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By | Timothy Prickett Morgan 11th August 2009 14:11

System sales might have hit bottom

Avnet and Arrow are hopeful

The two key master distributors of servers and storage, Avnet and Arrow Electronics, reported their financial results for their most recent quarters. Both companies are hoping that the server market has finally hit bottom.

Avnet

Avnet closed out its fiscal 2009 year on June 27, and says that in the fourth quarter it saw a gut-wrenching 19.5 per cent revenue decline across its combined Technology Solutions and Electronics Marketing groups, to $3.77bn. In the Technology Solutions business, which is where servers and storage from IBM, Hewlett-Packard, Sun Microsystems and others are peddled to downstream resellers, who in turn sell to customers, Avnet said that it had a 15.8 per cent decline in Q4, to $1.64bn.

Sales in the Americas were down 17.6 per cent in the quarter, and in Europe it was even worse, with a 20.8 per cent drop. Sales of systems, storage and software rose by 23.3 per cent in the Asia/Pacific region, however, but was obviously not enough to offset declines in Avnet's key U.S. market or in Europe.

I suppose this is a good thing inasmuch as the U.S. and European economies still matter, and it shows in the Avnet numbers because no matter how good Asia is doing, it doesn't counterbalance bad economies in the U.S. and Europe. Also, if you take out the impact of converting sales in the EMEA region to U.S. dollars, then Technology Solutions' EMEA sales were only off 4.8 per cent. More importantly, perhaps, is the fact that even with the currency issues caused by a relatively strong greenback, the Technology Solutions unit was able to book a $41.2m operating margin, down from the $61.8m in the fourth quarter of fiscal 2008.

The Electronics Marketing business, by contrast, posted sales of $2.13bn in fiscal Q4, down 22.2 per cent from the year-ago quarter, and Asia was once again pulling up the averages across the regions. Operating income for the Electronics Marketing group was more than cut in half to $57.1m.

When you add it all up and pay the taxes and other expenses, Avnet swung to a net loss of $30.9m, which compares pretty unfavourably to the $144.1m in net income in Q4 of fiscal 2008. That's pretty much par for the course in an economic situation like this one, and all things considered, these numbers are nowhere near as bad as you might think.

"Business conditions remained challenged in the fourth quarter, but I am pleased that we were able to grow revenue sequentially in both operating groups, significantly reduce expenses, achieve near-record working capital velocity and generate $330m in cash from operations," said Roy Vallee, chairman and chief executive officer at Avnet, in a statement accompanying the financial results. "Technology Solutions met its revenue expectations for the second consecutive quarter furthering our belief that the markets we serve have reached bottom."

Let's hope so.

For fiscal 2009, Avnet's sales came to $16.23bn, down 9.6 per cent, and because of various write-offs and restructuring charges, the company reported a $1.12bn net loss for the year.

Looking ahead, Avnet is anticipating that in the first quarter of fiscal 2010 ending in September it can bring in somewhere between $3.6bn and $4.2bn in revenues across its systems and electronics businesses, with earnings per share in the range of 29 cents to 37 cents.

Those numbers are predicted on Technology Solutions raking in between $1.55bn and $1.85bn in revenues and Electronics Marketing getting between $2.05bn and $2.35bn in sales. In fiscal 2009's first quarter, Avnet had sales of $4.49bn and brought $92.9m to the bottom line, which worked out to 61 cents per share.

Arrow Electronics

Over at Arrow, the other key systems and electronics component master distributor, the second quarter ended June 29 came in at the high end of the company's expectations, and Arrow was profitable as well, despite the poor economy.

In Q2, Arrow posted $3.39bn in sales, down 22 per cent, and operating income fell by a factor of three to $51.1m. Net income fell by 78.1 per cent to $21.1m.

I said Arrow was profitable. I didn't say there was a lot of money down there on the bottom line for the second quarter, or that profits hadn't been slammed.

Arrow's Enterprise Computing Solutions group had sales of $1.12bn, down 19 per cent compared to the year-ago quarter, and not including acquisitions, sales were actually off 24 per cent as reported.

"ECS sales were at the low end of our expectations, due to lower demand and IT spending, as capital-intensive projects continue to be highly scrutinized," explained Michael Long, Arrow's chief executive officer, in a statement going over the company's financial results. "With strong operating margins and cash flow, we remain confident that our strategy of portfolio diversification will continue to provide benefits, as the need for complex technology systems to provide security and storage solutions has not diminished despite the macro headwinds."

Arrow's Global Components business had $2.27bn in sales in the second quarter, down 23 per cent, hitting the mid-point of Arrow's expectations.

Looking ahead, Arrow said that it had another $100m in costs it planned to take out, predominately in its European operations, during the second half of 2009. Arrow expects its Enterprise Computing Solutions group to have revenues between $1bn and $1.2bn in the third quarter, ending in September, and its Global Components group to have sales ranging from $2.1bn to $2.5bn.

Adding it up, Q3 at Arrow should come in at between $3.1bn and $3.7bn in revenues, with earnings per share of between 25 cents and 37 cents. In 2008's third quarter, Arrow had sales of $4.35bn and brought $96.2m, or 79 cents per share, to the bottom line. ®

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