Q&A: Tech Data CEO Talks PCs, Tablets, Smartphones, Servers and More

PCs, Mobility Businesses Fuel Growth for Tech Data

Tech Data posted strong financial results in its most recent quarter, with sales for the Clearwater, Fla.-based distributor climbing 6.1 percent to $6.76 billion and non-GAAP profits soaring 14.4 percent to $45.3 million. CRN spoke with Tech Data CEO Bob Dutkowsky after the earnings call about continued PC sales growth, a slowdown in the tablet market, resell opportunities around the iPhone and how the distributor is preparing for the Microsoft Server 2003 refresh.

What do you feel is the most significant piece of news to come out of the past quarter?

The most significant thing has been the good, strong, balanced performance of Tech Data. If you look at the results that we just announced, we had good revenue growth, we had good improvement in profitability, we had exceptionally strong return on investment capital, we had good strong earnings growth. A company of our size, it's hard to hit all of the metrics all at the same time … The other perspective would be through nine months, Tech Data is on a record pace. Record revenues, record profitability. So we feel good about where the company is positioned.

What steps has Tech Data taken to improve its operating performance?

We've installed SAP as the system that we use to control the company. That project took us over 10 years, but it's basically completed now … We have one consistent system with one set of controls, one set of management tools and recordings. So it really gives us a real handle on the operations of the company … I bring that up because we're literally a decade ahead of many of our competitors, who are just in the process of starting to deploy a system like SAP. We're basically complete; they're just starting.

How sustainable do you feel strong PC growth is as the Windows XP refresh cycle comes to an end?

Basically, I think the refresh is beginning to end. And now, the demand or the growth that we see is around the idea that the fleet is aging … Some of the new products are substantially different than old ones. Some of the laptops that also are tablets, they have detachable screens, they have the ability to pivot … As an economy grows and an economy adds jobs, they hire more people and they need more PCs. So all of that kind of added up to create a continued demand for PCs that has nothing to do with the refresh cycle.

Can the demand for PCs be sustained going forward?

I don't know if it will be as robust as it's been over the last year or so, but yes, I think that demand is real ... A lot of companies invested in the tablet, and now that they've used it for a while, they realize that it is great to browse the web, it's a great content delivery device. But it's not a really great computing device. Businesses or individuals bought tablets; Now they're saying 'I still need to do real, live computing. I need a keyboard, I need a lot of storage, I need a lot of computing capacity to do spreadsheets.' And so the demand has shifted back to PCs.

Is the moderation of tablet sales in Europe tied to people realizing their limitations?

People realize the tablet does some things really well, and other things it doesn't do as well … Technology is what I called purpose-built … And over time, people focus on the things the device does really well, and they buy and they optimize it for that. So, on the case of the tablet, what the tablet does really well is deliver content, whether it's pictures, whether it's spreadsheets, whether it's web, whether it's email. The tablet does really well to deliver content. But when you ask it to compute, keyboard, high processor, lots of storage, it doesn't do that as well.

What does this mean for the device market?

I think the purpose-built mentality is beginning to settle into the tablet market, and it's pushing some workload up to PCs and pushing some workload down to the smartphone environment. And that's what created that bigger 7-inch, 6-inch iPhone 6 plus, the Note 3 from Samsung that's almost a tablet, but a phone. That has a purpose, to have a midsize tablet that also acts as a phone. It's not as good as an iPad, it certainly can't compute like a laptop … Over time, people know that when they need content, they buy a tablet. When they need a phone, they buy a smartphone.

What type of resell opportunities are there around the iPhone?

Some of the solution providers, their customers turned to them and said, 'Will you source my iPhones for me?' And the solution providers couldn't turn to Tech Data to buy that, so they literally went to the neighborhood retail stores and bought iPhones and resold them back to their customers. It was very inefficient … So Tech Data added the phones to our line card (in November 2013) so the VAR could come to one place to buy all of the technology their customers wanted. It isn't a massive market, but it's a growing one where the one-stop shop idea for the reseller is very important to their customers.

Have you seen many services or products that can be wrapped around the smartphone?

There's lots of opportunities around it. The first and most obvious is the accessories, the case, the power supply, the screen protector. Those are very big markets around the smartphone, and Tech Data plays in that in both of our geographies. The other thing is the aftermarket opportunities that exist. The insurance, the refurbishment of the phones. Those are all services we offer to varying degree across our geographies.

Why is it that your mobility business is bigger in Europe than in North America?

There's a lot of history behind that. We entered into the mobility business in Europe about six years ago. We did that through a joint venture with Brightstar, which is one of the world's largest mobility distributors. The thing that drove that is that we were big in Europe, but we didn't distribute cell phones. Brightstar was a big cell phone distributor in the Americas, but they weren't present in Europe. We formed a joint venture, and that business grew rapidly to the point where now, it's well in excess of $2 billion a year, just in Europe, to sell cell phones.

How do the mobility markets differ by geography?

The Americas market for mobility is very different than the European market. The American market is driven by the carrier stores. So if you wanted a Verizon phone, you go to a Verizon store. You wanted a T-Mobile phone, you go to a T-Mobile store. In Europe, if you wanted that similar phone, you go to a drug store or a retail store. So that's why the business grew so fast in Europe but not in the Americas. It's a different ecosystem, it's a different model. So we're finding places and spots in the Americas where our value proposition works, but it's not apples to oranges with the European market.

Why did the PC refresh drive business to corporate resellers and direct marketers?

If a VAR supports a little small company that has 5 PCs, then the VAR is only going to sell 5 PCs to their end user. But if a corporate remarketer supports Boeing, and Boeing needs 10,000 PCs, then the volumes are going to be radically different. It's not the opportunity is different, it's just the volume is much bigger in the corporate remarketers … It's obviously very efficient for us to sell a reseller 10,000 PCs … When we sell five little PCs to a reseller, we have to take them off the skid, package them up in a box, ship them.

Do you see in other technology areas more market opportunities for corporate remarketers going forward?

We sell corporate remarketers everything. We sell them the broadline products – PCs and printers. We sell them data center products, servers, storage networking. We sell tremendous amounts of software to their businesses. So yeah, the corporate remarketers take full advantage of Tech Data's line card. But in the PC refresh cycle, they bought and resold a lot of PCs.

Do you see sales shifting away from VARs and more toward other customers going forward?

I've been here now for eight years, and that ratio, give or take one percentage point, has remained virtually the same. One quarter, one might spike up a percent or two; therefore, another might spike down. But generally speaking, it stays in that range all the time, and it's partially because those are the customers that we cover. We cover a certain amount of the corporate resellers, we cover a certain amount of the VARs, we cover a certain amount of the retailers, so that mix stays about the same all the time.

What is Tech Data doing to prepare for the Windows Server 2003 refresh?

First of all, we have extensive data of where products have been sold over the years. So we know where literally thousands and thousands of servers have been sold. So we can take that data back to our customers and say, 'Here is 100 servers you sold in the last five years. You need to have a plan in place if that customer has a plan to upgrade or change or do the software swap or virtualize. Something is going to happen with these 100 servers that you sold.' So part one is an awareness of the opportunity.

What happens after that?

The second piece is, on behalf of our vendor partners, we're out educating the VARs on what they need to do to do this upgrade, whether it's a hardware upgrade, a software upgrade, a hardware and a software upgrade, putting in a bigger server and put in virtual servers underneath it. There's all kinds of different solutions … Then we're adding all the right products to our line card to make sure we have a full complement of servers that are the backdrop, that are going to be used to do this refresh ... So all of that action is taking place now, even though the refresh is probably going to happen next year.

Are some of the other vendors trying to make a play for the Server 2003 customers?

I think that there's going to be [options]. The customers or the resellers have a series of choices that they need to make. The simplest choice is just put in a new operating system in the existing hardware. Not all hardware will run the new stuff, but that's one alternative. Change operating systems, go to Linux. Put in bigger servers with more virtualization, so companies like VMWare are obviously very interested in the server refresh process. Update the database that's running on the system – that could be Microsoft, they can move into an IBM or Oracle. There's all kinds of different answers.

How do the server and PC refreshes differ?

With the PC refresh, there's basically one answer. You end using XP and you move to a new PC with either a Windows operating system or an Apple operating system. And that was the choice that people made. The server refresh is far more complex. And that's why the resellers need help from Tech Data, to be able to get educated with all the choices and the options and the strategies that they can have for their customers to make sure they win the business in the marketplace. It's a great opportunity for Tech Data, and a different degree of value than certainly what existed in the PC refresh.

What has been driving growth in the federal and health care verticals?

The health care vertical clearly is the initiative to digitize the medical records system in the United States. So whether you're a hospital or a clinic or an independent doctor's office, they need a lot more technology to be able to fit into what health care is going to look like in the future. In the case of the government, they buy in cycles. When the government shut down (in 2013), they didn't buy any technology. They had to stop. But when the budgets were then approved and the government came back into business, they still needed technology.

What about in the education vertical?

And then education, a lot of kids go home and there's more computing at home then there is in the classroom. They've got laptops and tablets and devices and networks in the home, and then they go to school and they don't have any of that technology. So the schools are catching up really rapidly in the deployment of technology. And therefore, health care, government and education, you see double-digit growth because technology has an important impact in those sectors. It seems to be a trend. I can't give you any look into the future, but over the last year or so, it's been a consistent theme that those three verticals have performed well.

How do you feel Tech Data is differentiating itself in the cloud?

We got into the cloud earlier than some of our competitors, with TD Cloud and certainly with StreamOne. We organically built StreamOne, and that project started four years ago. We've been on this journey much longer than our competitors have. That doesn't make us better or worse, it just means that we've seen the cloud coming a little bit earlier and made the investments necessary to be able to enable the channel to grow into the cloud … The cloud continues to be a small piece of the overall IT spend, but it's growing and it's important.

What are you hearing from vendors?

Our key vendors really want Tech Data to build out an ecosystem to support the cloud and the channel. The addition of Microsoft as a certified cloud provider, the addition of SoftLayer from IBM. Within the last couple of quarters, we announced Meraki, which is the Cisco cloud networking product. We continue to add solutions in that space that our VARs can take to the market today and support their customers with these cloud-enabled solutions. And all of that … puts us at … $200 million a year of cloud sales. I don't know where that stacks up against our competitors, but that's a really good position that we've earned in the channel.

How do you see cloud revenues changing moving into 2015?

I think it will continue to grow. I don't think that it's going to ever become as big as the other parts of Tech Data. If you think about the size of the broadline business or our data center business or software business, those are very very large businesses for Tech Data. But I think the cloud will touch each one of those parts … There will be certain things that the cloud will do really well. And over time, the cloud ecosystem will optimize what the cloud does well, and they won't try to force it to do what it doesn't do well.

With IoT, are the opportunities really in related technology areas?

There's the traditional places to sell into the IoT environment, particularly in the data center, because the more devices that are out in the marketplace, the more network capacity that's required, the more data they create that needs to be stored on storage devices. And to get any value out of it, you have to have computing, you have to have servers. The more prevalent IoT becomes, the more data center opportunity it creates. And so obviously, we have a very robust data center practice that we think will benefit from the growth of IoT.

Do you think there are resell opportunities around the devices themselves?

The devices are in many cases going to be completely different devices from different vendors sold through different channels to different customers than who they are selling to today. And so as we look at IoT out into the future, we see an untapped opportunity for us to establish ourselves as the IoT distributor of choice. That certainly is an opportunity we're focused on and we're working on aggressively.

Is there anything else you feel your channel partners should know?

We celebrated our 40th birthday last week. We're anxious to put the 40-year celebration behind us, and stop focusing on the last 40 years and get focused on the next 40 years. So that's where this explosive growth of IoT and the requirements around security and the strength of the data center, all of that is going to be the things that we're going to be watching over the next decade or so … And partners can rely on us to be thought leaders in those spaces. We're spent a lot of time and energy in that, and we're there for them as these things grow.