Q&A: John Paget, global president of Avnet Technology Solutions

Avnet had another strong quarter as it kicked off fiscal 2008, posting earnings of $105.5 million, or 69 cents per diluted share on $4.10 billion in revenues, up 12.3 percent from the first quarter of 2007. Sales of the Phoenix-based distributor's Technology Solutions division made up $1.61 billion of the total revenue for the quarter, up 32.5 percent over last year due to the company's successful acquisitions including Access Distribution.

Sales were strong in Asia and EMEA, but sales in North America slumped 5 percent for the quarter.

After the company announced its results, John Paget, global president of Avnet Technology Solutions spoke with Channelweb.com to talk about where he sees the market going and how Avnet plans to remain competitive in North America.

Where did you see strong growth in the Technology Solutions division?

I think it's going to be the same places that you witnessed it. Certainly the industry standard server product is up, so that means our virtualization and consolidation solution is going very well. Networking for us has been up. Security for us has been up. We've had a very great performance with some display product that we have that is very unique in Europe, so that's a really good piece there. Overall I would say: networking, security, wireless, industry standard servers are all doing very, very well.

How do you explain sales in the Americas dropping 5 percent?

It's a difficult market. It's a market where -- you've certainly read some of the earnings from some of the big manufacturers that we look to. It's a market where you're starting to see a transition. You have a transition going on with the product sets, and we've been able to maintain as products transition form the Unix market into the industry standard server market, we have been able to maintain our margins, which we think is the real answer there.

Certainly you don't have the same revenue production, but as we focus again on value-based management, we're maintaining the operating margins, in fact improving the operating margins as we go forward. That's all about creating the right kind of solutions and the right kind of tools and coming along side our resellers and surely adding value there.

Why do you think there is a shift away from the Unix server?

First of all, I think it' something that's been going on for six or seven years. I think it's a phenomenon that happens as people start to manage their companies with value-based management as well. It's something that for many years we didn't believe was going to happen and then it start transitioning. As industry standard servers create this value proposition and in fact create the situation where in many cases they can be as bullet-proof as the Unix type server you're going to see more and more companies transition that way.

That does not mean however that the Unix server goes away. That's generally the thing someone says. Gee, what's going to happen to your business? In some cases we're actually seeing some growth in some of the Unix platforms?

Next: Areas Of Growth

Where is that growth?

I have to be careful there because we don't point out specific manufacturers. But I can tell you that on a year over year basis, and also on a quarter-sequential basis, we've had some of our Unix server platforms actually grow. On a year-to-year basis in some cases double digit. Again, having some manufacturers like IBM, they just introduced the Power 6. That's a Unix product that looks like it's going to have good traction, good legs in the marketplace. It's green, so it's very friendly from an environmental standpoint in terms of power usage.

That market is not going to disappear is I guess what I'm trying to say.

I think they'll be happy to hear that.

They certainly are working hard at it, that's for sure. You could say some similar kinds of things with HP with their Integrity 64-bit product. That runs Unix, it runs Linux and it runs Microsoft. Depending on how you want to classify that, some portion of that is Unix, some is Microsoft and some is Linux. I don't know where you'd want to put that.

Do you see RISC server sales slowing down?

I would say RISC is probably flat at this point.

We have numbers from NPD showing that from September of 2006 to September of 2007, RISC server sales dropped 40 percent.

Again, it's going to be important to know what's classified in RISC.

RISC is merely a reduced instruction set. It is not a product, it's a technology, so I'd have to go back and look at NPD and ask what's classified in RISC.

Did anything about the company's results for the quarter surprise you?

Overall we were right at the midpoint of what we had anticipated form an operating

Europe certainly did a little better than I thought they would do. We have a very energized team in Europe now. Certainly the high-end server business there was a big portion of that.

Our Azure business, the IBM distributor we bought in Malaysia, they've done extremely well. Australia has done well. I would be hard-pressed to feel badly about this quarter.

What's Avnet going to do to build up its North American sales?

I think the strategy that really makes sense for us is the one we talk about a lot -- that's going to market with solutions distribution in the technology verticals of: storage, converged solutions, which is networking and security. We're seeing good growth there and introducing new product all the time.

We have a mobility market. You're talking about the Intermecs and Motorolas and so forth in that market. We have a very strong enterprise software business that's growing rapidly. In fact it's becoming a higher percentage of our business on a quarter-over-quarter basis. Almost 17 percent of our total volume this quarter was on the software side of the business.

The solutions technology verticals that we have are where the market is growing, and the market is growing anywhere from six to nine percent to has high as 25 percent on a compounded annual growth rate percentage. Telephony is an example. It's growing 23.5 to 25 percent, depending on who you talk to, in the VoIP market. As we've introduced those solution sets into the Americas, that's the growth of the future. That doesn't happen overnight but it's the investment that makes sense. At the same time you are frequently introduced to new customers. Resellers that we haven't done business with before become a real nice opportunity because they happen to be specialized in those marketplaces. We also help our current set of resellers establish new technology sect within their company.

How important will the midmarket be to the future of Avnet?

That is our market. We basically do not sell into the Fortune 1000. People talk about the difficulties in the financial community with what's going on now with the credit crunch. We don't sell into that market. That's a direct market, so we're insulated from that. The midmarket is where the companies are growing and where the end-users are buying. It's a market where it begins to make a lot of sense for a distributor, because a solutions distributor can actually get their value back out of that sale.