Tech Data CEO Weighs In On Intel-McAfee, HP Post-Hurd, Market Opportunities

Tech Data beat Wall Street expectations for earnings and sales Thursday, but the distributor's news was overshadowed by the Intel-McAfee announcement. CRN's Scott Campbell spoke to Tech Data CEO Bob Dutkowsky about the big vendor merger, HP's future post-Mark Hurd, oh, and the distributor's earnings too. Here are some excerpts from the conversation:

Before we get to your earnings, what's your reaction to the Intel-McAfee merger announced this morning? How will it impact the industry and the channel?

I used to be on the McAfee board of directors, for almost five years, so I probably should be really guarded in my comments.

I can say it's a huge acquisition from Intel’s perspective. It could potentially change the game as hardware and software become more closely intertwined. It'll be interesting to see where Intel takes the technology. From a channel perspective, we’re good partners with both Intel and McAfee. When you put two good partners put together, historically that’s been good for us. You don’t have two teams to work with. That one larger enterprise can typically invest more in distribution. It's usually good when you put them together. Think about when Hewlett-Packard bought Compaq and became a much larger player. HP is now our biggest partner.

Speaking of HP, do you have any concerns of what the company might do under a new CEO, or what would you like to see from a new CEO?

HP is a great company that has tremendous management depth. The executives in place to run lines of business and the executives in line to run the channel are top of their game. Because the CEO changes, all of those executives aren't going to change direction all of a sudden. You take a company of the size and scope of HP and it has tremendous momentum. I'll use the example of a battleship. The captain says stop but it takes two miles to stop. HP's commitment to the channel is barreling forward because of the strength of the organization.

In the short term, it's business as usual. HP and Tech Data have an excellent relationship. The next CEO could have a slightly different view of the channel. But I think if he or she steps back and looks at the channel, at the coverage we give, the breadth of our HP product portfolio that we bring to market, it wouldn’t be in the best interest of HP to change that.

The big difference [between Hurd and other CEOs] was Mark was very channel facing. He spent a lot of time in the channel personally. Other CEOs don’t spend as much time in the channel. He also spent a lot of time with customers. To a certain extent, that's a void that needs to be filled, the void whether the next CEO will be as channel facing. Is he or she going to be as committed to spending time in front of the channel or are they going to not do that? That's biggest potential change. But this person will sit before all kinds of issues before they get to the channel: integrating EDS, integrating Palm, integrating 3Com. Some place along the line, they'll look at the channel and I hope they’ll see us as effective.

On the analysts' call today, you talked about the mix of business from your VAR business has increased. Can you detail that?

For the 12 rolling months ended in July, VARs account for 52 percent of [sales]. Corporate resellers were 21 percent and direct marketers and retailers are 27 percent. Last year at this mark, VARs were 50 percent. So it's increased by two points and for a $22 billion company, that's a lot of sales.

Next: VAR/SMB Market Opportunity Grows

Is that due to an increased focus on the VAR/SMB market or due to market dynamics in which the overall SMB market is performing better?

That's due mostly to our focus on the VAR market and, conversely, our less acute focus on direct marketers and corporate resellers. The pricing pressure that everyone always talks about really is on those big deals with corporate resellers. Those are the ones that get ultra competitive. Those are deals we’ve consciously not bid on aggressively. We’ve moved that into SMB and of those SMB deals, more than half are done electronically. There's no pricing negotiations. We price to their volume. The SMB opportunity is growing faster and has better profitability for us. And that's where the vendors want us focused too.

Are the vendors increasing the incentives they give you to play there? Is that an area where the vendors are willing to invest more now in a recovering economy?

The vendors use the backend programs to steer distribution where they want us to cover, where they want us to sell. They make it very obvious they want us to sell certain products, certain segments. If anything we’re coin operated. They put money in and ask us to sell to the SMB space. We have vendors with very specific SMB programs in place so that we cover the SMB space. We have dedicated headcount to sell Vendor X's products into SMB accounts.

With a focus on SMB, your enterprise business was up. You mentioned on the analysts' call that the Advanced Infrastructure Solutions business increased 26 percent in the second quarter compared to last year, and the Azlan [enterprise] business was up 20 percent in Europe. How is that happening with a focus on SMB?

Some of that growth is coming from corporate resellers who sell those higher-end specific data center platforms, whether it's higher-end servers, midrange and above storage, higher-end networking products. In those cases that business is either the reseller sourcing it direct from the vendor and now they’re sourcing it from us, or they were getting it from a value distributor and now they’re getting it from us. They moved the business to us.

So even though your corporate reseller business is not growing as fast, their purchase of data center products is increasing?

The mix inside that is changing. We’re not selling the high-volume, low-value products to them. We’ve selling low-volume, high-value products. The price points are higher but the transactions are fewer. And profitability is up. Gross margins are growing faster for us because the mix to [corporate resellers] is more profitable.

Lastly, we're looking at the topic of unethical behavior in the channel. There’s been evidence lately that VARs believe there’s more bad stuff going on now because the economy was down. Do you see that in the market?

I personally have not seen that. I haven't seen the VARs color out of the lines more. If anything, I see the opposite. And that’s because the recession we’ve been in forced weaker VARs to step aside and well-managed VARs, the moral and ethical VARs, have gotten bigger. The days of the thousands and thousands of VARs are getting compressed to fewer.

In some ways, the tough times can be good for the channel. We’re giving credit to these companies and if they’re mismanaging it, then we're at risk. Our credit costs were at all-time lows [in the second quarter]. Our credit exposure has been managed successfully.