers. Can you elaborate on why that is?

I don't think it's safe to say we have no concerns, but through three-quarters of the year, we're right on track with the credit plan we have in place. We said on the call that the issuance of credit is at least half of what Tech Data is. People think of Tech Data as a big logistics center that moves products from Point A to Point B. We also issue the credit that sits behind that. We've been doing that for 35 years. We have the history, the trending on an awful lot of VARs that we do business with around the world. We're able to, a macro level, provide credit for 100,000 customers and we feel, on average, this feels about normal. It doesn't mean there are not some VARs falling by the wayside, but some are also markedly getting stronger and are less a credit risk for us.

I can understand looking from the outside, the only ones you see are the ones falling by the wayside. But they don't see the bigger ones getting stronger. I think there will be more weaker ones to fall by the wayside. That's intuitive in a difficult economic environment. But we have absolutely limited our exposure to those that fall by the wayside. The ones we think may get stronger, we may be giving them more credit.

Have you changed the criteria for providing credit? Are you being more conservative now than in the past?

First, we have some very large resellers and we talk about the health of their business practically daily. If we get a sense of any softening, we begin to pull back. We can do that gently or aggressively. As I mentioned, we're right on plan with our credit around the world. That's the best validation I can give you. It feels like we thought it would be at this point. If we thought more VARs may be at risk, we may have started to limit credit at this time. For those that fell by the wayside, our exposure was minimal.

You also mentioned on the analysts' call that your direct marketer customers are especially challenged now. Can you detail that?

A lot of the direct marketers sell into the enterprise, sell more into the Fortune 1000 kind of accounts. In a tough economy, that's where IT spending slows down first. The SMB VARs typically sell to small businesses and are very entrepreneurial in that they can maneuver through the marketplace and still find business opportunities in their customers' environments. They're gazelle-like in that regard. At the enterprise level, it's harder to do that.

In the second quarter, you talked about losing a couple of large business opportunities totaling $200 million because they weren't profitable enough. Did you see that level of competition in the third quarter?

Well, we grew 4 percent overall, 10 percent in Europe. Europe grew faster than the Americas but it's not true to say we're not walking away from business in the Americas. I thought it got a little more rational in the quarter. We can still point to a deal or a market opportunity that was irrational. I would venture our competitors could say the same thing. Selling billions in the quarter, there can be cases where everybody is irrational at some point. We try to deliver what we call responsible growth. We look to grow and deliver profit at the same time. I've never been in a business as elastic as IT distribution is. We could grow the top line much more if we didn't care about the bottom line. We try to be responsible.

How has your decision to pass along more freight costs to the channel worked out?

It's different country by country. The way we execute in the U.S. is radically different than in the U.K. or Spain. To paint with one brush that freight policies have been consistently executed would be difficult. In a country we have a leadership position like Belgium, we're able to enforce freight policy changes better than in Germany where we're the third player in the market.

In the end, we believe it's in the best interest of IT distribution to share costs of transportation with the channel. We're trying to do the right thing in the long term.

There will be some VARs who won't be happy to learn those costs are around for the long term. What would you like to say to them?

The best example I can give you is several years ago a laptop cost $3,000 or $4,000 and there was enough profit to have a laptop shipped for free. Now that same laptop cost $500 and it costs more to ship it. The concept of free freight was from a different time with different profit margins than what exists today.

If we continue to give away free freight, companies like Ingram Micro and Tech Data would be gone. That would be a death knell for companies of our size. By the way, this is not a cavalier decision on our part. We don't love running around telling customers we're going to raise their prices. If we didn't believe that we wouldn't change the way the industry has worked. It's for the long term survival of our company. We're not getting rich with these fees, believe me. It doesn't begin to cover our costs to freight. We try to sit down to show customers the data. Pretty soon it will cost more to ship than the products are worth.

I would imagine you're also looking to reduce your own shipping costs through more efficient processes?

Absolutely. In Europe, we recently signed a new agreement with a different carrier to lower costs in selected countries. We're always looking for ways to lower our cost of freight. We can get a much better rate than anyone else can, us and Ingram, vs. a small VAR who calls up FedEx and says 'Ship this box for me.' Handling that part of the logistics challenge for VARs makes sense, but we have to be able to pass costs along as well.

Anything else you'd like to say regarding your third quarter?

In a tough environment, we had a good quarter. We're ahead of our plan and we're ahead of where we were last year after three quarters. Even in a tough IT spending environment, people look to Tech Data. We're not declaring victory. There's a lot of work to do, a lot of room to improve. I believe great companies are made in tough times. Even though it's a tough time to be in the IT business, our goal is to make sure when the economy recovers and tech spending picks up, Tech Data is a better company than when we came in. We believe this quarter validates we're on that track.