European Slowdown Puts The Profit Squeeze On Avnet

Published: October 31, 2011

by Timothy Prickett Morgan

The uncertainty in the European economies and the after effects of some acquisitions in the region pushed down profits for master IT distributor Avnet in the first quarter of its fiscal 2012, which ended in September. That's the bad news, which is not bad relative to the political and economic uncertainty we're all facing. The good news is that the IT side of Avnet still showed very impressive year-on-year growth in a quarter that is not generally the strongest one for the company.

In the quarter ended October 1, Avnet posted sales of $6.43 billion, up 3.9 percent from the year-ago period. Net income was up six-tenths of a percent, to $139 million. The company's Technology Solutions group, which sells IT hardware, software, and services downstream to the reseller channel, had sales of $2.61 billion, up 1.9 percent. Avnet said that if you excluded the effects of translating foreign currency sales into U.S. dollars, sales for the Technology Solutions were actually down 1.3 percent. Revenues in the Americas region fell by 5 percent to $1.39 billion, and sales in Europe fell by 3.6 percent (it was down 10.4 percent in local currencies). Sales in Asia rocketed up by a staggering 51.4 percent, to $442.8 million. Operating income for the Technology Solutions unit came to $65 million, up 8.3 percent. So the profit squeeze was not here, but in components.

Avnet's Electronics Marketing group, which sells components to all kinds of IT and electronics vendors, posted sales of $3.82 billion in fiscal Q1, up 5.4 percent. But operating income was down almost a full point, to $191.2 million. Still, while component profits were down, this is a lot more profit for the revenue.

In a conference call with Wall Street analysts, Rick Hamada, the fairly new CEO at Avnet, said that the sequential revenue decline from the fourth quarter of fiscal 2011 was steeper than expected for both Technology Solutions and Electronics Marketing. Hamada said that the company's software revenues in the Technology Solutions group rose 40 percent in Q1 fiscal 2012, and hardware sales were up 30 percent, thanks to industry standard servers--what the rest of us call X86 machines--and storage.

Sometimes Avnet or its rival, Arrow Electronics, talk about how proprietary machines (by which it means IBM i and mainframe servers for the most part) did, but Avnet did not call them out for any praise this time around. What Avnet did say is that it was ramping up its server sales with Cisco Systems--on track with the expected plan from two years ago that had Avnet pushing $200 million to $300 million in Unified Computing System sales in two to three years. And Avnet mumbled something about having better relations with Oracle and its Sun server line, but did not elaborate further.

"Although it is difficult to forecast future demand in the current macroeconomic environment, we are encouraged by the speed with which the electronic supply chain is rebalancing and the relative strength of our computer business outside of EMEA," Hamada said on the call." We remain confident that our experience through many industry cycles will continue to serve us well, as we work through the current environment, and we continue to focus on driving long-term shareholder value creation."

The company said that the pipeline for both technology and components sales was good, and projected overall revenues in a wide range, between $6.45 billion and $7.15 billion in the fiscal second quarter, which will end in December. Technology Solution sales are expected to be between $3 billion and $3.40 billion. At the midpoints between those two ranges are exactly the overall and Technology Solution sales that Avnet posted in Q2 fiscal 2012.

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