Avnet Makes Up Server Decline With Software, Storage, And Services

October 28, 2013 Timothy Prickett Morgan

The Technology Solutions group at master distributor Avnet is one of the largest middlemen in the server distribution racket, and as expected, with Intel in the middle of processor transistors for its Xeon line, it was a bit tough going for system reselling in the first quarter of fiscal 2014 for the company. But sales of software, storage, and services were a different story.

In the quarter ended in September, Avnet’s overall sales were $6.35 billion, up 8.1 percent, and net income was $120.6 million, up 20.3 percent thanks to product mix and cost-cutting initiatives launched earlier this year.

In the Technology Solutions group, sales were up 8.6 percent to $2.41 billion, with revenues in the Americas region rising 10.7 percent to $1.29 billion, in EMEA up 9.3 percent to $694.3 million, and in Asia up 1.8 percent to $424.2 million. Operating income for Technology Solutions was up 61.9 percent to $62.6 million. While that is a big increase, it just goes to show you how little margin there is in IT distribution these days–in this case, operating income was only 2.6 percent of revenues for Technology Solutions. This is a necessary but very tough part of the IT distribution network.

Rick Hamada, chairman and chief executive officer at Avnet, said that the revenues for Technology Solutions were in the range it expected, albeit at the low end of the guidance range the company gave last quarter. In a conference call with Wall Street analysts going over the financial results, Hamada said that growth in revenues for services, storage, and software were partially offset by declines in servers.

Hamada said that for servers it was a bit of a “mixed bag” for the proprietary machines it resells on behalf of server makers, and by the way, Power Systems is the big piece of that business. Hamada said that some of its geographical regions saw an uptick in proprietary server sales. The volume-based server business, which is coded speak for X86 machinery–as if they were not just as proprietary, but don’t get me started–were in decline. Hamada added that servers are becoming a smaller percentage of its total business–but no less important–as Avnet distributes converged systems such as IBM’s PureSystems, Cisco Systems and NetApp FlexPods, Cisco and EMC Vblocks, or Hewlett-Packard CloudSystems. The server is at the heart of these systems, but they are wrapped in networking and software that might not have been sold by Avnet in the past, and the servers are only a piece of the overall solution.

Looking ahead, Avnet thinks it can do somewhere between $2.85 billion and $3.15 billion in business in the Technology Solutions business in the fiscal second quarter ended in December. Part of that is a normal bump that comes at the end of the second calendar year, and part of that will be due to the ramp of the new “Ivy Bridge-EP” Xeon E5-2600 v2 processors from Intel, which came out in early September. I would guess that there could be a bump in Power Systems sales, too. We’ll see.