Avnet Inc (NASDAQ: AVT) Q2 2026 Earnings Call dated Jan. 28, 2026
Corporate Participants:
Lisa Mueller — Director of Investor Relations
Phil Gallagher — Chief Executive Officer
Ken Jacobson — Chief Financial Officer
Analysts:
William Stein — Analyst
Joe Quatrochi — Analyst
Ruplu Bhattacharya — Analyst
Presentation:
operator
Welcome to Avnet second quarter fiscal year 2026 earnings call. I would now like to turn the floor over to Lisa Muller, Director of Investor Relations for Avnet. Please go ahead.
Lisa Mueller — Director of Investor Relations
Thank you Operator I’d like to welcome everyone to Avnet’s second quarter fiscal year 2026 earnings conference call. This morning Avnet released financial results for the second quarter of fiscal year 2026 and the release is available on the Investor Relations section of Avnet’s website along with a slide presentation which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward looking statements are not a guarantee of performance and the Company’s actual results could differ materially from those contained in such statements.
Several factors that could cause or contribute to such differences are described in detail in Abnet’s most recent Form 10Q and 10K and subsequent filings with the SEC. These forward looking statements speak only as of the date of this presentation and the Company undertakes no obligation to publicly update any forward looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non GAAP measures. The full non GAAP to GAAP reconciliation can be found in the press release issued today as well as in the Appendix slides of today’s presentation and posted on the Investor Relations website.
Today’s call will be led by Phil Gallagher, Avnet’s CEO and Ken Jacobsen, Avnet cfo. With that, let me turn the call over to Phil Gallagher. Phil?
Phil Gallagher — Chief Executive Officer
Thank you Lisa and thank you everyone for joining us on our second quarter fiscal year 2026 earnings call. I am pleased to share that we delivered another quarter of financial results that exceeded the high end of our sales and EPS guidance. In the second quarter we achieved sales of $6.3 billion, driving a 3.2% operating margin in our electronic components business and a 4.7% operating margin in our Farnow business. We also generated over $200 million of cash flow from operations in the quarter and reduced inventory dollars and days as projected. Our double digit year on year sales growth was led by record revenues in Asia along with better than typical seasonal growth in the Americas, Europe and Farnell.
I want to thank our team for delivering this performance while remaining focused on the areas we can control in the quarter. We made solid strides in expand margins, optimizing inventory and generating cash flow while continuing to make necessary investments to best support future growth. From a demand perspective, sales increased sequentially in most of the verticals we serve and not surprisingly were led by strong demand in compute and aerospace and defense. Year over year, we also saw a broad based improvement across most verticals. Now, turning to today’s market, demand signals continue to reset globally, resulting in lead times trending higher across most product categories.
This trend is still largely driven by the data center artificial intelligence, but is also broadening as projected growth rates at all segments we track continue to improve. We’re also seeing an increasing number of customers orders being placed within lead times along with higher instances of deliveries beyond lead times. These factors are driving a mismatch, if you will, between customer request dates and supplier delivery dates. This creates opportunity for us to deliver our supply chain value to our customers by addressing those misalignments. The pricing environment remained stable during the quarter, but we have seen spot price increases with a few suppliers and commodities.
The supply dynamics suggest there may be upward pricing pressure across many technologies going forward. We exited the quarter with robust book to bills in every region led by Asia and emea. As momentum builds, we are coordinating closely with customers to effectively validate and manage our backlog while continuing to encourage customers to provide us extended visibility that we can share with our supplier partners. The more visibility we can give to our supplier partners, the more supply chain expertise we can bring to bear to solve for the complexities in the market. With that, let me turn to highlights for our businesses at the top line.
Our electronic components business drove year over year growth and sequential sales growth across all regions. In Asia, sales reached a record high of over $3 billion. This marks our sixth consecutive quarter of year on year sales growth in the region. Demand increased across most of the verticals and geographies we serve for both the year on year and sequential compares. In emea, we’re seeing clear signs of recovery with sales growing both sequentially and year on year. Most end markets showed year on year growth including Industrial, while compute, Consumer and Transportation were the strongest end markets quarter over quarter.
We are encouraged with the improving outlook in the region, especially given the continued market uncertainty. I’m confident that EMEA’s new leader, Gillespetron will continue to drive profitable growth in the region. In the Americas, sales grew both sequentially and year over year, marking our second consecutive quarter of year on year growth. Most end markets showed sequential growth led by Aerospace and Defense, while Industrial, Communication and Compute were the strongest end markets year over year. Our EC team is focused on several growth and margin expansion opportunities including demand creation, supply chain services, embedded solution and our interconnect, passive and electromechanical business or IP and E.
Demand creation revenues increased sequentially by 7% as our field application engineers continue to drive the funnel for converting design wins into revenues. Our design registrations and wins also increased sequentially which is a positive indicator for future revenues. We continue to develop and invest in both digital tools and hardware solutions that will allow our design engineers to better support our customers design requirements. We are also pleased with the growth in our IP and E business which had double digit growth year on year. As a reminder, IP products carry higher gross margins and there are many cross selling opportunities with IP components that are complementary to our semi electric business including through our demand creation efforts.
Now turning to Fresnel, sales grew sequentially and year on year. Farnell’s continued improvement reflects recovery across all three regions. We believe this is a sign engineers are working on developing new products which we view as another indicator of the upturn in demand for electronic components. Operating margins improved sequentially in line with our expectations. We also continue to gain traction growing Fresnel sales of on the board components through our Power of One initiatives which leverages the best of Avnet, Core and Farnell digital platforms. Although we are seeing improvement in sales of higher margin onboard components, Farnell continues to have a higher relative sales mix of test and measurement, maintenance and repair and single board computers.
As the recovery of demand for the onboard components continues, especially in Europe, we expect Farnell’s gross and operating margins to continue so here at the center of technology supply chain as we look forward, There are many reasons why I’m optimistic about Avnet’s future and our position in the marketplace. We have a diverse and high quality supplier, line card and customer base. We have a seasoned and stable leadership team and employee base. We’re the only global distributor that also has a high service distribution business. We have the right resources and more importantly capacity in place with our sales teams, our engineers and our technical capabilities.
And from an operating expense standpoint, we believe we are well positioned for future growth. So our model will create operating leverage over the next couple of years as we return to growth across the world. We’re also well positioned with inventory but continue to drive down areas of excess while we invest in areas of need. To conclude, we are pleased with the momentum we’re seeing moving into the new calendar year. For those of you who attended CES this year, there was a lot of excitement at the show. We had the opportunity to meet with leadership of many of our supplier partners and customers and we continue to be encouraged that 2026 will be a year of growth and margin expansion and improved returns for Avnet.
With that, I’ll turn it over to Ken to dive deeper into our second quarter results. Ken?
Ken Jacobson — Chief Financial Officer
Thank you Phil and good morning everyone. We appreciate your interest in Avnet and for joining our second quarter earnings call. Our sales for the second quarter were approximately $6.3 billion above the high end of our guidance range and up 12% year over year. On a sequential basis, sales were higher by 7% regionally. On a year over year basis, sales increased 17% in Asia, 8% in Europe and 5% in the Americas. During the second quarter, sales from Asia grew to over 50% of total sales compared to approximately 48% of sales last quarter. From an operating group perspective, Electronic component sales increased 11% year over year and increased 7% sequentially.
In constant currency, electronic component sales increased 9% year over year. Farnell sales increased 24% year over year and 7% sequentially. In constant Currency, Farnell sales increased 20% year over year. For the second quarter, gross margin of 10.5% was flattish year over year and up slightly sequentially. EC gross margins are still being impacted by the Asia region growing faster than the West. From a regional perspective, EC gross margins were stable by region with gross margin improvement in Europe compared to last quarter. From a Farnell perspective, gross margins were up over 100 basis points year over year and were down 25 basis points sequentially.
As Phil mentioned, we anticipate improvement in Farnell gross margins as we see more growth in on the board components relative to other product categories. As a reminder, Farnell’s Europe region has the highest regional mix of on the board components and has been the slowest to recover. Gross margins at the product category level for Farnell continue to be stable. Turning to operating expenses, SGA expenses were $492 million in the quarter, up $55 million year over year and $27 million sequentially. The sequential increase in SGA cost is primarily from a combination of higher sales volumes and increases in stock based compensation expense.
As a percentage of gross profit dollars, SGA expenses were lower sequentially at 74% compared to 76% last quarter. We anticipate that our operating expense to gross profit ratio will continue to improve as we grow our gross profit dollars. For the second quarter, we reported adjusted operating income of $172 million and the total AVNET adjusted operating margin was 2.7% by operating group electronic components operating income was $187 million and EC operating margin was 3.2%. The sequential increase in EC operating margin was primarily due to EC operating income growing more than two times greater than sales. Driven PR by the growth in the Americas and Europe.
Farnell operating income was $20 million and operating income margin was 4.7%. Operating income margin was up nearly 40 basis points from last quarter. This is the highest operating margin Farnell has had since fiscal 2023. Turning to expenses below operating income, second quarter interest expense was $61 million and our adjusted effective income tax rate was 23%, both consistent with expectations. Adjusted diluted earnings per share of $1.05 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew nearly 4 times sales compared to last quarter. Turning to the balance sheet and liquidity during the quarter, working capital decreased by $42 million sequentially.
Working capital days decreased seven days quarter over quarter to 88 days. From an inventory perspective, we reduced inventory by $126 million or 2.3% sequentially. At the end of the quarter, our EC business received approximately $150 million of high demand inventory related to memory and storage products, which partially offset some of the broader inventory reductions that took place across EC this quarter. Substantially all of the membrane storage products received at the end of the quarter has already been shipped to customers. In January, we ended the quarter with 86 days of inventory as we continue to make progress on reducing total Avnet inventory days to below 80.
As a reminder, the inventory turns models are different between the EC business and Farnell. Our EC business typically runs between four to six turns per year, whereas Farnell typically runs between 1.5 to two turns per year. Farnell’s high service value proposition requires a breadth of on the board test and measurement and maintenance and repair product inventories. For further context on these inventory model differences, at the end of the second quarter, our EC business had less than 80 days of inventory and our Farnell business had less than 230 days of inventory. Even with the overall inventory improvement, our team remains focused on reducing inventory levels where elevated while still making inventory investments where needed.
Our return on working capital improved over 100 basis points compared to last quarter through a combination of operating income growth and the reduction in working capital days. We remain focused on continuing to improve our return on working capital, which will also drive improvements in our overall return on invested capital. In the second quarter, we generated $208 million of cash flow from operations. Cash used for capital expenditures was $15 million in line with our commitment to lower leverage in order to maintain a strong balance sheet. We paid down an incremental amount of debt from the prior quarter and we ended the second quarter with a gross leverage of 3.9 times.
With approximately $1.7 billion of available committed borrowing capacity, we still anticipate reducing our leverage to approximately three times over the next year. We continue to deploy cash in a manner that generates the greatest long term return on investments for our shareholders. In the second quarter, we paid our quarterly dividend of $0.35 per share or $28 million. Turning to guidance for the third quarter of fiscal 2026, we are guiding sales in the range of 6.2 billion to $6.5 billion and diluted earnings per share in the range of $1.20 to $1.30. Our third quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 1% of the midpoint.
The sales guidance implies sales growth in the Americas and EMEA and a less than seasonal sales decline in Asia due to the Lunar New Year. Our third quarter guidance also implies further recovery in our higher margin western regions, which accelerates the operating leverage in our business model. This guidance also assumes similar interest expense compared to the second quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. In closing, I want to thank our team for delivering a solid quarter of improved financial results with a third quarter guidance giving us further confidence in the overall recovery of our business.
2026 should provide several opportunities for Avnet to help our customers and suppliers adapt to continually changing market conditions and will serve us well as we continue to create value for our stakeholders. With that, I will turn it over to the operator to open it up for questions.
Questions and Answers:
operator
Operator thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from William Stein what Truist Securities. Please proceed.
William Stein
Hey, thanks for taking my question. I guess I’d like to squeeze in two if I can. First, could you talk to us about the linearity of orders during the quarter? Anything unusual or noteworthy there? I think typically new orders tend to fade as you go into December, maybe have that wrong. But whether it’s right or wrong, maybe comment on that trend and the also the duration of your backlog as it stands now, do you have a bit more visibility? Are you seeing customers place it longer at a longer sort of time to request? Thank you.
Phil Gallagher
Yeah, thanks Will. I appreciate you joining the call. So I guess that was the two questions, right. So I’ll go first if Ken wants to add something linearity. The December quarter is always an interesting one, right, because your billings continue through the quarter but your bookings do tail off near the end of the second half of December, let’s say give or take a few days. So yeah, it’s definitely a stronger booking in this case October, November pretty good through December till about midway. Then that bookings start to trail off. But the buildings continue because even if there’s shutdowns through the holiday, manufacturing starts up when they get back.
So you do bill out a bit more in bookings. But even that said the book to bills were positive on top of a pretty good billing quarter. So that was good news as far. And the other point which really ties to your the longer term view we’re getting is the drop in orders inside of lead time from customers is increasing. Our expedites are increasing and what that tells us, and we don’t know absolute will that inventories are depleting with lead times not going out until recent right customers weren’t pipelining and giving us enough visibility. And then when they go to their manufacturer, boom, they’re coming in with drop in.
We call them drop in inside. Kind of a quote book, ship bill inside the 90 days. So that’s again a positive sign which then leads to your last question or second part of the question is the visibility, it’s improving. Will the suppliers and a lot of them are on this call, they’re banging us for backlogs, they want to know what to build and we’re banging the customers for more visibility into the future longer term bookings if you will or forecast. And we’re starting to see that increase still probably not at the level we would like to see it.
But yeah, we’re starting to get a bit more visibility into the future which customers on the call and we’ll see a lot of them next week here in Arizona. That’s the message still. We still want that visibility and pipeline so we can pipeline appropriately for them. But it’s improving. Not where it needs to be quite yet.
William Stein
Thank you. Answer your question.
operator
Our next question is from Joe Quattrochi with Wells Fargo. Please proceed.
Joe Quatrochi
Hey, thanks for taking the questions. I was wondering if we could go back to just kind of understand maybe the pricing commentary that you talked about in terms of are there any end markets or end products that you can talk about that you’re seeing, you know, the price inflation on more than others?
Phil Gallagher
Yeah, thanks, Joe. I think we said there’s upward pricing pressures and so I think it’s going to continue. I think before we get into increased pricing. I mean, the good news is in this cycle, one of the positives, and it’s been a long cycle, is pricing has kind of held up. ASPs overall have held up, but as lead times start to trend higher across some of the product categories, then you can anticipate some of it’s already happening for sure in memory storage controllers, certain capacitors in the IPD space. We’re starting to see some pricing inflation.
A lot of that’s driven obviously by the activity around the data center increase in the hyperscalers. But it’s really a lot of our industrial customers are increasing demand based on their exposure to the data center, if you know what I mean. So overall, it’s not across the board over. Pretty much through Q2 is stable, but we’re starting to see some increases and I think that will continue as we move forward.
Ken Jacobson
And Joe, maybe just a point of clarity, we’ve seen the increases announced and we know they’re coming, right. But the actual quarterly results didn’t have a lot of impact from actual price increases in the quarter. So just to kind of clarify the timing of some of those things.
Joe Quatrochi
Okay, that’s helpful. And then just as, I guess as I’m thinking about just the, the guidance on the revenue you talked about Americas and EMEA up and then Asia maybe a bit better than seasonal in terms of the rate of decline. How do I think about just Americas and EMEA relative to seasonality? What’s your expectation for the March quarter?
Phil Gallagher
Yeah, so the March quarter, I would. Ken, jump in. Typically, Joe, the West bounces back in the March quarter over December. And a lot of that’s a math equation with just more days and whatnot. But last year it was an anomaly, you might recall, where the west did not increase over December quarter. That was kind of the first time that I saw that ever, I think. So this year it’s back to more typical seasonality, where the west will be up, which is positive. And that’s our higher margin regions, as you know. And Asia, it’s going to have a typical.
Well, maybe not typical Lunar New Year. Chinese New Year is going to have an impact, but not as significant as we’ve seen in the past. So that’s also positive. So a regional mix shift is in our favor this quarter as we get into March, which is good news. But Ken, anyone?
Ken Jacobson
I think steady high single digit is how I think about it in terms of the growth in the west, which is as expected. So maybe slightly higher seasonality, but I still think the west is ramping and the bookings continue to improve. I guess what I point to in the guidance is because the revenues are up slightly, normally what you’d see is Asia down even double digits and the west up. And so that mix shift usually created a nice gross profit margin boost. So we’re not seeing that because of where Asia’s at in terms of low single digit down, but we are seeing the operating margin expansion from that seasonal mix shift.
Right. We’re seeing good operating income growth from the west. Think about high teens. And so we’re happy about the operating margin expansion implied in the guidance, even though gross margin is still being impacted by mix.
Joe Quatrochi
That’s really helpful. I appreciate all the color. Thanks.
Phil Gallagher
Thank you.
operator
Our next question is from Ruploo Bhattacharya with Bank of America. Please proceed.
Ruplu Bhattacharya
Hi. Thanks for taking my questions. Maybe I’ll ask a follow up question on the guidance for the March quarter. Last couple of years, I mean the March quarter has been sequentially down. I mean this year, given the regional mix you’re guiding to slightly up. And from the guidance, I mean, from what I can tell, it looks like the core business margins can be up year on year depending upon how Farnell does and how the overall mix is. But can I, can I ask, do you think going forward, I mean, your core business margins can grow on a year over year basis for the remaining quarters of this year? And do you think the seasonality in the March quarter being different than the past couple of years impacts the seasonality going forward for the rest of the quarter? So how are you thinking about as you go through the year? You think we’ll see more than seasonal growth either in revenues or year over year growth in margins?
Ken Jacobson
Rupa, let me take the last part first. And I think there’s no reason to believe seasonality would change. And how we think about seasonality is simply just the number of shipping days. And if you had a traditional lunar new year with let’s say 7 to 10 days depending on the country of shutdowns, you have less shipping days to ship the product. I think what’s offsetting that is just the fact that bookings are up and business is booming there in Asia. I think similar to the west, it’s just a matter of shipping days. And so I think as we look forward into a more, let’s say normal mid high single digit growth environment, I think you will still see those normal swings within seasonality.
I guess to answer your question about operating margin, I think yeah, from an operating margin standpoint, we do expect continued momentum, especially as the west recovers. The west is really our operating leverage horses in terms of profitability. And so although Asia’s at record 11 is which we’re happy for and it really good signals over there, we’re still roughly 20 to 25% off the top line in the Americas and probably 30% to 35% the top line in Europe relative to their historical peak levels. That’s a lot of gross profit dollars that need to come back. I think as the west recovers, you’ll start to see operating margin expansion.
I think to answer your question more specifically, it depends on how quickly the west continues to recover. But I think, you know, this last quarter in terms of December quarter and the March guidance, you know, is good progress in terms of getting those EC margins back, which is really being led by the West.
Phil Gallagher
Yeah, Ruplu, Ken covered it well. Just we don’t guide outside as you know, outside of the 90 days. So but as we look at the, you know, I’m looking at it right now as I talk to you, as I look at the backlog and the 1 to 30, 31 to 90, 91, 180 et cetera, 180 and above days. It’s encouraging. That’s the word I’m using with the team. The signs are all very encouraging. But as you know, we don’t guide out beyond the quarter, but we are encouraged and optimistic about the next several quarters.
Ruplu Bhattacharya
Okay, that’s helpful. Can I ask a follow up question on the pricing comment you made? Can you remind us how like if suppliers are raising prices, how does that impact Avnet’s revenues and margins in the near term as well as in the more medium term? And Phil, I missed this if I might have missed this, but did you specify which product categories or areas you’re seeing spot price increases?
Phil Gallagher
Yeah. Thanks Rupalu. So pricing, it really affects the average selling price, right. So a lot of our business is under contract and some of it’s not, you know, where it’s not and it’s, let’s call it spot buys. If you Will customer coming in time place, utility. Yeah, we can increase margins there. The price and the margins particularly the product’s tough to get. We’re not very pillaging anything but just to kind of get a little bit unfair margin on that which is positive for us. In the contracted customers, the price gets passed on. So it doesn’t have as much effect on the margin percent but it does, it can affect the revenue dollars and margin dollars, if that makes sense.
And similar to what we saw in the last tightness in the market and customers, we can’t absorb it, that’s for sure. But we’re definitely starting to see that particularly in certain areas. Memory storage. Storage takes memory. So anything around memory storage, we’re going to start seeing some more in the controllers, some of the high end products in networking and our selected parts like antenna capacitors, things along those lines. We’re starting to see some price increases. So some are modest right now, others a little bit more than modest based particularly in the memory space.
Ruplu Bhattacharya
Okay, thanks for that. If I can sneak one more in. As Europe is recovering. Right. I think you’ve said For Farnell maybe 50 basis points improvement every quarter, but as the region itself improves, do you think that can accelerate and you can see a faster recovery in Farnell margins? Just help us level set our expectations for where this can go from a margin standpoint by the end of the year. Thank you.
Phil Gallagher
Yeah, thanks Ruploo. Yeah. So specific to Farnell, typically their largest region and most profitable is European. Okay. And that’s not been the case here the last several quarters based on Europe’s office still doing well. But actually the Americas, which is a higher, like we also pointed out a higher mix in the Americas of test and measurement, which is really good business, just runs at a different margin level than the onboard components being semi ductors and the IP and E. So any additional lift in Europe will further drive the drop through for now it could possibly accelerate that.
You’re right. That 50bps points of margin that we’re looking to see them improve on quarter on quarter. That’s the message to the leadership team of Farnell are on this call. We need to see them and expect them to continue to show incremental improvement in operating margin. And a lot of that can be accelerated to your point with higher revenues in the right mix. And although we may not be projecting that, certainly we would really like to see them accelerate that beyond 50 to 100bps. But that’s our commitment at this point in time while they continue to manage their expense line.
Right. So there’s still other things they’re doing, we’re all doing, we’re always doing as a company and Fresnel specifically as well, you know, driving out more efficiencies, taking out costs where we need to take out costs while making investments where we need to make investments, that is in digital E commerce, AI, et cetera. So hope that answers your question. But we do see it as a continuing tailwind for us as we move forward and we will look to accelerate getting to that double digit operating margin.
Ruplu Bhattacharya
Okay, thanks for the details.
Phil Gallagher
Yep. You got it, Rachel.
operator
Gentlemen, there are no more questions at this time. I would like to turn the conference back over to Phil Gallagher for closing remarks.
Phil Gallagher
Okay. Thank you very much. And I want to thank everyone for attending today’s earnings call. We look forward to speaking to you at upcoming conferences and at our third quarter fiscal year 2026 earnings report in April. Okay. Have a great day. Thank you.
operator
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.