AVT Q2 Deep Dive: Asia Growth Offsets EMEA Weakness, Farnell Margins in Focus

Electronic components distributor Avnet (NASDAQGS:AVT) reported Q2 CY2025 results beating Wall Street’s revenue expectations, but sales were flat year on year at $5.62 billion. Guidance for next quarter’s revenue was optimistic at $5.7 billion at the midpoint, 2.9% above analysts’ estimates. Its non-GAAP profit of $0.81 per share was 12.5% above analysts’ consensus estimates.

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StockStory’s Take

Avnet’s second quarter performance met Wall Street’s revenue expectations with flat year-on-year sales, while non-GAAP earnings per share and adjusted EBITDA both came in above consensus estimates. The company’s results were driven by strong Asia-Pacific growth and ongoing stabilization in its Farnell business, partially offset by weakness in EMEA and the Americas. Management highlighted the positive impact of demand recovery in key end markets such as compute and communications, as well as continued inventory normalization. CEO Phil Gallagher noted, “Sales were better than expected, led by Asia, which delivered 18% year-over-year growth in the quarter.”

Looking ahead, Avnet’s optimistic top-line guidance reflects expectations for continued demand recovery, with particular strength projected in Asia and incremental progress in EMEA bookings. Management is investing in digital infrastructure and operational efficiency, with a focus on leveraging its engineering capabilities as semiconductor demand broadens. However, the company is also preparing for margin pressure, as a shifting regional sales mix and increased merit pay will impact operating expenses. CFO Ken Jacobson stated, “We expect some operating expense headwinds as a result of our decision to invest in our people by providing merit pay increases.”

Key Insights from Management’s Remarks

Management attributed the quarter’s results to robust Asia-Pacific momentum, improvements at Farnell, and stabilization in customer inventory trends, while highlighting headwinds from EMEA softness and margin pressure from regional sales mix shifts.

• Asia-Pacific sales momentum: The Asia region posted its fourth consecutive quarter of year-on-year growth, outpacing other regions and driving overall sales, while maintaining stable margins. Management sees Asia as the leading indicator for market recovery and a core driver of Avnet’s performance.
• Farnell margin stabilization: Leadership changes and cost structure adjustments at Farnell yielded improved operating margins, with executive turnover exceeding 70%. The business is now focused on enhancing digital capabilities and expects digital-driven revenue to rise from the current 50%+ level.
• EMEA and Americas weakness: EMEA sales declined sharply year-on-year, though management cited modest improvement in bookings and backlog buildup in the region. The Americas experienced sequential growth in communications, but overall demand remains mixed.
• Inventory normalization progress: Avnet reduced inventories by over $400 million year-on-year in constant currency terms, supported by improved turns business and more normalized lead times. Management believes inventory trends are approaching an inflection point but sees further work ahead.
• Operating margin pressure: The growing proportion of lower-margin Asia sales, along with EMEA contraction, compressed gross margins. Management expects margin improvements as EMEA and Farnell recover and continues to pursue cost discipline across the business.

Drivers of Future Performance

Management expects Asia’s sustained growth, digital initiatives, and inventory management to drive revenue, while regional mix and operating expenses will shape profit margins in coming quarters.

• Asia and demand recovery: Continued strength in Asia-Pacific is expected to lead Avnet out of the current cycle, with management citing robust demand across compute, transportation, and communications end markets. The company believes Asia’s momentum will gradually extend to EMEA and the Americas as recovery broadens.
• Margin and expense headwinds: The shift toward a higher mix of Asia sales is likely to pressure overall operating margin, as Asia carries lower margins compared to other regions. Additionally, planned merit pay increases and ongoing investments in digital infrastructure will add to operating expenses, partially offset by ongoing cost control efforts.
• Farnell turnaround and digitalization: Farnell is targeting a return to double-digit operating margins over the next several quarters, driven by leadership changes, cost reductions, and accelerated digital adoption. Management views improvements at Farnell as a key lever for overall margin expansion and profitability.

Catalysts in Upcoming Quarters

In the upcoming quarters, our analysts will be watching (1) the pace of demand recovery in EMEA and the Americas, (2) whether Farnell can sustain margin improvements and progress toward digital sales goals, and (3) the impact of Asia’s continued growth on Avnet’s overall sales and margin mix. Inventory management and execution on digital investments will also be critical indicators of the company’s ability to navigate evolving market conditions.

Avnet currently trades at $52.93, up from $51.89 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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