Avnet Reports Q2 Revenue Increase, But Technology Solutions Division Sales Decline

Phoenix-based Avnet saw year-over-year revenue for its second quarter ended Dec. 27 of $7.55 billion, a 4.6 percent jump once changes from foreign currency exchange rates were factored in. This beat estimates from Zacks Investment Research of $7.34 billion.

Quarterly non-GAAP earnings rose 7.4 percent to $176 million, or $1.27 per share, topping analysts' expectations of $1.20 per share.

Investors sent Avnet's stock up 2.7 percent in trading Thursday to $43.22 on the quarterly results, which were released before the market opened.

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Avnet's Technology Solutions division, however, saw global sales fall 2 percent on a constant currency basis to $3.12 billion.

CEO Rick Hamada spoke highly during the earnings call of the division's new leader, Patrick Zammit, who was selected earlier this month to replace Phil Gallagher.

Zammit had served since October 2006 as president of the Europe, Middle East and Africa (EMEA) region of its electronics marketing group, which Hamada said will lend more of a global perspective to Avnet's senior leadership team.

Zammit's area has enjoyed the strongest growth and operating margins of any portion of Avnet's portfolio, according to Hamada.

While Hamada said he doesn't expect that same level of margins for the whole Technology Solutions group, he thinks Zammit will help move the Technology Solutions division toward more sustainable levels of profitability and returns, particularly in EMEA.

"Patrick has a very solid track record of performance in a very competitive and tough marketplace," Hamada said Thursday.

Computing component sales -- which include processors, servers and CPU--– continue to lag, according to the company, while networking, security, storage and services sales saw year-over-year growth. Components comprise roughly 8 percent to 10 percent of Avnet's overall technology business.

Hamada said that key Asian suppliers have been the source of much of the weakness. Hamada said Avnet typically looks to disengage from unprofitable businesses, a process that he said that has mostly played its course as far as components go.

"I don't think we have much further to go," he said.

The distributor said it's moving to align its resources with evolving technology trends such as private and hybrid cloud, increased software content and converged solutions.

The distributor sees the cloud as a value-creation and margin growth opportunity for both itself and its channel partners, Hamada said.

Private cloud should operate similar to a traditional data center, Hamada said, and the company is also investing resources in cloud consulting and Infrastructure-as-a-Service and Platform-as-a-Service.

Avnet also expects to benefit from new data center solutions since they'll serve as the pervasive platform undergirding the Internet of Things, Hamada said.

NEXT: Asia Records Another Double-Digit Sales Decline

The components weakness was particularly acute in Asia, where Avnet's technology sales plummeted 13.4 percent to $408.9 million. This is the second consecutive quarter of double-digit revenue drops in the region.

EMEA also saw another quarter of subpar revenue, which declined by 3 percent on a constant currency basis to $856.8 million.

On a more positive front, EMEA's core business growth, expense reductions and expanded gross profit margin drove a global increase in operating income margin from 3.7 percent to 3.8 percent. Hamada said he expects the distributor to build on that momentum going forward.

Avnet has been on a mission to cut $15 billion to $20 billion of expenses in EMEA, which was helped in great part by streamlining the region's four different ERP programs onto a single platform last year. Most of the cost savings is expected to be felt in the first six months of 2015.

In North America, technology sales slipped in the most recent quarter by 0.4 percent to $1.85 billion, which follows a quarter of double-digit organic sales growth in the region.

Avnet hopes to resume carrying out mergers and acquisitions when good opportunities present themselves. Hamada said the recent lull in M&A is due to a lack of quality targets rather than a change in strategy.

Hamada also said the company is hearing more from customers and suppliers about the Windows Server 2003 expiration coming up in July. He doesn't yet have a sense as to how many customers will keep on-premise servers vs. migrating to Linux, the cloud or partitioned workloads.

Unlike with the Windows XP expiration, Hamada doesn't expect companies to wait until the last minute to make a decision about what to do with their Windows 2003 servers given the intensiveness of the upgrade process.

For the next quarter, Avnet said it expects earnings per share of $1.04 to $1.14 and revenue in the range of $6.6 billion to $7.2 billion. Technology Solutions sales are expected to be in the range of $2.45 billion to $2.75 billion.

PUBLISHED JAN. 22, 2015