Tech Data CEO: Buying Avnet TS Will Help Us Shift From Legacy To Emerging Storage Technologies

Tech Data CEO Bob Dutkowsky said its purchase of Avnet Technology Solutions should help with getting out of the eroding traditional storage business and into the stronger flash and solid-state storage market.

Avnet TS' robust flash and solid-state storage practice was one of the major selling points for the $2.6 billion acquisition, Dutkowsky told Wall Street analysts Tuesday on the distributor's earnings call. But he acknowledged that all of Tech Data's big vendors had weak storage sales in the most recent quarter since revenue from emerging storage technologies isn't growing as quickly as sales from legacy storage technologies are declining.

"The two curves have not yet crossed, and I think it's going to take awhile before they actually do cross," Dutkowsky said. "But they will, and thus our investments in preparing ourselves for that marketplace are really important."

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Specifically, Dutkowsky said selling converged, hyper-converged or flash storage requires a different skill set as well as relationships with new, up-and-coming vendors that are strong in those spaces. Tech Data has organically been building up a practice around next-generation data center technologies, although Dutkowsky acknowledged that it's pretty small.

"We think we are well-positioned [with Avnet TS] to take advantage of the growth that is going to happen in those spaces," Dutkowsky said.

Tech Data is managing its business with two distinct teams of people until the Avnet TS acquisition closes in the first half of 2017, Dutkowsky said. One team led by Chief Operating Officer Rich Hume is driving the integration process, according to Dutkowsky, while the other team is headed by Tech Data's geographic leaders and is focused on tactical execution.

"We're trying very hard to keep the two tasks separate," Dutkowsky said. "We've succeeded very well in not becoming overly distracted by the transaction."

Since the Avnet TS transaction was unveiled in September, Dutkowsky said the companies have established an integration management office consisting of key functional leaders for both teams across multiple geographies. The functional teams are responsible for putting plans in place that ensure the integration goes smoothly for customers, vendors and employees of both companies, Dutkowsky said.

The teams have made good progress on integration planning efforts and have hit two milestones, Dutkowsky said. The first is that the U.S. government has permitted the deal to proceed, while the second is that the company has put in place $1 billion in term loan facilities that will be drawn upon at closing. The company also has increased its revolving loan facility from $500 million to $1 billion.

"While there's much work yet to be done, we're pleased with the progress that has been made by our integration teams thus far," Dutkowsky said.

Clearwater, Fla.-based Tech Data saw sales for the quarter ended Oct. 31 inch forward to $6.49 billion, up 1 percent from $6.43 billion the year prior. That beat Seeking Alpha's projection of $6.36 billion.

Net income, meanwhile, decreased to $36.5 million, or $1.03 per share, down 13 percent from $41.9 million, or $1.18 per share, last year. On a non-GAAP basis, however, net income jumped to $50.9 million, or $1.44 per share, up 13 percent from $45.2 million, or $1.28 per share, last year. That beat Seeking Alpha's estimate of non-GAAP earnings of $1.26 per share in the most recent quarter.

Wall Street was very pleased with the results, sending Tech Data's stock price climbing 4.6 percent to $87.90 per share, close to the distributor's all-time trading high of $88.50 per share. Earnings were released before the market opened Tuesday.

Tech Data's largest vendor partners in its most recent quarter were Apple, which accounted for 20 percent of the distributor's sales; HP Inc., which accounted for 13 percent of sales; and Cisco Systems, which accounted for 10 percent of sales.

One of Tech Data's vendor partners decided to re-examine a chunk of its PC business that it had traditionally done direct and move it into the channel. Dutkowsky said Tech Data competed and won the business, which has contributed to both high levels of PC sales growth in the most recent quarter as well as continued top-line benefits going forward.

"The very best market share we can gain is when we get share from our vendors," Dutkowsky said. "That's an example in this quarter where that happened, and it fueled a lot of the growth that we had."

Revenue for the Americas climbed 2 percent to $2.6 billion as strength around notebooks, desktops, tablet PCs, cloud, mobility and security was offset by declines in storage and consumer electronics sales.

European sales, meanwhile, grew by 1 percent to $3.9 billion as growth around mobile phones, notebooks and form-factor PCs was partially offset by weakness in the storage and software segments.

For the coming quarter, Tech Data expects sales in the range of $7.4 billion to $7.6 billion, with both Europe and the Americas expected to deliver relatively flat sales after factoring out changes in foreign currency exchange rates. That's ahead of Thomson Reuters' sales projection of $7.35 billion.

The distributor is also projecting non-GAAP earnings per share of $2.11 to $2.21, in line with the Thomson Reuters earnings estimate of $2.20 per share.