Legacy Storage Woes, Soft Americas Demand Lead To Avnet Sales Decline

A struggle to close legacy storage deals and a continued shift away from low-margin components caused Avnet’s technology sales to drop for the second consecutive quarter, said top executives on the company's earnings call Thursday.

The Phoenix-based distributor said year-over-year revenue for its quarter ended Jan. 2 tumbled 5.1 percent to $6.84 billion, after accounting for changes in foreign currency exchange rates. That’s well below Seeking Alpha estimates of $7.22 billion.

Quarterly non-GAAP earnings sunk 6.6 percent, to $164.3 million, or $1.22 per share, falling short of Seeking Alpha expectations of $1.25 per share.

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’The market has changed,’ said Patrick Zammit, president of Avnet Technology Solutions, during the earnings call Thursday afternoon. ’We recognized it, and we made the investment to be well-positioned on next-generation technologies.’

Investors sent Avnet’s stock down 1.4 percent in trading Thursday to $38.81 per share on the quarterly results, which were released before the market opened.

Avnet Technology Solutions saw revenue decline by 7.6 percent, to $2.73 billion, after accounting for foreign currency fluctuation, with Asia and the Americas lagging dramatically behind the rest of the world.

The company struggled to close legacy storage deals – which account for roughly 18 percent of Avnet’s technology business – in the most recent quarter, according to Zammit. Next-generation storage offerings saw double-digit growth in the quarter, Zammit said, but account for just 6 percent of Avnet’s technology business.

’Unfortunately, the positives were not enough to offset the decline in legacy storage technology,’ Zammit said.

The company has also exited a large portion of its component business – which includes processors, servers and CPUs – due to insufficient profitability, according to Zammit and Avnet CEO Rick Hamada, which has taken a sizable bite out of the distributor’s top line.

’Their focus on profitability is paying off,’ Hamada said. ’Despite the revenue shortfall, the continued margin expansion gives you confidence that we have a good thing going on.’

The weakness in storage was partially offset by single-digit growth in networking, server and software sales, according to the company.

Technology sales are currently split nearly evenly between hardware and services, though Zammit said the company hopes to accelerate growth of its software and services businesses to achieve higher margins and satisfy customer demand.

Technology sales in the Americas dropped for the second consecutive quarter, falling 12.2 percent to $1.63 billion. Hamada attributes the decline primarily to softness in the market and not any type of performance issue with Avnet’s team in the region.

’Our thinking is a top-performing team didn’t have a major stumble when it came to execution for the quarter,’ Hamada said.

In Asia, Avnet saw its sixth consecutive quarter of double-digit technology revenue drops, with year-over-year sales in constant currency ending 15.5 percent lower at $313.6 billion. Weakening demand in China and a continued softening of the computing components business accounted for the decline, according to the company.

Europe, the Middle East and Africa (EMEA) fared much better, though, with sales climbing 1.7 percent, to $794.4 million, on a constant-currency basis.

Following management changes and an improvement in the overall economy, Zammit said Avnet is enjoying record technology sales in Eastern and Northern Europe. Central Europe continues to perform solidly, Zammit said, while struggles in Southern Europe appear to be abating.

For its next quarter, Avnet said it expects earnings per share of 93 cents to $1.03 and revenue in the range of $6 billion to $6.6 billion. Thomson Reuters had been expecting projections of $6.77 billion in revenue on earnings of $1.13 per share.

Technology solutions sales are expected to be in the range of $2.15 billion to $2.45 billion.