Avnet Hit By Economic Downturn in Fiscal Q2

Published: February 9, 2009

by Timothy Prickett Morgan

As one of the two master resellers of IBM's Power Systems machinery in the world, the rise and fall of sales and profits of Avnet provide some insight on what is going on out there in the midrange channel. But because Avnet is such a large company with a diverse product set, you have to dig for clues.

In its second quarter of fiscal 2009 ended in December, Avnet's sales fell by 10.2 percent, to $4.27 billion; currency effects accounted for 3.8 percent of that decline, as the strengthening dollar made sales overseas balloon by less than they have been doing for the past several years. Net income for the quarter came in at $112.3 million, down 21 percent.

"Our second fiscal quarter was unusually challenging as demand weakened through the quarter, culminating with lower-than-expected revenue in the month of December," explained Roy Vallee, chairman and chief executive officer at Avnet in a statement accompanying the financial results for the quarter. "This slowdown was widespread as all three regions, and both operating groups contributed to a double digit year-over-year organic revenue decline for the quarter. Based on these results and our expectation of continued market weakness over the next few quarters, we have initiated additional cost reductions of $50 million in annualized savings and are expected to be fully implemented by the end of our fiscal year."

In the Technology Solutions group, which distributes servers, storage, software, and other IT stuff to downstream resellers, sales in fiscal Q2 came to $2 billion in the quarter, down 12 percent from the prior year's quarter. The Technology Solutions group posted a 12.5 percent decline in the Americas region, an 8.1 percent decline in EMEA, and a 26.2 decline (not increase, but decline) in Asia. Operating income for the Technology Solutions group fell by 32.7 percent to $69.9 million in fiscal Q2.

According to a recent press release: "Technology Solutions experienced a below normal calendar year-end surge as revenue finished at the low end of expectations due primarily to a weaker-than-expected final week in the Americas region. Similar to EM [Avnet's Electronics Marketing group, which had sales of $2.27 billion, down 8.5 percent], the shortfall in the more profitable Americas region negatively impacted profit volume and margins. Therefore, we are taking more cost reduction actions in the TS business to continue aligning our cost structure to expected revenues. We are pleased with our progress this quarter in EMEA where previously announced restructuring and the addition of Horizon Technology are having the expected positive impact on performance."

As previously reported, Avnet bought Irish distributor Horizon Technology Group last spring for €98.5 million, giving it customers in both Ireland and the United Kingdom. The U.K. business is hardware distribution, and Power Systems and System x boxes are most of what it pushes.

Looking ahead to fiscal Q3, Avnet is projecting that its Technology Solutions group will post sales of between $1.45 billion and $1.75 billion, with overall sales coming in between $3.6 billion and $4.2 billion. Those are some pretty wide error bars, which shows you just how tough business is out there.

Rival master IT reseller Arrow Electronics reports its financial results for its fourth quarter and 2008 year-end this week. We'll give you the skinny on that in the next issue of The Four Hundred.

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