Tech Data CEO Q&A: Will Tech Data Start Going Direct After VAR Acquisition?

Q&A With Tech Data CEO Bob Dutkowsky

Tech Data CEO Bob Dutkowsky spoke exclusively with CRN on Thursday to address any concerns partners may have over the acquisition of solution provider Signature Technology Group (STG).

During the Q&A, Dutkowsky addressed concerns from partners as to whether the distributor will sell direct and become a competitor to its partners. The Tech Data executive also responded to questions regarding what the deal is worth, what his pledge to partners is regarding the deal and what Tech Data looks to gain from STG.

As the call occurred after Tech Data reported its earnings results for the first quarter of fiscal year 2016, Dutkowsky addressed his company's performance.

In the quarter, the distributor saw its net sales drop more than 12 percent from just over $6.7 billion in the year-ago quarter to under $5.9 billion.

Despite the revenue decline, Tech Data reported net income of $51.3 million for the quarter or $1.38 per share , up from $13.5 million or 35 cents per share, in the year-ago quarter.

You said several times on the earnings call that 'this is a partner-led deal.' Does that mean zero percent of sales will be direct? What percent of your sales will be direct?

That means the company will lead with partner offerings. That's what it means. We don't disclose anything about percentages of sales on anything. That's not our model. That's not what we do. We don't give guidance. We don't break down our business that way, so again, we have over 400 vendors on our line card. CRN never asks what percentage of that is worth anything. So why this?

Just to give you the opportunity to drive this point home, Tech Data before and after this acquisition is not selling direct at all?

Again, STG is a partner-led business model. The partner is in the center of what they do. The partner is in the center of what Tech Data does. That's our model. We're not an end-user-focused company. We support the channel in their efforts to support their customers. This complements how we've viewed the market for the last 40 years. This is not new stuff for us. It just adds more services, more value, more capability than we had yesterday. We just signed Barracuda Networks. They sell to the end user. They sell to the channel. We now support Barracuda Networks. It's not dissimilar to STG -- it's just that we own STG now.

During the earnings call, you mentioned Tech Data lost on a deal because a competitor had STG service and Tech Data did not. Can you share more about that instance, and was that the only time that scenario occurred?

I just gave that as an example to illustrate to our investors that STG is a channel-driven business. Our competitors are selling STG today. So there shouldn't be any kind of disruption or angst in the channel that Tech Data is going to go out and take services opportunities from our customers. That is not what this is. Our competitors sell STG today. Anybody that writes a story that says that Tech Data is going to go direct with services into the channel, doesn’t get it. They're not listening. I don’t know who wrote a story like that recently, but they really ought to check themselves. That's not what this is. We really need you guys to print the truth here.

What is your pledge or comment to partners who have expressed concern over the deal?

First of all, not one has called me, and I know a lot of them. Secondly, some of our largest customers already use STG today. And our competitors resell STG today. If they call and ask me, I would say, 'If the value STG adds makes your company more competitive, then it's going to be on the Tech Data line card, and that should make it easier for you to go win in the market with it.'… Just like we sell [other products and services], now we sell [STG] services. This is not some radical departure from the distribution model. This just extends our reach into our customers to help make them more competitive ... Say a customer has a customer who wants a laptop with a unique sound card in it. We'll [replace the sound card with] the unique sound card, and then deliver that [laptop] to the end user. The end user doesn’t know who put the sound card in there ... Have you heard any noise in the market about that? We've been doing it for 10 years now.

How is this deal different from similar deals your competitors have made where they have acquired a solution provider?

I think what's different is many of the other companies that our competitors bought were actually VARs. They actually were value-added remarketers that had unique skills that were in the channel, and they had books of business that were VAR business, hardware business. STG doesn’t sell hardware. They don't have a hardware business. They are a value-added services company focused in the channel. The way I view it, it's very different. There is no hardware sales attached to STG. It's only value-added services that make hardware implementations better, faster, more successful. That service will be available to our customers now just like other services are available to our customers.

Can you talk about why Tech Data has agreed to acquire STG?

We've had STG on our radar here for quite a while. We bought roughly 20 companies in the last eight years ... None of them were in the Americas. We [were] focused on finding some acquisitions in the Americas that could help us add more value to our customers. The thing we found attractive about STG, first of all, it's a company that is focused around data center implementations, cloud assessments and cloud migration -- all very important value-added services that we know our customer wants to be able to offer to their customers. Secondly, STG is a partner-led business model, so they sell to resellers … We know that STG is very much a channel-friendly, channel-focused, channel-first kind of business …Thirdly, we already offer services similar to what STG has ourselves to our customers. This is not something new to Tech Data. It actually just enhances the set of services we offer to our customers already. STG really fit a lot of the criteria we were searching for.

Although the deal with STG isn't closed yet, can you tell me how the business will operate with the new company? Will it be a separate entity?

Like you said, the deal isn't closed yet, but our intention is to really take advantage of this high-growth, successful business model that STG has ... One of the things that we saw really attractive about STG is they've been on the list of fastest-growing companies in America for the last couple of years ... We think their portfolio of value-add products, plus Tech Data's scale, can equal an engine that can continue to grow and be successful but be even bigger, [meaning] more value to the channel. When you think STG, think channel. If you think STG plus Tech Data together, that says more value to the channel. Many of our customers are calling us every day asking if we have the skills and talent to help them help their customers. We have lots of different skills and offerings ... where we have value that we add. STG gives us more of that to add, so we think it will be a good growth engine for Tech Data.

Will you net new customers?

We hope so. STG has some customers that are not new customers today so, yes, if there is opportunity there, but there is probably customers who do business with our competitors, and because we don't have these services, they don't do business with us. But now we have this further array of services that we can compete with. We lost one opportunity in the channel because our competitor sold STG services and we didn't. There is a customer you'd think, going forward, we should have a nice opportunity to be able to compete now that we have STG services that we can resell.

Can we expect more acquisitions like this going forward? Is this part of a larger strategy that you have to turn around the U.S. business?

First of all, the idea that STG is a really fast-growing company was attractive to us as a component of where we want to take our Americas business. Our customers continuously ask us for more value-added services that they can't do themselves -- not every customer. Some customers have their own cadre of value-added services and we just supply the hardware, and we're perfectly fine with that. That's a model that we've had great success with for a long time. I can tell you that our vendor partners are asking us to offer more services like this to the channel. Our vendor partners are encouraging Tech Data to find more ways to add value to their products to make it easier for the channel to install their products. There aren't a lot of STGs in the world. That's part of why we're excited to make this deal with STG.

Can you share how much the deal is worth?

It's not closed yet. When it's closed all that will become public. It will close in the next couple weeks. It's not a long process.

What type of VARs are asking for this type of deal and these types of services? What technologies do they work with?

It's data center, cloud and it's big customers and little customers. We're not at liberty to share the STG customer list, meaning the partners that they sell to already today, but it's some of the largest resellers in the U.S. already using STG services. Some of these companies have a massive array of their own services, but they may not have a particular service that STG offers, so they resell STG to be able to win the deal. None of that changes. That's the model. All the big leading-edge vendors of the world all want help in cloud assessments and cloud deployments, and our partners need that help. Our VARs need that help to be able to sell that service to their customers, and they don’t have that capability. [Cloud assessment and deployment] is one of the core competencies of STG ... Our VARs and our vendors are asking us to drive cloud in the marketplace and [STG] will be really helpful for us to go do that.

How is this differentiating Tech Data from your competition?

I would say many of our competitors are already doing similar things. There is one point I want to [make clear]. We already do much of this today. We have storage practices. We have cloud assessment practices that we sell to our resellers today. This is not new thinking for us. This is not new thinking for much of the channel ... It's just that STG has unique methodologies, unique practices that we think with our scale we can serve more of the channel and make it more successful. So how do we compare? Well, you could argue that we were behind, and that many of our competitors have already made these types of steps. I think what's different, though, in our case is that STG is not a hardware reseller and many of the companies that our competitors bought were hardware resellers that had some of these skills embedded in them. It's a slightly different approach.

You've said that some of your competitors sell STG today. How long will that continue for after this deal closes?

We don't own the company yet, so we can't talk about that.

Anything else you want to add about STG and the deal?

It strengthens our partnership with our resellers. It answers a demand that our resellers and our vendor partners have asked us to try to solve -- adding more value in the marketplace and more value in the channel. It certainly pushes Tech Data's cloud initiatives forward aggressively because of STG's cloud assessment and cloud deployment practices. It adds a team of really focused and dedicated professionals that we think culturally match up very well with Tech Data. Typically, when two companies come together, the business case makes sense and the logic makes sense, and it’s the culture that makes it difficult, but I think the two cultures match up very well. We're excited about getting the deal closed and deploying the value in the channel.

What is your reaction to the quarter your company just had?

I would say that Tech Data had a very good quarter. The highlights would be the strengths of our European business. I think expectations for strength out of Europe were probably pretty muted, and so for a company of Tech Data's magnitude to have the kind of European quarter that we did speaks to the strength of our execution, and also the European economy is improving, particularly in southern Europe where for a long time it's been really muted. Southern Europe had a very nice rebound and is rebounding, so Tech Data execution in Europe coupled by a strong IT market in Europe, certainly was the highlight. The second highlight would be we had year-over-year improvement in net income and double-digit earnings per share growth. That's the bottom-line test of a publicly traded company. Can you grow your earnings and reward your shareholders for their investment? And in the quarter, Tech Data had a strong growth on the earnings side.

Can you talk about the U.S. market specifically and what your take-aways are from how you performed in the U.S.?

I would categorize it the opposite of the European story I just gave you. We saw the Americas IT spending market to be not as robust as we anticipated. We thought it was going to be better than what it was. Some of that is the particular mix of products that we sell. For example, the consumer wants to buy cellphones and we sell tablets. The opportunity based on the products that we have maybe wasn't as strong as what we had hoped. I think it was a combination of our particular mix of products and a softer demand in the Americas led us to underachieve in the Americas. We overachieved in Europe, we underachieved in the Americas. The important thing is, when you mix all of that together, Tech Data overachieved [in] its plans, and that’s part of the reason why we're diversified [in geographies, products and vendors] ... We still were able to have a good performance as a company.

What are the keys to turning that U.S. market around?

When I say the market is down, that doesn't mean that Tech Data did bad. That just means that businesses, enterprises, small business and consumers didn't buy what we planned that they would buy. That's not a Tech Data statement. It's a statement of the available business. Our broadline business -- think of that as PCs, printers and laptops -- that was down year over year, but remember last year, right now was when the PC business really took off. Dell, HP and Lenovo had really strong first, second and third quarters last year as the XP refresh process took off. So year over year, the broadline business in the Americas was down, but the data center business in the Americas was up, and up very nicely ... When you add that together, the Americas underperformed [in] what we had hoped, but it doesn’t mean Tech Data was bad, it means the market was not as good as we hoped.

What can we expect from Tech Data going forward?

We think we're off to a good start [for the fiscal year] and we think we're going to continue to operate effectively in both geographies and take advantage of the markets. As the European market remains strong, we'd like to continue to grow in that market. If the Americas market stays where it's at, we think we're in a good position to take advantage of the market.