Acquisitions Hike Avnet Fiscal Q1 Earnings
November 8, 2010 Dan Burger
The early impacts of recent acquisitions by Avnet have shown up in the latest quarterly financial reports released by the enterprise IT and consumer electronics company that many of you are familiar with because of its role in the IBM Power Systems reseller channel. Although year-over-year sales for the first quarter of fiscal 2011 ended October 2 increased 42 percent to a record $6.18 billion, the Technology Solutions portion of the business does not compare well with the previous quarter.
Roy Vallee, chief executive officer and chairman at Avnet, prefaced the Q1 results by saying the July 2010 acquisitions of Bell Micro, Tallard Technologies, and Unidux “should add approximately $4 billion to our annual revenue and produce a return on capital employed of at least 12.5 percent when the integrations are completed.”
Bell Micro distributed and resold storage, computing, software, and networking products from industry suppliers. Its sales in 2009 totaled approximately $3 billion, primarily in Europe and the Americas. It represents the largest acquisition in Avnet history. Unidux was an electronics components distributor primarily serving Japanese original equipment manufacturers. Its customers included Fujitsu, Panasonic, Sharp and Toshiba. For calendar year 2009, Unidux generated revenue of approximately $370 million. This acquisition will bolster Avnet’s Electronics Marketing (EM) business.
Tallard Technologies was the largest distributor of servers, software, peripherals, convergence equipment and enterprise integration services in Latin America. It generated $250 in revenue during 2009. This acquisition will contribute to the Technology Solutions side of the Avnet business.
In his comments describing Avnet’s current financial position, Vallee was attentive to factors involving the normal replenishment cycles that began about one year ago.
“While the expected deceleration in EM’s bookings this quarter implies that the electronics supply chain inventory replenishment cycle is nearing an end, our billings indicate that end demand remains solid across all three regions (Europe, the Americas, and Asia-Pacific). Pro forma revenue grew nearly 40 percent year-over-year and sequential growth of 4.2 percent was well above normal seasonality. Gross profit margin for EM, excluding the impact of the recently acquired embedded business, increased year-over-year in all three regions and has now substantially recovered to pre-recession levels. Operating income margin also improved year-over-year in all three regions and, at 5.3 percent, was within our target range for the third consecutive quarter.”
Over on the Technology Solutions side of Avnet, the technology refresh cycle continued to have a positive effect as revenue grew 11 percent year-over-year in “delivered dollars” and close to 14 percent in “constant dollars.”
Legacy equipment upgrades propelled hardware sales, which grew faster than software and services. This trend has been the case in recent quarters. The quarter also revealed double-digit year-over-year growth in storage, industry standard servers, networking, and microprocessors. However, those gains were partially offset by a revenue decline in the proprietary server business.
Including the impact of acquisitions, Technology Solutions revenue showed a 33 increase to $2.56 billion as reported. Revenue in the previous quarter was $2.09 billion. Excluding the impact of acquisitions, TS gross profit margin improved year-over-year but was down in accordance with typical seasonality. Gross profit margin declined 12 basis points year-over-year. Technology Solutions operating income grew 10 percent year-over-year to $57 million. And operating income margin of 2.2 percent was down 47 basis points year-over-year–again, due to the impact of acquisitions.
Despite the downward effect that the acquisitions had on Technology Solutions’ returns this quarter, Avnet is counting on many opportunities across this new portfolio to improve the results going forward. The North American business continues to generate returns well above our target levels, while the company moves to establish a larger presence (Tallard and Bell) in what is expected to be a higher growth Latin America region. Future growth in Latin America, along with EMEA (again the addition of Bell) and the Pacific Rim (Unidux) carry expectations of improved financial performance in the next several quarters.
Avnet’s Electronics Marketing group had $3.62 billion in revenues in the first fiscal quarter, up 48.5 percent. Operating income was $192.1 million.