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Avnet TS Misses Big In Q1, But Proposed Buyer Tech Data Is Not Shaken By The Earnings Shortfall

Michael Novinson

Weakness in data center sales caused Avnet's Technology Solutions (TS) division report earning below expectations, but the subpar performance isn't expected to derail Tech Data's proposed $2.6 billion acquisition.

"We have a locked deal in place, and we have certain deliverables that we've got to deliver," Avnet CEO Bill Amelio told investors Thursday. "That [Tech Data renegotiating the purchase price] is not a probability that it's going to happen to this deal."

Declines in the Avnet TS North American server and legacy storage business resulted in revenue for the quarter ended Oct. 1 dropping to $1.87 billion, down 21.2 percent from $2.37 billion last year. Excluding an extra week of sales from the same quarter last year, sales fell by 14.8 percent, with all three of the distributor's regions experiencing double-digit revenue drops.

[RELATED: 7 Things To Watch For Once The Tech Data-Avnet TS Deal Closes]

Avnet's server business in North America took a big hit this quarter around both proprietary and x86-type devices, according to Patrick Zammit, president of Avnet TS. And although flash comprises almost half of Avnet's storage sales today, Zammit said, that has been offset by continued declines in sales of legacy storage devices.

Market data indicates that server and storage sales are falling in North America as well as Europe, the Middle East and Africa (EMEA), but Zammit said Avnet has been able to avoid taking as heavy of a hit in EMEA by gaining market share there.

"We have experienced decline primarily in North America," Zammit said. Both sales and operating income for Avnet TS experienced a greater-than-expected decline, according to Kevin Moriarty, Avnet's chief financial officer.

Technology sales in the Americas dropped for the fourth consecutive quarter, falling 25.4 percent to $1.04 billion. Excluding the extra week of sales, revenue in the Americas fell by 17.7 percent.

Europe, the Middle East and Asia (EMEA) recorded their fourth consecutive quarter of declining technology sales, with revenue falling 14.3 percent to $580.3 million. Excluding the extra week of sales, EMEA revenue decreased by 11 percent.

Zammit said partners had told Avnet that their customers are delaying purchase decisions as they attempt to figure out what technology is right for them going forward. Hybrid cloud is expected to play a larger role in customers' decision-making process, Zammit said.

Fiscal 2017 first quarter revenue for all of Avnet dropped by 13.3 percent from $6.97 billion last year to $6.04 billion this year, missing Seeking Alpha's estimate of $6.11 billion. Excluding an extra week of sales in the first quarter of fiscal 2016, Avnet's year-over-year sales fell by 9.4 percent.

Net income plummeted by 22.6 percent from $152.9 million last year, or $1.12 a share, to $118.4 million this year, or 91 cents a share, edging out Seeking Alpha's estimate of 90 cents per share. Excluding the extra week of sales last year, net income fell by roughly 9 percent.

Investors sent Avnet's stock down 0.6 percent in trading Wednesday, to $42.03 per share, after the release of the quarterly results, which happened before the market opened. Tech Data's stock, meanwhile, was down 2.4 percent in trading Wednesday to $76.83 per share.

In Asia, Avnet saw its ninth consecutive quarter of double-digit technology revenue declines, with year-over-year sales ending 17.1 percent lower, at $243.1 million. Excluding the extra week of sales, Asia revenue fell by 10.1 percent.

Operating income for Avnet TS plummeted by 38.9 percent from $69.8 million last year to $42.7 million this year. Roughly a third of that decline can be attributed to the extra week in last year's quarter, Moriarty said.

Operating income margin for Avnet TS fell from 3 percent last year to 2.3 percent this year, with declines in the Americas and Europe partially offset by improvements in Asia, Moriarty said.

For the current quarter, Avnet said it expects earnings per share for its Electronics Marketing (EM) business of between 69 cents and 79 cents per share and revenue in the range of $4.2 billion to $4.5 billion. Avnet's outlook no longer includes its TS business since it is expected to be sold to Tech Data in the first half of next year.

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