艾睿電子 (ARW) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Arrow Electronics Incorporated first quarter earnings call. My name is Erin and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms Greer Aviv. Please proceed.

Thank you, Erin. Good afternoon. Welcome to the Arrow Electronics first quarter conference call. I am Greer Aviv, Senior Manager of Arrow's Investor Relations program. I will be serving as a moderator on today's call. If you would like to access today's call via webcast, please visit our Investor Relations website at www.Arrow.com/investor and click on the webcast icon. With us on the call today are -- Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President - Finance and Operations and Chief Financial Officer; Andy Bryant, President - Global ECS; and Peter Kong, President - Global Components. By now, you all should have received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website, along with the first quarter CFO commentary that should be used a compliment to the earnings press release. You can access a copy of our earnings reconciliation for the first quarter in our press release or on the Investor Relations section of our website.

Before we get started, I would like to review Arrow's Safe Harbor statement. Some of the comments to be made on today's call may include forward-looking statement, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings. We will begin with a few minutes of prepared remarks which will then be followed by a question-and-answer period. As a reminder, to members of the press, are you in a listen-only mode on this call, but please feel free to contact us after today's call with any questions you may have. At this time, I would like to introduce our Chairman, President and CEO, Mike Long.

Thank you, Greer. Thanks to all of you for taking the time to join us today. We executed well in the first quarter with sales and earnings per share in line with our expectations. Cash flow generation was a bright spot for the first quarter as we generated $250 million in cash flow from operations with contributions from both business segments. We continue to manage the Company for long-term growth and continuous improvement which enables us to outperform the market, regardless of the market conditions we operate in. We've also maintained gross margins in what is still a very difficult macro environment. Our return on working capital and return on invested capital continue to be strong. In our Global Enterprise Computing Solutions segment, we had a very impressive performance this quarter. Sales were well ahead of normal seasonality and increased 15% year-over-year or nearly three times the rate at which the market was expected to grow.

Highlights for the quarter included robust product line performance in storage software and services which each grew in excess of 20% year-over-year. Consistent with our strategy to increase our scale in Europe, we recently announced our intent to acquire the Altimate Group, a value-added distributor of enterprise and mid-range Computing products, services and solution based in France. Once completed, this acquisition will enhance our industry-leading position across Western Europe and further strengthen key supplier relationships in the region. For 2012, Gartner expects global IT spending to increase more than 5% year-over-year on a constant currency basis with faster growth rates expected in the sub segment, such as telecom equipment and software. Global ECS is well positioned to capitalize on these trends as we have evolved our portfolio to the data center with almost 50% of our billings generated by software and storage product offerings. We have and will continue to outperform the market and execute on our strategic objectives to differentiate Arrow ECS by expanding our geographic reach, increasing our services portfolio and utilizing our broad product offerings to create better value for our customers and suppliers.

In our Global Components business, the Americas region performed well. We continue to generate operating margins above the targeted level for the region in what was a more difficult environment compared to a year ago. The well-publicized macro economic challenges in the European region as well as slower growth in China, have impacted our performance in those regions. Despite these headwinds, we did see an improvement in the global book to bill which is now at 1.04 reflecting sequential increases across all regions. We continue to see solid design activity in all regions with approved registrations up 21% from prior quarter. As we look forward, Gartner expects global semiconductor revenue to grow 4% in 2012. As always, we would expect to be able to outgrow the market. Our Global teams remain committed to driving increased market share in all regions while providing the highest possible level of service to our customers.

We continue to focus our initiatives on profitable market share growth in our core businesses, as well as new products, geographies and markets. In addition, we've been investing in businesses that will lessen the impact of the economic or technology-driven cycles on our overall business. To that extent, over the past two years, we successfully expanded our presence in the high margin life cycle services market. In the first quarter, we completed an important step in our strategy by adding to our size and capabilities in the Electronics Asset Disposition, or EAD space, with the acquisitions of TechTurn and Asset Recovery. Today, we are the largest independent EAD Company with both domestic and international reach with annual pro forma revenue expected to be in excess of $200 million in 2012.

We look forward to sharing more about this with you, and these market opportunities for EAD, at our annual Investor Day on May 24 in New York City. In summary, we're pleased with the Company's performance and commend all of our business leaders for remaining focused on the long-term strategic priorities which will result in growing faster sales, growing profits faster than sales and generating positive cash flow and generating returns in excess of our cost of capital. Paul will now provide you with an update on our financial results for the first quarter.

Thanks, Mike. First quarter sales of $4.9 billion were in line with our expectations and represent a decrease of 6% year-over-year. Pro forma for acquisitions and excluding foreign exchange, sales were down 8% year-over-year. Sales in Global ECS increased a strong 15% year-over-year, primarily driven by better than expected growth in both the Americas and in Europe. In Global Components sales declined 14% year-over-year, as continued concerns about the European economy and slower growth in China weighed on our performance. Our consolidated gross profit margin was 13.9% an increase of 10 basis points year-over-year. Pro forma for acquisitions, excluding foreign exchange, gross profit margin was down 30 basis points year-over-year. Operating expenses are down 1% year-over-year on an absolute basis and increased 60 basis points as a percentage of sales.

Pro forma for acquisitions, operating expenses declined 7% year-over-year and are up 30 basis points as a percentage of sales. Excluding the impact of acquisitions and foreign exchange, our legacy operating expenses declined $24 million year-over-year. To assist you with your analysis, acquisitions added approximately $30 million to operating expenses this quarter. Operating income was $195.7 million. Operating income as a percentage of sales is down 50 basis points both year-over-year and on a pro forma basis. On a pro forma basis, Global ECS operating income as a percentage of sales increased 70 basis points year-over-year to 3.6%. In Global Components, pro forma operating income as a percentage of sales increased 80 basis points year-over-year. Our effective tax rate for the quarter was 29.8%. For modeling purposes, you should assume that our tax rate, the next few quarters, will be between 29% and 30%. Net income was $119.8 million and earnings per share were $1.07 and $1.05 on a basic diluted basis respectively.

Mike mentioned, we generated $250 million in cash flow from operations in the first quarter. This is the second highest level of cash generation in any first quarter with contributions from both business segments. On a trailing 12-month basis, cash flow from operations was $551 million. In the first quarter, we repurchased 1.2 million shares of Arrow stock for a total of $50 million. We currently have $100 million remaining on our most recent repurchase authorization to fund future share buybacks. Return on working capital was 25.6%. Return on invested capital was 10.2% and that remains in excess of our weighted average cost of capital. In summary, we had a good quarter and once again executed well on our strategic objectives. Despite the choppy macro environment, we continued to post industry-leading levels of profit ability. Time and again, we have shown that we can deliver strong financial results regardless of the current market dynamics. This is a high level summary of our financial results for the first quarter.

For more detail, regarding the business unit results, please refer to the CFO commentary published this morning. Looking ahead to the second quarter, we believe that total sales will be between $5.04 billion and $5.44 billion. With Global Components sales between $3.37 billion and $3.57 billion and Global Enterprise Computing Solutions sales between $1.67 billion and $1.87 billion. As a result of this outlook, we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.08 to $1.20 per share. Our guidance assumes that the average euro to US dollar exchange rate for the second quarter, to be EUR1.31 to $1. In the second quarter, we expect sales in all of our regions in our legacy Components businesses to be in line with normal seasonality. In Global ECS, our core Americas value-added distribution business is expected to be in line with normal seasonality. Our European ECS business is expected to be slightly ahead of normal seasonality.

Thank you, Paul. Erin, please open up the call to questions at this time.

(Operator Instructions) Brian Alexander, Raymond James.

Can you guys talk about the linearity of bookings in the quarter in the Components segment by region, given the below seasonal revenue performance? But you alluded to the positive book to bill of 1.04. And then I have a follow-up.

Sure, Brian. For the whole segment, we were above 1 in each month during the first quarter. We're again above 1 for the entire segment in the month of April. So we saw that for the entire segment, very strong. NAC and our Asia core business, each month was above 1, also in the first quarter and they remain above 1 in the month of April. Our European core business was at parity. It was more choppy, though, as you would expect, considering the broad economic background that we saw during the first quarter. With that said, they too, in the month of April, were above 1. So above parity. So I would say overall, that each of the businesses where there was some consistency in the economy, we were above 1, with the exception of Europe, where it was a bit choppier, in each of the first four months of 2012.

So Paul, how do we reconcile your Components revenue performance to your major competitor who reported more seasonal patterns and they were above the midpoint of their guidance while Arrow was below seasonal at the low end of your guidance? Are there any major differences in supplier line card or pricing strategies or mix or anything else that you could think of that would explain the stark contrast in performance?

Yes, Brian, it is a good question, because line cards are similar, but there are some differences with a couple of the suppliers. And there may have been a bit of a change in supplier performance. So that is not a significant item for us. But it is an item that is out there. When we look at it, we now have probably outperformed the market for three years. Good or bad, it's a statement of fact. So we're cautious on the economy around the globe. We're cautious on performance. If we were more negative, you would see us taking more expense actions, but right now, we're hanging with those investments we've made because we do believe the second half of the year will show some more robust economic backdrop and some more robust activity going forward.

Brian, I might be able to add a little bit of clarity, also. I think, as you know and well publicize, in Asia-Pac set-top boxes, TVs and some of the computer business, but primarily the set-top boxes, the TVs, were down fairly significantly. And as you do know, we do play a pretty good -- or have a pretty good position in set-top box and I think that hurt us a little bit in Asia-Pac.

Thanks. Just to be clear, the ERP rollout that you're currently going through had no impact on results in the quarter?

We don't believe there were any measurable impacts from the ERP rollout which we did in Q4 -- in the early part of Q4. So we now have momentum for six months behind it.

Matt Sheerin, Stifel Nicolaus.

This is Param Singh on for Matt Sheerin. Are you guys seeing any different trends across your component product categories and specifically any difference between semiconductors and your passive end connectors business?

Actually, right now, we saw a bright spot in the passive electro mechanical and connector business, primarily due to some increase in automotive. We did have some share gain in what we would call our high reliability cable business that deals with some of the aircraft that were out there. There was some contracts that came through for us in the quarter and held that business in a pretty good position. So we did see a little bit of what I would say is better improvement on the passive electro mechanical side than we did the semiconductor side for the quarter.

Got it. And a follow-up question. On the gross margin, it looks like mix for margin in Q1. If you look at your guidance, it looks like it could be flat to down again. Is that more of a mix issue due to higher Computing revenue or is there a mix issue in Components that is giving you a little bit of pricing pressure?

Right, so let me take it in reverse order. There was minimal GP change in our core Components business year-over-year or even on a sequential basis. So it's principally being driven by a change in mix, especially true from a historical point of view. As we look at second quarter seasonality, where we see some of the more higher margin businesses, in Components like Europe, have business drop off because of fewer shipping days around national religious holidays, but we also grew our ECS business in the second quarter. So no real change from normal seasonality. The impact in pricing has been nominal, if anything, over the last year or so.

Amitabh Passi, UBS.

I had a similar question to one asked earlier. But more related to your Computing Solutions segment. I think again, relative to your largest competitor, you significantly outperformed, growing 15% while they were down 5% on a pro forma basis year-over-year. I would just love to get your commentary on that, where you think some of these differences are coming from, just in terms of performance.

Well, in terms of the overall performance compared to them -- I think I will let Andy tell you how our performance went and you can draw your conclusions. I haven't really commented on our competitors that way before. I don't know their business as well as they do and would hate to make a mistake on it. So Andy, why don't you go ahead and let them know how we performed and where we performed for the quarter.

Sure, Mike. Thanks. Well, I think we've had a very steady strategy and great execution at ECS. If you look at the last, even seven or eight quarters, we've continued to grow and put the numbers on the board. I think a lot of it is based on how we've built our data center line card. We've talked a lot about the data center of the future. If you look at the product lines we've added at ECS, that is bringing revenue, organic revenue, in the tens of millions of dollars. Our strategy on small and medium business is paying off, especially in Europe. I think a lot of people skip Europe when they think about SMB. But Europe is a very large SMB market. As you can see, we grew 8% excluding FX and pro forma in Europe. So we're outperforming our peers there. So all in all, I think good strategy, good execution, that's why you see us at a great first quarter.

I think if you were to put some percentages, maybe to help you behind the numbers a little bit, we had storage, software and services, each of those categories, for us, grew in excess of 20% year-over-year. So we are getting quite a bit of traction around the services business we had started. As you know, we've had a good storage program for years. The software business now for us is growing at a much faster clip than it had been in the past. So there may be some differences there for you. But that puts a little economics behind Andy's comments.

Sure. Just as a follow-up, Paul, for you, how should we think about cash flow generation, inventories and your appetite for share buybacks for the second quarter?

Sure. So we're absolutely committed to another quarter of cash flow generation, remember we talked a bit about this last year, where we're changing and modifying a bit, our approach to managing cash flow. Focused more so on average cash flow internally throughout the quarter, not just at the end of the quarter. We have seen a great success now that we've got momentum around that both in Q4 and Q1, where we've significantly outperformed our cash flow target. So that is really working well. We expect to be cash flow positive in Q2. I can't promise that it will be at the same level as Q1, though we do have good goals for the team internally. So around the levels of inventory, I think we saw back in the last recession that we were willing to take what we thought was a low level risk, high reward approach to inventory. Where we invested a little bit ahead of other companies and it paid off for us as we gained market share that way. Our inventory was up about 2% to 3% this quarter, compared to Q4 as we listen to what suppliers are talking about, potentially for the second half of the year on inventory availability.

Once again, that is -- we're talking about $60 million of inventory, so not a dramatic swing in the levels of inventory. We will pay attention once again as we get closer to quarter end, around whether we will take the opportunity because of strong cash flow to maybe step up, or maybe we will just push it back depending upon the timing for third quarter activity levels. So overall, I would say we think they're healthy. Our actual inventory turns were up compared to the fourth quarter, so we think we're managing better even in the face of an increase in inventory. Then finally, around buybacks, we purchased $50 million of shares in Q1, somewhere between $40 and $41 a share. We believe in the long-term viability and our long-term performance. So we have $100 million left. The window is closed for us right now. It will open up in the next week or so. We will take another look at about how we will deploy capital as we go forward. We don't have another Board meeting until the end of this week. Then we will have to think about whether we will increase the authorization or not.

Scott Craig, Bank of America Merrill Lynch.

Paul, two questions. First, on the operating margin in the Global Components business, quarter-over-quarter, so comparing it to the December quarter, was roughly flat. Obviously, your geographic mix was favorable, but maybe volumes were a little unfavorable. What else am I missing in there when looking at the quarter-over-quarter performance of that business? Then I have a follow-up.

Sure. Well, thanks, Scott, for the question. You're right, it is flattish compared to Q4. We're really trying to balance out this choppy macro economic backdrop and then some of good signs that Mike mentioned -- whether it was design registrations up 21%; whether it is book to bill; whether it is a stability that we may be seeing in some of the businesses. So maybe we're being a little bit less aggressive than we might have been, if we saw signs of a continued downturn around expense structure. So I think that is probably the one item that, in the past, we might have been more aggressive if we thought we were in some type of extended L, versus something that has a little more vitality in the second half of the year.

Okay. Thanks. Then last quarter, you discussed having a benefit from the Thai flood situation. I think it was around a $0.05 but I can't remember exactly. Did you have any benefit this quarter? Can you describe what happened, related to that business? Thanks.

Right, we did talk about the fact that in our independent distribution business, in the month of December, we did get a bit of an uplift from the flooding and the limits around the disk drive, hard disk drive capabilities and availability. We really didn't see anything happening in Q1 that was meaningful and measurable for us.

Sherri Scribner, Deutsche Bank.

Paul, I was hoping you could give us a little bit of color on your expectations for expenses moving forward. I think last year, the change between the first and the second quarter was about $26 million, $27 million in SG&A, with SG&A going up. Would you expect that type of increase this quarter? The EPS guidance sort of suggests that we see either operating expenses go up pretty significantly, or gross margins declining a bit. Just wanted to get some detail from you.

Right. So Sherri, last year, we had the Richardson acquisition in for the month of March in Q1 and then we had them in for all three months in Q2. They drove a pretty significant change in our expense structure just because of that timing. So that is as a starting point. We did talk a bit about the fact that our expectations are that we will get more expenses out of the business with the Components team committing to a $30 million annual expense reduction. We won't get that full run rate until the second half of the year. So we will see some change in expense structure as we go forward, but I don't think it will be as measurable as it was in 2011 when we talked a bit about the impact of acquisitions.

And as I said, we already have some of those benefits in Q1 from the expense reduction program. Just looking, if you'll go back and look at 2010, the expense increase was about $8 million, Q1 to Q2. You go back to 2009 and it actually went down by about $14 million. In 2008, we actually went up by about $17 million. So it is tough to call what the period of normalcy is, but if you kind of average that all together, you see a bit of an uptick in the expenses in Q2. But not the same level as last year. I guess the other point I would say, is that we are expecting our European -- sorry, our Asia-Pac business to perform well in Q2. So that would have a change in mix impact also which would negatively impact the margin overall at the GP level.

Okay. That's helpful. Then just thinking about what you're hearing from customers, clearly you guys did well in the storage side and software and you outgrew the market, I think you said by 3x. What are you hearing from customers about their intentions for their IT build outs for this year and what they're planning to do with data centers? Are we still going it to see a refresh?

Well, I think that what we have been hearing is somewhere around the 5% from Gartner, throughout the year. We don't have any reason to doubt that. As you know, we significantly outperformed that number in the first quarter which was great news, whether or not that hold is yet to be seen. But I would have to tell you based off of what we've seen from Andy's team and the continued guidance, we're rather bullish on the indicators for that business right now.

Shawn Harrison, Longbow Research.

Two brief questions. Just focusing in on Asia-Pac Components guiding up in the second quarter, I know you said there were some challenges earlier in terms of the end market during the March quarter. Do you think those headwinds have bottomed out and now you're just kind of seeing normal market growth? Or are you still seeing some of the low end handset and set top box headwinds effect you into the June quarter?

It has been interesting because really there are two major parts in our Asia-Pac business -- think about it from just a pure business point of view. One of them is the contract manufacturing export business that you guys know about and the other is really the indigenous manufacturing business. Both markets actually continue to be slow for really different reasons. But we've streamlined and really reshaped the organization to align with that market environment and we will continue to do what needs to be done. We did see a big improvement in design wins over the quarter, for Asia-Pac. We're encouraged by that. We are also encouraged by the improvement in book to bill. But of course, we're operating at a volume that is less than a year ago. But those are still two positive signs. Whether or not we're at the bottom completely, I wouldn't say that, but what I would say right now is if we're not at the bottom, we are very close. And I would put that out there, given the current environment.

Okay. Then my follow-up question just has to do with the operating profit margin within Global Components. Given, I guess maybe the lower than expected starting point for the March quarter -- but some of the cost savings you have coming online and hopefully better volumes in the back half of the year, do you think you can get operating profit margins above 5% at any point in time during the other parts of 2012?

Yes, Shawn, it is Paul. There's no doubt in our mind that we're not going to move away from our targets. Last year, the segment was well ahead of the target that we had set. Our expectations would be that as either the economies firm up and the supply chain starts to rebuild, we'll drive to a higher level of profitability, or if there was to be some type of extended downturn, or step down further, we would be more aggressive around expense reductions which would also provide us the opportunity to grow the margins again. So this is more of a -- not a permanent change in the business, a bit of a trend, if you will, based upon the macro, but more episodal than anything else.

One of the other things right now that I would call a positive is we are not seeing lead times shorten at this point in time. We're not seeing products become more readily available, if you will. In fact, there has been several suppliers that have talked about lead times extending out, if the market does not increase the order pattern. Given that and given where we all are and the resiliency of sort of the supply chain, I don't see a lot of excess inventory out in the marketplace today which does mean that inventory is going to have to get replaced. Whether it gets replaced under an allocation mode which generally means more profit for the suppliers and more profit for the distributors, or it continues on. But right now, all indications again, positive book to bill, positive design activity. If you remember, we started talking about the design activity back after the 2009 drop and that has been something we have been watching for a fair period of time. This type of increase tells me there's new products being designed right now and they have to go into production sometime.

Craig Hettenbach, Goldman Sachs.

Just wanted to follow up on the strength in ECS, particularly in Europe. Is there anything specific you could point to on the line card or just some of the tracks you're seeing there that is allowing you to outperform the market despite all of the weakness over there?

Well, there has been a couple of things that will have obviously happened over there. We have increased our footprint in Europe, like we said we would. We have increased our relationship with our suppliers through acquisitions which means we're now dealing with more acquisitions. But most importantly, I think the team that we have over there have integrated the acquisitions well, got us the synergies and continue to grow the businesses that they've had. That's been a real positive to us. So I think we're nearing a place there that we're seeing the scale that we've been talking about for the last couple of years. And I believe Andy and his team are executing well. Andy, anything you would like to add to that?

I think you've covered it well, Mike. I would just highlight that there is a lot of organic growth going on in our business in Europe based on expanding into new countries and taking our existing lines into new countries. So it is a combination of organic and M&A.

Got it. Thanks for that. Then Paul, it has been a little while since I had the opportunity to ask this question, but nice cash flow. Any update on where you stand on a dividend policy and kind of thoughts around that?

You're sure you missed last quarter asking that question?

Yes.

Let me give you a high level view on that. We do review that with our Board periodically during the year. We do take a pretty high level view around both what our ability is to generate cash both in the short term and in a more medium length period of time. We do look at pipeline for M&A, pipeline for investments for organic growth and actually, the pace of the business itself. So we will have that debate continuing. I don't expect that we will be changing our view on that over the next 12 months or so. But we will continue to look at it. We also still believe that the buyback is in effect a dividend because we're committing a certain amount of capital to be returned to shareholders every year. So whether you call it a dividend or buyback, it is still ultimately a commitment to deliver capital back to shareholders. With a buyback, we can accelerate or up-size or slow it down, depending both upon organic growth, M&A opportunities and the overall credit market. So we will keep looking at it. We will keep you apprised of it as we go forward.

Okay. Got it. Thanks.

Craig, for you, don't forget the piece of data you owe me yet.

Yes, no, I would say on that, we've seen kind of multiples. The multiples are still depressed for the distribution group in particular. So I do think we're seeing some -- an increase in the overall market multiple and the [dist t] is lagging. So we will see how it shakes out.

Jim Suva, Citi.

This is actually Samuel Meehan on behalf of Jim Suva. Paul, the question is for you. You provided some nice color earlier in the call on the OpEx line and what was broken out as organic versus acquisition. Can you remind us on the timing and the goals of the ERP rollout -- I think all the geographies should have been rolled out in the back half of the year and just the size of the OpEx savings going forward?

I'm sorry, I couldn't hear the second half or the actual question itself. Can you just give it to me again, please.

Yes, just the timing and magnitude of the cost savings for the ERP rollout. I think all the geographies had already been rolled out in the back half of the year. Just an update on how that is tracking.

Sure. A quick update on where we stand on ERP. You remember our beta site in the Components business was in Australia, New Zealand and we now have it in two to three regions we have in Europe. One would be Northern Europe which was the first one we rolled out. Then the second one we rolled out was in the Central European area. So we're making good progress around that. In fact, we believe that there is some actions we will be taking that will give us some second half expense reduction. It takes -- I have to admit, it takes probably six months before you get up to speed, around change management. So we're coming up on that six-month level, or time frame in Central Europe. So we would expect to see some type of benefit in the second half. We're also taking some strategic actions to better rationalize our cost structure there. So we expect to see some expense reductions second half of the year. Not quite ready to quantify that yet.

But I would point out that the one area that we have completed the rollout was in the ECS VAD business in North America. Andy and his team have done a great job both from the project itself which facilitated a reduction of somewhere between $25 million and $30 million of expenses, some two years ago. In addition, provided the platform for the great leverage they're getting now, from increasing volumes and having a more significant contribution margin. So we validated that in the ASCENT project in North America VAD business and we're pretty confident now that we will get even more savings coming out of the bigger more complex Components business. So not quite yet ready to put a stake in the ground for the second half of the year, but we should be in good position -- a better position, as we move forward through Investor Day and complete the second quarter.

(Operator Instructions) Brendan Furlong, Miller Tabak.

Looking at the SG&A versus compared to sales and gross profit dollars, kicked up to in the March quarter and looking into the June quarter, the same thing, kind of some negative leverage if you will in both two quarters. I'm just wondering how you can explain that and how long you think that is going to persist here, that negative leverage aspect. Then I have a follow-up. Thanks.

Thanks, Brendan, for the question. You're right about that. We did take what we think to be aggressive expense reduction actions in our legacy business compared to the first quarter of last year. I think I mentioned it was a $24 million decrease in expenses year-over-year. That is probably not as aggressive as we were in the recession, because we were absolutely sure in the recession that it was a quick and steep decline. What we've been really faced with today is an economic backdrop that at least calls for some stability in North America. Though I would say that the world in general has been caught by the continued volatility in the European marketplace and then in the Chinese economy.

So with that as a broad backdrop and some of this inventory rebalancing, we're really a bit hesitant to force out trained, good-performing people, with the thought that there may be a recovery. If we think about it, we thought there was going to be a recovery in technology late in 2011. We didn't quite see it, in general, right? If you really look at most technology companies, we haven't seen that and we didn't quite see it in the first half of the year. Maybe we've kind of misjudged it, but we still think there is going to be this recovery and it doesn't make sense in our mind to force people out and then start re-hiring people that may not be as well trained or well experienced six months or nine months later. So that has kind of been the thought process, even with that back drop, a $24 million decline year-over-year in corporate expenses, it is a pretty big drop.

Okay. That's a good explanation. Thank you. My other question, going back to the Component business, underperforming versus [Avnet] in the March quarter. If I look into, even with a seasonal June quarter for you guys, you're still on a year-over-year basis way underperforming Avnet there. I'm just -- I don't think I have gotten why that is. Maybe I missed it on the call, but if you could just maybe educate me a little bit. Thanks.

I would say as a starting point, you need to remember that there is some differences around customer sets. So we've talked about, as an example, the low end handset that we participate with and year-over-year, that business had a dramatic decline. And that has a pretty significant impact both when you just look at our Asia-Pac performance, as well as the overall segment as an example. To be frank, we have another customer engagement that we have gone from gross revenue recognition to net revenue, as providing a service. So it really doesn't impact profitability that much, but it does impact top line performance. That business year-over-year also declined well ahead -- well actually, that business declined year-over-year in Europe compared to the European core business being up year-over-year. So there are some other dynamics that are going on when you make that comparison. One, a well-publicized customer product set that we've been talking about which is still declining, as well as this gross to net change that doesn't have much impact on profitability, but does impact the change in the sales at the top line.

There are no further questions at this time. I would now like to turn the call over to Greer Aviv for closing remarks.

Thank you, Erin. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you and have a nice day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.