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Avnet 2Q'19: IoT Set To Be Growth Driver After Softweb Buy, But Tariffs Could Weigh On Future

Avnet CEO Bill Amelio said the distributor's IoT business is growing rapidly, and that the acquisition last month of Softweb Solutions will only accelerate that growth.

Avnet Thursday reported strong revenue and non-GAAP gains in its second fiscal quarter of 2019 related to its bid to be a global technology solutions company despite potential uncertainties from its Asia business.

The Phoenix-based distributor said it is also seeing strength in the Internet of Things market and expects further growth from its December acquisition of Softweb Solutions, a consulting firm specializing in developing artificial intelligence and IoT solutions.

Avnet exited calendar year 2018 in a different place from where it was at the end of calendar 2017, said Bill Amelio in prepared remarks during the company's second fiscal quarter 2019 conference call.

[Related: A New Distributor Dawns: Tech Data-Avnet TS Deal Closes, Avnet Partners Want To Retain Existing People, Level Of Service]

"Our execution is solid, and our strategy is really starting to pay off with growth across the globe and across our unique ecosystem," Amelio said.  

A definite slowdown in Asia is being tempered by strength in Avnet's Americas and Western Europe strengths going forward, Amelio said. Avnet's position in the defense and aerospace verticals are improving, while industrial demand remains strong and the transportation sector is doing well, he said.

IoT is a fast-accelerating business focus of Avnet, Amelio said.

"Avnet rapidly continues to expand it IoT pipeline with new customers and new opportunities," he said. "In fact, we're adding new opportunities at an accelerating rate. In the first half of fiscal 2019, the three-year total IoT pipeline more that tripled to exceed $500 million. This number does not include device revenues we were already supplying the market, but represent end-to-end solutions of devices, software, gateways, security, and cloud applications that are in development with our customers."

The company has partners working with IoT who see that Avnet offers capabilities to speed their time to market and reduce costs and complexity, Amelio said. This also exposes Avnet's customer base to other services the distributor provides.

"This is creating multiple sources of revenue from a given customer," he said.

Avnet's acquisition of Software Solutions is a valuable addition to the company's IoT business, Amelio said.

"It possesses world-class A.I., data advisory, and digital development services," he said. "This is a major addition to our ecosystem. Softweb now brings us software, A.I., cloud, and analytics expertise necessary to offer complete end-to-end solutions for our customers. … We're setting up something that really just puts us in a great position [with] recurring revenue at higher margins."

Avnet also closed several multi-million-dollar deals in the quarter with cryptocurrency customers, and recently began accepting cryptocurrency payments, which Amelio described as a "valuable service for certain customer types."

For the fiscal second quarter of 2019, ended December 29, 2018, Avnet reported revenue of $5.05 billion, up 11.7 percent over the $4.52 billion the company reported for its second fiscal quarter of 2018. That was a miss of about $20 million compared to analyst expectations, Seeking Alpha said.

Avnet also reported operating income for the quarter on a GAAP basis of $96.1 million, up 17.7 percent over last year's $81.6 million. However, earnings per share for the quarter fell nearly 30 percent to 33 cents compared to last year's 47 cents.

On a non-GAAP basis, Avnet reported operating income of $178.8 million, or $1.04 per share, up from last year's $140.3 million, or 78 cents per share.

Earnings per share were in-line with analysts' expectations on a non-GAAP basis, while they fell short by 51 cents per share on a GAAP basis, according to Seeking Alpha.

Avnet's Americas sales rose 7.5 percent year-over-year to $1.30 billion. Sales in EMEA (Europe, Middle East, and Africa) rose 10.8 percent to $1.67 billion, while sales in Asia rose 15.2 percent to $2.10 billion.

However, on a sequential basis, sales in the quarter to Avnet's Americas business rose 2.3 percent, while EMEA sales fell 2.7 percent and Asian sales fell 1.1 percent.

During the question and answer period with analysts, Avnet Chief Financial Officer Tom Liguori said the company is facing further downturns this quarter because of the Chinese New Year, which this year falls on February 5.  

The tariffs the U.S. has placed on goods from China is also having an impact.  

Amelio, responding to an analyst's question, said that Avnet has put plans in place to mitigate impacts from the tariffs. The company is shipping more products direct from Hong Kong, and is sending products from China to a warehouse in Guadalajara, Mexico for sale to customers outside the U.S.  

Avnet is also looking to source more of its products from outside China for the U.S. market, he said.  

"We've made it clear that this is not a tariff that we'll absorb in the company," he said.  

Looking forward, Avnet is expecting third fiscal quarter 2019 sales of between $4.5 billion and $4.9 billion, or down 2 percent year-over-year at the midpoint. The company also expects non-GAAP earnings per share of $1.03 to $1.13, or up 6 percent year-over-year at the midpoint.

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