Distributor Tech Data Corp. (NASDAQ: TECD) reported improvements in net income and operating income when it released its second quarter financial earnings last week. The improving U.S. and global economy was one factor for the growth, but Tech Data executives indicated the distie is also working on improving its margins by focusing on business that can be transacted more profitably.
For the three months ending July 31, 2010, Tech Data reported net sales of US$5.47 billion, up 5.6 per cent from the same period one year ago. The company noted the strengthening of the U.S. dollar against certain foreign currencies in the quarter negatively impacted the year over year comparison by six percentage points. Operating income grew by 22.1 per cent over the year-ago period to US$65.8 million, or 1.20 per cent of net sales. Net sales in the Americas were US$2.6 billion, up by 8.4 per cent over the year ago, representing 47 per cent of the global total.
Numbers for Tech Data’s Canadian subsidiary were not broken-out, but Tech Data Canada president Rick Reid said the recent overall growth of the IT industry has been more rapid in the U.S. than it has been in Canada, although with Canada not having as slowed as much during the recession the U.S. business is coming off lower year-ago numbers.
“Right now we’re really focused hard on taking the right kind of revenue,” said Reid. “We have two responsibilities: we need to be a significant partner to our vendors, and we have a responsibility to our shareholders to provide them a profitable return.”
Accordingly, in the last quarter, Reid said Tech Data chose to focus on taking more “distributor-friendly” business, which means larger deals with higher selling prices, while choosing to shy away from lower-margin business or even leave it to the competition.
“We’ll never shy away from our historical roots as a broadline distributor, but we’re certainly focused on the more value parts of our portfolio,” said Reid. “It’s not a specific product set. It’s more to do with the size of the opportunity. If it’s a small average selling price and its heavy and we’ll have to include freight, we don’t make any money on that.”
Reid said opportunities around networking, storage, servers, large workstations and software with no freight are more attractive in terms of return on capital. He added the small and medium-sized business market is also attractive and continues to contribute strongly to the bottom line.
“Typically in SMB there’s a little more margin to play with because they’re not big, competitive deals, and at the same time the vendor community is rewarding us to go after those deals on their behalf,” said Reid, adding since they usually don’t have the freight-paid contracts they have with larger clients, not having to cover the shipping costs also helps protect profitability in the SMB.
While consumer electronics is an area of business that Tech Data has been growing in the U.S., recently adding 3D televisions to its line card, Reid said that’s a segment Tech Data Canada is still exploring. They’re having conversations, but he said they don’t have the volumes in that area in Canada yet that they have in the U.S., and with the consumer market already well-served in Canada by other distributors Tech Data would want to identify a way to add value and differentiate before jumping in, rather than being just another distributor in the market.
“It would really take the right vendor with the right product,” said Reid. “What we’d need is a product that would be considered unique to Tech Data, where resellers and retailers would know they could only get it from us.”
Follow Jeff Jedras on Twitter: @JeffJedrasCDN.