Distributor Tech Data's Q1 Net Income Soars 49% as Deal Pricing Stays CompetitiveBy Jessica Davis | Print
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IT Distributor Tech Data's net income soared 49 percent in Q1 compared with last year's quarter. But the company did that on revenues that fell 17 percent year over year. CEO Bob Dutkowsky tells Channel Insider that Tech Data delivered that kind of bottom-line performance in a market where pricing on every deal remains deeply competitive by walking away from certain deals.
Seeming to defy the recession, Tech Data’s (NASDAQ:TECD) net income soared 49 percent year over year in the distributor’s first fiscal quarter. But the company did that on revenues that declined 17 percent year over year.
That’s because not all revenue is good revenue, Tech Data CEO Bob Dutkowsky tells Channel Insider. Dutkowsky says that Tech Data has walked away from nearly $1 billion worth of revenue in the last year because the pricing just didn’t make sense.
"In this business not all revenue is good revenue," he says. Pricing pressure is fierce in the market. With less deals to be had, more VARs are going after the same deals and Tech Data is often pricing the same deal multiple times for all the different VARs that are looking to bid on it, says Dutkowsky.
"Every deal becomes much more competitive. Everybody is going to bid more aggressively on those deals to get their fair share," he says. "Everything is becoming hyper-competitive."
Tech Data offers pricing on these deals based on the size of the VAR, the products and the combination of products, says Dutkowsky. "We have a disciplined approach to pricing on the market. That’s another one of those things that serves us well in tough times. We choose not to bid on certain things because they won’t deliver the return to our shareholders that we think is necessary."
Tech Data reported net sales of $5 billion in Q1 compared with $6.1 billion for the same period last year and $5.7 billion in the previous sequential quarter.
Tech Data reported net income of $31.8 million in Q1 compared with $21 million for the same period last year and $58.6 million for the previous sequential quarter.
Much of the company’s profit strength in Q1 came from Europe, Tech Data executives told analysts during a conference call following the earnings release. Tech Data CFO Jeff Howells told analysts that the European team executed well, but also, in many cases Tech Data earned incremental back-end dollars and incentives that may not be repeatable, and those improved Tech Data’s gross margin and tax rate.
Looking ahead, Tech Data executives say that their forecast for fiscal Q2 calls for a similar decline year over year—between 15 and 20 percent. For last year’s fiscal Q2 Tech Data reported revenues of $6.2 billion.
Dutkowsky notes that IT solutions that continue to sell well are those with a quick return on investment, while those that are not doing as well provide a slow ROI. He also says that while there's plenty of excitement around the economic stimulus package and funds that may be coming to IT organizations, he's seen no deals put together with those funds yet and doesn't expect them to really become available until 2010.
Dutkowsky says that the measures Tech Data has taken to improve its business during these tough times will serve it well when prosperity returns.
When that is, is anyone’s guess however. Visibility is still very low, Dutkowsky says, based on the company’s conversations with vendors and VARs. Declines appear to have slowed, but "we just don’t see it getting any better," he says.
"The way we are mentally positioning the company is that we have reached a trough," he says. "We’ve tried to size the company to be successful in this trough."