Avnet Saw IT Budget Flush Spending As 2012 Came To A Close

January 28, 2013 Timothy Prickett Morgan

Not everybody saw IT spending tick upward as last year came to a close, but IT and electronics component distributor Avnet did.

In its second quarter of fiscal 2013 ended in December, Avnet said that its overall sales were only up one-tenth of a point to just a hair under $6.7 billion, with net income dropping 6.5 percent to $137.5 million. But you can’t blame the Technology Solutions side of Avnet, which is a master distributor of server, storage, and networking gear as well as software and services for the data center.

“Our overall Q2 results reflect a stronger than expected performance despite some continuing concerns on the longer term macroeconomic environment,” said Rick Hamada, Avnet’s chairman and CEO, in a statement accompanying the financial results. “Our team was able to leverage our recent resource alignment activities along with a few bright spots in technology spending into significant sequential improvements in EPS, margins and returns. In the December quarter, sequential growth returned to seasonal trends after below seasonal growth over the past two quarters as revenue exceeded expectations at both operating groups. Driven by stronger than expected calendar year end spending on IT infrastructure at Technology Solutions and accelerating growth in our Asia components business, revenue grew over 14 percent sequentially in reported dollars.”

In a conference call with Wall Street analysts going over the numbers, Hamada said that so-called industry standard servers (by which people mean X86 servers and these days mostly what they mean is Intel Xeon E5 servers) were up between 20 and 30 percent sequentially from the fiscal first quarter ended in September, and that proprietary servers (meaning Power, Sparc, and Itanium boxes mostly) were up about the same amount. Thanks to the year-end budget bump that Avnet saw, X86 servers were up year on year, and Hamada estimated that proprietary servers were somewhere between flat and down 5 percent. This is big improvement over the past several quarters.

The bump seems to have come mostly in North America, where projects that were delayed in the September quarter were restarted in the final quarter of the calendar year. Technology Solutions had a 36 percent sequential growth, which is a bit above normal seasonality, according to Hamada. That said, Technology Solutions revenues were down 2.3 percent to $3.02 billion, and operating income was down 9.2 percent to $108 million.

The Electronics Marketing components business at Avnet, which is a kind of leading indicator for the IT side (in a loosely coupled way, mind you) had a 2.2 percent revenue increase to $3.67 billion, and if you ignore currency affects, Electronics Marketing was actually up 3.5 percent. Operating income was down a staggering 19.9 percent to $140.1 million however, so that growth seems to have come at a cost. Other component suppliers are not playing around, either, and business has to be fought for to be won.

Looking ahead, Avnet expects for Technology Solutions to bring in between $2.325 billion and $2.625 billion in the fiscal third quarter ending in March, which would represent as much as a 25 percent decline and as little as a 15 percent decline year-on-year. That is not a great story right there, but with IBM and Oracle in the middle of RISC system transitions and perhaps the channel having enough X86 gear for a while, this dip is not surprising. Moreover, X86 server sales were up 35 percent in the third quarter of fiscal 2012 ended in March, and that is just a tough compare. Electronics Marketing is expected to do somewhere between $3.625 billion and $3.925 billion, which is somewhere between a little less than 1 point to as much as 9.2 percent growth. Add it up, that’s between $5.95 billion and $6.55 billion, with earnings per share of between 81 cents and 91 cents, which is a bit of a haircut on both revenue and profits. So the calendar 2012 year might have ended better than expected, but conditions are still tough.