Avnet Sees IT Spending Slowdown March Draws To A Close

April 28, 2014 Timothy Prickett Morgan

It could just be a hiccup in the downstream channel from Avnet, or it could portend something else happening in the market for data center equipment. But the master reseller, which is one of the largest distributors of IT gear on the planet, had a weak close in its Technology Solutions business in the 13th and final week of its fiscal third quarter.

In the March quarter, which is the third quarter of Avnet’s fiscal 2014 year, the company booked $6.68 billion in total revenues across its electronic components and IT distribution businesses, an increase of 6.1 percent from the year-ago period. And net income rose by 32.1 percent to $113.9 million, which is not so bad. But the weakness in the Americas region during that last week of sales did nonetheless cause Avnet to report lower revenues and profits than it had been expecting, and Wall Street is always very sensitive to this sort of thing. The Americas region is where Avnet gets a slightly higher percent of its profits, so the slowdown hurt profits more than revenues.

In fiscal Q3, revenues at the Technology Solutions group, which resells servers, storage, switches, software, and services from the top-tier vendors in those categories, were up 2 percent to $2.55 billion; if you ignore the effect of acquisitions, then sales were down 2.5 percent for the core business before those acquisitions. Avnet had $1.37 billion in revenues in the Americas region, up 5.6 percent (but down 2.9 percent outside of acquisitions), and the EMEA region had $774.6 billion in sales, down 1.1 percent. The Asia/Pacific region contracted by 3.8 percent to $402.5 million. Avnet posted a $60.9 million operating income in the quarter for all of Technology Solutions, down 11.3 percent.

The first thing to note there is how little money Avnet makes in this business. That operating income is a mere 2.4 percent of revenues. If you allocate corporate overhead, restructuring charges, and other costs on top of this evenly across Avnet, then about $38 million would drop to the bottom line. That is about 1.4 percent of revenues, and now you see why the wholesale business is such a tough one–and thankfully companies like Avnet are willing to do it and thereby grease the wheels of commerce while accepting some of the risk of holding inventory. You know the IT vendors are grateful, because otherwise they would have to sell directly to customers and assume those burdens and risks.

Rick Hamada, Avnet’s chairman and chief executive officer, said on a call with Wall Street analysts that the company was on track to meet guidance in the first 12 weeks of the March quarter, but some deals that were in the pipeline to close in week 13 got pushed out. Some of these have already closed in April, but others are pending. He did not elaborate on the nature of the push-out, but Phil Gallagher, global president for the Technology Solutions unit, did say that server sales were down across all geographies, and he added that the IBM deal to spin off its X86 server business had “zero negative effect” on the current Technology Solutions business.

That is hard to believe, since rumors have been going around about IBM trying to sell off its X86 server business since January 2013, and there is little doubt that these rumors and then the announcement of the actual deal have had an impact on IBM’s sales volumes for X86 machines. There is no other reason to explain IBM’s declines in X86 machines, unless hyperscale datacenter and public cloud operators are buying a lot more gear than we think they are. (Dell and Hewlett-Packard get a lot of their sales volumes from such big customers; IBM does not.) IBM has been hit harder in the X86 space than its rivals as far as Gartner and IDC are concerned, and perhaps Avnet means sales of IBM gear are off by no more than anticipated.

The good news for Avnet is that its Electronics Marketing unit had an 8.8 percent jump to $4.13 billion, despite a 9.6 percent decline in the Americas region, and brought $193.4 million in operating income, up 17.2 percent from the year-ago period.

Looking ahead, Avnet expects for Technology Solutions to book between $2.55 billion and $2.85 billion in sales in the June quarter, with Electronics Marketing bringing in between $4.05 billion and $4.35 billion. That puts total sales between $6.6 billion and $7.2 billion, representing a flat to slightly up final quarter to the fiscal year. Adjusted earnings per share are expected to be flat to slightly up as well.