Avnet, Inc. (AVT) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
Avnet reported strong financial performance with 12% YoY revenue growth and robust operating margins, especially in Farnell. The optimistic guidance for regional sales growth and market recovery, along with effective inventory and leverage management, supports a positive outlook. The Q&A revealed management's optimism about margin expansion and the positive impact of pricing strategies. However, lack of detailed future guidance and high leverage are concerns. Given the market cap and overall positive sentiment, a stock price increase of 2% to 8% is likely over the next two weeks.
Key Financial Performance
Sales $6.3 billion, up 12% year-over-year and 7% sequentially. Reasons for growth include record revenues in Asia, better than typical seasonal growth in the Americas, Europe, and Farnell, and strong demand in compute and aerospace and defense.
Operating Margin (Electronic Components) 3.2%, driven by growth in the Americas and Europe, with operating income growing more than 2x greater than sales.
Operating Margin (Farnell) 4.7%, up nearly 40 basis points from last quarter, reflecting recovery across all three regions and growth in on-the-board components.
Cash Flow from Operations $208 million, driven by reductions in inventory dollars and days.
Gross Margin 10.5%, flattish year-over-year and up slightly sequentially. Farnell gross margins were up over 100 basis points year-over-year but down 25 basis points sequentially.
SG&A Expenses $492 million, up $55 million year-over-year and $27 million sequentially, primarily due to higher sales volumes and increases in stock-based compensation expense.
Adjusted Operating Income $172 million, with total Avnet adjusted operating margin at 2.7%.
Adjusted Diluted Earnings Per Share $1.05, nearly 4x sales compared to last quarter.
Inventory Reduced by $126 million or 2.3% sequentially, with inventory days decreasing by 7 days quarter-over-quarter to 88 days.
Return on Working Capital Improved over 100 basis points compared to last quarter, driven by operating income growth and reduction in working capital days.
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Operating Highlights
Farnell's onboard components: Sales of onboard components are improving, reflecting recovery across all three regions. This indicates engineers are working on developing new products.
Asia market: Achieved record sales of over $3 billion, marking the sixth consecutive quarter of year-on-year growth.
EMEA market: Sales grew sequentially and year-on-year, with clear signs of recovery in industrial, compute, consumer, and transportation markets.
Americas market: Sales grew sequentially and year-on-year, with aerospace and defense leading sequential growth and industrial, communication, and compute leading year-on-year growth.
Inventory management: Reduced inventory by $126 million sequentially and improved inventory days to 86, with a target to reduce below 80 days.
Cash flow: Generated $208 million of cash flow from operations in the quarter.
Operating margins: Improved operating margins in both Electronic Components (3.2%) and Farnell (4.7%) businesses.
Demand creation and design wins: Sequential increase of 7% in demand creation revenues and growth in design registrations and wins, indicating future revenue potential.
IP&E business: Achieved double-digit year-on-year growth, leveraging cross-selling opportunities with semiconductor business.
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Risk or Challenges
Demand Signals Resetting Globally: Lead times are trending higher across most product categories, driven by data center and artificial intelligence demand. This creates a mismatch between customer request dates and supplier delivery dates, posing challenges in aligning supply chain operations.
Pricing Environment and Upward Pressure: While pricing remained stable during the quarter, spot price increases with a few suppliers and commodities were observed. There is potential for upward pricing pressure across many technologies, which could impact margins.
Market Uncertainty in EMEA: Despite signs of recovery, the EMEA region continues to face market uncertainty, which could affect growth and profitability.
Inventory Management Challenges: Efforts to reduce inventory levels are ongoing, but elevated inventory in certain areas remains a challenge. Balancing inventory reductions while investing in high-demand areas is critical.
Farnell's Product Mix: Farnell has a higher relative sales mix of lower-margin products like test and measurement, maintenance and repair, and single-board computers. This mix could delay improvements in gross and operating margins.
Leverage and Debt Reduction: The company has a gross leverage of 3.9x and aims to reduce it to 3x over the next year. High leverage could limit financial flexibility.
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Guidance & Outlook
Market Demand and Trends: Demand signals are resetting globally, with lead times trending higher across most product categories. Growth rates in all segments are projected to improve, driven by data center and artificial intelligence demand. There is upward pricing pressure across many technologies.
Regional Performance: Asia sales reached a record high of over $3 billion, marking six consecutive quarters of year-on-year growth. EMEA shows signs of recovery with sequential and year-on-year sales growth, particularly in industrial, compute, consumer, and transportation markets. Americas also experienced sequential and year-on-year growth, led by aerospace and defense.
Farnell Business Outlook: Farnell's sales grew sequentially and year-on-year, reflecting recovery across all regions. Improvement in sales of higher-margin onboard components is expected to continue, especially in Europe, leading to better gross and operating margins.
Inventory and Supply Chain: Inventory levels are being optimized, with a focus on reducing excess while investing in high-demand areas. Supply chain expertise is being leveraged to address mismatches between customer request dates and supplier delivery dates.
Financial Guidance for Q3 FY 2026: Sales are projected to range between $6.2 billion and $6.5 billion, with diluted earnings per share expected between $1.20 and $1.30. Growth is anticipated in the Americas and EMEA, with a less than seasonal decline in Asia due to the Lunar New Year.
Long-Term Growth and Margin Expansion: 2026 is expected to be a year of growth, margin expansion, and improved returns. The company is positioned for operating leverage over the next couple of years as global growth resumes.
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Shareholder Return Plan
Quarterly Dividend: In the second quarter, Avnet paid a quarterly dividend of $0.35 per share, amounting to $28 million.
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Key Q&A
Q:Could you talk to us about the linearity of orders during the quarter and the duration of your backlog?
A:Philip Gallagher explained that bookings tend to trail off in the second half of December, but billings continue due to manufacturing resuming after the holidays. He noted a positive book-to-bill ratio and an increase in orders within lead time, indicating inventory depletion. Visibility into future bookings is improving but not yet at desired levels.
Q:Are there any end markets or end products experiencing more price inflation than others?
A:Philip Gallagher mentioned upward pricing pressures, particularly in memory storage controllers, certain capacitors in the IP&E space, and products related to data centers. Ken Jacobson clarified that while price increases have been announced, they did not significantly impact the quarterly results.
Q:How should we think about Americas and EMEA relative to seasonality for the March quarter?
A:Philip Gallagher stated that the West typically bounces back in the March quarter due to more shipping days, with high single-digit growth expected. Asia's decline is less significant than usual, leading to a favorable regional mix shift. Ken Jacobson added that operating margin expansion is expected due to the seasonal mix shift.
Q:Do you think core business margins can grow year-over-year for the remaining quarters of this year?
A:Ken Jacobson expressed optimism about operating margin expansion, particularly as the Americas and Europe recover. He noted that the backlog is encouraging, but the company does not guide beyond the current quarter. Philip Gallagher added that signs are optimistic for the next several quarters.
Q:How do supplier price increases impact Avnet's revenues and margins in the near and medium term?
A:Philip Gallagher explained that price increases affect average selling prices. For non-contracted business, margins can increase, while for contracted customers, price increases are passed on, affecting revenue and margin dollars. He highlighted price increases in memory storage, controllers, and certain networking products.
Q:As Europe recovers, can Farnell margins improve faster than the projected 50 basis points per quarter?
A:Philip Gallagher stated that higher revenues in Europe could accelerate Farnell's margin improvement beyond the projected 50 basis points per quarter. He emphasized the importance of managing expenses while investing in areas like digital and e-commerce.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance beyond the current quarter, using terms like 'encouraging' and 'optimistic' without offering detailed projections. Additionally, while discussing pricing impacts, the responses lacked precise numerical data on revenue or margin changes.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CES lot
Components line
Components margin
Demand signal
Demand vertical
Director result
EMEA leader
EMEA momentum
EMEA sign
Europe Farnell
Farnell Sales
Farnell area
Farnell center
Farnell platform
IPE Demand
IPE digit
Interconnect Passive
Passive IPE
Power core
Relations result
aerospace defense
compute
delivery
design
engineer
indicator
margin expansion
onboard component
recovery
region Asia
sale record
sale region
service
solution
supplier partner
visibility supplier
AVT Transcript
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The earnings call revealed a decline in revenue, net income, and EPS, which negatively impacts sentiment. Despite a slight increase in gross margin and cash flow, the overall financial performance is weak. The absence of strategic initiatives or operational updates further dampens the outlook. Additionally, the management's unclear responses in the Q&A section and the warning about risks and uncertainties contribute to a negative sentiment. Given the company's market cap, the stock price is likely to experience a negative movement of -2% to -8% over the next two weeks.
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Avnet, Inc. (AVT) Q2 2026 Earnings Call Transcript
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Avnet reported strong financial performance with 12% YoY revenue growth and robust operating margins, especially in Farnell. The optimistic guidance for regional sales growth and market recovery, along with effective inventory and leverage management, supports a positive outlook. The Q&A revealed management's optimism about margin expansion and the positive impact of pricing strategies. However, lack of detailed future guidance and high leverage are concerns. Given the market cap and overall positive sentiment, a stock price increase of 2% to 8% is likely over the next two weeks.
AVT Slides
AVT Report
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