Tech Data CEO: How We Achieved 49 Percent Earnings Growth In This Economy

Your first-quarter earnings were up nearly 50 percent, even with a revenue decline, and in this market. How did you do it, and please try to be as specific as possible?

It's a great question. It's a series of moving parts. You hear us talking pricing discipline for example. We carefully analyze opportunities and we choose to walk away from those that don't offer what we feel is a good return to our shareholders.

But does that only occur at multimillion dollar deals, such as big deals that come through direct marketers, or does it get down to small-business opportunities too?

It goes deeper than big deals. At the big opportunity level, those deals come to Ken [Lamneck, president of the Americas for Tech Data] and my level every day. But down at the territory level, we have disciplines in our IT systems that make it harder for the sales guy to book an order that's not profitable. We have our OneDesk system, which is an IT system that we've been rolling out for almost a year.

At the point of sale, it allows the salesperson to see the profitability of a transaction. As they're entering in the line items, it calculates freight and back-end value. It really tells the salespeople whether or not it's a deal that's good for Tech Data. If the answer is not, the salesperson is trained to add more products so that we can get more value.

Does the OneDesk system give them a yes or no answer to accept the deal, or does the salesperson have the authority to make that decision?

The salesperson. Remember, they get paid on profitability. It's possible, before OneDesk, that someone could be selling deals they thought were profitable but actually weren't. Now, they get instant feedback on the deal they're talking to. But you can't look at every deal on an individual basis either. You have to look at the overall relationship with the customer. A customer may need one printer cartridge, by tomorrow morning.

OneDesk will say that's a bad thing to do. It would cost us more to pick, pack and ship that than we'd make selling it. But the salesperson knows he's also talking about a $1 million deal with that customer, so of course we do that. That happens every day.

We have to sell $90 million worth of products every day. We open each day with no backlog. Our average order size is under $1,000. There's a million moving parts in that $90 million, so the better data you have the better decision you can make.

Can you talk about your HP business. It reported enterprise storage and server business was down 28 percent year-over-year, Personal Systems Group was down 19 percent, and Imaging and Printing Group was down 23 percent. Did you take more market share with them, or how was their sales decline worse than yours?

HP's business with us was 30 percent [of Tech Data's total] in the quarter. That's consistent with [past quarters]. We haven't displaced HP or replaced HP business. I know we had a very good quarter with HP, across the board, in virtually every product segment, according to our metrics and their metrics. How do I know that? At the beginning of the quarter, we map out incentives. We know what they expect from us and we know what to expect from them. There's no mystery between a vendor and an IT distributor.

You mentioned on the analysts call that you have 'caught up' with some vendors regarding quarterly volume rebates to be adjusted for lower demand, but not all vendors. Are there still some vendors playing hardball in terms of wanting you to reach higher incentives than the market can bear?

The majority of vendors have acknowledged the realities of the market and are laying [out] and negotiating incentives that are reflective of the real market opportunities. Every vendor wants to gain share in every segment. Let's say one segment is down 10 percent. They want their performance only down 8 percent. It's impossible for us to have all vendors go down 8 percent if the whole market is down 10 percent. At the end of the day, we decide we will focus on one vendor or another. We will focus on the one that can optimize our performance and give us the best chance to make [our] goal with and make more money.

So let me rephrase the question. Instead of the vendors playing hardball on vendor incentives, is it Tech Data playing hardball, saying, 'If you don't lower your volume thresholds, we'll focus on somebody who will?'

Absolutely right. That happens every quarter. And there's no difference now than in a boom time. In a boom time, they want to be up 10 percent instead of down 10 percent. It's a question of the dynamics of the market. But today, vendors are acknowledging the realities of the market, which wasn't the case a couple of quarters ago, and we missed back-end goals.

You've had the Dell relationship for a couple of months now. Can you provide us with an update on how that's progressing?

The Dell relationship is right on track. The VARs in the marketplace that bought direct from Dell did so for the last 20 years. They're not going to change everything in their business model in a few weeks. Between Tech Data and Dell, we have a business plan and a ramp and we're on track against that plan.

Tech Data recently launched a 'Stimulus Watch' initiative where VARs can go to get the latest information on opportunities created through the American Recovery and Reinvestment Act. When do you think we'll start to see real business taking place in that regard?

I think this is a next-year phenomenon. That's why we call it Stimulus Watch. We're shining headlights on it so VARs become aware of it today and can be positioned tomorrow for market opportunities that unfold in the future.

Take the digitizing of medical records. That says every doctor's office and clinic is going to need more technology. Where's the doctor in Des Moines, Iowa, going to get that? From a VAR. We can lead those customers to that. That's how VARs are going to grow their business.