AVT Q1 2027 earnings call transcript, November 4, 2026

Please stand by. Our presentation will now begin. Welcome to the AvNet First Quarter Fiscal Year 2027 Earnings Call. I would like to turn the floor over to Lisa Mueller, Director of Investor Relations for AvNet.

Thank you, Operator.

Thank you, everyone, for joining us on our first quarter to the new fiscal year. Our first quarter results came in well above our expectations since both our electronic components are all above our expectations. The strength we saw at the top line translated into meaningful operating margin and earnings expansion, once again demonstrating the earnings power and operating leverage embedded in our business model as demand continues to strengthen. I'm extremely proud of how our team is executing in this dynamic business environment hard work and dedication for the technology supply chain. If I are gold on a line card, diverse end markets, deep customer and supply relationships, experienced and dedicated employees, and. Interconnect passive electromechanical product categories, as demand broadened across all of our end markets and applications, decent acceleration and growth.

Thank you, Phil, and good morning, everyone. We appreciate your interest in AvNet. Our sales for the first quarter were $10.7 billion, up 82% year over year. On a sequential basis, sales were higher by 29%. The first quarter had 14 weeks compared to a typical 13-week quarter. Normalizing the first quarter growth by excluding the impact. Back to the extra week, sales grew 71% year over year and 21% sequentially. Foreign currency did not have a meaningful impact on our sales growth this quarter. Regionally, on a year over year basis, sales increased 109% in the Americas, 79% in Asia, and 64% in EMEA. On a sequential basis, sales increased 39% in the Americas, 30% in Asia, and 19% in EMEA. During the first quarter, sales from Asia represented 48% of total sales compared to 47% of sales last quarter. And 49% of sales last year. From an operating group perspective, electronic components had record sales during the quarter, increasing 84% year-over-year and 30% sequentially. Normalized for the impact of the extra week, EC sales grew 73% year-over-year and 22% sequentially. Record sales during the quarter increasing 46% year-over-year and 17%. From a pricing perspective, memory prices increased during the quarter at similar levels to last quarter. As a result, approximately one-third of both the sequential and year-over-year sales growth was attributable to pricing increases in the memory product category.

We did not see a meaningful impact from pricing in other electronic component categories beyond memory during the quarter.

The margin of 10% decreased about 40 basis points year-over-year and sequentially, primarily due to product and customer mix in the quarter. Electronic components gross profit margin was down about 30 basis points year-over-year and sequentially. BC gross margin declined. The margin declined primarily due to the growth in our ABNA integrated solutions business, which had a lower gross margin than the EC average, but contributed meaningfully to the operating margin expansion. Farnell gross margin increased about 200 basis points year-over-year and declined about 60 basis points sequentially. The year-over-year improvement in gross margin is primarily due to the growth of on-the-board components, which come with a higher gross margin. Farnell's gross margins at the product category level remain stable. ...expenses. SG&A expenses were $570... ...in the quarter, up $112 million year-over-year and $29 million sequentially. The sequential increase in SG&A is primarily due to a combination of higher sales, annual pay increases for employees that took effect on the new fiscal year, the impact of the extra week in the quarter, and from an increase in stock-based compensation expense. As a percentage of gross profit dollars, operating expenses were 54%, exceeding our near-term target by approximately 600 basis points. We expect to continue to drive... ...ab net operating expense to gross profit dollar ratio to low 50s through the remainder of fiscal 2027. Our EC business had a record low operating expense to gross profit dollar ratio of 46% for the quarter, compared to 69% last year and 56% last quarter. The for now operating expense to gross profit dollar ratio is 65% in the quarter, which is the lowest level since the first quarter of fiscal 2027. As we move through fiscal 2027, we will continue to maintain a high level of cost discipline.

Well... ...still making the necessary investments in the business to enable profitable growth. For the first quarter, we reported adjusted operating income of nearly $500 million, and the ad net adjusted operating margin was 4.7%, an increase of more than 200 basis points year-over-year and more than 80 basis points from last quarter. This represents the fifth consecutive quarter of adjusted operating margin expansion and the highest ad net operating margin since fiscal 2023. Adjusted operating income also grew approximately three times greater than sales compared to last year, and approximately... two times greater in sales compared to last quarter. This is consistent with our continued expectation of driving operating income growth at least twice the rate of sales growth. By operating group, electronic components operating income was $484 million, and EC operating margin was 4.8% in the first quarter, a 71 basis point sequential increase. Similar to last quarter, the sequential improvement in EC operating margin was led by the Americas, including both the core and admin integrated solution businesses, with all regions increasing the... operating margin over 45 basis points sequentially, and even more year over year. We expect EC operating margin to reach our near-term role of 5% in the second half of fiscal 2027. Farnell operating income margin of 10.1% was its highest operating margin in more than three years. Farnell operating income margin grew by over 100 basis points sequentially, achieving our near-term target of returning the business to a double-digit operating margin. We expect to continue to expand Farnell operating margin beyond 10% as they continue to grow and

their product mix of on-the-board components improves. According to expenses below operating income, first quarter interest expense was $92 million, a sequential increase of $25 million, mainly due to higher debt levels to support working capital investments for stronger-than-expected sales growth. The increase in interest expense negatively impacted adjusted diluted earnings per share by $0.23 quarter over quarter. Our adjusted effective income tax rate was 23%, consistent with expectations.

$3.63 was a quarterly record for AvNet and was well above the high end of our guidance. Adjusted diluted earnings per share grew 4.1 times greater than sales compared to last year and grew two times greater than sales compared to last quarter. Turn to the balance sheet and liquidity. During the quarter, we invested $1.2 billion in working capital sequentially to support our profitable sales growth. Of this increase, approximately $2.1 billion came from inventories, substantially offset by $1.8 billion increase in accounts payable. Accounts receivable increased by approximately $900 million, which was the primary driver for the use of operating cash flow during the quarter. The increase in inventory was driven by a few factors. Roughly one-third of the inventory increase was due to memory-related pricing. Another third was attributable to increases specific to supply chain services engagement. The final third was primarily due to a combination of sales growth as well as the timing of inventory fees near our quarter-end of October 3rd, which was later than the quarter-end of many of our suppliers. The inventory continues to be a key driver for our business and helped enable us to achieve record sales and earnings during the quarter. We are positioning ourselves appropriately from an inventory perspective so that we can capitalize on the numerous opportunities we see in the markets we serve. Inventory days remain relatively flat sequentially. Our accounts payable and accounts receivable days improve quarter over quarter. Overall, working capital days decrease five days quarter over quarter to 64 days. We continue to focus on discipline, inventory, and working capital management, which is contributing to the improvements in our return on working capital.

Our return on working capital improved by approximately 600 basis points sequentially to 25%, which is the highest level of returns in the past 10 years. The increase in working capital led to an increase in debt of approximately $950 million and an approximate $842 million use of cash from operations for the quarter. Because we expect strong sales growth in the coming quarter, we also anticipate using cash to support that growth. As growth moderates, we expect cash generation to catch up, and we are currently expecting to generate positive cash flow by the end of fiscal 2020.

We expect to continue to raise additional capital primarily through various debt instruments and facilities to support these increased working capital requirements. We expect to continue to raise additional capital over the coming quarters as we support the anticipated growth through the remainder of fiscal 2027 and beyond. We ended the first quarter with a gross leverage of 3.1 times, down from 3.2 times in the fourth quarter, and approximately $1.2 billion of available committed borrowing capacity. We anticipate reaching our target of three times leverage by the second half of fiscal 2027. Cash use for capital expenditures was $24 million during the quarter, as expected. With regard to our capital allocation strategy, we continue to prioritize supporting our profitable growth while maintaining a strong and flexible balance sheet. We also increased our quarterly dividend by approximately 6% to $0.37 per share this quarter. Over the past decade, we have more than doubled the dividend, with the average annual increase exceeding 10%. During that same time, we have also returned approximately $1 billion to shareholders through the year. We also expect to continue to explore potential tuck-in M&A opportunities that equip us with the capabilities needed to further advance our strategic priorities and provide a strong, risk-adjusted return on capital. Finally, as cash generation improves, we would also expect to revisit our shared buyback program, which still has $226 million of authorization remaining.

Turn to the second quarter guidance. We're guiding sales on a range of $11.1 billion to $11.4 billion and adjust the diluted earnings. In the range of $3.90 to $4.10. Our second quarter guidance assumes current market conditions and electronic component availability, including in the memory product category, persists. Our guidance implies that sequential sales increase of 5% of the midpoint. Adjusted for the extra week in Q1, Q2 sales are expected to increase 12% sequentially at the midpoint on a comparable basis. This guidance also assumes similar interest expense compared to the first quarter, an effective tax rate of between 21% and 25%. and 87 million shares outstanding on a diluted basis. In closing, we're on the continued momentum we see in our leading indicators for fiscal 2027. Our first quarter results and second quarter guidance demonstrate that our team continues to deliver profitable growth on the value proposition we bring to our customers and suppliers. With that, I will turn it over to the operator to open it up for questions.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Thank you.

Our first question is from Mr. William Stein with Truist Securities. Please proceed with your question.

Great.

Thanks for taking my question.

Congrats on the great results and outlook. I'm hoping you can talk to us a bit about lead times. We know they're stretching. You cited it in your prepared remarks. I'm wondering if that's challenging your ability to grow, to deliver product and grow, and if so, maybe quantify any of them.

Yeah, thanks, Will.

Thanks for the comments.

I appreciate it. Yeah, so we did comment on that, and we are seeing, I would say more broadly, you know, we know what's happening in memory and the likes. We're starting now to see it.

But I can't say, and with that, as we also talked about, we're starting to see some additional inflation and pricing as well with ASP starting to get impacted again, probably most of that price starting in the new calendar year. To date, I mean, I want to say, well, to date, we've not seen that directly inhibiting our growth all into next year.

You know, are some customers struggling, particularly their heavy concentration of memory in their bomb? You know, they're having a tougher time. Yes, we have some customers that may be farm producing, maybe as many tablets as they were before, things along those lines. That's tough to measure. They're done. They're just slowed down. But it's not really broad-based at this point. But of course, we're watching it because today, again, we're an impact. I appreciate that. As a follow-up, I'd like to ask about guidance and maybe going out a little bit further. You gave us a great December quarter guide. Extra week that I think you just had in September, the December guide is still, I think, six or seven points above typical seasonality. And understanding you're not guiding further than a quarter, when we look to March, I think normal seasonality is approximately down one or two percent. Would that be an appropriate way to think about growth in this part of the cycle or considering the strength that we're seeing, should we expect stability? Or sequential growth in the March? Yeah, well, let me take a shot at that and pass it over to KJ for some comments.

Yeah, we don't guide out that far, so you're right. So thanks for saying that. But as far as we look out, you know, the March, if you look at it with the, you're right, typical, which is a word we don't use much. Any more stuff in March would be down more dramatically in Asia pack due to Lunar New Year and the West would.

Our next question is from Ms. Melissa Fairbanks with Raymond James. Please proceed with your question.

Hey guys.

Thanks very much.

So we heard from one of your suppliers earlier this morning. They noted that channel inventories are pretty tight across most geographies, which I think is pretty consistent with what you're seeing as well, but actually exceptionally low in Asia. I know that you've, Asia has been a very strong market for you for several quarters now. Just wondering what you're seeing in terms of your ability to address upside demand in Asia. uh, and, and what your own inventories in Asia look like today. Yeah. Thanks. Uh, thanks. I think I know who you're referencing there. Um, anyway, so again, right now, uh, you know, again, as you saw, we grew inventories. I'm sure we'll give you a breakout on what inventory position now. We're going to need to make sure we're replenishing appropriately. And I'm looking at the, our inventory actually, um, in total dollars and the, uh, inventory about a day, a day, uh, 1.5 days or so. So inventory position we have, uh, again, can change quickly, you know, based on the market. Will's previous questions, but we need to qualify. It's a broad question, right? The inventory, you know, so in certain areas in power, break it down by where we have the inventory position.

There would be some pockets that were shorter than we need to be, but in total, our inventory is in pretty good shape. Okay, great. I would be happy to break it down by component if you want to give me that data. Yeah, just hold on. I'll pull it out for you. Look at those sheets. I want to zoom in.

So you mentioned that, you know, demand creation. Activity remains healthy. How much, as much as your mix or just the market mix in general is pivoting to data center, aerospace and defense, networking, you know, kind of some of these higher touch areas, how much is that impacting your demand creation business? Are you able to engage with customers? Yeah. You know, are they reaching out to you earlier in the design cycle? Well, it's a really good question because some of that, obviously, what we're dealing directly. into the data center. Some of that might be more just fulfillment. So we wouldn't even have demand creation tied to it in many cases. It was a supply chain piece for that. Because you would think with the growth that we had,

as a percentage of our sales, it's actually flat, which is really good news. Demand creation revenue, yeah, as a percentage of our total revenues, actually stayed flat as a percentage, frankly, because it's well as well.

Okay, great.

Thanks very much, guys.

Thank you.

Our next question is from Mr. Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi, thanks for taking my questions. First question is on inventory. Ken, I think you said of this $2 billion sequential increase, one-third was due to supply chain services. How much revenue did supply chain services account for in the quarter, and how should we think about the impact of this going forward, and what inventory days are you targeting? And I have a follow-up. Yeah, roughly a third of the inventory growth came from inventory bills for supply chain services, and again, the revenue there is more of a services revenue, so you're not going to see it a lot on the top line, but we'd see it in the gross margin. And, you know, I don't think we'd expect... I think we'd like to build meaningfully in the next couple quarters from there, from the supply chain services perspective. You know, that business is growing pretty well, Ruflu. I would say the rest of the business is growing pretty hot as well. So, you know, I think it's contributing overall. I think from an overall inventory days, you know, I think we expect things to continue to, you know, be flattish to down slightly. I think we feel pretty good about the days overall. You know, the returns for the quarter are really good, and the supply chain services business really helps on the returns side of the quarter.

So we're continuing to ramp that business, especially in data center.

That was timing differences at the end of the quarter as well, and then the last piece that we

related products, we had a pricing increase during the quarter, and the inventory we had at the end of the quarter reflects that pricing. Got it. Thanks for the details there. Can I ask a follow-up on operating margins? So obviously, great performance in both Farnell as well as the EC business. EC, you're already at 4.8%, and I think on the call you said you can get to 5% in the second half of fiscal 27. What drives the ceiling? What is the ceiling and operating margins for that business? How should we think about the puts and takes there? And the same question, I guess, for Farnell. I mean, you're already at double-digit margins. Is there a ceiling to this? Can you get back to, like, the 14, the mid-teams kind of operating margins over time? Should we continue to think 50, 100 basis points every quarter? So can you just give us, you know, how we should think about, like, where the ceiling is for these two businesses in terms of operating margins? Yeah, maybe I'll... I'll comment this way. I think it's higher than 5% for EC and higher than 10% for Farnell. And we'll continue to drive steady progress there. I think the 50 to 100 basis points you mentioned was more of a Farnell commentary versus EC. EC was a little bit more modest. But look, you know, we're continuing to drive efficiency. You know, you can see the expenses didn't go up very much. This quarter, the guidance would imply further improvement from our OE to GP perspective. You know, I think we're going to be in the low 50s, right? And we can

continue to drive that lower. And so that will help, you know, continue to drive the operating margin improvement. So, you know, I think we want to hit those near-term goals and then reset a little bit. But again, you know, I think Farnell in the low teens over time and then, you know, EC trending towards 6% over time. But, you know, part of it depends on the growth. Part of it depends on regional mix. But, you know, we'll continue to drive efficiency with the expense model and the working capital model to continue to drive the returns up 25% this quarter. But, you know, continue to drive the returns up 25% over time. But, you know, continue to drive the returns up 25%.

Thanks for the comment.

And, you know, we're proud of the team thus far. But we're not planning on stopping that progression, okay? So, Farnell is listening on the call and planning to get that to continue to increase quarter and quarter. A lot of it will come back to exactly what Ken just said, the regional mix. As Europe gets stronger, that helps all of our businesses, right? We use the higher margin profile. And then the commodity mix as we expand on board components. With Farnell that. From the higher margin. So constantly driving that. Do you think regional mix? Remains a bigger contributor to margins or a bigger factor for margins versus product mix or supplier programs or other investments? I think it goes back to the seasonality more so than, let's say, a fundamental mix shift. And then Asia is performing pretty well. They're well positioned. You can see the growth over the last three years. So we don't see Asia slowing down, although, you know, in the third quarter with Lunar New Year, they could have, you know, a little bit lower sales just because of less shipping days. But. You know, I think the mix where Asia is, you know, roughly high 40 to 50 percent of our mix kind of continues into the foreseeable future, but we're still going to continue to drive operating margin expansion in the West. So I think it's hard to say exactly where the regional mix lands, but I think for the time being, we should think about it being, you know, flattish.

Thank you so much.

Thank you.

Our next question is from Mr. Joe Quattrochi with Wells Fargo and Company.

Yeah, thanks. Maybe just following up on that line of thinking, if, you know, if Asia is stronger than seasonal into the March quarter, do you think you can get EC margins back to that 5% in the second half? Yeah. Yeah, I don't think that's going to be a constraint. I think either way, we'll get it through growth or we'll get it through gross margin expansion from the mix.

And as a follow-up, I think you heard you say they expect to raise capital over the coming quarters to fund growth. Can you just kind of maybe share some more color on that? Are you expecting to raise some more debt? Yeah, I mean, I think with the growth we've seen, you know, $3.6 billion in the past six months, we've just needed to have more borrowing capacity to kind of fund those receivables and the inventory. So, you know, we think it starts to normalize a little bit, but we've done notes, we've done terms. We've done upsizing to our revolving line of credit, and we've done more securitization. So we'll continue to tackle those things, and we'll have some maturities coming due that we'll have to refinance. You know, interest rates aren't the most favorable right now, but, you know, we'll be thoughtful about.

Okay, so maybe if I could sneak one more in. What's embedded in the guide from just a memory pricing perspective in terms of, like, the... to revenue growth you've seen over the last few quarters? The guide would imply, you know, very modest improvements in pricing. You know, it's just kind of flattish pricing. I think Phil gave some commentary. We're seeing more announced in the new calendar year, so we expect maybe a little bit more impact there. You know, we're still digesting that, but, you know, we're kind of going on a guide of flattish.

Gentlemen, there are no further questions at this time. I will now turn it back to Phil Gallagher for closing remarks.

Great.

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