Avnet To Cut $25M In Costs After Demand Tanks For Legacy Storage, Servers

Avnet plans to cut $25 million worth of personnel and other expenses from its technology business after demand for data center hardware and software plummeted.

The Phoenix-based distributor said year-over-year revenue for its quarter ended April 2 sank 6.9 percent, to $6.17 billion, after accounting for changes in foreign currency exchange rates. That's well below Seeking Alpha's estimate of $6.31 billion.

Quarterly non-GAAP earnings tumbled 7.6 percent, to $132.6 million, or $1.01 per share, edging out Seeking Alpha expectations of 99 cents per share.

[Related: Legacy Storage Woes, Soft Americas Demand Lead To Avnet Sales Decline]

"We're just underexposed to some of those key [growth] areas at this time," said Rick Hamada, Avnet's CEO, during the earnings call Thursday afternoon. "We think some others have better mixes and offerings [in current areas of growth]."

Investors sent Avnet's stock down 6.2 percent in trading Thursday, to $41.90 per share, after the release of the quarterly results, which happened before the market opened.

Avnet Technology Solutions (TS) saw revenue plunge 12.9 percent, to $2.13 billion, after accounting for foreign currency fluctuation, with all three of the distributor's regions experiencing double-digit sales drops.

The company plans to reduce TS expenses starting in the current quarter and concluding by the end of 2016.

The cuts will be primarily personnel-based, CFO Kevin Moriarty said during the earnings call. A company spokesperson said Avnet had no further information to share regarding the number or location of affected workers.

"We will make the right decisions to make sure our cost base supports the revenue we're generating," said Moriarty, noting that Avnet is also looking to reallocate sales, business development and product management experts from areas performing below expectations to areas of high importance.

Avnet's technology struggles were most pronounced in the storage space, the largest component of the distributor's hardware practice. Some 60 percent of Avnet's storage revenue is still from legacy spinning disk systems, where Hamada said sales fell more than 20 percent from the previous year's.

Avnet’s emerging storage practice fared better, Hamada said, with sales of hybrid storage devices climbing 15 percent and sales of all-flash arrays improving more than 40 percent over those of the previous year. But since Avnet's product mix is so heavily weighted toward legacy storage, the sector was down as a whole.

The distributor also experienced weaker-than-expected demand in servers and data center software, according to Moriarty.

Hamada said Avnet is looking to up its game in high-growth areas by building out an ecosystem and creating a unique value proposition in technology areas such as security and analytics and verticals such as health care. In other key areas of growth, though -- such as converged infrastructure, emerging storage and networking -- Hamada said Avnet is already well-positioned.

Avnet is also seeing tremendous amounts of investment in private and hybrid cloud, with the distributor's recent launch of Cloud Marketplace opening the door to new consumption and subscription models for VARs, according to Hamada.

"We believe the future for technology solutions is in the cloud," he said.

Technology sales in the Americas dropped for the third consecutive quarter, falling 13.8 percent, to $1.24 billion.

In Asia, Avnet saw its seventh consecutive quarter of double-digit technology revenue drops, with year-over-year sales in constant currency ending 19.2 percent lower, at $276.2 million. Europe, the Middle East and Africa didn't fare much better, with sales dropping 10.8 percent, to $615.8 million, on a constant-currency basis.

For its next quarter, Avnet said, it expects earnings per share of 95 cents to $1.05 and revenue in the range of $5.95 billion to $6.55 billion. Thomson Reuters had been expecting projections of $6.54 billion on earnings of $1.13 per share.

Technology solution sales are expected to be in the range of $2.05 billion to $2.35 billion.