The evidence mounts: the tech slowdown is far from over.
Consider, for instance, the latest results from electronics distributor Avnet (NYSE:AVT). The company Thursday posted revenue for its fiscal first quarter ended September 27 of $4.49 billion, a bit short of the Street consensus of $4.54 billion. EPS excluding special items of 67 cents a share was three cents short of the Street at 70 cents.
In response to deteriorating conditions, the company plans to reduce annualized expenses by about $50 million, most of that through staff reductions in the U.S. and Europe. that’s about a 3% reduction in total costs; if you assume that also means a 3% headcount reduction, the cuts would amount to close to 400 job cuts. Avnet had previously announced expense reduction programs of $40 million in April and another $15 million in August; all told, the company has now cut its expenses by 5%-6%.
For FY Q2, the company sees “less than normal” seasonality in both of its primary businesses: electronics marketing, its chip distribution unit, and technology solutions, which sells computer hardware. The company also notes that its quarter ends December 27, four days earlier than many of its suppliers, which will shift some sales into the company’s fiscal third quarter. Avnet sees sales for the quarter of $4.34 billion to $4.74 billion, with profits excluding stock options related expense of 69 cents to 77 cents a share. The Street has been expecting $4.82 billion and 78 cents.
In an interview with Tech Trader Daily Thursday morning, CEO Roy Vallee noted that the company suffered particular weakness in the quarter in its computer business. He says the business was on track through August, but weakened in September.
Vallee says that the hardware business is actually off to a “decent start” in October, but he notes that the same thing was true in January, April and July. The “wild card,” he says, is December. Meanwhile, although the IT business has good so far this month, he says that the components business is off to a “weakish” start, down moderately from the September quarter rate.
Vallee notes that Avnet is seeing a considerable hit from currency: he says changes in the dollar/euro exchange rate over just the last week have taken over $60 million our of his December revenue forecast. He notes that the company saw an average 1.51 dollars to the Euro in the latest quarter, while the rate has lately been in the 1.27-1.28 range.
As for the recent weakness in Avnet’s computing business, he says the company continues to see weakness in enterprise servers, with revenue down about 10% year over year. He says all of the server vendors it serves are suffering weakness, but that it matters where each company is in its product cycle, and what end markets they serve. You’ll not be surprised to learn that the weakest area is in financial services, which in particular hurts Sun Micro (JAVA). On a geographic basis, he notes that the Americas, Europe and Asia were all down in the quarter, but with Europe and Asia down more.
Asked about the 2009 outlook, Vallee says he has “no good answers.” However, he points out that in 2001, the tech industry heading into the downturn had been in big trouble, with inflated pricing, too much inventory, over capacity and excess consumption from the failed dot-coms. This time, the supply side is in better shape - while demand is an issue, he says the industry is in much better shape on inventories, capacity and pricing.
But he also says we could be facing at least another 2-3 quarters of low or negative growth; he thinks there could be some progress in the second half of next year, but no dramatic pullout, with demand gradually improving in 2010. Says Vallee: “It feels like a slow pull.”
Avnet Thursday is down 48 cents, or 2.8%, to $16.55.