Server Sales Hiccup Stalls Avnet In September Quarter, December Sobering Up

October 29, 2012 Timothy Prickett Morgan

System and component sales at master reseller Avnet took a pause in the fiscal quarter ended in September, catching the company’s top brass a bit unawares as the declines were larger than expected. You can blame the U.S. presidential election and the uncertainty surrounding that as well as the uncertainty in certain debt-laden countries in Europe, if that makes you feel better.

IBM had some software sales slip in the third quarter in its emerging markets that made its numbers worse than expected, as The Four Hundred previously reported, but at the same time Big Blue’s System x, Power Systems, mainframe, and storage sales all took a whack as customers pulled back on spending and pushed out deals because of the economic uncertainty as well as because of product transitions, particularly with Power Systems and mainframes. Avnet is part of the same sales channel, so it is no surprise for the same quarter ending in September, which is the first quarter of Avnet’s fiscal year, that it had similar problems. In a way, Avnet’s component sales are a leading indicator for the larger electronics and systems market, and its systems sales are a lagging indicator for system makers like IBM.

In the first fiscal quarter, Avnet’s sales were off 8.7 percent, to $5.87 billion, and its net income fell 27.9 percent to $100.3 million. This was the fifth consecutive quarter of declines for Avnet in Europe, down 8 per cent at constant currency, and the Americas region was off 14 percent. Rick Hamada, chief executive officer at Avnet, laid the blame for the surprise clearly on the Americas region. “While Q1 is typically our weakest revenue quarter each fiscal year, our sequential revenue decline was beyond normal seasonality due primarily to the unexpected double-digit percentage decline in our Americas region across both operating groups,” Hamada said in a conference call with Wall Street analysts. In other words, Europe being in trouble was already expected, as it has been for two years now.

The Technology Solutions side of Avnet, which distributes IT gear, software, and services, took a bigger hit than the components business. Electronics Marketing, as that business is known, had sales of $3.65 billion, down 4.3 percent, with operating income off 23.5 percent to $146.3 million. Technology Solutions stomached a 15.1 percent drop, to $2.22 billion, with sales in the Americas down 16.1 percent to $1.16 billion. Technology Solutions pushed $635.5 million in stuff in EMEA, down 18.4 percent (and I have to believe that amount of decline was surprising, too), and even Asia had a 5.9 percent hit to $416.8 million. That last two weeks of September were when the brakes were pushed, said Hamada.

The acquisition of IT distributor Magirus, which closed last month, will help the second fiscal quarter ended in December, but that may not change the underlying trajectory for the pre-Magirus Technology Solutions business. In normal years, Magirus was about $500 million a year in revenues.

The September quarter was about $200 million lighter than expected, and the blame was on–you guessed it–proprietary servers. Phillip Gallagher, president of the Technology Solutions unit, said in the call that on a global basis x86 servers were actually up “close to double digits,” which I think means 9 percent, and that storage, networking, and virtualization revenues were up. But Gallagher also said that servers overall had the biggest drop, and followed by PC component sales, which for some reason are in the Technology Solutions unit instead of Electronics Marketing. (I did not know that.) You can blame delayed Power7+, Itanium 9500, and Sparc T5 server launches for that, and maybe some System z mainframes if Avnet gets a piece of that action. (Which I seriously doubt.) When pressed for some more precision, Gallagher said that industry standard servers (which is channel-speak for x86 boxes) was up in the range of 10 to 15 percent (that’s solid double digits as far as I can tell) and that proprietary servers (which now appears to include anything not x86, which is a funny new definition of that word that I think is actually more accurate as long as you apply it to x86 chips, too), were off in the 20 percent range. In other words, Avnet’s server business in RISC/Unix and other proprietary systems took a much bigger hit than IBM did.

What Avnet did not say–and what it should have said if it were true–is that downstream customers were less eager to take current gear with so much new stuff on the way, and those that did wanted bigger price breaks on it. No surprises on either fronts, if this turns out to be the case. Intel still hasn’t launched the Itanium 9500 chips, Oracle didn’t launch the Sparc T5 processors as many expected, and IBM pushed out the Power7+ launch to early September and then only put it into Power 770+ and Power 780+ machines. I am no prognosticator, but I think it is safe to say that customers are going to wait to see what the entry and midrange Power7+ machines look like before they buy, if they can wait. So the December and March quarters are not going to be much fun for Avnet or IBM, either. And possibly Arrow Electronics, too.

What Hamada did make clear was that he did not think we were heading into a recession, and this was not an issue with rebates up and down the channel, which caught Avnet off guard in early 2008. “It wasn’t a major rebate story like in 2008 when there were a bunch of cliff-vested types of incentives, where you either get 0 or 100 percent or 0 and or some factor that created that debacle back in, if I remember correctly, the March quarter of 2008. So the R word really isn’t a major part of the story here. Again, the R word that applies is revenue. It was the shortfall in revenue that really drove the issue here.”

Looking ahead, Avnet expects for Technology Solutions to post sales of $2.6 billion and $3 billion in the December quarter, which is its second quarter of fiscal 2013. That would represent sequential growth from fiscal Q1 of 17 percent at the midpoint of the range, which is significantly lower than the typical uptick of 20 to 25 percent that it sees in the jump from the September to December quarters. But it sure beats a 20 percent decline, too. Electronics Marketing is expected to see a 6 percent sequential decline at the midpoint of a revenue range of $3.35 billion to $3.65 billion.

In a related story, Avnet said that it was working with IBM’s business partners in Europe following its acquisition of Ascendant Technology to boost sales of services related to middleware infrastructure automation and social business in the cloud. These services, which have been available in the United States and Canada, are now being rolled out in the United Kingdom, Germany, Austria, Switzerland, the Czech Republic, Slovakia, Hungary, Poland, Romania, Belgium, and Turkey. Avnet bought Ascendant back in April.