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Avnet CEO Phil Gallagher: Revenue, Growth Strong Despite Economic Environment

Joseph F. Kovar

‘Our continued investments in digital and design tools and field application engineers are paying off as demonstrated by another solid quarter of design and engineering activity across all regions. These high levels of design registrations and wins in prior quarters resulted in yet another quarter of record demand creation of sales and gross profit,’ says Avnet CEO Phil Gallagher.

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Electronic components distributor Avnet Wednesday reported strong revenue and profit growth for its fiscal 2022 third quarter despite the supply chain issues plaguing the IT and electronics industry and Russia’s war against Ukraine.

Robust and improving demand for electronics components, including in Avnet’s Americas and Asia-Pacific business, in its U.K.-based Farnell business, which it acquired in 2016, and across a wide range of verticals, gave Avnet 32-percent year-over-year growth in revenue, said Avnet CEO Phil Gallagher.

Gallagher, (pictured), speaking to analysts during the company’s quarterly financial conference call, said during his prepared remarks that not even the Lunar New Year holiday in Asia could slow down Avnet’s strong revenue or margin growth.

[Related: GTDC Panel: Distribution Taking Ever-Changing Challenges Head-On]

“We are competing favorably across the board, and are pleased to see continued improvement in our America‘s business where strong demand and expanded supply chain orchestration opportunities helped us grow revenue by over 40 percent year over year, and achieve our fifth consecutive quarter of operating margin growth,” he said. “We are also especially pleased with strong results from Farnell, which has proven to be an important needle mover for total Avnet and is now responsible for 7 percent of our sales and 23 percent of our adjusted operating income.

Robust demand was widespread across Phoenix-based Avnet’s end markets, with the company seeing strength in the automotive, transportation, and industrial segments, with the aerospace and defense segments in particular expected to remain elevated over the coming quarters, Gallagher said.

“Overall, we continue to forecast favorable demand conditions throughout the second half of this calendar year,” he said.

Avnet also showed strength in its design and engineering business, Gallagher said.

“Our continued investments in digital and design tools and field application engineers are paying off as demonstrated by another solid quarter of design and engineering activity across all regions,” he said. “These high levels of design registrations and wins in prior quarters resulted in yet another quarter of record demand creation of sales and gross profit.

Gallagher also addressed the conflict in Ukraine and said Avnet continues to closely monitor the safety of its employees in the region.

Avnet had only a small number of employees in Ukraine, most of whom have safely left the country, he said. The company also has a few employees in Russia, and throughout the region has many partners, suppliers, and customers, which means the distributor expects some minor impact to its business.

“While we have no distribution or integration centers in the region, we‘ve ceased all business activities in Russia, which represents less than 1 percent of our annual revenues and gross profits dollars,” he said. “Our focus remains on supporting our impacted employees and partners. And while I am deeply unsettled by the situation in Ukraine, I’ve been heartened by the incredible efforts undertaken by Avnet and the Farnell employees to provide direct support to Ukrainian refugees entering Poland, including through the delivery of supplies and equipment. I couldn‘t be more proud of these efforts and the supportive culture we’ve built here at Avnet.”

During the question and answer period of the conference call, when asked by an analyst whether Avnet is better prepared to weather a possible recession than it was during the 2007 to 2009 downturn, Gallagher said Avnet is now 100-percent focused on components and no longer has the computer business it had then.

“A lot of our costs are variable from the standpoint of commissions and freight and logistics cost and whatnot,” he said. “So we adjust those as we go. And some of them self-adjust.”

On the components side, Avnet has a sustainable, high-margin business, including with Farnell, Gallagher said.

“We maintain that will maintain a double-digit operating margin line, even if there is a downturn,” he said. “So we think between the mix and the demand creation continuing to grow our line card, we think we can drive through it. Maybe we‘ll have to make some adjustments. [And] if there is a downturn, we’ll spin off a lot of cash, which makes Tom [Liguori, CFO] happy.”

Avnet is also working with its suppliers on more and more advanced opportunities, Gallagher said. “Even in a downturn, they leverage us as much as they possibly can because of the variable model that we bring them from a scale stand point,” he said.

When asked if there was any signs of supply issues loosening, Gallagher said he does not see clear indications, as some lead times are getting better and some worse,.

“But overall, it‘s still pretty tight up there,” he said. “I’m on calls pretty much every day with customers and suppliers trying to work the expedites,” he said.

For its fiscal 2022 third quarter, which ended April 2, Avnet reported revenue of $6.5 billion, up 32.0 percent over the $4.9 billion the company reported for its third fiscal quarter of 2021.

The distributor also reported GAAP net income of $183.4 million, or $1.84 per share, up from last year’s $107.5 million, or $1.07 per share. On a non-GAAP basis, the company reported earnings per share of $2.15, compared with $0.74 in the prior year quarter.

Revenue beat analyst expectations by $780 million, and non-GAAP earnings beat expectations by 61 cents per share, according to Seeking Alpha.

Looking ahead, Avnet expects fiscal 2022 fourth quarter sales of $6.0 billion to $6.4 billion versus analysts consensus of $5.8 billion, and non-GAAP earnings per share of $1.90 to $2.00 versus the consensus of $1.50.

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