Arrow and Avnet Say Their June Quarters Exceeded Expectations

Published: August 18, 2008

by Timothy Prickett Morgan

With so much dicey news out there in the economy, you have to look high and low for a little good news. IBM, Hewlett-Packard, and Intel have been doing pretty well for themselves in recent quarters, but in a market where Microsoft is under pressure and Sun Microsystems can't seem to right itself as Dell is making progress. And, as it turns out, so are the largest IT and electronics distributors in the world, Arrow Electronics and Avnet.

Both companies, who are the two major master distributors for servers in the world, reported their financial results for the quarters ended in June recently, and both said that these quarters exceeded their expectations. Such an excess might, of course, be as much the effect of a pessimistic viewpoint 13 months ago about the prospects for the immediate future as it is the result of an uptick in business out there in IT land. It is hard to say. But I think the IT industry is in the mood to take its good news where it can find it.

Arrow, which is based in Melville, New York, said in its second quarter ended June 30 beat its own prognostications for sales and profits, with sales of $4.3 billion, up 7.7 percent, but net earnings actually dropped by 3 percent to $96.2 million. The company booked $8.2 million in restructuring charges covering the integration of several acquisitions, which is what pushed down profits along with cost of goods and general expenses that outpaced revenue. The acquisition of European IT distributor Logix, which closed on June 2, accounted for 2 percent of the company's growth in the second quarter, and within the Enterprise Computing Solutions business unit, Logix added five points to growth, pushing overall sales of IT solutions up 9 percent to $1.39 billion in the quarter. Michael Long, Arrow's president and chief operating officer, said in a statement accompanying the financials that Arrow's ECS unit had double-digit revenue growth year-on-year in storage, software, and services and had growth in proprietary servers (that is mostly what we used to call System i machines and now call Power Systems running i with some IBM mainframes tossed in). He added that the company had "strong" growth sequentially from the first quarter of 2008 in all product segments, and "notable double-digit gains in proprietary servers." Overall, the ECS unit saw sales rise 26 percent sequentially from Q1 to Q2, and proprietary server sales rose by 50 percent sequentially in the quarter.

I told you the System i didn't do as badly as IBM's new accounting would lead you to believe. (See IBM's Q2 Server Sales: Let's Do Some Math for more on that.)

Thanks largely to acquisitions, Arrow's ECS unit has been transformed from a $2.5 billion North American business to a $5 billion unit with a reach into 28 countries through its partner channels.

Looking out ahead into the third quarter, Bill Mitchell, Arrow's chairman and chief executive officer, said in a conference call with Wall Street analysts that he expected sales to be in the range of $4.1 billion to $4.4 billion, with the ECS unit posting sales of between $1.25 billion and $1.35 billion. He called this a normal seasonal trend, since it will obviously be down sequentially from Q2.

For rival Avnet, the company's fourth quarter and fiscal year ends in June, and the Phoenix, Arizona, distributor of IT products and electronic components also said it had record sales and earnings in the quarter. Avnet's sales in fiscal Q4 rose by 10.4 percent to $4.68 billion, with net income rising by 15.6 percent to $144.1 million. For the full fiscal 2008 year, Avnet's sales rose by 14.5 percent to $17.95 billion, and net income rose by 27 percent to $499 million.

Avnet's Technology Solutions IT distribution business posted sales of $1.95 billion in the fourth fiscal quarter, up 9.9 percent as reported but up only 5.6 percent on the basis of sales in local currencies. Avnet said that sales in the EMEA region for Technology Solutions were up 26.4 percent in those local currencies, and this ballooned to 43.1 percent growth when the dough was brought back to Phoenix. Even with the exchange rate push, Avnet's sales in the Asia/Pacific region only grew by 1.6 percent, which means Avnet is finding it tough going in Asia and which also explains its recent acquisition of Mumbai-based IT distributor, Ontrack. (See Avnet Buys Ontrack for Asian Expansion for more on that.) Sales for Technology Solutions were essentially flat in the Americas region.

"Technology Solutions rebounded from the disappointing March quarter as double-digit sequential growth in servers, storage, and software along with higher gross margin drove an 88 basis point improvement in operating income margin," explained Roy Vallee, Avnet's chairman and chief executive officer. "In the Americas region, both operating income margin and return on capital employed were at the high end of our long-range business model. The cost reduction initiatives at certain TS business units that we announced last quarter are essentially complete and we expect the full savings to be realized in the September quarter. With the recently completed acquisitions of Horizon Technologies and Ontrack Solutions, TS is continuing to build out its international footprint while also investing in new organic growth opportunities."

Looking out into its first quarter of fiscal 2009, which ends in September, Avnet says that it expects normal seasonality, just like Arrow, and that overall sales will fall between $4.53 billion and $4.73 billion, with the Technology Solutions unit posting sales between $1.88 billion and $1.98 billion.

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