Avnet Looking To Break M&A Lull As Data Center, Storage Sales Surge

Avnet is looking to acquire capabilities around software, services and converged solutions as demand for data center, networking and storage products continues to climb.

In its earnings call Thursday, the Phoenix-based distributor said year-over-year revenue for its third quarter ended March 28 was $6.74 billion, a 7 percent jump once changes from foreign currency exchange rates were factored in. That, however, fell short of analysts' estimates of $6.85 billion.

Quarterly non-GAAP earnings fell 0.4 percent, to $143.5 million, or $1.04 per share, missing analysts' expectations of $1.07 per share.

[Related: Behind The Scenes: A Look Inside Avnet's Global Solutions Center]

Investors sent Avnet's stock down 4.4 percent in trading Thursday to $43.49 on the quarterly results, which were released before the market opened.

"The prospects are positive, and we are very close to meeting our long-term targets," said Patrick Zammit, president of Avnet's Technology Solutions division, during the company's earnings call. "I'm expecting more improvements to come."

The Technology Solutions division enjoyed 4.3 percent global sales growth on a constant currency basis, to $2.52 billion, with strong data center, networking and storage demand in the Americas and Europe overshadowing weak computing component sales -- which include processors, servers and CPUs -- in Asia.

Avnet CEO Rick Hamada assured investors that mergers and acquisitions are still an important part of the company's growth strategy, though he acknowledged that Avnet is taking more care to ensure the deals align with the company's long-term growth strategy.

"We are being more selective and more strategic with the acquisitions we're making," Hamada said.

Avnet has not had a major technology solutions acquisition since it picked up cloud and data center automation services provider Seamless Technologies in June 2013. That's in stark contrast to fellow distributors Arrow and Ingram Micro, which have both made several IT-related acquisitions in recent months.

Avnet has historically been extremely active in M&A, making upward of 85 acquisitions from 1993 to 2013. Going forward, Hamada said, Avnet will pursue deals that align with already articulated long-term growth plans, which include technology areas such as social, mobility, analytics, cloud, converged solutions, software and services.

"We are open for business when it comes to M&A," Hamada said.

From a revenue perspective, technology sales in the Americas grew 4.9 percent in the most recent quarter, to $1.44 billion, while sales in Europe, the Middle East and Asia (EMEA) climbed 6 percent on a constant currency basis, to $717 million.

Zammit said Avnet has completed its restructuring activities in EMEA, allowing the company to focus exclusively on markets and customers for the past two quarters. The distributor has benefited from strong manufacturer relationships in the region, Zammit said, as well as a move by end users to upgrade their IT infrastructure.

"We are taking advantage of it," he said.

But in Asia, Avnet saw its third consecutive quarter of double-digit revenue drops, with year-over-year sales ending 10.7 percent lower, at $359.6 million.

Zammit said Avnet has been realigning its components infrastructure to reflect new sales norms in the region, but has no plans to disengage completely. Strong discipline exercised by Avnet in the components arena has improved the company's gross margins, Zammit said.

Avnet has been driving growth in its networking practice by having its salespeople push hard to sell full, converged solutions, Zammit said, while growth in the storage practice has been spread across all geographies, vendors and customer segments.

"Storage, in aggregate, continues to be one of the better growth stories in our overall [technology solutions] portfolio," Hamada said.

Avnet has received anecdotal reports of gaining IT-related market share, particularly in EMEA, but has yet to receive the hard numbers, Zammit said.

For the next quarter, Avnet said, it expects earnings per share of $1.02 to $1.12 and revenue in the range of $6.6 billion to $7.2 billion. Analysts had been expecting projections of $7.06 billion of revenue on earnings of $1.17 per share. Technology Solutions sales are expected to be in the range of $2.45 billion to $2.75 billion.

PUBLISHED APRIL 23, 2015