Avnet Inc (AVT) June 2, 2026 Conference Transcript

All right, everybody, thanks again for coming to our day one 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 and this industry. And we also have Ken Jacobson. 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?

Yeah, tough to call exactly where we are in this cycle. First of all, thanks, Rufu, for having us. and thanks for all those in the room and those listening. That's where I want to start. So I think the difference, at least in my view, you have 43 years and seeing a handful of cycles. I always go back to 99, 2000, where it was heavy comms, heavy, you know, the Cisco's, the Lucent's, et cetera, Alcatel's, and the whole thing, you had Y2K, the perfect storm came together, and boom, dropped. And it was a pretty significant drop. And then, you know, flattened out and, you know, obviously came back. This one, and then you had the most recent, you know, post-COVID, if you will. This just feels a lot different. You got the, everybody knows, you know, the data center, what's happened to the data center and the hyperscalers, which, you know, that started several quarters before we actually saw the impact, the positive impact, I should say. And now the expansion to the balance of the vertical is being impacted. So, you know, you've got the data center, you've got the hyperscale, so we call that in compute, driving up. Industrials are moving up and to the right. We even saw some growth in automotive transportation. We bulked it, lumped it in with transportation, anything with wheels, with golf carts, e-bikes, trains, tractors. That's stronger. Aerospace defense, what's going on in the world, not only is it 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 in our eighth quarter of year in New York growth in Asia-Pac with record numbers. That's through June, by the way, because we're not giving any guidance into – I mean, through March. That's not guidance into June. Europe has shown oxygen, which is great news for European friends. I saw some light 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 Fresnel business, which is now three-quarters in a row of over 20-plus percent growth. And that's not just onboard components, you know, semi-electors, interconnect, pass, electromechanical. They also have that MRO test of measurement, which is another indicator in the market. So, what's happening in tektronics and natural instruments and Keysight, and they're all doing extremely well. And that's another front end, if you will, in the cycle on testing and whatnot, what's happening. So just, you know, just feels better. And the data says it is better. And our job as CEO and CFO is to keep our eyes wide open, stay vigilant. You know, as I like to say to the team, sit the champagne and enjoy them and get back to work because, you know, there's still a lot to get done.

Yeah, I know. 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? 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're about to come back to me with a couple of other four or five tied in there. But the backlog is 50% to 80% higher than it was this time last year. And we look at the backlog daily. And we not just look at the backlog, but we look at the adjustment of the backlog and the cancellation rates and whatnot. And that's still in manageable range. There's nothing crazy happening there. So the backlogs look solid. Of course, we continue to audit the backlog. I think that's important for all of our customers and suppliers to know. The booked of bills are still very positive, even when you net it out for memory inflation, still positive. And so, you know, the numbers, again, it supports, and we look at the backlog. I go back as far as 180 days. After that, it gets pretty great. But it looks really solid for the next at least six months. And I think it's going to continue to increase. And what was the other two you added on that?

Lead times and book to bill.

Yeah, so the book to bill I hit on, that's, you know, positive in all regions across the verticals. And then lead times. And so that's kind of a mixed bag. We know what's happening in memory. I don't think that's going to get better. We don't talk about supplier-specific, by the way, ever. But you can guess who the memory guys are. So that's going to continue to be tight. And I challenge it all the time. I challenge, you know, you've been around long enough, you live in a paranoid state, right? I'm like, are you serious, really? But when you go across the verticals and you go across the technologies, you know, yeah, I think memory is going to be super tight. And I'll just lump it after that. I think you're going to, any tide to power is going to continue to be tight. Any tide to power, high-rel products, any tide in the high-end capacitors in mill aero are going to be tight. Certain parts of the streets going out, controllers going out, and pricing going up. So the pricing, you know, there's many of you have the letters out there have been sent from suppliers. So it's, you know, pretty public knowledge what's going on in memory. That's, you know, we'll see how that continues. And then even one of your participants here, Steve, came out with something yesterday. They'll be putting out some price increases. We've seen that from other suppliers. And the higher tech stuff, if you will, more than hiring controllers and whatnot. night. 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 four or five times in the same month. Like we were seeing the last, it was kind of constant. So trying to give customers as much notification as we possibly can and just manage through it one supplier at a time. Everybody handles it differently. And that's the good news, 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 Avni's strategic relevance over the next five 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 five years? What value add are you of providing?

Yeah, I think it's actually going up real cool. You know, I, you know, I talk to the board or our team or people like you, I don't, I don't, but we can't control what supplier is going to buy what supplier and who's going to merge with who. I mean, we're not sitting in the boardrooms or we don't have control over that, but what we can control is the value we bring to the market. And, you know, you know, from, from really inception through design, through manufacturing, end of life and our job is just to add value on all those different journeys within the within the supply chain within the ecosystem um so domain creation leaning in on that uh supply chain as a service leaning in on that uh you know the dramatic what's happening with manufacturing moving around the world uh constantly uh lifting and shifting um supply chains it's 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, you know, tariffs. Nobody talks about tariffs hardly anymore, right? It's back to life. We help manage that, right? We take the complex and make it simple. But the world's getting more and more complex with different regulations and compliance. And so I think the supplier is 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 they ship with us, and we handle the receivables. We pay them on time. We manage the inventory for it. 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. Center of Technology for Suppliking. Just think about where we are. The amount of suppliers we have, the technology, again, I'm not going to list them all. And then taking that downstream to this mass customer base from the highest end on the defense arrow 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, 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 a mixed bag. I'd say on the supplier side, I don't think a whole lot has changed. 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 and what is it we really need. But we don't ever take inventory that don't have any demand or visibility to, right? I mean, so we're not just, oh, yeah, put that inventory and we'll ship it back in 90 days. No, that is not happening. But it's a give and take based on the suppliers. Certain commodities, you've got to carry more inventory. But sometimes in the past, it's going to actually might have 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 when I'm talking about inventory in general, it's not as much how much inventory I just have as are you getting returns on the inventory you do have. So that's why I got to my left, you know, return on working capital, return on capital employed. If we're getting good returns, then we want to put more inventory in. 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 on the shelf, just the right amount with the right returns. Farnell, though, on the other hand, runs a different inventory model. We've been breaking that out separately in the last several quarters for you guys to help better understand the days of inventory. They have to carry more because on the core side, we carry it more. It's not narrow, it's wide, but it's deeper in inventory. Where Farnell is really broad because their service and the engineer don't want to get the one-stop shop. So, yeah, the broader inventory, but not as deep. So, the modeling is just a little different for the business units, and it's different within commodities, and it might be a little different within the technology within the commodity, or the supplier within the 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-round. They, just like a lot of us, end up with too much inventory. They had too much either finished goods, whipped, or raw inventory on the shelf, and they had to burn it off. So I think actually the demand has probably been back a little bit earlier than we saw because they're eating up their own inventory. And 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 demands and the bookings we're seeing and the billings, it feels pretty good. And the customer has been pretty reasonable on that end. We'll see it. I think the key is going to be is this gets tighter and broader, you know, how the suppliers behave this time versus last time. How do they behave bad or good? I just, how do we enforce NCNRs and things along those lines as they build up capacity?

Got it. No, that makes sense. Let me ask Ken a couple of questions. So 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 Abnet's exposure memory business it's primarily focused on our key focus vertical so industrial aerospace defense right transportation some but not necessarily data center type memory and what we saw is in calendar 2025 that was roughly five 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 and memory doubled. 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's some time to roll it out. So our approach to price increases is we need to pass those through. 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 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, 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 a customer's portfolio or, sorry, supplier's portfolio. Now, from our perspective, you know, that these are built into the bombs and they have to, you know, usually pass those through. So whether it's an EMS customer, whether it's, you know, a transportation customer, then they would typically take that piece of the bomb and pass it along to the end customer. And so, you know, I think there's some anecdotes about, you know, certain consumer technologies where the price of memory is now making it non-competitive right consumers aren't only going to pay a certain amount but i think more broadly we're not seeing pricing affect you know just underlying demand uh and again um we haven't seen pricing increases anywhere near what we saw post-covid and those shortages but lead times aren't extended the same you know a lot of that price increase was because 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 you know those are real um and 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'll be some impact of 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 three questions into one question, and I'm going to do that again. Which is, are you seeing any components, if I look out six 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 yeah so i think maybe i'll start off by you know we've been talking probably for the past year if not 18 months about customers needing to give us visibility and you know one of the challenges we saw is if we don't get the visibility from our customers and we're only looking out three 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 uh amount of time to start to get that visibility and phil mentioned the backlog so And now the good news is we have more visibility. And that's where I think supply chain capabilities overall help, you know, help mitigate the impacts of parts getting tight. If we're pipelining appropriately, if we've given suppliers the right forecast, we can minimize those disruptions. Not only in our core business where we, you know, supply chain is our, you know, core competencies, 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, you know, things like buffer stock, you know, 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. You know, I would say, you know, things are getting tighter. We've talked about lead times extending, but parts are generally still available. You know, memory is probably the most tight right now, but other categories are starting to extend. I won't get into any specific categories, but, you know, I think the criticality here just 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 those solutions come with a cost that they're 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 provide 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 for now 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. If you get into these shortage times, those who have the inventory end up benefiting, and then you have more premium pricing power.

Yeah, I would jump in that one as well. I mean, the whole umbrella of value-added services, that was kind of 80s, 90s, you know, have value-added services give up? I don't think we do. I mean, when you think about it, you know, value equals benefit minus cost, right? So are we adding value to the marketplace or not? And the customers, as far as ultimately, you know, will define that value equals benefit minus cost and make any profit. You know, and you've got the most complex value-added, or the simplest, let's say. So you have, you know, cable center, connector assembly, a prompt program, you know, We program chips for some of the largest OEMs in the world, you know, 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. You know, special handling, date codes, special packaging, whatever it might be, including the services 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 big boxes in, we just take and ship small boxes. It's a lot more complex than to invite anybody to any of our distribution centers around the world. I think you'd walk away saying, hmm, holy cow, these guys do a lot more than we thought. Then you get to the more complex, you know, with, of course, demand creation is value-added, design services. You know, we do total board solutions, supply chain solutions. You know, we started with consignments and implant stores in the 80s and 90s. Now it's as complex as you can get with all the way up to supply chain. That's a service for customers that couldn't spell distribution, you know, five, ten years ago. They're coming in now saying, hey, we need help managing our supply chain around the world. And by the way, suppliers are coming in and saying, hey, why would we build this supply chain if we already have an Adnet as a partner to go do this for us? So we're continuing to drive that. We've got integrated solutions where we do more data center work. And we've got the Fresnel, which Ken just talked about, helps seed the market. So it all, you know, in this whole power one comes together under value-added services umbrella. As far as, you know, products and things getting tight, you know, I think we talked about memory probably enough. Yeah, that market is super tight. I think the next one's going to be, well, I'm not saying in order, you know, but I think high-rel is going to get tight. Anything around power is going to get tight. Anything around the data center, you know, lead times are going to be going out. It's going to be a little more difficult. So we need customers to give us that visibility as much as possible. As far as services to help them find that, yeah, we have third parties to help them go find that. We're not in that business directly. We're not in the great market, the broker business. We're authorized, but we will help them try to find products if 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 if you spun that off and and maybe not now but as margins improve so tell us like is is a catalog business something that avnet really needs to have

yeah i just uh if our funnel team is uh listening to probably panic now but uh yeah no we're not uh no we're not that's not uh on on on the radar screen at this point in time by any stretch of imagination. We love Farnell. And, you know, as I shared before in the prior peak, the trough, you know, in the peak, you know, Farnell was 6% of our business. And you'd say, ah, you know, kind of yawn. But it was 20% of our operating income, okay, and that's a public number. So it means a lot to us. Yes, I like the people. Yes, I like the model, but I'm also capitalists. We need to get the returns. And it's on track to, it's on the right track right now. But it was like a year ago we started with Rebecca taking that over, just the power of one. And how do we better – I think we made some mistakes in the past. We isolated it two separate. It was kind of a moat around it sitting over here. And we're like, no, no, how do we bring it closer to the core, still keep it separate, I call it on the front end, but build out their digital capabilities, build their e-commerce capabilities. You know, 70-plus percent of all their line-inems go through e-commerce, 55 percent of their revenues. and we're actually doing joint calls together now with the Power One joint count calls because, again, they're not just selling on-board components. I said this earlier. Yeah, they got line card almost matches 85%, 90% of what Adnet core has, but they got test and measurement, MRO, lines like N.I., He-Sight, Tecronix, the 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, you know, Fresnel, you know, they've got hundreds of thousands of customers, upwards of a million. They define the customer as an engineer on a peak car. You know, so they get an order for a reference design, design kit, a high-end chip. You know, we filter that and get that lead over to the core team. If it's a sign, boom, it goes to that account manager. If it's not, it goes to central, if you will, tell sales screening process to help further develop that lead. So, yeah, 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 pick and ship is different. I mean, the whole, you know, that's why some people say, well, why don't we just merge the warehouse? I mean, it's a very, very different business model.

We're pleased with the progress on the rebound here. farnell and uh we're looking to have them around for a long time got it by the way if they are listening they still have work to do so they're not back what they need to get to all right i'm sure she's laughing on that um this is a question maybe for both ken and yourself um can 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 opportunities to drive more automation and more productivity and phil for you i guess you know ai has been on on the radar for many companies how are you implementing ai within uh avnet and and and what are you doing on the on the portal side and and is there uh some advancements there

yeah from from an operating margin perspective um our electronic components business. We're targeting return to 4% plus here over the next few quarters. And then for now 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 timeline 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, you know, 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 and expense. And, you know, we feel well positioned and as we get into this next up cycle, if you will, we feel pretty good about where our expense space is at and that we continue to drive operating leverage across all of our regions, right? One of the challenges we've had with our operating margin has been, you know, we've seen a lot of growth from Asia relative to the West and Asia is roughly 50% of our business, but Asia is still expanding their operating margin, still generating a lot of operating income dollars and their expense efficiency has been pretty strong. So, you know, all of our businesses, you know, continue to make improvements and strides in recovering their operating margin.

And so I feel pretty good about that trajectory i'll let phil talk about the yeah internal efficiencies ai so it's you know so just to build on ken's uh point we're driving efficiency and productivity across the board we need to increase drop through we got to improve our expense to net gp ratios and um as far as the operating margins themselves go and then drive of course eps uh you know the message to our asia team isn't to shrink okay we want them to continue to grow it's good growth um they're doing a great job we just need the west to pick it back up because it's just the math it's just the math issue just the asia is so big and we don't want that to stop we're getting good returns in asia but it does affect the percent if you will on the operating margin um so as for now in the west picks up that should kind of balance that well ai yeah we're i mean we're right smack in the middle of that um obviously on the i look at it in multiple ways you know we sell into ai right directly into data centers and our hyperscalers. Our customers are the OEM customers, if you will, in the industrial sector. We're selling into them, and they're selling into the application data center. And you have the EMS providers who have big pieces. So to me, it's almost an N minus one even trying to figure out exactly how much of that business is going into the data center, but it's obviously in the mid-high billions from a vertical standpoint, if you could verticalize it. As far as AI as an application and using AI internally, driving productivity and efficiencies, we've got multiple applications already running in that space, customer services, etc., quoting, 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 and e-commerce. So we've got multifaceted angles that we're attacking AI and leveraging AI internally, as well as selling and leveraging it 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. More and more is going to end up on the edge with IoT. And that line card we have is phenomenal. and that's just going to further increase smart buildings, smart elevators, smart everything, robotics, drones, et cetera, et cetera. So, yeah, 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 and what message do you want to leave investors with?

We're excited. We're a center of technology supply chain. I think, you know, people wouldn't know the name, obviously, you know, but we're selling the highest technology suppliers to the highest technology customers and a 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 in the marketplace

got it all right great thank you so much for coming thanks for the details appreciate it