Distributors Arrow and Avnet Deal with the Meltdown

May 26, 2009 Timothy Prickett Morgan

The server makers of the world have all been slammed by the economic downturn, and by definition that means that their distributor partners are having a tough time, too. But all things considered, they seem to be holding up pretty well.

IBM‘s two master resellers, and the ones who do the selling downstream to myriad resellers who in turn interface with customers, are Arrow Electronics and Avnet. Let’s take at look at their most recent financials in alphabetical order so there’s no fighting here on the pages of The Four Hundred between these fierce and long-time rivals.

In its first quarter of fiscal 2009 ended on April 4, Arrow reported sales of $3.42 billion, down 15.2 percent from the year ago quarter, and net income plummeted to $26.7 million, down 68.9 percent. Arrow’s Enterprise Computing Systems group held up fairly well, with sales of $1.07 billion, down only 3.1 percent, and operating income actually rose by 4.4 percent to just a hair over $32 million in the quarter. If you take out the effect of Arrow’s Logix acquisition from last year, sales for the ECS group fell by 13 percent in the quarter.

“Our ECS segment performed well despite the macro environment,” explained Michael Long, Arrow’s president and chief operating officer in a statement accompanying the financials. “We continue to see the integration of Logix in Europe going well, as sales in this region came in ahead of expectations due to strong performance in the UK and Southern Europe. While our visibility on revenue and demand remains challenging, we would expect second quarter sales growth to be at the low end of our normal seasonal range.”

Arrow’s electronics components business posted $2.35 billion in sales, down 19.7 percent, and this group’s operating income was slashed by 52.6 percent to $76.1 million. This all sounded pretty good, all things considered and particularly for the systems part of its biz, until Arrow had to book $24 million in restructuring charges.

Over at Avnet, which also has systems and components distribution businesses, sales were down 16.3 percent to $3.7 billion in its third quarter of fiscal 2009 ended in March. Taking out the effect of acquisitions, sales were down 22.3 percent, according to the company. Operating income for Avnet fell by 67 percent, to $55.5 million, in Q3, and net income was whacked by $22.3 million in restructuring and integration charges, ending up at $18 million when all the math was done. That’s an 83.2 percent decline from the $107.2 million net income that Avnet reported in the year ago quarter.

Avnet’s Technology Solutions group had sales of $1.6 billion in fiscal Q3, down 10.8 percent (but down only 3.8 percent at constant currency). The group’s sales fell by 11.1 percent in the Americas region, but fell further in Europe, down 15.7 percent. Technology Solutions’ sales in the Asia/Pacific region rose by 19.2 percent. This group had an operating income of $42.2 million in the quarter, up 2 percent compared to last year, but just as was the case at Arrow, restructuring charges hit this operating income.

“Technology Solutions met our expectations for both revenue and operating income as business spending in the markets we serve, while still tepid, appears to have stabilized over the past two quarters,” said Roy Vallee, Avnet’s chairman and chief executive officer. “We continued to see relative strength in software and services and are also pleased with our solutions and vertical market practices that address higher growth opportunities in the marketplace. TS year-over-year improvement in both operating income dollars and margin was driven by an improvement in gross profit margin and benefits from our previously announced cost reduction actions. Although we are reducing costs in response to the market slowdown, we continue to invest in higher-growth emerging markets, new product lines, and tools and resources that expand our solution practices and enhance the value we bring to the marketplace.”

Avnet’s Electronics Marketing components business saw sales decline by 20.1 percent in the quarter, to $2.1 billion, and its operating income was cut by 61.2 percent, to $59.6 million.

Clearly, if there is a business that is worse to be in than servers and storage, it is electronic components.

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