艾睿電子 (ARW) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Arrow Electronics, Inc., second-quarter earnings conference call hosted by Greg Hanson.

During the presentation all participants will be in listen-only mode. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded for replay purposes only.

I would now like to turn the conference over to your host, Mr. Hanson. Please proceed, sir.

Thank you. Good afternoon and welcome to the Arrow Electronics second-quarter conference call. I am Greg Hanson, VP and Treasurer of Arrow. I will be serving as the moderator for today's call.

If you would like to access today's call via webcast, please visit our 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 of Global ECS; and Peter Kong, President of Global Components.

By now you should have all received a copy of our earnings release. If not, you can access the release on the Investor Relations section of our website along with the CFO commentary and the earnings reconciliation for the second quarter.

Before we get started I would like to review Arrow's safe harbor statement. Some of the comments made on today's call may include forward-looking statements, 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, you are 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.

Thanks, Greg, and thanks to everybody for taking the time to join us today. Arrow had a very strong second quarter with both sales and diluted earnings per share up year over year. Our revenue of $5.3 billion was at the top end of our guidance and diluted earnings per share of $1.12 were well in excess of our expectations. Both business segments contributed to the successful quarter.

We continue to push forward with our long-term strategic initiatives while managing well the short-term tactical aspects of the business. Cash flow generation in the second quarter was also impressive at more than $330 million. Solid execution in our Components business led to all regions posting sales growth above normal seasonality. Our Enterprise Computing Solutions business continues to produce record results with strong organic growth year over year and a record level of operating income for the second quarter.

In Global Components, sales of $3.4 billion were ahead of expectations. In the Americas our core sales advanced 4% versus the prior quarter. They remain below a year ago levels reflecting the ongoing macroeconomic challenges.

In Europe, we saw a better-than-seasonal trend in sales growth. Core sales in constant currency increased 3% in the quarter with normal seasonality down approximately 8%. Sales in Europe are still down versus the year-ago period, although the rate of year-over-year decline has lessened.

Asia-Pac also experience strong momentum with a core growth of 13% year over year and we saw broad strength geographically. China and the ASEAN region were up significantly driving a sequential gain in core sales of 17%. Book-to-bill was above 1 globally for the third consecutive quarter.

Our Enterprise Computing Solutions business continues to outperform the markets we serve with our 14th consecutive quarter of organic growth. Sales of $1.9 billion were up 12% year over year with strong contributions from both regions.

In the Americas, sales grew 10% year over year and were slightly ahead of our expectations. Sequential growth in the North America value-added business was in line with normal seasonality following a very strong first quarter.

In Europe, our sales grew 18% year over year as we saw broad-based strength across the region. This was driven by the expansion of our matrix strategy which includes the Altimate acquisition. With solid improvements in both regions our operating margin of 4.2% reached a level not achieved since the second quarter of 2008.

Over the past 12 months we have returned nearly $400 million to investors through our stock buyback program. We have been aggressive about repurchasing our shares as we believe in the long-term value of our strategy.

In summary, we executed very well in the second quarter. Our markets remained stable, although the global macro environment is still seeing some challenges. We will continue to pursue our strategy which has served us well in the short term and positions us to accelerate our performance in the future.

Paul will now provide an update of our financial results for the second quarter.

Thanks, Mike. Second-quarter sales of $5.3 billion were at the high end of our guidance. Adjusted for the impact of acquisitions and changes in foreign currency, sales were flat year over year. In Global Components, sales declined 2% year over year as double-digit growth in Asia was offset by revenue declines in the Americas and Europe, reflecting the broad macroeconomic trends in those regions.

Adjusted for the impact of acquisitions and changes in foreign currency, sales in Global Components were down 3% year over year. Sales in Global ECS increased 12% year over year with strong double-digit growth in both Europe and the Americas. Adjusted for the impact of acquisitions and changes in foreign currency, sales increased 7% year over year in Global ECS.

All of our businesses performed in line with or above normal seasonality this quarter.

Our consolidated gross profit margin was 13%, a decrease of 30 basis points year over year due primarily to changes in geographic mix. Operating expenses increased 4% year over year on an absolute dollar basis. Adjusted for the impact of acquisitions and changes in foreign currency, operating expense dollars increased only 1% year over year and were flat as a percentage of sales.

To assist you with your analysis, acquisitions added approximately $13 million to operating expenses this quarter.

We also took important steps in the second quarter towards our annualized $75 million productivity enhancement initiatives, and we remain on track to realize the targeted savings by the end of 2013. Operating income was $186.1 million. Operating income as a percentage of sales was down 40 basis points year over year as reported and down 30 basis points as adjusted for the impact of acquisitions.

In Global Components, adjusted for the impact of acquisitions, the operating margin declined 80 basis points year over year due in part to geographic mix as Asia-Pacific growth continued to outpace the other regions and accounted for a greater percentage of Global Components sales, as well as a macroeconomic environment in Q2 2013 that is weaker than last year's second quarter in the more profitable regions of Europe and the Americas. Adjusted for the impact of acquisitions, Global ECS operating income as a percentage of sales was up 60 basis points year over year driven by solid increases in both the Americas and Europe.

Our effective tax rate for the quarter was 26.3% and for the remainder of the year we expect the effective tax rate to be between 27% and 29%.

Net income was $168.9 million. Earnings per share were $1.13 and $1.12 on a basic and diluted basis, respectively. Included in the second-quarter results is a pretax expense of $9 million, that is $7 million net of taxes or $0.07 per share on both a basic and diluted basis, related to the amortization of intangible assets.

Cash generation from operating activities in the second quarter was $334 million, but on a trailing 12-month basis $519 million. We have converted more than 116% of GAAP net income to cash over the last 12 months, far exceeding our targeted level. Return on working capital on the first quarter for the first quarter was 23.3% and return on invested capital was 9.5%, well ahead of our weighted average cost of capital.

In the second quarter we repurchased 5.1 million shares of our stock for nearly $200 million. And as of the end of the second quarter we have nearly completed our most recent share repurchase authorization, bringing the total amount returned to shareholders to $900 million since the beginning of 2010.

This is a high-level summary of our financial results for the second quarter. For more detail regarding the business unit results, please refer to the CFO commentary published this morning.

Now turning to guidance. With our solid execution in the second quarter leading to strong sales, the reality is the overarching macroeconomic backdrop has not changed much. Customers remain somewhat cautious and lead times haven't changed either.

Our sales outlook, therefore, generally reflects the low to midpoint of normal seasonality across all of our businesses. In the third quarter we believe that total sales will be between $4.9 billion and $5.3 billion with Global Components sales between $3.35 billion and $3.55 billion and Global Enterprise Computing Solution sales between $1.55 billion and $1.75 billion.

We expect earnings per share on a diluted basis, excluding amortization of intangible assets, of approximately $0.07 and any charges to be in the range of $1.14 to $1.26. Our guidance assumes an average tax rate in the range of 27% to 29%, average diluted shares outstanding are expected to be 101.7 million, and the average euro to US dollar exchange rate for the third quarter to be $1.31 to EUR1.

Thank you, Paul. If you would open up the call for questions at this time.

(Operator Instructions) Jim Suva, Citi.

This is Nicholas Jones on behalf of Jim Suva. I was hoping you could give an update on some of the pricing pressures you are seeing and then also just kind of the operating margin targets you have and what sales levels you expect to kind of get in those, especially for the components business.

Sure. I think that on a year-over-year basis gross margins are negatively impacted by a few factors. One is the ongoing pricing pressure competition, as well as some of the changes in product and geographic mix. The other one is Asia-Pac components grew significantly faster than the Americas or EMEA, and accounted for a greater proportion of our sales versus a year ago.

What we have seen is a strengthening in the backlog coming off of three quarters of positive book-to-bill, so it is our belief that the margin decline will abate and we will start seeing margin growth from this point out. Paul, you want to talk about the cost reductions?

Sure. So we are really tracking very nicely to our cost reduction efforts at this point in time. You can see some of that in the operating income percent in Global Components.

Interestingly, if you look on a historical basis, operating income percent only trends down sequentially in Q2 in Global Components, and in fact, this quarter we trended up in operating income by 20-plus basis points. So when we look at it we are starting to see traction there. Remember also, we are still investing in our business as we do believe we want to be best prepared to capture our fair share of future growth in the marketplace.

Okay. Thanks a lot, guys.

Mark Delaney, Goldman Sachs.

Great. Thanks very much for taking the question and, Mike and Paul, congratulations on the good quarter.

I was hoping you could help me understand a little bit more on the third-quarter guidance. Since I understand you are assuming growth that is at the low end to midpoint of typical seasonality, even though in the second quarter you had results that were above your previous guidance. So is that just general conservatism that you are picking up at your customers, or is there anything that you are actually seeing in terms of order patterns that would make you give guidance a little bit below seasonal?

We actually have a couple of factors that we are really wrestling with. We have an increased backlog over the last three quarters because of a positive book-to-bill level that we have had. So that would suggest the growth.

We also are a little unclear in our computer business around sequestration and what that is going to do in the third quarter. Then we are also augmented by something not as big, but this quarter there is two days less than normal for us in the entire quarter. And as you know, those last couple of days can be a couple hundred million dollars of sales.

What is interesting is I think we are talking about maybe $60 million of sales in the guidance that would sort of make the question go completely away, but we are not sure right now whether those sales actually pull ahead into the third quarter or whether they stay in the fourth quarter. And that is really the conservatism around our guidance to give you, obviously, the best number that we can at this point in time with what we see.

That is helpful. Thank you. For my follow-up I was hoping to dig a little bit deeper into the margins. Based on your third-quarter guidance, it seems that you are expecting some additional margin improvement and I understand there is some cost savings that are starting to flow through the model.

I am wondering if there are other factors that are starting to benefit you as well in terms of product mix or maybe better pricing.

Well, we are, as we said, seeing an increased book-to-bill, which is always possible. Typically, when you get down toward the bottom the margin will follow the sales back up because you still have that period of time where there is more of a competitive nature versus when the business gets healthier.

We are expecting an uplift in our components business in the third quarter and an uplift in margin in the computer products business for the third quarter, too. That is a result of what we see as more normal day-to-day bookings and really a more consistent view of bookings going forward, so we do expect the margin to improve for us.

We also took -- on the expense side we really did take some important steps toward that annualized $75 million productivity enhancement program. We do remain on track with that by the end of 2013. We did have kind of a number of items related really to the warehouse transition in Europe as we closed the warehouse and consolidated some operations that we could do after the computer system being turned on.

And so there may be some fluctuations in sort of the quarterly breakdown as we are restructuring right behind that computer conversion to bring us additional savings. As I said, I believe we are going to be on track with the $75 million but that is probably the noise that you are seeing.

Thank you.

Shawn Harrison, Longbow Research.

I guess just a couple follow-ups on the earlier questions. When thinking about the Global Components EBIT margin target of 5.3% is there anything other than kind of the Asia dynamics and then mix headwind that would not allow you to get back to that 5.3% margin if we were to see something like a $200 million to $250 million increase in the quarterly sales run rate in North America and Europe?

Sure. So first up, we don't see that there is anything that has changed both in the short term last couple of quarters over the last couple of years that would cause us to move away from our targeted levels of profitability in any of our businesses. And you know as we have talked about some are further along the path than others, so we don't think there would be any real dynamics, changes, that type of thing that would change the targets.

$200 million of sales would -- I'm just trying to do the math in my head -- really push us much closer to the target over the long-term. So don't have any real concerns around that at this point in time.

Okay. Then two brief follow-ups. Just on the restructuring savings, how much has hit the P&L so far? And then the amortization that is being backed out; how is that split between Electronic Components and Computer Products?

I will take them in reverse order and admit that you have me stumped. I don't have the information in front of me. I looked at it yesterday but, sadly, there was a lot of acquisitions. I don't remember it. We will come back to you with that one.

There is a lot of action going on around expense, so if I look at it the way we are tracking it we have actually got $17 million of expenses out through Q2. So Q2 versus Q4.

But, because that puts us ahead of the pace that we thought we were going to be at, we have chosen to also make some investments in the business so that we think -- and you how investments work, they are front-end loaded and they trail off. So it is maybe hard to see going from Q4 tech Q2, but the way we keep track we have selectively chosen to invest in the business because we are ahead of our productivity enhancement targets.

I guess to that, Paul, then what would be kind of -- you have the restructuring savings, now the investments. What should be the final number that we see on an annualized basis exiting the year?

We are already at $68 million annualized expense action savings, so to get to our $75 million number it is not that far away. We have clear line of sight about what is happening in Q3 and Q4.

The other issue, though, is that some of the front-end loaded spending that we are going through today in some investments will absolutely tail off also. So you will really see the whole impact of really starting -- the whole impact of the $75 million in probably the fourth quarter.

Okay, that is helpful. Thanks a lot and congrats on the quarter.

Sherri Scribner, Deutsche Bank.

Just wanted to ask a little bit, Paul, on the model. Thinking about the SG&A and the cost savings would you expect the SG&A to be relatively flat in September? And is there any chance that it goes down in December or is it going to tick up like it normally does in December?

We think that as we look to the third quarter we will see expenses trend downward from second-quarter levels when you look at it. Then if you look at it year over year kind of looking at actually flattish, that is really where you see some of the investments not falling out of the mix shift. But we will definitely be down in expenses on a sequential basis probably -- I am going to put a round number on it -- somewhere between $10 million and $15 million.

Okay. And then, thinking about the depreciation, it sounds like you are going to start stripping out amortization from your numbers starting in the September quarter. At least that is the way the press release sounded. So should we assume that the depreciation number in September is roughly $7 million lower than the $33 million that it was in the June quarter?

Yes. Thanks for asking that question, Sherri. Really what we are looking at is only the amortization of intangibles, so we are putting a lot of a big investment into our Unity, our ERP rollout. That will still hit the P&L; we won't carve that out.

We have done a lot of research around this and saw that many high-tech companies, tech-related companies were in fact pulling out amortization of intangibles. We don't see much of a change so it's about $9 million pretax, $7 million after-tax. And, yes, you are right; that will be pulled out pretty consistently going forward.

And that will be in the D&A line?

Yes.

Okay. Then just thinking about the semiconductor business, it sounded like you had a good quarter and you are expecting going forward in line to slightly lower. Have you seen an inventory refresh in the semi business? It sounds like things are still cautious out there, but just wanted to get your thoughts. Thanks.

Sure, Sherri. I think that the supply chain today is pretty lean. There is a lot of hand to mouth and lead times are in that 11-week range where historical average, as you know, has been somewhere around 12. So everything right now is still flowing at a very lean rate.

So an uptick will make quite a difference for everybody. It should be more than marginal as that uptick does take place.

Okay, great. So we haven't seen it yet. Okay, thank you.

Matt Sheerin, Stifel.

Good afternoon. So a question on your commentary about the fewer selling days in the quarter. Would that also have a positive impact then on your expenses, or is it just the timing of when the days fall where it impacts sales more than it does actual operations or expenses?

Matt, as you know, we are not losing the days at the front of the quarter. We are losing the days at the back of the quarter and those usually have the most volume. So that is why it has more of an impact on sales and GP dollars than it might have on the expense structure.

Okay. So when you talk about that sequential decrease in OpEx that is sort of a clean number?

We like to think so.

And then, Mike, just another question on the component cycle because it looks like we have been sort of been stuck at a 1.0, 1.04 kind of book-to-bill for three quarters now as these cycles tend to shift fairly quickly. We have been sort of stuck in this malaise, if you will, which is not a bad thing because it is not going down.

But if you sort of had a guess at where the cycle is headed here, given some signs of rebound in markets like telecom and networking offset by some weakness in mobility, so lots of puts and takes, but is your sense that we are sort of stuck in this mode for a while? Or are you more optimistic that the semi cycle will continue to recover and then beyond that you will see lead times stretch and better pricing and firmer orders?

For where we are right now, as you can tell by our guidance, we see it hanging here for another quarter. The book-to-bill -- the good news about it is we have had three quarters of positive book-to-bill in that business.

We do see some of the new business, the margins increasing. The real trick here is to have the manufacturers start to tick up their sales. As they do we will not only get that sales increase but then inventory safety will be important to them and the supply chain will kind of flow.

We have not seen the signs of that yet. Really, until we do, our view is that the third quarter will fall about as we see it. We are hopeful, hopeful for an uptick towards the fourth quarter, but we don't have enough in here to call it yet.

You are seeing -- last quarter you talked about a pickup in design activity. Could you give us any numbers around that? That tends to be a good leading indicator.

Yes, I sure can. What we have seen is that our approved design registrations increased about 11% year over year in the second quarter. We did see stronger trends in Europe, which was good news.

The other good news that is decent news is that sequentially those registrations also increased 6%. So if we take the last 12 months there has really been a 12% increase in those design registrations. That is the part -- as you know, the higher that number sort of the greater the rebound will be. That is one of the reasons that is giving us a little bit of that hold back at this point, because they are not in that 15%, 20% range yet where we really see things starting to take off.

Okay. Thanks a lot, Mike.

Louis Miscioscia, CLSA.

Thank you. Maybe if you could just go into a little bit more detail into the strength in ECS in both I guess America and Europe, just mostly organic demand. I know you broke out in Europe the acquisition difference; that was helpful.

Then, in the Americas, again you commented it would be below normal seasonality quarter to quarter. Just curious why you didn't go back to just being a few days short on the quarter.

Sure. So first part of your question I think our strategy is really the reason that we continue to produce organic sales growth. We have had this matrix strategy in Europe in place for quite some time and we have also had it in North America. So new product lines, our ability to gain share and out-execute our competition is producing the results.

Of course, storage, as you probably have read in the CFO, report was strong again. Software was strong. And even though the server market is kind of unremarkable right now, we are producing record results even without the server market participating.

So good results in North America and Europe. As you mentioned, we are kind of coming off of two great quarters, so when you look at seasonality the bar has been set pretty high for us.

I think Mike mentioned we are watching the sequester. We have a good presence in the federal space, so if there is an upside to be had there we will participate. The fact is that September 30 falls on a Monday so that will be the end of the government's year and that will be outside our quarter. So that is a little bit of color as to why we are seeing it the way we are seeing it on a go-forward.

Let me add a little bit to this. If you take a look at how the ECS business has transformed, today well over half of our sales come from software services, storage, and security, something that really didn't exist here five years ago. So there has been a very good path towards diversifying this business into higher value spaces that require more than just shipping the product.

By doing that we have actually helped ourselves -- if you really think of the industry standard servers, a long time ago we were primarily proprietary servers. The truth is, even with the competition that is out there, our worldwide growth and industry standard is around 16% and 15% in Europe and 19% in North America. So given that extra value-added content that has really allowed us to move this business into a new place.

Okay, great. Maybe, Andy, if you could just -- your comment was helpful. Maybe you could pull out your strength in comparison to maybe just what you are seeing organically? A lot more tepid, I guess, in comparison.

In Europe?

Europe and the US.

Well, the organic growth actually is well above market growth, so you strip out foreign exchange and acquisition and I think we still do 7% or 8%. So we are pretty much pacing 3 times the market growth. Again, I think looking ahead we feel pretty comfortable that our strategy that Mike just talked about is going to pay off.

Okay, great. Last two housekeeping questions. When does your quarter actually end? What was the last date?

September 28.

And then you had mentioned the amortization. Is that about $0.07 and is that actually already in your EPS guidance of $1.14 to $1.26?

The exclusion of the $0.07 is in those numbers you just quoted.

Okay, great. Thank you.

Brian Alexander, Raymond James.

What was the book-to-bill on a global basis as you exited the quarter? And how does that compare to the end of last quarter; was there much variability by region? Then just help me understand why backlog is increasing, but lead time is still pretty short. Then I have a follow-up.

Okay. So each of the major regions in Global Components had book-to-bill between 1.01 and 1.05, and I will tell you the one that was at 1.01 is Europe. And that was well ahead of normal seasonality, so we see it as very positive.

When we look at it rolled up -- remember those are our core businesses -- it was above 1.03. So feel good about that as we exited the quarter and as we move forward, so I think that is a very positive sign for us. I guess the other question was on backlog?

Yes, just maybe clarify why that is rising as lead times still remain pretty short.

Well, your backlog, Brian, is not necessarily what you have in inventory. Your backlog is what customers have placed on you that will ship in the future.

So as the book-to-bill increases the sales your backlog starts to build and as that backlog starts to build you start to get better visibility into your numbers going forward. And that is really what is going on right now. So the customer demands on us for the future are higher than they were last quarter and higher than they were the quarter before that.

And are you seeing a further out in bookings in terms of is the window moving out from 30 to 60 to 60 to 90?

Right. We have not seen anything abnormal in our bookings. Our cancellation rates are remaining the same. The backlog tends to be building on a more steady basis, which we like to see.

And as I said, the hardest part right now is as that backlog starts to build which pieces will ship in the third quarter versus which pieces will ship in the fourth quarter. That is what is giving us a little bit of a headache right now.

Then, Paul, just on cash flow. You mentioned you had that $300 million plus in operating cash flow, very good performance, and that you are overachieving in terms of your net income conversion to cash flow. How are you thinking about that over the next few quarters? Is that going to normalize? How should we be thinking about working capital?

Then on the buyback, very active here in the first half. How should we think about the buyback going forward? Thank you.

Sure. Thanks, Brian. So on the working capital management we made good progress year over year when we look at it really in the inventory area, though we did slip a little bit in managing our payables. But net-net when you look at it year over year we improved and working capital for billings went down.

When we look at it on a sequential basis, we really made good progress in DSOs which were two days better, inventory turns which improved also with the payables management flat. So we think we can continue to push hard on managing well by doing the basics around working capital.

So we expect to be cash flow positive in Q3. Not at the same level as Q2, but still at a good level. Probably more in line with our target of about 70% conversion at this point in time and we think we will be fine also in Q4.

So our target is a long-term target, and as we all know, sometimes we have quarters where we have really strong performance and other times when it looks like we slipped. But we have got to really look at the long-term; I still think we will be able to do better than the 70% over the long term.

And then the buyback. We got a Board meeting coming up, and as always, we review our capital structure with our Board. Look, we were aggressive in Q2. We did believe at that point in time that we were executing what we told you we all we would be doing, which would be buying aggressively around book value.

So that is what we did. We have used up our authorization and we will continue to have the dialogue with our Board.

All right, great. Thank you very much.

(Operator Instructions) Amitabh Passi, UBS.

Mike, I am just trying to reconcile the trends in your Americas Components business -- I think we have had almost six quarters of negative year-over-year growth -- with sort of the macro commentary about things getting marginally better. Just trying to understand what is exactly do you think is going on in that segment and why have trends been so weak for so long.

Well, I think there has been some fundamental market changes. We did have the 4% increase versus the prior quarter. Things are showing a sign of life.

The lighting industry continues to be robust and we have seen that increase about 21% year over year, 15% sequentially. The PEMCO, the passive electromechanical and connector initiatives, continue to gain momentum. And what we have seen is aerospace and defense having around a year-over-year growth of 3%. Lighting is up in the 15% to 21% range quarter on quarter to year over year.

We have actually seen -- you have got some offsetting factors that are having an impact. The medical industry, medical devices quarter on quarter was down about 2%, but on the year it's flat. So we have -- that has typically been an industry where there has been some wind at our back and we haven't had that for quite some time as that medical devices have not been that strong.

The other thing you have to remember is that there has been a pretty good hit in the alternative energy sector. Solar, wind, those types of things are not growing at the pace that they used to. In fact, we have seen a decline in both of those and that has pulled us the other way.

So I think there is some industry rationalization that is going on. Of course, automotive is ticking up, and that is good, but until that stuff sorts itself out that is what is really causing the problems.

Got it. Very helpful. Then, Paul, just one for you. Operating margins in your Computing Solutions segment up 30 bps year over year. They were up 10 basis points in your first calendar quarter.

Should we expect on a year-over-year basis ongoing improvement over the next couple of quarters, maybe 10, 20 basis points?

Andy is sitting right here so yes. I would expect that we will continue to see improvement there. As Andy has mentioned, look, we are running at a top line 3 times the growth in the overall market that he is serving around a data center.

We think that is still a rich opportunity so we want to make sure we get the right balance between obviously maximizing our profitability, but also we want to invest in the business. So it may not be as linear every quarter because there is a bit of a lag between investment and pay off, but we would expect over the long-term that we continue to see the trends strengthen in our operating income percent.

Got it. Andy, can I ask one for you quickly? I am just curious, how is it that in most of your key categories -- Computing Solutions, servers, networking, and security storage -- you continue to outgrow your supplies by quite a great extent? I'm just wondering what explains that dynamic.

Most of the organic growth is coming from the matrix expansion strategy, which means we take a new line and we are enjoying revenue from dollar zero up. So that is why you see the growth. Or we are expanding into a new country where we had no revenue in that vendor line previously and so that strategy is driving the faster-than-market growth.

And how far are we into that? Is there still quite a bit of headway?

I think we are in just the middle innings. There is more to come, more to come.

Okay, thank you.

Steven Fox, Cross Research.

Thanks, good afternoon. Just one question and one comment. Just from a comment standpoint, I totally understand why you are making the change on the amortization line, but it would helpful if we just got in 8-K filing sort of breaking out the change from a margin standpoint by your business segments. I think you can only get to a couple of the quarters from your 10-Q. It just makes it hard on an apples-to-apples basis.

Then from a question standpoint, just looking at the enterprise spending line -- enterprise spending demand, rather, for the rest of the year. I know that you have mentioned some calendar issues, some government issues as well.

But if you look at just your core set of small- and medium-sized customers, can you sort of describe what has been going on there from a big picture standpoint? Whether the product trends you have described so far apply fully to those markets and also how you feel -- I know it is early summer, but how you feel about year-end spending around that group of customers? Thanks.

So I will take the part about the medium business versus maybe large enterprise. Let's take the quarter close out and when the fiscal year ends for the federal government, and I would say that business and our pipelines continue to show steady growth. There is no change really in our outlook.

We are actually seeing some of our bigger customers driving back into the IT spending arena, so when you look at the markets we serve -- financial, healthcare, government, and so on -- some of the spending is large accounts getting back in the game and spending on IT. And the midmarket has been consistent and pretty good for us.

So to wrap it up, I think heading into year-end I don't want to go out on a limb and talk about growth ahead of what the industry is calling for, but I do think the data center spend is a little bit stronger than the general IT spend. And so I think we are in a good position as we head into year-end.

Great, thank you very much.

We have no further questions in the queue. I will now turn the call back to Mr. Greg Hanson for any closing remarks.

Okay, thank you. As a reminder, if you have any questions about the information presented today, please feel free to contact me. Thank you. Have a nice day.

Thank you, ladies and gentlemen, for your participation in today's conference call. You may now disconnect. Have a great day. Thank you.