U.S. Manufacturing Contracts for First Time in 3 Years
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Following the $2.6 billion sale of its Technology Solutions business to IT distributor Tech Data, Avnet Inc. is doubling down on its components business with an eye toward leadership in both design chain and supply chain services. With the acquisition of U.K-based Premier Farnell plc poised to move forward, Avnet expects to be a $17 billion electronics components business by the end of 2016.
Avnet plans to leverage its strength in components distribution to fuel both organic growth and profit margin expansion, newly named CEO William Amelio told analysts on a conference call Monday. The combination of Avnet Electronics Marketing Group’s (EMG) depth in supply chain services with Premier Farnell’s catalog business will enable Avnet to engage with OEM customers early in their design cycles and capture a larger share of their spend as products move from concept through production, Amelio added.
Avnet TS was becoming a drain on the company with sales flagging and the outlook dull. In the fiscal 2016 year ended July 2, the division reported sales of $9.65 billion, down nearly 9 percent from $10.6 billion in the prior year and contributing heavily to the overall revenue decline of more than 6 percent for the entire company. Avnet’s outlook for the TS business isn’t rosy, either. The company in its latest financial statement lowered the sales forecast for TS in the ongoing quarter to a range of $1.9 billion to $2.2 billion, compared with $2.3 billion in the immediately preceding quarter and $2.5 billion in the year-ago quarter.
Following the sale Avnet will retain some systems-related business with Tech Data; Avnet Technology Solutions has provided support to the EMG in IoT-related development. Security and interoperability among IoT devices rely heavily on software, the cloud and other enterprise-level capabilities, Avnet executives told analysts.
Avnet’s focus on design services and its acquisition of Premier Farnell should solidify Avnet’s position in higher-margin component businesses. In order to encourage a focus on their products, component suppliers reward distributors for design wins. If a distributor secures a spot for a supplier in an OEM design, that distributor may get exclusive rights to sell that component for a time or receive a higher profit margin on subsequent volume sales. Also, by engaging with engineering early in a product’s design cycle, distributors can capture significant component volume sales when a design reaches fruition. Profit margins from catalog businesses tend to be higher than those in volume sales because engineers -- catalogs' primary customers -- aren't sensitive to price.
The company is also anticipating Premier Farnell will provide a new base of engineering customers. On Sept. 12 the shareholders of Premier Farnell approved Avnet’s offer of $915 million to buy the UK-based distributor. The acquisition has cleared antitrust regulations in the U.S. but are pending in the UK and Israel. Assuming there are no problems, Avnet expects the acquisition to close in November. “Premier Farnell brings us 300,000 registered users and small-order DNA,” Amelio said.
Avnet hasn’t ruled out further acquisitions, executives said, although nothing of Premier Farnell’s size is currently in the funnel. “There are no other anticipated sales of Avnet [divisions],” Amelio added.
Avnet’s components business, which accounted for $16.5 billion of its 2016 sales, currently has approximately 1,000 field applications engineers generating about 45,000 design wins annually or the equivalent of about $5 billion an annual revenue, Amelio said. Moving forward the company will focus on three key markets: web enablement, embedded solutions and the IoT.
“Our intent is to grow these underlying businesses with the following strategies,” Amelio said. “First is to expand our customer base and get to our engineers earlier in their lifecycle; deepen our engagement with customers and the digital transformation of our business. As we look at the rapidly evolving technology landscape there will be new customers from the maker market as a result of the IoT that we will need to reach in order to accelerate our growth. We also need to deepen our engagement [with customers] to add more value in order to maintain and grow our profit margin.” Amelio pointed to a digital sales tool Avnet has recently introduced that allows customers to tap into a design library; produce a bill of material; and quicken their time to market.
Avnet’s embedded business, which was run by company veteran Ed Smith before his abrupt departure on August 19, represents about $2 billion in sales. Historically, Avnet embedded had focused on the Americas market but was elevated to a global business earlier this year. Executives did not discuss plans for the embedded business except to say it was being run under the auspices of the Electronics Marketing Group.
"There are many ways that we can expand our role in the technology supply chain and find more ways to get compensated," Amelio concluded.
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