Avnet is a distributor with two primary business segments: it sells semiconductors and other parts to electronics manufacturers, and it sell servers, storage systems and other IT goods to corporate buyers. In an interview with Tech Trader Daily today, Vallee says his take away is that consumer demand right now is holding up better than IT spending.
Vallee notes that the company had a surprise disappointment right at the end of the March quarter, in part due to a fall off in demand for servers. Vallee says there was no comparable issue this time; it was, he says “a more normalized finish.” He said revenue from the components business this quarter was above the high end of its guidance range, but that the “technology solutions” business, which sells to IT departments, was just below the low end of guidance.
It is fair to say we are still seeing a mild amount of weakness in IT spending, but that our components business is holding up reasonably well.
In the components business, Vallee says the company is seeing a “stable but subdued” environment in both the Americas and Europe. He notes that European revenue looks like a growth region in dollars but contracted in Euros for five quarters in a row before growing in Q2. Americas growth is in the low single digits. Asia/Pacific is growing, but slower than a year ago.
The IT business, he says, saw weakness again in both the Americas and Europe. He says there was particular weakness in Germany, Italy and the U.K., three of the largest European markets.
Vallee says he is expecting “normal seasonality” in the summer quarter. He says things look “stable…solid…flattish…consistent.” From a macro view, Vallee says he hopes the worst is behind us, but that he is not expecting a rapid recovery.
The company’s troubles in the IT segment in the March quarter were due specifically to slower server demand; Avnet is a reseller for servers from Sun Microsystems (JAVA), Hewlett-Packard (HPQ) and IBM (IBM). He notes that there was strong sequential growth in the June quarter, but that servers are still showing negative growth on a year-over-year basis. He says storage, on the other hand, was up more than 30% on a year-over-year basis, and that networking and security also were strong. Vallee says he would not be surprised if servers are down four quarters in a row, which would mean two more still to go.
Vallee thinks conditions improve next year. When IT budgets are set for 2009, in November and December, he thinks people will know that while the environment may not be great, neither are we having a meltdown. He thinks “the competitive forces that drive IT spending will be omnipresent, and budgets will be raised.”
Finally, a few words about the company’s September quarter guidance: the company expects profits of 70-74 cents a share, which would put the midpoint 2 cents below the Street consensus of 74 cents. Vallee thinks the Street may have been 1-2 cents shy on their estimates for the impact of stock-options related compensation expense in the quarter. But he also noted that the company did 3 accretive acquisitions in the quarter, which should have at least partially offset that. Vallee also notes that the September quarter is the seasonally weakest for the company, typically providing just 20% of annual income; he thinks some analysts may not have gotten the seasonality right.
Vallee did not give any full year guidance, but he does note that the Street’s current numbers look “very conservative.”
Avnet closed the day up 0.1%, or 3 cents, to $28.88.