Q&A: Tech Data CEO Talks Ingram-HNA Deal, Blossoming Apple Partnership and Dell-EMC Synergies

Capturing New Opportunities

Tech Data recorded yet another stellar quarter, increasing profits by 8 percent to $80.9 million, while sales for the Clearwater, Fla.-based distribution giant climbed 2 percent to $7.48 billion.

Tech Data CEO Bob Dutkowsky spoke with CRN after the earnings call about why the premium Tianjin Tianhai paid for Ingram Micro is promising for the distribution industry as a whole, how Apple penetrated the enterprise to become Tech Data's largest partner, and why he believes Dell and EMC have become so channel-centric.

Read on to learn why Dutkowsky thinks Tech Data outperformed its competitors last quarter, why so many emerging vendors are looking to link up with distributors, and how the Clearwater, Fla.-based company plans to capture opportunities in the enterprise and network security space.

What does HNA's acquisition of Ingram say about the distribution landscape?

I don't know why the Chinese were interested in buying Ingram Micro. You'll have to ask Ingram and HNA. … The thing that's clear is a company valued a U.S.-based IT distributor very aggressively. They paid a nice premium to get access to Ingram Micro. All of us IT distributors are probably undervalued relative to what the Chinese were just willing to pay for one of the companies in our ecosystem.

What make IT distribution appealing to companies outside the industry?

Clearly, if you look at Tech Data, we believe we have one of the lowest SG&As of any supply chain logistics kind of company in the world. I can see where someone would be interested in this very efficient model that we've built, to be able to logistically move $26 billion of things through the system very efficiently and effectively every single year. It's an attractive business that these IT distributors have built. And Tech Data in particular has a very strong foundation that could be attractive to someone.

Has Tech Data's partner messaging changed as a result of the Ingram deal?

Absolutely not. Not one word. We've competed with Ingram when it was private, we've competed with Ingram when it was public, we can compete with Ingram when it's owned by the Chinese. Nothing changes for us. We're the exact same company we were the day before that announcement happened, and we're the same company that's focused on our vendors and our customers and our shareholders. That's what we can worry about. We can't worry about what our competitors do.

Why is Apple becoming a bigger portion of your overall business?

Apple has really diversified and strengthened their product line over the past couple of years. … And so what started out for us as a vendor with a very narrow set of products has now become a vendor with a very broad set of products. And we sell all of that. Clearly, the market has really taken to the Apple product set, both the consumer side and the enterprise side. So we now sell Airbooks into retail, and we sell them into businesses. When you take an expanded product line and apply it to an expanding market, you get the kind of numbers that have popped up with us and Apple.

Have you gotten a bump since Beats became part of Apple?

The addition of Beats has been a very large piece of that Apple growth that you're seeing. Remember, last year in Q4, we didn't sell Beats. Now we do sell Beats, and all of a sudden, you now see this big growth in Apple. … And then factor in that we took over Beats right in the key retail season, the fourth quarter, which is the holiday season. Beats made great Christmas and Chanukah presents. … Keep in mind, we grew the other components of Apple aggressively as well – the phones, the notebooks, the desktops, the tablets, the watch, the TV, all of those had good growth in Q4.

When did Tech Data start distributing Beats?

I'm [going to] say it was late in the summer. … I think it was late in the summer that we started it, and then it really built up a head of steam in Q4.

What convinced the enterprise side to adopt Apple?

The employees are saying ’I want an Apple. I have an iPhone, I have an Apple at home, I have an iPad and I want an Apple product.' Apple in the enterprise is a force that both CIOs are asking for, but also just employees. That's not to denigrate the PC and the Windows environment. We sell more Windows PCs and laptops than we do Apple products. But they come across multiple vendors. There's only one Apple. There's Dell and Lenovo and HP in the PC space. We sell more PCs with Windows devices than we do Apple devices.

What are you trying to do to become Apple's preferred distributor?

I think we're just executing very, very well on behalf of our vendors, not only Apple, but all of our vendors. Execution is exceptionally strong, and we have the right product on the shelf, we're calling on the right customers, we're able to pick, pack and ship the product efficiently, we give and get good payment terms. All of that all put together is why a reseller or retailer would choose to buy from Tech Data. … We're happy with the amount of market share that we're able to earn from our relationship with Apple, and our customers that are Apple buyers are looking more and more to Tech Data to source those products.

What technology areas are shaping up nicely for 2016?

The one area I would call out that is going to be a real focus area over the next couple of years is going to be the whole area around security, in both securing the IT infrastructure as well as physical security, things like IP cameras. The whole security space has a big spotlight shining on it right now, and it's only going to get brighter. So that's an area where we're focused, we continue to invest, and we continue to grow.

What are your biggest areas of differentiation from other distributors?

In our DNA is the ability to pivot rapidly toward market opportunities that are fresh and real. So, for example, in Q3, we said we thought that as we entered into Q4, demand was going to be low single-digit [growth]. And if you look at Synnex's performance in Q4 and Ingram's performance in Q4, it was low single digit. We grew at 11 percent. There was more opportunity in the market than what we anticipated, and we were able to pivot, move our resources, move our coverage models, move our logistics capability … to grow faster than what we planned. … And there aren't a lot of Fortune 100 companies that can do that as well as Tech Data.

What about from a back end or line card perspective?

Say for example Ingram, Synnex and Tech Data, there's a lot of things we do [similarly] and a lot of ways our line cards look alike. But then there's a lot of ways the line cards look very different. For example, Synnex doesn't sell Apple. Ingram sells data capture/point of sale. Synnex doesn't sell Cisco. Those are things that Tech Data has. … One of the things that we have built the Tech Data franchise on is a worldwide IT system. … We sell $100 million a day of things, and our average order is about $2,000. Think of the power that's necessary from an IT system point of view to be able to handle those transactions.

When you say IT system, are you talking about ERP?

Part of the reason we're able to do that goes back to that IT system, and the investments that we've made over the years to build that platform out. None of our competitors have that same capability. … It's SAP. It's a full-time deployment of SAP. And that is clearly a differentiating building block in the Tech Data system. It's all built around this idea that we can serve a vendor anywhere in our footprint exactly the same with the same tools, the same systems, the same knowledge about the marketplace. It's all tied together in one place. And that's a very powerful differentiating characteristic that we have.

What characteristic would you say sets Tech Data apart?

Agility is what's really the difference-maker for a company, whether it's a distributor or a reseller or a vendor, you have to be agile in this environment. That's why we keep bringing up the idea of how Tech Data's been able to pivot to these market opportunities that are growing and are profitable. That's not something that every company can do. … If the commander of a battleship says, 'Stop,' it takes the battleship a mile before it actually stops. He knew it needed to stop, but the thing just has so much momentum and inertia. So here's Tech Data, this $26 billion a year battleship. And we're able to pivot, and stop and start, really quickly.

Does Tech Data benefit from being the only distributor with both Dell and EMC on its line card?

Dell is a fast-growing partner with Tech Data. EMC was an even faster-growing partner with Tech Data. It's actually very interesting that those two came together because they're two of our fastest-growing suppliers in the world. So one plus one equals three from our point of view. With all of the momentum we have with Dell and with EMC, we think there's a good opportunity for us to carry on and help them as they bring that new company into the marketplace, because we know them, and they know us. As the new company comes together, we think we're really well-positioned to help them grow in the marketplace.

Why have you seen so much growth in recent years from Dell and EMC?

Both of them have embraced the channel in a way that's far more aggressive than they've historically done. And I think they look at the marketplace and they see where all of the momentum is and where all the growth is, and it's being driven by distribution. So both of those companies have embraced distribution more aggressively. And they're being rewarded. Both of those companies' business in distribution is growing faster than their core businesses. The distributors are serving both EMC and Dell very efficiently.

Why have so many new vendors been looking to link up with Tech Data?

We used to be a broadline distributor, and we were mostly around the PC ecosystem. Now, we're in consumer electronics. Now, we're very large in the data center. For example, in Europe, we're bigger than Arrow or Avnet in the data center. … Consequently, there's lots of software products that now expose themselves to Tech Data through that data center relationship ... and there's a broad array of mobility products, both hardware and software. … Mobility is now far more than just a phone. So all of those forays … have brought Tech Data … to places where vendors might say, 'Hey, I wonder if Tech Data could help me.'

How has that prompted small vendors to join up with you?

Although the technology industry is a huge multitrillion-dollar industry, in reality, it's kind of a small industry. And so some executive who might have worked at a company that used Tech Data gets a new job at a startup that doesn't even know what Tech Data is, and this new executive says, ’Hey, my old company used to work with Tech Data. They were able to cover that market or sell that products,' and all of a sudden, we get that opportunity. … That's why there's vendors that we've never heard of with product sets that we never focused on that are talking to Tech Data.

Are these new vendors focusing on any particular technology areas?

Just the ones that I've talked about – mobility, wearables, the data center, in particular, security in the data center has become much more of an important element. Consumer electronics – things like Beats, wearables. Remember, the Apple Watch is really a wearable, if you want to think about it that way. But an Apple Watch is nothing if it's not connected to something, so that interconnected world becomes much more important. And now we're having dialogue with vendors about the Internet of Things that is opening up a new vista of opportunities. For example, Cisco has made massive commitments to the Internet of Things, and Cisco's one of our most important partners in the world.

Why are lower-margin vendors covering Tech Data's SG&A costs?

We sell about 400 vendors' products. Every one of our vendors has a unique relationship with Tech Data based on their products and their requirements. … In some cases, the vendors pay us big back-end rebates based on sales. And other vendors will want to pay us very low front and back-end, but they'll help cover the cost of sales through SG&A. … And we have to manage both models, and both can create different economics, but at the end of the day … record earnings per share proves that we manage all of that diversity of those relationships that our vendors want. And that sounds simple, but it's really complex to do that.

Have you had to turn many new vendors down?

Nobody wants to enter into a partnership where one side or the other is not going to make money. That's guaranteed to fail. And so, when the vendors start to explore relationships with Tech Data, we're right up front with them in terms of ’what have we seen that works in other places?' You don't need to invent this. We've had relationships with so many vendors over the years that we have models. … And then we go to market. … If they don't make money, the partnership will not work. Nobody is out to nickel-and-dime your new partner and hope you can snooker them into not having a profitable partnership.

Do you see much of an opportunity around the SQL Server end of service?

We play in that space, and I think it will be an opportunity that will emerge. And I don't think it's one that can be forced. It's going to emerge, and we're prepared to deal with that. Our software franchise continues to grow very nicely, and so the value that we're adding into the server space via software is a growing business opportunity for us. I think servers were down in Q4, but I think if you went back a year, servers in Q4 of last year performed very well for us. So a little bit of the down is a year-over-year comparison versus not market opportunity. We sold servers in Q4 in both geographies; it wasn't as if there wasn't an opportunity there. It just wasn't as robust maybe as we had hoped.

Is the Ingram deal a good sign for the industry as a whole?

Yeah. I've never been more optimistic about the future of IT distribution than I am today, and I've been here for almost 10 years now. The opportunity to help our customers and help our vendor partners transition to this more complex physical and virtual world is a great opportunity for Tech Data. And we've made substantial investments in the areas that we need to serve those vendors and serve customers. And we see more opportunity coming every single day. So we think that this is the golden age of IT distribution. Right now is a very good time to be in the space that we're in. We're excited about it.

What's different today in IT than maybe a decade or two ago?

The innovation that's happening inside of technology is what makes the tech industry different. … The winners are going to be the companies that are nimble, agile and have the infrastructure that's able to adjust very rapidly to these dynamic changes. … I was with Meg Whitman a couple of weekends ago, the CEO of HPE, and I remember her saying she's never seen technology evolve and emerge as fast as it's moving today. There's somebody that's been in this space for a long time. I've been in the industry now for nearly 40 years, and I've never seen things move as fast as they are now.

Had you seen much Chinese interest in distribution acquisitions?

We've chosen not to comment aggressively on the Ingram Micro transaction. It's way too new to know if it's going to have an impact on the market. That's a transaction Ingram Micro and their board did. We're not going to comment on this.

Is there anything else you'd like customers to know?

Tech Data has performed very well, and we're really grateful for the partnership we have with our vendors and the loyalty we have with our customers. When a company like Tech Data does well, it's because their vendors and their customers have lined up with them. We're grateful for those partnerships we have in the marketplace.