Avnet and Arrow: System Sales Might Have Hit Bottom

Published: August 10, 2009

by Timothy Prickett Morgan

The two key master distributors of IBM and other brands of servers and storage, Avnet and Arrow Electronics, reported their financial results for their most recent quarters, and both companies are hoping that the server market has finally hit bottom.

Avnet closed out its fiscal 2009 year on June 27, and said that in the fourth quarter it saw a gut-wrenching 19.5 percent revenue decline across its combined Technology Solutions and Electronics Marketing groups, to $3.77 billion. In the Technology Solutions business, which is where servers and storage from IBM, Hewlett-Packard, Sun Microsystems, and others are peddled to downstream resellers who in turn sell to customers, Avnet said that it had a 15.8 percent decline in Q4, to $1.64 billion. Sales in the Americas were down 17.6 percent in the quarter, and in Europe it was even worse, with a 20.8 percent drop; sales of systems, storage, and software rose by 23.3 percent in the Asia/Pacific region, however, but was obviously not enough to offset declines in Avnet's key U.S. market or in Europe. (I suppose this is a good thing inasmuch as the U.S. and European economies still matter, and it shows in the Avnet numbers because no matter how good Asia is doing, it doesn't counterbalance bad economies in the U.S. and Europe.) Also if you take out the impact of converting sales in the EMEA region to U.S. dollars, then Technology Solutions' EMEA sales were only off 4.8 percent, and more importantly perhaps is the fact that even with the currency issues caused by a relatively strong greenback, the Technology Solutions unit was able to book a $41.2 operating margin, down from the $61.8 million in the fourth quarter of fiscal 2008.

The Electronics Marketing business, by contrast, posted sales of $2.13 billion in fiscal Q4, down 22.2 percent from the year-ago quarter, and Asia was once again pulling up the averages across the regions. Operating income for the Electronics Marketing group was more than cut in half to $57.1 million.

When you add it all up and pay the taxes and other expenses, Avnet swung to a net loss of $30.9 million, which compares pretty unfavorably to the $144.1 million in net income in Q4 of fiscal 2008. An economic meltdown will do that, and all things considered, these numbers are nowhere near as bad as you might think.

"Business conditions remained challenged in the fourth quarter, but I am pleased that we were able to grow revenue sequentially in both operating groups, significantly reduce expenses, achieve near-record working capital velocity and generate $330 million in cash from operations," said Roy Vallee, chairman and chief executive officer at Avnet, in a statement accompanying the financial results. "Technology Solutions met its revenue expectations for the second consecutive quarter furthering our belief that the markets we serve have reached bottom."

Let's hope so.

For fiscal 2009, Avnet's sales came to $16.23 billion, down 9.6 percent, and because of various write-offs and restructuring charges, the company reported a $1.12 billion net loss for the year.

Looking ahead, Avnet is anticipating that in the first quarter of fiscal 2010 ending in September it can bring in somewhere between $3.6 billion and $4.2 billion in revenues across its systems and electronics businesses, with earnings per share in the range of 29 cents to 37 cents. Those numbers are predicated on Technology Solutions raking in between $1.55 billion and $1.85 billion in revenues and Electronics Marketing getting between $2.05 billion and $2.35 billion in sales. In fiscal 2009's first quarter, Avnet had sales of $4.49 billion and brought $92.9 million to the bottom line, which worked out to 61 cents per share.

Over at Arrow, the other key systems and electronics component master distributor, the second quarter ended June 29 came in at the high end of the company's expectations, and Arrow was profitable as well despite the poor economy.

In Q2, Arrow posted $3.39 billion in sales, down 22 percent, and operating income fell by a factor of three to $51.1 million and net income fell by 78.1 percent to $21.1 million. (I said Arrow was profitable. I didn't say it was a lot of money down there on the bottom line for the second quarter, or that profits hadn't been slammed.)

Arrow's Enterprise Computing Solutions group had sales of $1.12 billion, down 19 percent compared to the year-ago quarter, and not including acquisitions, sales were actually off 24 percent as reported.

"ECS sales were at the low end of our expectations, due to lower demand and IT spending, as capital-intensive projects continue to be highly scrutinized," explained Michael Long, Arrow's chief executive officer, in a statement going over the company's financial results. "With strong operating margins and cash flow, we remain confident that our strategy of portfolio diversification will continue to provide benefits, as the need for complex technology systems to provide security and storage solutions has not diminished despite the macro headwinds."

Arrow's Global Components business had $2.27 billion in sales in the second quarter, down 23 percent, hitting the mid-point of Arrow's expectations.

Looking ahead, Arrow said that it had another $100 million in costs it planned to take out, predominately in its European operations, during the second half of 2009. Arrow expects its Enterprise Computing Solutions group to have revenues between $1 billion and $1.2 billion in the third quarter ending in September, and its Global Components group to have sales ranging from $2.1 billion to $2.5 billion. Adding it up, Q3 at Arrow should come in at between $3.1 billion and $3.7 billion in revenues, with earnings per share of between 25 cents and 37 cents. In 2008's third quarter, Arrow had sales of $4.35 billion and brought $96.2 million, or 79 cents per share, to the bottom line.

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