Avnet Rises On Quarterly Results

Avnet reported profit and sales growth Thursday, with success in North American technology sales and European cost-cutting that weren't hampered by the sluggish sales for computing components and the Asia-Pacific region.

The Tempe, Ariz.-based distributor saw year-over-year revenue for its first quarter ended Sept. 27 jump 7.8 percent to $6.84 billion, topping analysts' expectations of $6.71 billion.

Quarterly non-GAAP earnings rose 14.4 percent to $144.2 million this year, or $1.02 per share. This beat estimates from Zacks Investment Research of 97 cents per share.

[Related: Avnet Solutions Global President To Step Down]

"We continued the momentum of fiscal 2014," Avnet CEO Rick Hamada said during the company's earnings call.

Investors sent Avnet's stock up nearly 3 percent in trading Thursday to $41.15 on the quarterly results, which were released before market open. The company had a recent market value of $5.69 billion.

Avnet's technology solutions division saw global sales increase 2 percent to $2.47 billion once changes from foreign currency exchange rates were factored in.

Operating margins, meanwhile, fell from 2.6 percent to 2.5 percent. Hamada said getting technology solution operating margins back to the long-term goal of 3.4 percent to 3.9 percent will require continuous year-over-year improvement and take some time.

But given sequential buying patterns, Avnet's current quarter is expected to deliver year-over-year technology margin growth, according to Chief Financial Officer Kevin Moriarty.

Computing component sales -- which include processors, servers and CPU -- continued to be a drag on Avnet's technology business due to transitions and technology refreshes from major vendors, Hamada said.

Weaker-than-expected component sales resulted in year-over-year revenue falling by 5.8 percent on a constant currency basis in Europe, the Middle East and Africa (EMEA). Components comprise 8 to 10 percent of Avnet's overall technology business, said Global Technology Solutions President Phil Gallagher, who plans to step down before the end of the year.

Hamada said Avnet will exercise disciplined portfolio management, allocating resources to products that deliver an appropriate return. He cautioned, though, that the sluggish component sales may continue for at least a couple more quarters.

"Over time, we will make sure we right-size this [components] business," Hamada said. "Whatever we're retaining will meet our growth margins."

NEXT: Asia-Pacific Sales Off

In Asia, Avnet's technology sales plummeted 15.2 percent on a constant currency basis to $359.5 million, with operating margins falling for the first time in six years.

"Asia was a surprise for us, and our team is doing some forensics on that," Hamada said.

A multitude of factors are believed to have contributed to the weak Asian sales, Hamada said, including macroeconomic concerns in Australia and New Zealand, a "Buy China" bias and a particularly large order in the first quarter of fiscal 2014 that didn't repeat.

"It's a broad-based thing," Hamada said.

Looking forward, Gallagher said Asia also typically sees just half the sequential boost of North America and Europe around the holiday season. Asia, according to Hamada, is Avnet's smallest region for technology sales, accounting for 15 percent of its global business.

On a more positive note, North America technology sales enjoyed double-digit organic growth for the first time in three years, increasing 11.2 percent to $1.43 billion.

Hamada said Avnet was pleasantly surprised by the results, which were not associated with any particular large event. Sequential buying trends and margins in the Americas are expected to continue increasing in future quarters, Gallagher said.

Consolidation efforts have yielded an increase in EMEA operating margins and a 4.6 percent reduction in EMEA operating expenses, according to Moriarty.

Streamlining EMEA's four different enterprise resource planning (ERP) programs onto a single platform last quarter is expected to standardize and simplify Avnet's business model, Hamada said.

All told, Avnet is looking to reduce costs by $15 billion to $20 billion in Europe. Gallagher said half of the cuts have been identified and enacted subject to regulatory approval, with the cost savings to be mostly felt in the first six months of 2015.

For the next quarter, Avnet said it expects earnings per share of $1.15 to $1.25 and revenue in the range of $7 billion and $7.6 billion. Analysts from Thomson Reuters have projected earnings of $1.17 per share on revenue of $7.23 billion.

PUBLISHED OCT. 23, 2014