Electronic components distributor Avnet (NASDAQGS:AVT) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 5.3% year on year to $5.90 billion. Guidance for next quarter’s revenue was optimistic at $6 billion at the midpoint, 2.5% above analysts’ estimates. Its non-GAAP profit of $0.84 per share was 4% above analysts’ consensus estimates.

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StockStory’s Take

Avnet's third quarter was marked by revenue growth ahead of Wall Street expectations, with management attributing the performance to strong results in Asia and the Farnell business. CEO Phil Gallagher noted that both Asia and Farnell achieved double-digit year-over-year growth, while the Americas returned to year-on-year growth for the first time in recent quarters. Demand was particularly resilient in the transportation, compute, and communication sectors, and Gallagher highlighted that “semiconductor lead times and pricing continue to be stable for most technologies,” though memory and interconnect products saw some tightness tied to data center and AI demand.

Looking forward, Avnet’s optimistic revenue guidance for the next quarter reflects management’s expectation of continued momentum in Asia and the Americas, with Europe stabilizing after a prolonged downturn. Gallagher emphasized that “book-to-bill ratio improved globally, led by Asia and the Americas, and all regions were above parity,” signaling a strengthening order pipeline. However, the company remains cautious on margin expansion, pointing to higher input costs and the impact of regional sales mix. CFO Ken Jacobson underscored that while operating leverage is expected from volume growth, “guidance implies flat gross margin year-over-year, which we think is good” given ongoing uncertainties.

Key Insights from Management’s Remarks

Management credited the quarter’s outperformance to regional strength and product mix, but also acknowledged margin headwinds from geographic and product shifts.

• Asia and Farnell drive growth: Asia delivered its fifth consecutive quarter of year-on-year sales growth, now representing over half of Avnet’s electronic components revenue, while Farnell saw improved sales and margin performance, notably in Asia and the Americas.

• Americas recovery underway: The Americas segment grew year-on-year for the first time in several quarters, with momentum in industrial and communications end markets. Management pointed to early signs of recovery, though the region's contributions remain modest compared to Asia.

• Product mix impacting margins: Gross margin declined year-over-year, primarily due to a higher concentration of lower-margin Asia sales and less favorable product/customer mix in Europe. Farnell’s increased sales of higher-margin on-the-board components offset some margin pressure, but test and measurement products carried lower profitability.

• Inventory management a focus: Inventories rose to support growth in Asia and supply chain opportunities in the Americas. Management explained that while inventory days remain elevated, “the quality and aging of our inventory continues to improve,” and efforts are underway to bring days down as sales grow.

• Early signs of price inflation: Gallagher noted that certain memory and interconnect products, especially those tied to data center and AI build-outs, are experiencing both extended lead times and price increases. Management sees potential for selective price hikes in high-end microcontrollers and memory as supply tightens.

Drivers of Future Performance

Avnet’s outlook is shaped by continued strength in Asia and selective product segments, but margin pressures and regional mix remain areas to monitor.

• Asia and Americas momentum: Management expects sequential sales growth in both Asia and the Americas, with book-to-bill ratios above parity and a growing backlog suggesting sustained demand. However, the company is watchful for seasonal fluctuations, especially around Lunar New Year in Asia.

• Margin headwinds persist: Despite anticipated volume gains, margin expansion is uncertain due to the growing proportion of sales from lower-margin regions, ongoing high input costs, and the risk of further product mix shifts. Jacobson said, “If Asia is going to be 50% of our business, it’s going to take a little longer… to get the operating margin to that 4% level.”

• Selective pricing power: Management identified opportunities for price increases in memory and interconnect products—areas where demand is linked to AI and data center infrastructure. These increases could help offset margin pressures if tightness in supply persists, but are not expected to be broad-based.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether Asia and the Americas sustain their sales momentum, (2) signs that margin pressures from regional and product mix begin to ease, and (3) progress on inventory management, especially reductions in inventory days. Developments in AI and data center demand, as well as the trajectory of price increases in memory and interconnect products, will also be closely monitored.

Avnet currently trades at $48.64, down from $50.56 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).

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