Avnet's Q1 2026 Earnings Call: Contradictions Emerge on Inventory Management, Margins, and Hyperscaler Exposure

Date of Call: October 29, 2025

Financials Results

• Revenue: $5.9B, up 5% YOY and up 5% sequentially, above guidance
• EPS: $0.84 adjusted diluted EPS, at the high end of guidance
• Gross Margin: 10.4%, down 42 basis points YOY and down 15 basis points sequentially
• Operating Margin: Adjusted operating margin 2.6%; Electronic Components 2.9% (down 11 bps sequentially); Farnell 4.3% (up ~375 bps YOY, flat sequentially)

Guidance:

• Q2 FY2026 sales guidance: $5.85B to $6.15B (implies ~2% sequential growth at midpoint)
• Q2 FY2026 diluted EPS: $0.90 to $1.00
• Assumptions: sequential sales growth in Americas and Asia, flattish sales in Europe; similar interest expense; effective tax rate 21%–25%; ~83M diluted shares
• Capital/financial posture: continue share repurchases and dividend; target to reduce gross leverage to ~3.0x over the next year

Business Commentary:

* Sales Growth and Regional Performance: - Avnet reported sales of $5.9 billion for Q1 2026, above guidance, with adjusted EPS of $0.84. - Growth was driven by strength in Asia and Farnell, with sales in the Americas region growing year-on-year for the first time since fiscal 2023.

• Geographic Mix Impact on Gross Margin:
• Gross margin for Q1 was 10.4%, with a decline of 42 basis points year-over-year and 15 basis points sequentially.

• The regional mix shift to Asia, where sales now represent 49% of total sales, contributed to this decline due to a less favorable product and customer mix.

• Inventory Management and Cash Flow:

• Inventory rose to support sales growth in Asia and supply chain opportunities, with inventory days decreasing by 3 days to 92 days.

• Increased cash usage of $145 million was primarily due to the increase in receivables to support growth in Asia revenues.

• Supply Chain and Lead Time Challenges:

• Lead times are stable overall, but there are extended lead times and price increases in memory storage, certain interconnect products, and specific technologies like MCUs.
• These trends are linked to data center and AI build-outs, with memory storage and specific interconnect products in high demand.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We are off to a solid start... achieved sales of $5.9 billion"; CEO: "encouraged by the increasing number of positive signs"; CFO: guidance implies modest sequential growth and a plan to reduce leverage to ~3.0x and continue returning capital to shareholders.

Q&A:

• Question from William Stein (Truist Securities, Inc., Research Division): Can you bring us up to speed on your exposure to the data center/AI application category?
  Response: Exposure is relatively small—hyperscaler-related demand is about ~7% of Asia sales; Avnet is selling beyond GPUs/FPGAs into storage, connectivity, power, cooling and sees larger downstream opportunity in MCU/NPU and edge applications.

• Question from William Stein (Truist Securities, Inc., Research Division): Inventory days were only modestly down; should we expect elevated inventory days to persist or to decline over time?
  Response: They expect inventory days to decline—EC inventory is improving (down ~10 days YOY), quality/aging looks good, and the company aims to reduce days toward the 80s while investing for growth.

• Question from William Stein (Truist Securities, Inc., Research Division): How soon will you get inventory days into the 80s?
  Response: Management expects to be in the 80s next quarter (exited current quarter ~91–92 days) and then follow a gradual downward trajectory.

• Question from Joseph Quatrochi (Wells Fargo Securities, LLC, Research Division): How should we think about demand profile and visibility in EMEA for the December quarter given seasonality?
  Response: Expect modest improvement in EMEA for December as Europe appears to be bottoming—bookings and backlog have improved, so modest sequential growth is anticipated.

• Question from Joseph Quatrochi (Wells Fargo Securities, LLC, Research Division): With total business back to YOY growth, how should we think about incremental margins?
  Response: Guidance implies flat gross margin YOY, but seasonal mix shift (more Western sales) and Americas recovery should provide operating leverage and help expand operating margins over coming quarters.

• Question from Joseph Quatrochi (Wells Fargo Securities, LLC, Research Division): Any color on supplier potential price increases?
  Response: Selective price increases expected in memory (HBM), certain interconnects and some high-end MCU/power products due to extended lead times; input costs remain elevated and ASPs are holding up.

• Question from Ruplu Bhattacharya (BofA Securities, Research Division): What needs to happen for core business margins to exceed 4% and can that occur in fiscal '26?
  Response: Management won't commit to >4% in FY26—achieving that depends on a favorable mix shift toward Western sales and seasonal improvements in H2; it's mix- and timing-sensitive and possible but not assured.

• Question from Ruplu Bhattacharya (BofA Securities, Research Division): How should we think about Farnell margins going forward if Europe remains flat?
  Response: Farnell margin upside is driven more by product mix (more semiconductors/on‑board components) than regional mix; expect modest sequential improvement as mix shifts, with seasonality affecting the March quarter.

• Question from Ruplu Bhattacharya (BofA Securities, Research Division): What percent of revenue are demand creation and IP&E, and what's the margin delta vs core business?
  Response: IP&E is roughly 15%–20% of components; demand creation is ~28%–33% of revenue; combined they deliver ~300–400 basis points higher margin but require additional costs (FAEs/technical support).

• Question from Melissa Dailey Fairbanks (Raymond James & Associates, Inc., Research Division): Was the transport strength across all geographies or concentrated where you saw growth?
  Response: Transport strength was concentrated in Asia Pac (up YoY and sequential) and in the Americas (up sequentially, down slightly YoY); Europe remains negative.

• Question from Melissa Dailey Fairbanks (Raymond James & Associates, Inc., Research Division): Do you have visibility into exposure to pure EV/hybrid vs ICE in transport?
  Response: No precise split on hand; broadly Asia skews more EV, Americas skews more ICE, and Europe sits in between.

• Question from Melissa Dailey Fairbanks (Raymond James & Associates, Inc., Research Division): For higher-value data center components (memory, FPGA, interconnect), is the booking linearity changing or is it still book-and-ship within the quarter?
  Response: Mostly supply‑chain arrangements—these tend to book and ship within the same quarter (book‑and‑bill) as forecasts are managed, so they don't materially inflate long‑term bookings.

Contradiction Point 1

Inventory and Cash Flow Dynamics

It involves differing explanations of inventory and cash flow trends, which are crucial for understanding Avnet's financial health and operational efficiency.

Inventory days were flat and cash flow was negative. How should we view this in the context of future expectations? - William Stein (Truist Securities, Inc., Research Division)

2026Q1: Inventory days were average, not end-of-quarter numbers. Despite increases in Asia and supply chain services, efforts are on to align inventory levels with demand. The quality of inventory remains good, with the goal to reduce days to the low 80s. - Philip Gallagher(CEO)

How should we think about inventory trends in the September quarter? - Joseph Michael Quatrochi (Wells Fargo & Company)

2025Q4: We expect the EC business to continue driving inventory down modestly, while Farnell will add back slightly. The progress in inventory is despite increased sales and is showing improvement in Asia and the Americas. - Kenneth A. Jacobson(CFO)

Contradiction Point 2

Core Business Margins and Margin Improvement Strategies

It relates to the company's outlook and strategies for improving core business margins, which are critical for profitability and investor expectations.

How should we assess core business margins over the next few quarters, and what would drive margins above 4%? - Ruplu Bhattacharya (BofA Securities, Research Division)

2026Q1: Fiscal 2026 margins for the core business are not specifically addressed. Improvements in gross margin through seasonal mix shifts are expected. Note that achieving 4% margin is contingent on Asia's growth and West's stabilization. - Ken Jacobson(CFO)

What trends in the core business and their impact on margins do you expect over the next few quarters? - Ruplu Bhattacharya (Bank of America)

2025Q4: Asia is strong with 4 consecutive quarters of year-on-year growth, maintaining its margin profile. We expect Asia to continue this trend and eventually turn around the global market. The mix of regions affects overall margins, but each region's stand-alone gross margin has held steady. EMEA and Americas' recovery will positively impact the margin mix as they improve. - Philip R. Gallagher(CEO)

Contradiction Point 3

Data Center and Hyperscaler Exposure

It involves changes in the reported exposure to data center and hyperscalers, which are critical for understanding Avnet's market positioning and potential growth opportunities.

What is your current exposure to data centers and AI applications, and what opportunities do you see? - William Stein (Truist Securities, Inc.)

2026Q1: Avnet's exposure to the hyperscalers is about 7% of their Asia sales. Opportunities are beyond GPUs and FPGAs, including storage, connectivity, power, and cooling. - Philip Gallagher(CEO)

How does visibility into AI-driven components/systems affect your business? - Wamsi Mohan (Bank of America)

2025Q3: Our exposure to the hyperscalers remains about 7% on a product basis. - Ken Jacobson(CFO)

Contradiction Point 4

Inventory Management and Days Inventory

It involves changes in the reported inventory management strategies and inventory days, which are critical for understanding Avnet's operational efficiency and financial health.

Inventory days were flat and cash flows were negative. How should we view this in the context of future expectations? - William Stein (Truist Securities, Inc.)

2026Q1: Despite increases in Asia and supply chain services, efforts are on to align inventory levels with demand. - Philip Gallagher(CEO)

Could you clarify the inventory management strategy and target inventory levels? - William Stein (Truist Securities, Inc.)

2025Q3: We continue to tighten inventory levels with $57 million of reductions. That's down $57 million year-over-year on a constant currency basis. - Ken Jacobson(CFO)