Avnet, Inc. ($AVT)

Day 1 of our Global Technology Conference. Great to see everybody here. We're honored to have the team from Avnet. And from Avnet, we have CEO, Phil Gallagher. And those of you who've known Phil for over 43 years, he's been with Avnet and he's a real institution when it comes to distribution in this industry. And we also have Ken Jacobson, who he's been with the company since 2013, and prior to that, he was with First Solar. So a lot of experience on that side as well. So we hope to have a great discussion.

Phil, I'm going to start with a very overall general question. Where do you think we are in this cycle? Is this cycle any different from prior cycles, which have been primarily driven by inventory? What do you think is driving this cycle? And where do you see this year trending?

Yes, tough to call exactly where we are in the cycle. First of all, thanks, Ruplu, for having us, and thanks for all those in the room and those listening. So where I want to start. So I think the difference, at least in my view, 43 years and seeing a handful of cycles. I always go back to '99, 2000, where it was heavy comms, heavy, the Ciscos, the Lucents, et cetera, Alcatels and the whole thing had Y2K and the perfect storm came together, won't drop. And it was a pretty significant drop. And then flattened out and obviously came back. This one -- and then you had the most recent post-COVID, if you will. This just feels a lot different. You got -- everybody knows the data center, what's happened to the data center and the hyperscalers, which that started several quarters, before we actually saw the impact of -- the positive impact, I should say. And now the expansion to the balance of the verticals being impacted. So you got data center, you get the hyperscale, so we call that in compute driving up, industrials are moving up into the right. We even saw some growth in automotive transportation. We lump them with transportation, anything with wheels, with golf carts, e-bikes, cranes, factors, that's stronger. Aerospace, defense with what's going on in the world, not only strong in the Americas, that's going to continue to expand in Europe and even parts of Asia Pac. Consumers steady as she goes. So it's really a diverse recovery across multiple verticals, or you can arguably say all the verticals and geographic as well. So Asia is now on our eighth quarter of year-on-year growth and Asia Pac with record number, that's through June, by the way, we're not giving guidance -- I mean, through March, that's not guidance into June. Europe has shown [indiscernible] which is great news for our European friends, still saw some life here in the last several quarters in Europe. Still not where it needs to be, but definitely some rebound there in the industrial space as well, which is good news. And the Americas now has been on its third, probably fourth quarter of accelerated growth, in the 30-plus percent range. So overall, it's not only diverse vertically, but it's diverse geographically. Then we have our Farnell business which is now 3 quarters in a row of over 20-plus percent growth. And that's not just onboard components, semiconductors, interconnect [indiscernible] electromechanical. They also have that MRO test and measurement, which is another indicator in the market. So what's happening in [ Tektronix ] and National Instruments and Keysight, and they're all doing extremely well. And that's another front-end, if you will, the cycle on testing and whatnot, what's happening in semiconductor. So just feels better. And the data says it is better. And our job as CEO and CFO is that keep our eyes wide open and stay vigilant. As I like to say to the team, sip the champagne and enjoy and get back to work because there's still a lot to get done.

Yes. No, that makes sense. So let's put some numbers on this, and talking about the components, electronic components business, can you talk about backlog? Can you talk about lead times and pricing and book-to-bill? Like what are some of the numbers that are giving you confidence that this is a sustainable recovery that you're seeing?

Well, you start with the backlog and the book-to-bill, you might have to come back to a couple of years, like 4 or 5 tied in that, Ruplu. But the backlog is 50% to 80% higher than it was this time last year. And we look at the backlog daily. And we don't just look at the backlog, but we look at the adjustment of the backlog, cancellation rates and whatnot. And that's still in manageable range. It's not -- there's nothing crazy happening there. So the backlog looks solid. Of course, we continue to audit the backlog, and it's important for all of our customers and suppliers to know. The book-to-bills are still very positive, even when you net it out for memory inflation. So still positive. So the numbers, again, it supports, and we look at the backlog, I go about as far as 180 days. After that, it gets pretty gray. But it looks really solid for the next at least 6 months, and I think it's going to continue to increase. And what was the other 2 you added on that?

Lead times and book-to-bill.

Yes. So the book-to-bill, I hit on, that's a positive in all regions across the verticals. And then lead time. So that's kind of a mixed bag. We know what's happening in memory, I don't think that's going to get -- we don't talk about supplier specific by the way ever. But you guys [indiscernible] the memory guys are. So that's going to continue to be tight. I mean -- and I challenge it all the time. I challenge -- you've been around long enough, you live in [indiscernible] state, like are you [indiscernible] really? Like when you go across the verticals and you go across the technologies, yes, I think memory is going to be super tight. And I'll just lump it after that. I think you're going to -- anything tied to power is going to continue to be tight. And any tied to power, high-rel products, anything tied to the high-end capacitors and [indiscernible] are going to be tight. Certain parts of [ discretes ] are going out. Controllers going out and pricing going up. So the pricing, there's -- many of you have the letters out there, have been sent from suppliers. So it's pretty public knowledge what's going on in memory, and that's -- we'll see how that continues. And then even one of your participants here [indiscernible] something yesterday they'll be putting out some price increases, and we've seen that from other suppliers, and the higher tech stuff, if you will, more [indiscernible] controllers or whatnot. And I think the good news, I think it's being managed better this time. We'll see as we get through it. We're not seeing price increases 4 or 5x in the same month. What we were seeing the last was kind of constant. So trying to give customers as much notification as we possibly can and just manage it [indiscernible] time. Everybody handles it different way. And that's the good news and bad news of the job we do for the supply chain, right? We manage the complex and we try to make that simple.

Phil, I want to ask you a couple of higher-level questions that we keep getting time and again from clients. One is like how do you see Avnet's strategic relevance over the next 5 years? There's always talk of vendors consolidating, them trying to go in-house or they're trying to go direct to customers. So how do you see your relevance over the next 5 years? What value-add are you providing?

Yes, I think it's actually going up, Ruplu. When I talk to the Board and our team or people like you, I don't -- we can't control what supplier is going to buy what supplier, who's going to merge with who. We're not sitting in the boardrooms. We don't have control of that. But what we can control is the value we bring to the market, and from really inception through design, through manufacturing, end of life. And our job is to continue to add value on all those different journeys within the supply chain, within the ecosystem. So demand creation, leaning in on that. Supply chain as a service, leaning in on that. What's happening with manufacturing moving around the world, constantly lifting and shifting supply chains, is really complex. So I actually think the relevance of what we do is going to keep going up. I mean it's not going down, because the world is getting more complex. And I think there's a tariff -- let me talk about tariffs, right? It's back to life. We help manage that, right? We take the complex and make it simple. But the world is getting more and more complex with different regulations and compliance. And so I think the suppliers are going to continue to lean in on the channel. Most of them know that we're the most profitable means to go to market still because we handle -- they ship with us and we handle the receivables. We pay them on time. We manage inventory for them, we do -- so I think it's going to go the other way. I think it's more positive than not. Actually, I'm really excited about the spot we're in right now. And [indiscernible] just think about where we are, the managed suppliers, we have the technology [indiscernible]. And then taking that downstream, this mass customer base from the highest end on the defense, aero to data centers and hyperscalers and everything in between. It's a pretty cool place to be.

Another higher-level question we keep getting is in terms of inventory management, right, are suppliers less willing to hold inventory now? Are they pushing more inventory into the channel? And on the other side, I'll also talk about customers, after COVID and what happened in automotive, are customers more willing to hold inventory? Or is it just in time? So how are you seeing inventory on both sides?

Probably mixed bag. I'd say on this wire side, I don't think a whole lot of change. It's pretty fair and balanced. I mean sometimes you have to carry a little bit more inventory for a given supplier based on maybe their lead times or whatever might be happening in the market. But there's no extremism here where we're being asked to go carry x amount of inventory more than what we should have. And by the way, where there is, we have a conversation, we go back and forth. I mean we just negotiate with what's fair and balanced, what is it we really need. But we don't ever take inventory that don't have any demand or visibility, right? I mean so we're not just [indiscernible] that inventory and we'll ship it back in 90 days. That is not happening. But it's a give-and-take based with suppliers. Certain commodities, you got to carry more inventory, but sometimes in the past [indiscernible] to carry more inventory to serve that market. It turns at a different level in the IPD space than it does in the semi space. So [indiscernible] inventory in general, it's not as much how much inventories we have, it's are you getting returns on the inventory you do have. So that's why [indiscernible] return on working capital, return on capital employed. And we're getting good returns, that we will put more inventory. Inventory, I mean, sometimes inventory is seen as a bad thing. It's not. It's good inventory. That's a good thing. Distribution, we're supposed to have inventory in our shelf, just the right amount with the right returns. Farnell though, on the other hand, the inventory model, we've been breaking that out [indiscernible] over the last several quarters for you guys to help better understand the days of inventory, they have to carry more. On the core side, we carry a more -- it's not narrow, it's wide, but it's deeper inventory. Where Farnell is really broad [indiscernible] one-stop shop. So yes, the broader inventory was not as deep. So the inventories, the modeling is a little different for the business units and it's different within commodities and might be a little different within -- the technology within the commodity. And then the [indiscernible] commodity. On the customer side, I think we're finally getting a little bit more visibility, which is good news. They were -- understandably so with what happened in the last go around. They -- just like a lot of us ended up with too much inventory, right? They had too much either finished goods with raw inventory on the shelf and had to burn it off. I think actually demand -- demand is probably back a little bit earlier than we saw because they were eating up their own inventory. I think they're eating through that. We feel pretty good about the customer and inventory. We don't have visibility to every single inventory out there. But just based on the demand and the bookings we're seeing and the billing, it feels pretty good. And the customer has been pretty reasonable on that end. We'll see. I think the [indiscernible] just gets tighter and broader how the suppliers behave this time versus last time. I don't know if you hit bad or good, just how do you [indiscernible] along those lines, they build up capacity.

Got it. No, that makes sense. Let me ask Ken a couple of questions. So the one thing that's been impacting the industry is supplier price increases. Can you help us just walk through how that impacts your revenues and margins? And as prices have gone up for components, is there any danger of demand falling off in the second half of the calendar year or next year as -- do you see any signs of demand destruction in any end market?

So maybe I'll start, Phil mentioned memory a little bit, and maybe just to kind of level set. When we talk about Avnet's exposure, memory business, it's primarily focused on our key focused verticals. So industrial, aerospace, defense, right, transportation, but not necessarily data center type memory. What we saw us in calendar 2025, that was roughly 5% to 7% of our business. And in the March quarter, it was roughly 10% to 15% of our business. And that's mostly because prices doubled, right? Not that we got more units. It was the pricing in memory double. Now I think that's an extreme amount of price increase. What we're seeing more broadly across our portfolio is selective price increases, maybe between 10% and 20%. And usually, there is some time to roll it out. So our approach to price increases is we need to pass those through, right? As a distributor, we can't absorb price increases, especially of that magnitude. And so we pass those along and we do a good job trying to message our customers, give them time to adjust, if they want to pull some stuff in, usually, that happens, right, depending on the size of the price increase, and then we'll kind of move forward at the new price. And I think we're seeing now as lead times go out a little bit, more pervasiveness of price increases. So again, not as significant as what we saw in memory, but starting to see more and more signs of at least selected price increases across certain parts of the customers' portfolio -- or sorry, suppliers' portfolio. Now from our perspective, that these are built into the BOMs and we have to usually pass those through, so whether it's an EMS customer, whether it's a transportation customer, then we typically take that piece of the [ BOM ] and pass along to the end customer. And so I think there are some anecdotes about certain consumer technologies where the price of memory is now making it noncompetitive, right, consumers aren't only going to pay a certain amount. But I think more broadly, we're not seeing pricing effect, just underlying demand. And again, we haven't seen pricing increases anywhere near where we saw post-COVID, those shortages, but lead times aren't extended the same. A lot of that price increase was because of input costs, right? You think about the cost of energy, you think about the cost of substrates, all those things that require to make a semiconductor, those are real and they're still real today. So we'll continue to monitor it. But I think the impact we saw this last quarter, we wouldn't expect to see similar levels of impact, although there will be some impact on pricing as we kind of move forward most likely.

Got it. I want to ask you a question on value-added services. I want you to talk about what type of value-added services Avnet provides. But I have a tendency to put 3 questions into one question, and I'm going to do that, which is are you seeing any components? If I look out 6 months, are there any components that could be in short supply? We've heard of things like MLCCs that might become short. So does that enable you to do some other type of service such as like shortage market? Like is there some value-add that you can provide customers by trying to get parts? So talk to us about what you're seeing in the market in terms of which components are going into shortage or that are already have a shortage? And just overall, can you talk about your value-added services, supply chain services, demand creation?

Yes. So I think maybe I'll start off by we've been talking probably for the past year, if not 18 months, about customers needing to give us visibility. And one of the challenges we saw is if we don't get the visibility from our customers and we're only looking at 3 months, then we can't provide the proper visibility to suppliers to figure out what to build. And so we've been harping over the past amount of time to start to get that visibility, and Phil mentioned the backlog. So now the good news is we have more visibility. And that's where I think supply chain capabilities overall help mitigate the impacts of parts getting tight. If we're pipelining appropriately, we've given suppliers the right forecast, we can minimize those disruptions, not only in our core business where we -- supply chain is our core competency, but also on supply chain services, think about large OEMs that have complex supply chains that we can help manage those supply chains. And so things like buffer stock, vendor managed inventory, all the different supply chain solutions we have we can bring to bear as long as we have the visibility and know what the customers need. I would say things are getting tighter. We've talked about lead times extending, but parts are generally still available. Memory is probably the most tight right now, but other categories are starting to extend. I won't get into any specific categories, but I think the criticality here becomes if we don't know what the customers need and they don't give us that visibility, it's hard for us to bring solutions to bear. Now many times, some of these solutions come with a cost that are going to have to pay for the value we provide. But we have kept customers up and running longer the customers that use our services versus others. And I think the suppliers are seeing that value provider as well and we're being referred to from the suppliers as well for that. So I do think we're going to continue to see things get tighter, especially as demand gets pulled through. Now some of that demand is being pulled through by the data center. But it's broad-based. We're seeing it pretty broad-based. And so that's just many more categories that need the components. And so again, that leads into pricing, that leads into shortages and things like that. And again, we want to make sure Farnell, who's seeding the market for new designs and revs continue to have the right product as well. So that's where inventory comes in, and you get to the shortage times, those who have the inventory end up benefiting. And then you have more premium pricing power.

Yes. I would jump on that one, Ruplu, as well. I mean the whole umbrella of value-added services, that was kind of 80-ish, 90-ish, we have value-added services. I don't think we do. I mean when you think about it, we -- value is benefit minus cost, right? So we're adding value to the marketplace, they're not. And the customers [indiscernible] ultimately will define that value, benefit minus cost, make any profit. And you got the most complex value-added, or [indiscernible] so cable, connector assembly [indiscernible] program. We program chips for some of the large [indiscernible] in the world around the globe, and that's a services capability. 70-plus percent of what we ship out of every warehouse around the world, we're doing something to the product, special handling, [indiscernible] special packaging, whatever it might be, including the service I just mentioned, we're touching that product, for sure more than once. I think sometimes there's this image that we have these large warehouses, we get [indiscernible] it's a lot more complex and anybody to any of our distribution centers around the world, I think you'd walk away, say, boom, these guys [indiscernible] what we thought. Then you get into the more complex [indiscernible] creation is value-added. Design services. We do total board solutions. Supply chain solutions, that started with consignments and implant stores in the '80s and '90s and now it's as complex as you can get with [indiscernible] supply chain as a service for customers that couldn't spell distribution 5, 10 years ago. They're coming in now and say, hey, we need help managing our supply chain around the world. And by the way, suppliers are coming in and say, "Hey, why would we build the supply chain if we already have an Avnet as a partner and go do this for us?" So we'll continue to drive that. I think we've got integrated solutions where we do more data center work and we've got the Farnell, which Ken just talked about, helps seed the market. So it all -- in the whole power of one come together on the value-added services and grow it. As far as products and things getting tight, I think we talked about memory probably enough. Yes, that market is super tight. I think the next one is going to be -- well, I'm not saying an order, but I think [indiscernible] is going to get tight, anything around power is going to get tight. Anything around the data center, lead times are going to be going out, it's going to be more and more difficult. So we need customers to continue to give us that visibility as much as possible. As far as services to help them find that, yes, we have third parties that can help them go find that. We're not in that business directly. We're not in [indiscernible] or the broker business. We're authorized. But we will help them try to find products as we can, but we won't sell it to them. We'll find it and help them go negotiate it.

That's helpful. We talked about Farnell a little bit. Strategically, do you see Farnell as a core part of Avnet? And is there value to be created if you spun that off? And maybe not now, but as margins improve. So tell us like, is a catalog business something that Avnet really needs to have?

Yes. I just -- if Farnell team is listening, they'll probably panic now. But yes. No, we're not -- that's not on the radar screen at this point in time by any stretch of imagination. We love Farnell. And as I've shared before in the prior peak to trough, in the peak, Farnell was 6% of our business. You'd say, kind of yawn. But it was 20% of our operating income, okay? And that's a public number. So it means a lot. Yes, I like the people, yes, I like the model, but mostly with capital, we need to get the returns. And it's on track to -- it's on the right track right now. But a year ago, we started with Rebecca taking that over, just the Power of One. And how do we better -- where I think we made some mistakes in the past, we've isolated the 2 separate, kind of a moat around it sitting over here. We're like, no, no, how do we bring it closer to the core, still keep it separate [indiscernible] on the front end? But build out their digital capability, build e-commerce capabilities. 70-plus percent of all their [indiscernible] go through e-commerce, 55% of the revenues. Yes. We're actually doing joint calls together now with the Power of One joint count calls. Because again, they're not just selling onboard components. Yes, they got -- line card almost matches 85%, 90% of what Avnet core has. But they got test and measurement, MRO, [indiscernible] [ Heatsight ], Tektronix and things that we don't have that every customer, every supplier is using. So it's a fragmented market as well, which is opportunity. So then back on the core side, Farnell, they got hundreds of thousands of customers, upwards of $1 million. Because they define the customer as an engineer [indiscernible]. They get an order for reference design, design kit, high-end chip. We filter that and get that lead over to the core team. If it's assigned, boom, goes to that account manager. If it's not, goes to central, if you will, sales screening process to help evolve that lead. So yes, I think they're integral to each other, and we're leaning in on both and leveraging back office where we can. But it is a different model. I mean, the way they make a chip is different. I mean the whole -- that's why some people say, "Well, why don't you just merge the warehouse?" But this different. I mean it's a very, very different business model. We're pleased with the progress on the rebound here with Farnell, and we're looking to have them around for a long time. By the way, if they are listening, they still have work to do. So they're not back to where they need to get to. I'm sure [ she laughing on that ].

This is a question maybe for both Ken and yourself. Ken, maybe talk about operating margin targets for both the core as well as for Farnell and how quickly you can achieve those. And then how variable is the cost structure now versus maybe pre-COVID? And are there opportunities to drive more automation and more productivity. And Phil, for you, I guess, AI has been on the radar for many companies, how are you implementing AI within Avnet? And what are you doing on the portal side? And is there some advancements there?

Yes, from an operating margin perspective, our Electronic Components business, we're targeting a return to 4% plus here over the next few quarters. And then Farnell is 10% or above operating margin in the next, let's say, several quarters. And we think we're well on track and hopefully can beat those time line targets we gave this last quarter. And we look at our overall, let's say, operations, our cost structure is much more efficient and structurally sound than prior to COVID, right? We've been through some restructurings. And I think we really have our stronger company operationally than we were prior to COVID. And so what that means is as we grow, we can continue to create more operating leverage from the model, right? And our models want to scale, but also efficiency in expense. And we feel well positioned as we get into this next up cycle, if you will, we feel pretty good about where our expense base is at and that we can continue to drive operating leverage across all our regions, right? One of the challenges we've had with our operating margin has been we've seen a lot of growth from Asia relative to the West. Asia is roughly 50% of our business. But Asia is still expanding their operating margins, still generating a lot of operating income dollars and their expense efficiency has been pretty strong. So all of our businesses continue to make improvements in strides in recovering their operating margin. And so I feel pretty good about that trajectory. I'll let Phil talk about the internal efficiencies, AI.

So just to build on Ken's point, we're driving efficiency and productivity across the board. We increased drop-through -- improved our expense and net GP ratios. And as far as the operating margins themselves go [indiscernible] core EPS, the message to our Asia team isn't to shrink, okay? We want them to continue to grow. It's good growth. They're doing a great job. We just need the West to pick it back up. Because it's just a math issue, just Asia is so big, and we don't want that to stop. We'll get good returns in Asia. But it does affect the percent, if you will, on the operating margin. So Farnell and the West picks up, that should kind of balance that. Well, AI, yes, we're -- I mean we're right smack in the middle of that. Obviously, on the -- I look at it in multiple ways, that we sell into right, directly into data centers and the hyperscalers. We -- our customers are the OEM customers, if you will, in the industrial sector. We're selling it to them, and they're selling into application data center, any of the MS providers who are big pieces. So to me, it's almost an [indiscernible] trying to figure out exactly how much of that business is going into the data center, but it's obviously in the mid to high billions from a vertical standpoint, if you could verticalize it. As far as AI as an application using AI internally driving productivity and efficiencies, we've got multiple applications already running in that space, customer services [indiscernible] coding, and then leveraging it in the supply chain, how we better manage supply chains moving forward and demand creation, how do we better automate design cycles or design services with agents in e-commerce. So we've got multifaceted angles that were attacking AI and leveraging AI internally as well as selling -- leveraging externally. And I think everyone needs to remember that once this -- as this infrastructure gets built in data centers, it's just going to increase our opportunity on the edge, right? More and more is going to end up on the edge, okay, with IoT [indiscernible] and that line card we have is phenomenal. And that's just going to further increase smart buildings, smart elevator, smart everything, robotics, drones, et cetera, et cetera. So yes, we're excited about it.

I always ask you this as the last question, I'm going to ask this again. What are people missing about the Avnet story? What message do you want to leave investors with?

We're excited we're in the center of the technology supply chain. I think people would know the name, obviously, Avnet, but we're selling the highest technology suppliers to the highest technology customers, and right smack in the middle of it. And it's a complex world. And I always say complexity is our friend, okay? And our job is to help simplify and drive value into the marketplace.

Got it. All right. Great. Thank you so much for coming. Thanks for the details. Appreciate it.

One second left. Thanks, Ruplu.