CRN Exclusive: Tech Data CEO Dutkowsky On Key Vendor Program Changes, The Distributor's Response And Apple's Enterprise Push
The Shifting Tide
Tech Data CEO Bob Dutkowsky has been in the IT business since 1977, so he's seen the channel tides rise and fall for many years by now. And, surely, that perspective guided Dutkowsky's response to news that "a few" major suppliers made program changes that will hurt the distributor's margins.
"We as a company and the channel as a whole have to absorb the realities of what that program is," Dutkowsky told CRN on Thursday. "As many times as programs go down in value, there's another program that will go up in value. This time around, a few of the vendors that change their programs are amongst their largest vendors. It has an over-weighted impact on the profitability of the company."
The names of the specific vendors making those changes were not disclosed. According to a recent filing with the U.S. Securities and Exchange Commission, only three companies generated more than 10 percent of Tech Data's revenue for the nine months ended Oct. 31, 2017: Apple (14 percent), Cisco Systems (10 percent) and HP Inc. (10 percent).
Dutkowsky sat down with CRN shortly after he briefed investors during Tech Data's quarterly earnings call. What follows is an edited excerpt of that conversation, which includes the chief executive's thoughts on channel opportunities, future acquisitions and the potential Dell-VMware reverse merger.
How will these channel program changes affect Tech Data and its partners?
These types of changes have been a reality for as long as the channel has existed. The vendors bring out programs, and those of us in the channel respond to those programs. We invest in those programs. We divest out of that vendor. We buy more inventory because we think we can sell more. We buy less inventory because we think we're not going to make as much money. We as a company and the channel as a whole have to absorb the realities of what that program is. As many times as programs go down in value, there's another program that will go up in value. This time around, a few of the vendors that change their programs are amongst their largest vendors. It has an over-weighted impact on the profitability of the company.
How will you and Tech Data respond to these latest challenges?
We'll work hard and sell more so we earn more – that's one option. We'll reduce the amount of resources that we put on that particular vendor so that our profitability improves. We'll buy less inventory from that vendor so our cost structure goes down. Or some combination of all that. It's not all negative. It's just hard for us to respond in a short time frame. Those actions I just described will take place over a period of time, not just inside of a window.
Will these new program structures force Tech Data to deprioritize the vendors?
It doesn't mean that Tech Data is any less committed to those vendors, or that we're not going to invest in training our people on those vendors' products, or that we're going to stop calling on the resellers to sell those products. That's not what it means at all. There might be a scenario where a vendor really wants to gain market share with a particular product, or in a particular geography, and they'll put an even larger rebate potential in front of the channel – distributors, resellers and retailers – so they pay more attention to that product. It happens both ways, not just negatively. And the resellers are going to be faced with their own program changes. It happens all the time.
Apple products represented 19 percent of Tech Data's total revenue this past quarter. What's your take on their push to increase sales in the enterprise market?
The BYOD phenomenon really got Apple into the enterprise, probably over the course of the last decade. I think just in the last few years, Apple has seen the potential in the enterprise. Therefore, they've formed strategic partnerships with companies like IBM and Cisco, who each have really strong presences in the enterprise. I think you'll see those partnerships start to create different business opportunities for Apple products. That's where Tech Data can come in as the supply-chain partner – to help fulfill those opportunities. It's probably a little early to say the initiatives Apple has around the enterprise are actually delivering results. But clearly their focus is there. Companies like Tech Data stand to really benefit from that focus.
What about the possibility of a Dell EMC-VMware reverse merger? Would the channel benefit?
From a Tech Data point of view, we have really deep, strong partnerships with [both] organizations. I'm not qualified to speak for why Dell might do it or what the benefit might be. That's for Dell and their executive team to make those decisions. I don't think it would change the relationships that Tech Data has with Dell EMC and VMware in any way. It doesn't have much to do with how Tech Data sells their products. I don't think it would change much. But I'm not an expert on that. They continue to be some of our most important vendors we take to market, and we're one of their routes to market that they're focused on.
You told investors that the company feels very comfortable with how the Avnet TS integration is progressing. Does that make Tech Data more likely to ramp up its M&A activities?
When we did the merger between TS and Tech Data, we said paying down our debt would take 18-24 months. We've paid down a substantial portion of that money already. We're way ahead of our commitment to Wall Street ... That frees up some cash as we roll into this year. What we will do with that cash is, first, organically invest in the company – hiring the right skills, building the right tools and processes. Secondly, we'll look at M&A that makes sense. Thirdly, we'll return that cash to shareholders with potential stock buybacks.
Are there any technology areas where you see a particular investment opportunity?
We're one year into integrating Tech Data and TS together. One thing that has become clear is the places where we need to invest. We have this mapping of the market: Dark spaces where Tech Data has skills and white spaces where we don't. Either through organic investments or M&A, we'll try to fill in those white spaces. We think we have a better handle on the white spaces today than we did a year ago. We know what we have. It'll make Tech Data a better partner for vendors and the channel.
You mentioned the Global Lifecycle Services business as being a key part of Tech Data's growth strategy. How will that business evolve as you continue integrating it with STG, which you acquired in 2015?
Tech Data had a small services business. I could argue that Tech Data is basically a services business – we have supply chain services, credit capacities, marketing programs. Over the years, we were trying to diversify those services into the technical side. One of the things TS had was substantial investments in that portfolio of services. When we put them together, we said, 'There really is a global lifecycle management capability here.' From acquiring a product to decommissioning a product, the new Tech Data has service offerings across that whole continuum. We structured all of it together under John O'Shea, and we're very optimistic about that type of value-add to help our resellers serve their customers more effectively.
Would there be any potential for that business to conflict with the services channel partners provide?
We remain committed to the two-tier model. We don't have any intentions of competing with our customers' services. We only want to supplement the services that our customers can take to their customers. That's the whole design around our services business – to keep that two-tier model intact.
Wouldn't this business be particularly well-suited for partners focused on SMB customers?
The small resellers need those technical skills and talents to be able to serve their customers more than the big guys do. One of the things our services initiatives do is help a smaller reseller look bigger and have more skill and capability to serve their customers more effectively. The design point around our services is to primarily serve the SMB reseller. We think that opportunity is very large and growing quickly. To be honest about the deployment, some of our largest resellers continue to use Tech Data services as well. Everyone needs some help in deploying the breadth of technology that exists.