Avnet, Inc. (AVT) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture: strong sales growth in Asia and inventory optimization are positive, but declining margins and sales in EMEA and the Americas are concerns. The Q&A reveals modest optimism but highlights uncertainties, particularly in EMEA and inventory correction. The share repurchase program is a positive factor, but the market may focus on margin pressures and regional sales declines, leading to a neutral stock price movement.

Key Financial Performance

Revenue for fiscal year 2025 $22.2 billion, with no specific year-over-year change mentioned.

Adjusted diluted earnings per share for fiscal year 2025 $3.44, with no specific year-over-year change mentioned.

Revenue for Q4 2025 $5.6 billion, up 6% sequentially and slightly year-over-year.

Adjusted operating margin for Q4 2025 2.5%, with no specific year-over-year change mentioned.

Cash flow from operations for Q4 2025 $139 million, with no specific year-over-year change mentioned.

Sales growth in Asia for Q4 2025 18% year-over-year.

Sales decline in EMEA for Q4 2025 17% year-over-year, or 21% in constant currency, attributed to market conditions.

Sales decline in the Americas for Q4 2025 2% year-over-year, attributed to market conditions.

Gross margin for Q4 2025 10.6%, down 99 basis points year-over-year, mainly due to a higher mix of Asia sales.

SG&A expenses for Q4 2025 $451 million, up $1 million year-over-year, with foreign currency negatively impacting by $10 million.

Adjusted operating income for Q4 2025 $143 million, with no specific year-over-year change mentioned.

Farnell operating margin for Q4 2025 4.3%, up 25 basis points year-over-year, attributed to improved sales and prior operating expense reduction efforts.

Interest expense for Q4 2025 $58 million, decreased by $6 million year-over-year, attributed to lower average borrowings.

Adjusted diluted earnings per share for Q4 2025 $0.81, with no specific year-over-year change mentioned.

Inventories for Q4 2025 Decreased by $185 million sequentially in constant currency, or over $400 million year-over-year, attributed to inventory optimization efforts.

Cash flow from operations for fiscal year 2025 $725 million, with no specific year-over-year change mentioned.

Debt reduction for fiscal year 2025 $237 million, with no specific year-over-year change mentioned.

Shareholder returns for fiscal year 2025 $415 million through share repurchases and dividends, with no specific year-over-year change mentioned.

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Operating Highlights

New Chief Digital Officer: Appointment of Dave Youngblood, a 25-year industry veteran, as Chief Digital Officer to enhance digital capabilities.

New EMEA President: Promotion of Gilles Beltran as the new President of the EMEA region, succeeding long-time leaders.

Asia Growth: Achieved 18% year-over-year growth in Asia for Q4, marking the fourth consecutive quarter of growth in the region.

EMEA and Americas: EMEA sales declined 17% year-over-year, while Americas sales declined 2% year-over-year.

Inventory Management: Reduced inventories by $185 million sequentially in constant currency, with a year-over-year reduction of over $400 million.

Cash Flow: Generated $139 million in cash flow from operations in Q4 and $725 million for the fiscal year.

Farnell Stabilization: Farnell business showed improved operating margins and stabilized performance after cost restructuring.

Digital Investments: Significant investments in digital infrastructure to enhance customer experience and data insights.

Book-to-Bill Ratio: Improved book-to-bill ratio across all regions, indicating growing demand and backlog.

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Risk or Challenges

Market Conditions: Challenging business conditions over the last two years, including mixed market performance in EMEA and reliance on Asia for growth.

Inventory Management: Although progress has been made in reducing inventories, there is still work to do to optimize inventory levels and balance reductions with investment opportunities.

Regulatory Changes: Uncertainty around potential regulatory changes in the U.S. has led to slight benefits from customer ordering but also poses risks.

Gross Margins: Decline in gross margins year-over-year due to regional sales mix shift to Asia and product/customer mix.

Operating Expenses: Expected operating expense headwinds in fiscal year 2026 due to merit pay increases for employees.

Farnell Business: While Farnell's results have stabilized, there is still significant work required to achieve its full margin potential.

Foreign Currency Exchange: Negative impact on operating expenses and gross margins due to foreign currency exchange rate changes.

Debt and Interest Expense: Although interest expense has decreased, it remains a factor, and further reductions are needed to improve financial performance.

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Guidance & Outlook

Revenue Expectations: For Q1 fiscal 2026, Avnet is guiding sales in the range of $5.55 billion to $5.85 billion, with sequential sales growth of approximately 2% at the midpoint.

Earnings Projections: Diluted earnings per share for Q1 fiscal 2026 are expected to range between $0.75 and $0.85.

Regional Growth: Sales growth is anticipated in all regions for Q1 fiscal 2026, with Asia showing double-digit growth in fiscal 2025 and expected to lead out of the current cycle.

Capital Expenditures: Capital expenditures are expected to normalize to approximately $25 million to $35 million per quarter in fiscal year 2026.

Market Recovery: The company expects market recovery in fiscal 2026, particularly in the Americas and EMEA regions, supported by improving bookings and customer demand.

Inventory Management: Avnet plans to continue optimizing inventory levels, balancing reductions with investment opportunities, and ensuring the right inventory is in place for fiscal 2026.

Farnell Business Outlook: Farnell is expected to achieve steady growth and margin improvement, supported by a right-sized cost structure and synergies from the Power of One initiative.

Digital Infrastructure Investments: Significant investments in digital infrastructure are expected to enhance customer experience and data insights, supporting demand creation and growth.

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Shareholder Return Plan

Dividend payments: In the fourth quarter, Avnet paid a quarterly dividend of $0.33 per share, amounting to $28 million.

Total dividends for fiscal year: For the fiscal year, Avnet returned a total of $415 million to shareholders through share repurchases and dividends.

Share repurchase in Q4: Avnet repurchased approximately $50 million worth of shares in the fourth quarter.

Share repurchase for fiscal year: Avnet achieved its goal to reduce shares outstanding by at least 5% for the fiscal year, repurchasing nearly 7% of its outstanding shares.

Remaining share repurchase authorization: Avnet has more than $300 million left on its current share repurchase authorization.

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Key Q&A

Q:What has changed in the EMEA region, and what end markets are driving the change?

A:Management expressed modest optimism about the EMEA region, noting that bookings and backlog are starting to increase year-on-year and quarter-on-quarter. However, they emphasized that the improvement is modest and not yet a cause for celebration.

Q:How should we think about inventory trends in the September quarter?

A:Management expects a modest decline in inventory driven by the EC business, offset slightly by Farnell. The goal is to reduce inventory while maintaining appropriate SKUs and inventory levels to serve the customer base. They aim to return to mid-80s days of inventory.

Q:How do you see the trend in Asia continuing over the next couple of quarters, and how does the mix of regions impact core business margins?

A:Management is optimistic about Asia, which has shown four consecutive quarters of year-on-year growth. Asia's growth as a percentage of the business has impacted margins due to the regional mix. They aim to grow other regions to improve the margin profile while maintaining Asia's performance.

Q:What are you doing to improve margins at Farnell, and how do you see margins trending?

A:Management has made leadership changes and reduced non-value-added expenses at Farnell. They are focusing on digital improvements, with 70% of activity and over 50% of revenue coming through the online portal. They aim to achieve double-digit operating margins (10%-13%) over the next 4-8 quarters.

Q:Do you think the industry is at the bottom of the inventory correction, and are we at an inflection point?

A:Management believes the industry is close to the bottom of the inventory correction. Indicators such as increasing book-to-bill ratios, short-term orders, and reduced inventory days among suppliers and OEMs suggest improvement, but some excess inventory remains.

Q:What is the normalized margin for Farnell, and what are the internal targets?

A:Management aims for Farnell to achieve an average operating margin greater than 10%, with a range of 10%-13%. They want to avoid margins falling below 5% during market corrections.

Q:How should we model OpEx going forward with the restart of merit increases?

A:The full impact of merit increases is included in the Q1 guidance, adding $8-$10 million to OpEx. Management expects some potential reductions in other inflationary expenses but suggests using the Q1 run rate for modeling.

Q:What should we assume about inventory investment and its impact on interest expense?

A:Management expects inventory to decline modestly while improving the quality mix. They believe they have sufficient inventory dollars for current sales levels and some growth, which should limit the need for additional cash utilization.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the question about whether the industry is definitively at the bottom of the inventory correction. They cited indicators of improvement but refrained from making a definitive statement, indicating uncertainty.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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