Tech Data: We Need Room For 'Tomorrow's Technology'

After reporting sales growth of 12.6 percent and net income growth of 43.7 percent for the first fiscal quarter, Tech Data executives said the company’s emerging specialty businesses are going strong and that some legacy broadline vendors could be dropped to make way for new technologies.

Slowly, steadily, Tech Data is restructuring its business to include more data center and consumer-electronics-focused products because that’s where the market is going.

’The legacy of broadline distribution is to be all things to all customers, all things to all vendors. In this competitive environment, it’s more important to focus on vendor profitability and customer profitability,’ said Jeff Howells, CFO of Tech Data, on the distributor’s earnings call Friday.

As a result, Tech Data is shedding vendor relationships that are too small or not profitable enough, Howells added.

’We’ll work with [vendors] to get the right return and grow the business collectively, but at the end of day we’re probably being more aggressive in eliminating certain vendor relationships and making room for new ones,’ Howells said. ’Clearly, we need room for tomorrow’s technology. Our broadline business is a great business, but we’re tweaking the right relationships to where we will make the right returns.’

Bob Dutkowsky, CEO of Tech Data, said on the call that the company will always have a broadline core business because ’you have to have volume of products to make the model work.’ But, he added, the push and pull of technology innovation means change is necessary.

’I’ll give an example. You’ve heard us say we’ve added televisions. Take a 52-inch high-definition TV. Consider how much space in the logistics center that takes and that you have to handle it with kid gloves vs. a keyboard. Maybe we have five keyboard vendors and we want to reduce that to two keyboard vendors and use those dollars and that space and fill that up with big-screen TVs. It’s still broadline distribution, but it’s a different set of products, a different set of value propositions and a different margin.’

Tech Data’s Advanced Infrastructure Solutions unit in North America and its enterprise-focused Azlan business in Europe continue to outpace the distributor’s overall growth, fueling the strategy to redefine Tech Data’s products portfolio. Tech Data’s AIS division Friday unveiled an agreement to carry more Avaya products, Dutkowsky said.

’We expect AIS and Azlan to reach $5 billion in this fiscal year. In the first quarter, AIS grew 31 percent, driven by industry-standard servers, storage and virtualization products. To further strengthen that, we’ve expanded our agreement with Avaya to provide a full range of data networking, unified communications and more,’ Dutkowsky said.

NEXT: By The Numbers

In the first fiscal quarter ended April 30, Tech Data beat Wall Street estimates, posting a 12.6 percent increase in revenue compared with the year-ago quarter and a 43.7 percent increase in profit.

The company reported net income of $45.6 million, or 88 cents per diluted share, on $5.62 billion in sales in the first quarter. Analysts had predicted earnings of 75 cents per share on sales of $5.36 billion.

’We continue to plan conservatively but expect positive demand trends to continue and have year-over-year sales growth in both regions [Americas and Europe],’ Dutkowsky said.

Tech Data traditionally is more conservative than other distributors and its sales growth of 12.6 percent was in line with of one of its fiercest competitors, Synnex, at 12.5 percent, but behind Ingram Micro at 20 percent.

Looking forward, Tech Data didn’t offer specific guidance for the July-end quarter, but Dutkowsky said the company should outpace overall IT spending growth.

"There’s a bit of a ’catch-up’ process [happening]. I still think there will be single-digit-growth the rest of year. If we run our play correctly, we’ll get at least that and maybe a little more,’ he said. Pricing pressure in the first quarter was ’average,’ Dutkowsky said, lower than it has been in some recent quarters.

’It wasn’t overly aggressive. There were some opportunities where competitors were more aggressive than we were looking to follow, but generally pricing was pretty reasonable in the quarter,’ Dutkowsky said. ’We’re like a surfer kicking waves that we want to ride. We’re looking for smart waves that represent revenue and profit growth. If we let the market take you, I don’t think we’d realize the same performance that we’ve seen.’

Tech Data shares were trading at $40.35 Friday morning, up 87 cents, or 2.2 percent.