Avnet Sees IT Sales Slump Amid PC Woes And Low-Margin Deals

Passing on low-margin deals and poor PC market conditions in the Americas caused Avnet's quarterly technology sales to dip, the company said Thursday.

The Phoenix-based distributor said year-over-year revenue for its quarter ended Oct. 3 grew 0.7 percent, to $6.44 billion, after accounting for changes in foreign currency exchange rates and an additional week of sales. Including the additional week, Avnet's sales came in at $6.97 billion, which beat Seeking Alpha estimates of $6.74 billion.

"We do think that growth has slowed," Rick Hamada, Avnet's CEO, said during the earnings call Thursday, noting that the distributor remains committed to expanding margins and return on investments even in a low-growth environment.

[Related: Avnet Looking To Break M&A Lull As Data Center, Storage Sales Surge]

Quarterly non-GAAP earnings jumped 6.1 percent, to $152.9 million, or $1.12 per share, beating Seeking Alpha expectations of $1.03 per share.

Investors sent Avnet's stock down 0.4 percent in trading Thursday to $44.87 per share on the quarterly results, which were released before the market opened.

Avnet's technology solutions division saw revenue sink by 1.4 percent, to $2.27 billion, after accounting for the extra week and foreign currency fluctuation, with performance varying dramatically by region.

Technology sales in the Americas declined 4.3 percent, to $1.37 billion, after accounting for the extra week. Avnet's core distribution business in the Americas fell slightly as the company became more selective and walked away from deals that didn't meet its return criteria, said Patrick Zammit, president of Avnet Technology Solutions. Avnet saw double-digit decreases in its Americas computing components business -- which includes processors, servers and CPUs -- because of PC market conditions, Zammit said.

"The top line is declining," Zammit said. "On the other hand, operating margins continue to improve for the business."

Avnet has opted to focus more intently on its strategic IT priorities, Zammit said, and has seen solid execution in the selected business lines.

Europe, the Middle East and Africa (EMEA), though, fared much better, with sales climbing 6.4 percent, to $623.8 million, on a constant-currency basis after accounting for the extra week.

The IT investment cycle is at last accelerating in Europe as cash flow issues from the economic crisis finally subside, Zammit said. As the European economy improves, Hamada said, Avnet's sales teams in the region are executing well and building momentum.

"The recovery, particularly in the computer business for EMEA, is very good to see," Hamada said.

Avnet's technology sales were strongest in Central and Eastern Europe, which Zammit said tend to carry lower margins than sales in Western or Southern Europe.

In Asia-Pacific, Avnet saw its fifth consecutive quarter of double-digit technology revenue drops, with year-over-year sales ending 22.7 percent lower, at $277.8 million, after accounting for the extra week. Continued declines in Avnet's components business accounted for much of the woes, though that revenue is expected to stabilize in the quarters ahead, said Kevin Moriarty, Avnet's chief financial officer.

Looking forward, Zammit said, Avnet feels pretty confident about its global IT pipeline.

"The hot technologies continue to drive demand," Zammit said. "We have a solid pipeline for converged infrastructure and software."

Avnet is also seeing significant growth in its hybrid cloud practice based on the lower cost, greater flexibility and data center optimization opportunities presented, Zammit said.

"That traction is there," Zammit said. "We see a lot of traction, a lot of interest."

For its next quarter, Avnet said it expects earnings per share of $1.20 to $1.30 per share and revenue in the range of $6.9 billion to $7.5 billion. Thomson Reuters had been expecting projections of $7.29 billion of revenue on earnings of $1.25 per share.

Technology solution sales are expected to be in the range of $2.8 billion to $3.1 billion.

PUBLISHED OCT. 29, 2015