Avnet: This Economic Turmoil Is Not 2008 All Over Again

The Wall Street roller coaster ride was recently personified by Avnet's stock performance on Aug. 10. After reporting stellar earnings in the morning, the distributor's stock increased more than $2 per share. But by the end of the day, that euphoria was gone and Avnet shares closed only a penny higher than the day before. The next day, CRN's Scott Campbell spoke with Phil Gallagher, global president of Avnet Technology Solutions, about his company's performance, how the fluctuating economy might impact business and, of course, what would any exchange with an IT executive be without talking about the cloud. The following are excerpts from the conversation:

With the Wall Street woes of the last several weeks, have you seen any impact on the business yet, in terms of orders and IT projects being pushed back? Or do you expect that to happen as a result of the economic turmoil?

From an [Avnet Technology Solutions] perspective, globally, we are projecting just south of the low end of our normal seasonality for the quarter. We're forecasting 5 to 7 percent down from the [last] quarter. We were asked a lot [by Wall Street executives], based on the market, what's happening to business. As we sit here today, without calling 1,000 VARs and 50 suppliers, we do think it's a bit different than 2008. There's not the tightening for capital or cash that there was in 2008. We do not see the credit crunch there right now. Everything I've read the last few days, I did talk to some partners and suppliers, they're looking at investments to continue to be made.

They're going to be in the data center, around virtualization, around storage, all for productivity and efficiency. There may be an effect but I do see corporations still going to look at investments in IT to drive more efficiency. We did OK in July with bookings relevant to previous benchmark numbers and August is looking pretty healthy right now. We can't predict much beyond that but we stay optimistic and realistic to market conditions.

I was talking to a VAR last week and he noted that in the 2008 downturn there was no cloud computing. That is, there was no technology that was still able to drive sales because it provided big productivity and cost-efficiency gains despite macro-economic challenges. That's happening this time around so he was more optimistic. Do you agree with that?

In areas like a PC refresh, that might slow down a little. But take cloud; what are the big [reasons] for cloud. First, it's hot, sexy. Second, it reduces risk and enhances efficiency and reduces cost. Better we educate the market on what cloud can do for them. That gives more pop for us and our suppliers to provide that need. The big thing still will be the education factor.

Next: Even Proprietary Servers Saw Growth

Avnet Technology Solutions reported a 15.8 percent increase in sales, including a 13.4 percent increase in the Americas. Can you provide more color on what constituted that growth?

We closed out the [fiscal year] at $11.5 billion for the year up, 11.3 percent. You go back three to five years, and our Americas business was 65 percent of the business. Today, North America is less than 50 percent of [Technology Solution's] revenue. That's not because North America is shrinking. It's still our most solid market today but we've made further investments in growth markets like Latin America, which is now, say, a $800 million to $1 billion business. Asia Pacific is 13 to 15 percent [of total revenue] now and the balance is in Europe. That affords us further growth opportunities in areas like China, Brazil and Eastern Europe.

Is there something you've learned or taken from one of your recent acquisitions, a best practice, a process or a new vendor that you've been able to move into North America?

If you look at the last year, there's been a few. Start with Tallard [Technologies in Latin America]. That brought us Apple, which is not typically in the enterprise space for us. Now they're fast approaching a top-15 supplier for us. That matches up very well for us. What's happening is Tallard, they're embracing our solutions.

They're wanting to get into the different [SolutionPaths]. We're able to take our IP out of North America and into Latin America. That's the leverage we bring to them. ITX [in Australia] brought us Oracle, some IBM software we didn't have. When we do acquisitions, we look for synergies in processes, products and services theses companies bring us. In France, we announced in early July Amosdec. We didn't have VMware in France. Now we have leverage in France for virtualization that we didn't have before.

What technology areas were strong in North America in the fourth fiscal quarter?

We were pretty solid across the board. Overall we saw servers [increase] over 10 percent. Industry standard servers is up greater than that but we actually saw some growth on the proprietary side as well, which is exciting. The real story is our networking number is up phenomenally, 50 percent, and storage is closing at 30 percent [growth] year on year.

How about growth in your different SolutionsPaths areas? Which verticals were especially strong?

I didn't get a chance to get growth numbers in our different paths. They're going well. We continue to expand them in North America. Getting Cisco [Systems] a year and a half ago was [due to] our Solutions Paths. Getting Microsoft too. We're continuing investments in retail, energy and now we're taking them into other regions. Now we're looking at which ones apply in Asia Pacific. It may not be health[care], but it could be StoragePath or VirtualPath. We're also starting to take them into Europe.

Even GovPath, with all the questions around government spending is growing at a good rate this year. The industry rate is about 4 percent growth. Our business in SLED is growing around 12 percent year over year.

In the services area, we're going to continue to add resources, organic and inorganic. Stay tuned for that. We've brought on some external resources to help with this. There's resold services, which is going over $1 billion [annually] now. We also have Avnet branded services, configuration, IaaS, management services, now our CloudReady services. Avnet sees itself as a service provider.

Next: Distributors' Role In The Cloud

More than $1 billion in services is a pretty important benchmark, and that doesn't include the Avnet branded services? That must mean services is more than 10 percent of total Technology Solutions revenue, correct?

The $1 billion is the branded. With our services it's in the $1.2-$1.3 billion range. The percentage is about 12 percent. With CloudReady, we are also building some cloud offerings to help partners with cloud, such as Microsoft, IBM, HP. We just rolled out HP cloud offering a month or so ago. We have our own, but others are turning to us to enable theirs too.

That's interesting that the vendors are turning to you to sell their services. It wasn't long ago that the big myth was that distributors weren't going to have a role in the cloud.

That reminds me of the notion that there wasn't going to be a role for distributors back when contract manufacturers said they were going to build boards either, back in the mid '80s. Distributors would be out of business, they said. It increased our business. The role we play as an aggregator as part of the supply chain, whether it's for chips or IT and information services, is critical and scalable. That's the key that people forget.