Avnet Inc. AVT recently reported first-quarter fiscal 2020 results, wherein the bottom line missed estimates but and the top line matched the same.
Its non-GAAP earnings were 60 cents per share, missing the consensus estimate of 65 cents. The bottom line also declined 41.7% year over year.
Revenues of $4.6 billion matched the Zacks Consensus Estimate but decreased 9.8% year over year. Nonetheless, the top line came within the company’s guided range of $4.4-$4.7 billion.
Persistent weakness in the components industry due to macroeconomic headwinds hurt the top line. Softness in the industrial and automotive segments due to the downturn in Asia was further aggravated by the headwinds from Europe. Moreover, shorter lead times and lower average selling prices led to higher-than-expected pricing and margin pressures in the Farnell business, affecting the bottom line.
However, pricing stabilized as the quarter progressed. Moreover, proactive measures taken to decrease expenses mitigated the headwinds to an extent. Strong performance in vertical markets such as defense and aerospace, new opportunities in retail and healthcare were positives.
Avnet, Inc. Price, Consensus and EPS Surprise
Avnet, Inc. price-consensus-eps-surprise-chart | Avnet, Inc. Quote
Electronic Components segment fell 8.8% year over year to $4.29 billion. However, management noted that this segment witnessed encouraging momentum in Asia.
Revenues from EMEA region fell 14%, particularly due to weakness in Europe.
Further, Asia revenues were down 7.6% year over year due to macroeconomic issues. However, after a macroeconomic slowdown in the March quarter, revenues from Asia displayed stabilizing trends.
Purchasing Manager Index (PMI), which should be greater than 50 to indicate industrial expansion, is currently below 50 across the United States, Europe and China. Brexit and tariff concerns are affecting the PMI data across Europe and China. This was a major headwind in the fiscal first quarter and is expected to continue through fiscal 2020.
Revenues from the Americas were $1.2 billion, down 4% year over year due to a slowdown during the quarter. This downtrend is expected to remain an overhang in the second quarter of fiscal 2020.
Premier Farnell segment’s revenues totaled $336 million, down 11% year over year. Brexit continued to affect the investing and purchase decisions in the United Kingdom. Pricing and demand in this segment slowed further in July, thereafter stabilizing slightly in August and September.
Notably, Avnet continued to expand its Farnell portfolio, adding 26,000 SKUs and two new supply lines to its website. Moreover, e-commerce global order penetration witnessed a significant increase.
During the quarter, Avnet inked an agreement to acquire software and embedded systems provider Witekio, in a bid to expand and enhance its end-to-end IoT strategy. Witekio’s solutions help developers address the challenges that crop up while developing IoT solutions. The acquisition is expected to close by the end of calendar 2019, subject to regulatory approval. If the buyout materializes, it will add more capabilities in embedded software, edge computing and security to Avnet’s IoT business. The deal will also bolster Avnet’s focus on simplifying the process of launching IoT products for client companies, time and cost efficiently.
Avnet also announced the ending of its 40-year distribution partnership with Texas Instruments TXN.
During the fiscal first quarter, Avnet continued to focus on its strategy to move certain back-office functions to lower cost regions, including Serbia, Guadalajara, and Bangalore.
Avnet reported gross profit of $543.8 million, down 14.6% year over year. Gross margin declined 76 basis points (bps) to 11.8%, primarily due to lower revenues and contracting margins in Farnell, as well as global pricing pressures and a higher mix of Asia revenues.
Adjusted operating income was $107.4 million, down 41.2% year over year. Adjusted operating margin came in at 2.3%, down 127 bps.
However, focus on cost reduction efforts was a positive. Notably, SG&A expenses declined $19 million year over year.
Balance Sheet and Cash Flow
Avnet exited the fiscal first quarter with cash and cash equivalents of $664.1 million compared with $546.1 million recorded in the previous quarter.
Long-term debt was $1.19 billion compared with $1.42 billion in the prior quarter.
The company returned $133 million to shareholders in the form of $112 million worth repurchased shares and $21 million worth dividend.
Working capital days improved from 88 days to 84, contributing to the $196 million of cash flow generated in the quarter.
For second-quarter fiscal 2020, the company estimates sales in the range of $4.2-$4.6 billion, with mid-point at $4.4 billion.
Non-GAAP earnings per share are estimated in the range of 35-45 cents with mid-point at 40 cents.
Farnell’s distribution center will come online in December this year. This will allow the company to continue SKU expansion and reduce operating costs.
However, Farnell's SKU expansion and e-commerce upgrade is expected to take more time. The benefits of the new distribution center are expected to be realized in the second half of calendar 2020.
Market pressures are expected to persist in the near term. Avnet expects operating margins at Farnell to remain below 10% in the forthcoming quarters.
Assuming modest improvement in the macro environment for both EMEA and Americas, management anticipates operating margins in the Electronic Components segment at 2.5% by summer next year.
Avnet expects to replace the Texas Instruments revenues with higher margin revenues by the end of fiscal 2022.
Zacks Rank and Key Picks
Avnet currently has a Zacks Rank #3 (Hold).
A couple of better-ranked stocks in the broader technology sector are Splunk Inc. SPLK and Benefitfocus, Inc. BNFT, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Splunk and Benefitfocus is 31.24% and 20%, respectively.
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