Tech Data's CEO: Moderate Growth In Sight For Q4

Tech Data celebrated its 35th year in business recently and CEO Bob Dutkowsky talked with CRN Assistant News Editor Scott Campbell about what changes the distributor is making to ensure it's around for another 35 years, as well as why the company expects sales to increase year-over-year in the fourth quarter. The following are excerpts from the conversation:

Tech Data surpassed Wall Street expectations for the third quarter, but perhaps more surprising is that you're forecasting a year-over-year sales increase for the current fourth fiscal quarter. That's a pretty bold statement from a company known to be fiscally conservative. What makes you so bullish now?

We've now had four quarters in a row where we have beaten our own internal expectations. We're trying to make sure that we are modeling as reflective to reality as we can possibly make it. What we see in 4Q, is some currency strength, which will boost year-over-year. But also, remember the bottom fell out starting in the fourth quarter last year. When you look at our comparison year-over-year, you're comparing to a relatively weak 4Q last year. This is an opportunity to show some kind of growth. It's single-digit, small, but it's dramatic to go there from several quarters of decline.

Was 4Q the bottom last year? When we get back to 1Q, will the year-ago results enable you to forecast another top-line increase year-over-year?

4Q was weak [last year]. 1Q [2009] was really weak. 2Q was weak, 3Q we just announced. It's still down. It's almost better to look at sequential numbers than year-over-year. In sequential, we showed some growth. We were up 9 percent from 2Q. It might make more sense to look at it this way. There's opportunity for us and for everybody in the industry to take small, quantum steps forward.

Has Tech Data started spending and investing internally, too, to show your faith in the economic recovery, so to speak?

In the environment we're in, it's double-digit-plus declines [in sales]. We've been aggressively spending to address the business for the short and long term. We've bought half a dozen companies this year. We've invested in specialized business units focusing on health care and open systems, and unified communications and network security. We've hired specific sales talent in countries to go after, for example, the SMB arena. We've built a West Coast innovation center. We've made lots of investments in a down year. We believe when the economy does turn around, we want to be in a position to take advantage of that. You haven't heard Tech Data making large layoffs and restructuring moves.

As you add new technologies and new solutions, that requires more training and more education of resellers. How have you been able to do that and still control costs? Are the vendors still ponying up that money as much as in the past?

An example of that takes place at our Vendor Summit. They talk to us about product families, rollouts, launches. They work with us to do go out and do the enablement. That's recruiting, training, mobilizing solution providers. All of that takes money. Vendors help us with that. They're the ones that benefit in the long run.

Any time a big, disruptive technology arrives, or a disruptive method of delivering technology arrives, inevitably people start saying that distribution will be disintermediated. Now it's cloud computing. What role will distribution play in that space as more VARs and more end users adopt that technology?

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

Our view is we support the here and now today. We have products and relationships with vendors to support the broadest of computer environments, from high-end servers to mouse pads. Tomorrow, whenever that comes, there will be cloud computing environments at the SMB level, the enterprise level and the consumer level to attach to the cloud. Everyone will need some device to attach to that cloud, whether it's a PC or a laptop or a phone. When that unravels, we know we are the preferred route to market for the who's who of the tech world.

In the long run, it will be some hybrid computing model between what we know today and what the cloud represents. The opportunity for the VAR is to support that transition and support that integration. That world is not going to change dramatically.

The second thing is, it's a long stretch to think enterprises are going to let go of mission-critical applications and functions and put them in the cloud. It's hard to think the Department of Defense is going to put their missile strategy into the cloud. It's hard to think that the CFO of Tech Data will put our financials in the cloud. We could put it in our own secret cloud inside of Tech Data with the same technology. The challenge is, how can our cloud talk to their cloud? What's the difference, if our cloud talks to ADP about Tech Data's payroll? It's different deployment of the same technology. I think our roles will change, but we won't be disintermediated.

Next: Dealing With Dell

Can you update us on the Dell relationship? Tech Data, Dell and fellow Dell distributor Ingram Micro have been equally coy about progress. On the earnings call with analysts, you used the term that your business with Dell is "opportunity defined by customer demand." But at the same time, vendors like Dell also look to distributors to grow their business. Are you guys having difficulty generating demand with Dell and, if so, what needs to be done?

We don't spend a lot of time talking specifically about vendors. Today we have a whole broad array of vendors that brings PCs and laptops to the market. It's also safe to say that demand for PCs and laptops is down. In that environment, we added another vendor. The demand for products we added from Dell has not been robust. Second, the VARs are the ones that call us looking for products from vendors X, Y or Z and have allegiances around products. We don't change that necessarily. We can influence, but really we fulfill demand that exists in the marketplace.

We also help vendors create demand. But we do that by identifying new VARs and enabling those VARs to sell products and services. That activity is taking place every day with Dell and many other vendors.

How important is it to attract new customers to Tech Data? If you expect sales to increase in 4Q, how much of that is your existing customer base growing vs. new customers coming on board? And where are new customers coming from?

We have a very focused initiative around recruiting new customers and have had through the whole downturn.

That's one area we focus on when we add unique products that might represent new customers. For example, we added Sharp and Sony to our line card. In many cases, we didn't do business with those partners before. We had to bring them into our management system. For us, that means giving them credit. That's a big step for us.

When we do that and help them grow their business and allow them to offer more products and give them credit, very quickly we get a nice relationship with new customers. We've seen over the downturn, some [distributors] have pulled away from customers. We've invested more into relationships with them. We've been rewarded with business in our geographies. We're not going to get that business without creating value. We know our business is only as good as the value we provide. Over the last handful of quarters, we've been able to do that very, very well. Even though sales are down, our margins are up. Customers are rewarding us for our execution.

You mentioned acquisitions before. Are you still looking to buy more companies? And if so, what holes need to be filled?

There continues to be a lot of opportunities out there. Our acquisitions we've made have filled a void in a geography or added a product set or gave us skills we couldn't get otherwise. That profile of finding that kind of company, particularly in Europe, is an open playing field. There continues to be dozens of opportunities that we analyze every day. It has to be accretive to us, to add products or customers that otherwise would cost us a lot of money to add. We've been disciplined and religious on that approach. We've made maybe a dozen acquisitions since I've been with the company, and every one has been successful.

Finally, what's your general outlook as we head into 2010?

Through three quarters, we've had a solid year in a tough environment. Now there are great opportunities and the vendors are excited about what the rest of this year holds. The enthusiasm is great. We just had our 35th birthday and it's a testament to the people in the company to weather all these sea changes we talked about earlier. Think about the number of companies in our ecosystem that are 35 years old. At a little party we had for our 35th birthday, I challenged our employees to name more of those companies. You run out pretty quickly after IBM and Intel. Here's Tech Data at 35 who is a strong partner with IBM and Intel. There's only a handful of companies that have been able to morph themselves into this next sea change. It's in our DNA to be in front of that through strong partnerships to position ourselves to flourish. I have no doubt we will do that.