安富利 (AVT) 2008 Q4 法說會逐字稿

I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Good afternoon and welcome to Avnet's fourth quarter and fiscal year end 2008 corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website www.ir.avnet.com and click on the icon announcing today's event. In addition to disclosing financial results that are determined in accordance with Generally Accepted Accounting Principles or GAAP, the Company also discloses non-GAAP results of operations that exclude certain items. Reconciliation of the Company's analysis and results of GAAP can be found in the Form 8-K file with the SEC today and in several of the slides in this presentation and on Avnet's investor relations website.

As we provide the highlights for our fourth quarter and fiscal year end 2008, please note that we have excluded restructuring, integration and other items from both the current and prior year period in the accompanying presentation and slides. Additionally, discussing pro forma sales or organic growth prior periods are adjusted to include acquisitions. Before we get started with the presentation from Avnet Management, I would like to review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. Listed on the slide are several factors that could cause results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors are set forth in Avnet's filings with the SEC.

In just a few moments Roy Vallee, Avnet's Chairman and CEO, will provide Avnet's fourth quarter and fiscal year end 2008 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the Company's financial performance during the quarter and provide first quarter fiscal 2009 guidance after which a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations is Rick Hamada, Avnet's Chief Operating Officer; Harley Feldberg, President of Electronics Marketing; and John Paget, President of Technology Solutions. With that, let me introduce Mr. Roy Vallee to discuss Avnet's fourth quarter and fiscal year 2008 business highlights.

Thank you Vince and hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet. Fiscal year 2008 was more of a challenge than we anticipated when we initially established our plans and budgets in the June 2007 time frame. By August, the well publicized issues around housing, credit and oil began to spread throughout the economy and we began to experience slower growth in our end markets. While slower organic growth has had a negative impact on our progress toward our long-term financial goals, we remain focused on driving return on capital employed to 12.5% to 14%. As we have stated many times, our value based management, or BBM discipline, is embodied by this key metric which, when coupled with growth, is a proxy for shareholder value creation.

Similar to the mix of data points we read about on the economy, the details of our results are also mixed and raises the question is the glass half empty or half full. Now that we've closed the books on this fiscal year, we can see that we missed our sales budget, earnings per share finished below our plan, and operating profit margin was down year over year. Well, that sounds like a glass half empty kind of year. Putting things in perspective, however, we believe we can also view fiscal year 2008 as a glass half full year. We delivered record sales and EPS for the fiscal year, increased working capital velocity and generated a significant amount of cash from operations. As a result of the performance of our entire global team, Avnet was able to increase return on capital employed by 7 basis points at the enterprise level and grow profit dollars despite the well publicized difficult environment. This was accomplished through a disciplined BBM approach to managing our operations and making value creating acquisitions. That sounds like a glass half full kind of year.

In addition to the consistent focus on our growth and margins, BBM requires that we pay similar attention to the management of working capital. In fiscal 2008 this was especially important as the slowdown in organic growth and business mix shifts reduced our operating income margin. This meant that working capital velocity had to improve. Our team did an excellent job reacting realtime to market conditions and, as a result, improved working capital velocity, reduced our cash cycle by two days, and generated more than $450 million of cash from operations. This performance further strengthened our investment grade balance sheet thereby providing the financial flexibility for us to continue investing in value creating M&A to supplement our growth and enhance our competitiveness.

In fiscal 2008, we completed seven acquisitions. Early in fiscal 2009 we've added three more businesses to our portfolio that increased our geographic footprint, expand our line card, add to our global scale and scope competitive advantages and bring us many talented new employees. These acquisitions, which span both operating groups and all three geographic regions, had annualized revenue of approximately $1.5 billion prior to being acquired by Avnet. Including the contributions of acquisitions, we accelerated our revenue growth rate to 14.5% over fiscal 2007 and grew pro forma EPS to a record $3.18 per share.

While some of the benefits of our acquisition activity are apparent in our current financial results, additional contributions will be realized in the future as organic growth accelerates and we leverage the new levels of scale and scope globally. By investing in value creating M&A when grow is slow, especially in the less consolidated international markets, we are improving Avnet's competitive position and solidifying our indispensible role in the global technology supply chain.

In the June quarter, Technology Solutions rebounded from the disappointing March quarter as double digit growth in servers, storage and software drove revenue up 8.3% sequentially. However, revenue was slightly below the low end of expectations primarily due to lower sales of microprocessors and memory products. The rebate issues that negatively impacted gross margin in the March quarter were corrected as gross profit margin for TS rose 43 basis points sequentially to the highest level in fiscal 2008. Higher gross profit margin combined with the initial benefits from cost reductions drove operating income up 49.5% sequentially while operating income margin improved 88 basis points.

On the balance sheet, working capital velocity at TS improved 15% over the March quarter which contributed to a 352 basis points sequential improvement and return on capital employed. In the June quarter, the Americas region delivered operating income margin at the high end of our target range and return on capital employed well above our 12.5% threshold. Even though Technology Solutions faced challenging market conditions in fiscal 2008, it was a year of growth and expansion as we made several international acquisitions. In Europe, TS solidifies its position as the leading value added IT distributor with the acquisitions of [Mageris] and Acal in the first half of 2008 and the recently completed Horizon in July.

In addition to expanded geographies, these acquisitions added new product lines and services in high-growth segments along with an expanded customer base, thereby creating new cross selling opportunities. The acquisition of Channel Works expanded Technology Solutions' product line in Australia while the recent acquisition of Ontrack in India provides a solid base upon which to grow in one of Asia's fastest growing IT markets. Benefited by acquisitions, Technology Solutions revenue grew 27.1% to $7.63 billion in fiscal year 2008. On a pro forma basis, TS revenue grew 4.7%.

While the June quarter represented significant progress in growth and profitability, operating income margin was down 45 basis points for the full year due primarily to the impact of lower organic growth in certain product lines. We are not satisfied with this performance and we'll continue taking actions to align our expense and working capital investments with market realities. For the second year in a row, our most consolidated region, the Americas, delivered operating income margin at the high end of our target range and exceeded our 12.5% return on capital employed threshold. In EMEA, where the consolidation process is still playing out, we will begin integrating the recently completed Horizon acquisition this quarter.

As organic growth returns and we realize the financial benefits of the cost reduction initiatives, we will continue to make progress in driving Technology Solutions to generate operating income margins within our long-term goals. In the June quarter, tech solution sales of $1.95 billion were up 9.9% year-over-year on reported basis and 5.6% adjusted to exclude the impact of changes in foreign currency exchange rates. Revenue was roughly flat on a pro forma basis when you account for acquisitions.

At a product level, servers continue to decline as a percent of total revenue as tech solutions executes on its strategy of investing in solutions practices and vertical markets in high growth segments. In the fourth quarter of fiscal 2008 our storage solutions growth rate exceeded 50% year-over-year for the third consecutive quarter while sales of networking products doubled from the prior year quarter, both benefited by acquisitions. At a regional level, EMEA grew revenue 43.1% over the prior year quarter in delivered dollars and 26.4% if you exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA grew 4.2%.

The Asia region grew 1.6% as compared with the year-ago quarter and was down 11.3% on a pro forma basis due to relatively weak microprocessor and memory sales. However, gross profit dollars at TS Asia grew 24.8% year-over-year on a pro forma basis. Revenue in the Americas region was essentially flat as growth in storage and networking offset declines in servers. Turning now to the results for electronics marketing, the fourth quarter of fiscal 2008 represents another solid performance by our team despite the somewhat challenging environment. Revenue of 2.73 billion was above our expectations due to better than expected sales in all three regions.

Our team in EMEA has done an excellent job of working through this macro slowdown by focusing on profitable growth and asset velocity. Although EMEA's operating profit margins are down from record levels in the fourth quarter of fiscal 2007, working capital velocity increased 8% year-over-year and return on capital employed improved 49 basis points. In the EM Asia region the team improved operating profit margin year-over-year for the fourth consecutive quarter. The Americas region grew faster than the market and continues to exceed our return on capital employed target.

For fiscal 2008, electronics marketing revenue of $10.33 billion grew 6.7% over fiscal 2007 in delivered dollars and 2.5% in constant dollars. Pro forma growth after adjusting for acquisitions was 5%. Gross profit margin was up 15 basis points while operating income margin was roughly flat as compared with the prior year. Record working capital velocity at EM for the year contributed to a nearly three day decline in its cash cycle and a 117 basis points improvement in return on capital employed. While the EM Americas region continues to exceed our return goals with relatively flat return on capital employed year-over-year, return on capital employed improved for both the Asia and EMEA regions by 95 basis points and 99 basis points respectively.

In summary, our EM team around the world reacted rapidly to the challenges in the market and stayed focused on profitable growth and working capital management while continued to invest in organic growth initiatives and value creating M&A. Our emphasis on value added offerings focused on the global electronics design and supply chains has allowed us to take share without sacrificing gross profit margin. Our flexibility and willingness to partner with both customers and suppliers continues to gain traction in the market and we believe that we are well positioned to capitalize on future market opportunities.

In fourth quarter fiscal 2008, EM revenue of $2.73 billion was up 10.8% year-over-year on a reported basis and up 7.3% pro forma after adjusting for acquisitions. The Americas region delivered a third consecutive quarter of year-over-year growth with sales up 2.4%. The Asia region grew 10.3% as compared with the fourth quarter of fiscal 2007 and 3.7% on a pro forma basis. The EMEA region grew 20.8% over the prior year quarter and grew 5% after adjusting for the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA was up 15.6%. Now, I'd like the turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer. Ray.

Thank you, Roy, and hello everyone. Let's begin with a review of operating results for the fourth quarter of 2008 as compared with the prior year quarter. In the June 2008 quarter Avnet's sales of 4.68 billion were up 10.4% in reported dollars and up approximately 5.4% in constant dollars as compared with the year ago quarter. Organic revenue growth was roughly 4.2% over the year-ago quarter. Gross profit of 611.8 million was up 60.2 million or 10.9% as compared with the fourth quarter of fiscal 2007 positively benefited by the impact of acquisitions and the year-over-year weakening of the US dollar against the Euro.

At the enterprise level, consolidated gross profit margin for the quarter was up 6 basis points year-over-year. Electronics marketing, gross profit margin was up 7 basis points year over year even though the relatively lower gross margin Asian business continues to grow faster than the western regions. Technology Solutions gross profit margin was essentially flat for the quarter year-over-year, but up 43 bases points sequentially as supplier rebates returned to normalized levels. Our continued focus on profitable growth and value added services has allowed us to maintain gross profit margins despite the headwinds of the macroeconomic environment and a very competitive marketplace.

Operating expenses of 413.2 million were up 57.4 million or 16.1% year-over-year primarily due to the impact of acquisitions and the impact of fluctuations in foreign exchange rates. The cost reduction initiatives that we announced in April for certain business units are essentially complete and we expect the full benefits to be realized September quarter. We were able to reduce roughly 18 million in annualized operating cost during the June quarter. However, these were masked from our reported results by the addition of operating costs from recent acquisitions as well as the impact of changes in foreign currency exchange rates.

In response to continued weakness in portions of our portfolio, we have identified additional corrective actions that will be initiated in the September quarter of approximately $15 million on an annualized basis with the full benefits expected in the March quarter. In addition to these restructuring efforts, we continue to manage the integration of our acquisitions and expect to obtain the synergies planned.

Excluding restructuring integration and other charges, operating income of 198.7 million increase 2.9 million or 1.5% as compared with the prior year quarter. Operating income margin declined 37 basis points year-over-year to 4.25%. Taxes on income before restructuring integration and other items decreased 3.5 million year-over-year primarily due to the mix of business. The effective tax rate in the June 2008 quarter was 157 basis points lower sequentially as the effective tax rate for the year came in at 30.6%, resulting in 28.9% effective tax rate for the fourth quarter of fiscal 2008. This year in trueup added roughly $0.02 per share to our quarterly earnings relative to our earlier projection. We had a similar trueup of $0.02 in last year's fourth quarter as well. We currently estimate that our effective tax rate will be between 30.5% and 32.5% for the fiscal year 2009.

Excluding restructuring, integration, and other items, net income for the fourth quarter of fiscal 2008 increased $4.3 million or 3.5% to $128.2 million, increasing diluted earnings per share to $0.85 up 4.9% as compared with $0.81 per share in the year-ago quarter. GAAP net income increased 19.4 million to $144.1 million or $0.95 per diluted share as compared with net income and earnings per diluted share of 124.7 million and $0.81 respectively in the prior year quarter. Included in the GAAP earning is a non-operating gain of approximately 42 million from the sale of our interest in Calence LLC on April 1, 2008.

On a trailing 12-month basis our ratio of expense to gross profit dollars increased 108 basis points from 66.5% at the end of last year's June quarter to 67.6% in the current quarter. At the operating group level, electronics marketing increased its year-over-year rolling four quarter expense to gross profit ratio by 41 basis points while Technology Solutions increased its ratio by 421 basis points. The fourth quarter of fiscal 2008 the ratio of operating expense to gross profit dollars increased 302 basis points year-over-year with deterioration coming from both operating groups due to the lack of organic growth and the benefits from the previously stated restructuring activities not being fully realized in the June quarter. We expect restructuring actions along with the synergy benefits from the integration of acquired businesses to improve this ratio in upcoming quarters. Our trailing 12-month operating income margin was down 20 basis points year over year to 4.2%.

As we look at the fourth quarter fiscal 2008 on a stand-alone basis, operating income margin of 4.25% decreased 37 basis points over the prior year. For electronics marketing, operating income margin was down 18 basis points to 5.6% while Technology Solutions operating margin of 3.2% was down 70 basis points as compared with the year-ago quarter. The decline in EM year-over-year was due to slower organic growth and higher sales from the lower margin Asia business. At TS we bounced back from our third quarter gross margin decline and expect to substantially recover the operating margin decline by the end of the calendar year. Again, as we mentioned earlier, we will continue to manage our portfolio of businesses to a long range financial model.

In the fourth quarter of fiscal 2008 return on capital employed declined 114 basis points to 11.4% as compared with 12.5% in the fourth quarter of fiscal 2007. On a trailing 12-month basis, return on capital employed improved slightly by 7 basis points to 11.3% in the fourth quarter of fiscal 2008. Even though our results are below expectations, we remain committed to a long-range goal of 12.5% to 14% return on capital. Our disciplined approach to managing our business is helping us drive return on capital to new levels and continue to grow shareholder value despite difficult market conditions and we are executing this while making smart acquisitions. Maintaining a strong balance sheet and substantial cash flow generation provides with a comfort that we can continue to invest in growth initiatives, including value creating M&A.

As depicted on this next slide, cash flow from operations was 454 million for fiscal 2008 and 257 million in the fourth quarter due to the combination of solid earnings and prudent working capital management. The slight slower growth we were able to increase inventory turns and working capital velocity for the fiscal year. As a result, on a sequential basis cash generated from the reduction of inventory was $81 million during the quarter with reduction in inventories at both operating groups. At the enterprise level, our net days were down four days sequentially and we continue to see no deterioration in our receivable bad debts despite the continued concerns in the credit markets. The significant cash flow generated in the fourth quarter and for the full fiscal year resulted in a continued strengthening of our balance sheet and credit statistics. On a trailing 12-month basis, debt to EBITDA was 1.5 and EBITDA coverage was 11.5. We exited the quarter with over 1.5 billion of liquidity, including 640 million in cash, giving us the financial flexibility to capitalize on strategic opportunities.

Looking forward to Avnet's first quarter fiscal 2009, Management expects normal seasonality at EM and TS with anticipated sales for EM to be in the range of 2.65 to 2.75 billion and sales for TS to be between 1.88 and 1.98 billion. Therefore, Avnet's consolidated sales are forecasted to be between 4.53 and 4.73 billion for the first quarter of fiscal 2009. As a result, we expect first quarter fiscal year 2009 earnings to be in the range of $0.70 to $0.74 per share. This EPS guidance does not include the amortization of intangibles or integration charges related to acquisitions and additional restructuring charges related to the actions to be taken in the September quarter.

Before we open the line for questions, I would like to point out one item related to our December quarter which is more of a reminder. As many of you know, December is typically the strongest quarter for our TS business driven by the year-end budget activities of many of our customers and by the fact that some of our key suppliers operate on a calendar year basis. Typically, a significant amount of the sales activities for that quarter occur in the latter part of December. In Avnet's current fiscal year, our December quarter will end on December 27, four days before the end of the calendar year. As a result, some of the sales activity in calendar December will actually fall into our March quarterly results. Although we are not providing second quarter fiscal 2000 (sic - see press release) guidance at this time, we wanted you to be aware of this so you can take it into account in your modeling, and as part of our usual practice on guidance we will provide our December outlook on our September earnings conference call. With that, let's open the line for Q&A. Operator.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of William Stein with Credit Suisse. Please proceed with your question.

Thank you. So I'm looking at the revenue growth guidance. I'm backing out what I think source Horizon and Ontrack will contribute and it looks like you are guiding towards the high end of normal seasonality for revenue growth in both segments. Do I have that right? If so, what is what is driving that guidance level?

Hi, Will. It's Roy. So I guess the first thing we ought to do is maybe backtrack and calibrate what is normal. So from an EM point of view, we think that anything from minus 1 to minus 4 sequential would be normal. Therefore, about minus 2.5 would be the normal midpoint. And we think that including M&A we are guiding minus 1.5. It's very close, perhaps just slightly better. As you know, we just came off a quarter where we exceeded the high end of our expectations for the quarter for EM. You have probably seen some of the SIA data lately indicating strength in the semiconductor market on a worldwide basis. We feel that we are gaining share in the component segment on a worldwide basis. And so we are slightly ahead in that regard.

Okay.

From a TS point of view, typically coming off the June quarter, which is the Sun Micro fiscal year end, we think midpoint we'd be down around 7% and including impacts from M&A we think is down roughly 7%. So perhaps there's a rounding error in there. 7.5 maybe on the guidance we gave on analyst day versus 7% we're guiding to.

Helpful. One more. I'm hoping we can get clarity on the rebate issue. Is there still -- I heard at one point I think someone said that that issue is fixed and it's now behind us. But obviously margins are still quite a bit below the target range in that segment. Is there still something to be worked out in that segment in the current fiscal year, fiscal '09 where we should see something from rebates cause margins to recover and return back into the targeted range?

Again this is Roy. We had full recovery at the gross margin line. The impact of our gross profit margin for TS for the quarter was the highest quarter we've had for the fiscal year and it was up just lightly from the fourth quarter of last year. And that's where the rebate accounting would occur. So that begs the question, therefore, what is the problem with the operating margin relative to our long-range model and our historical levels and the answer to that would be volume relative to where we were last year and relative to our expectations. Keep in mind, in both of our businesses a significant amount of the top-line growth that we are delivering right now, let's say in the last couple of quarters, is the result of M&A and currency. And that kind of top line doesn't create the operating leverage that you would normally expect to see in our model. So the simple answer on TS, we need any combination of higher levels of organic revenue growth and/or lower cost as a percentage of revenue or gross profit volume and that's how we are going to get our margins back.

Do you think you are going to hit the margin range in that segment in fiscal '09?

I think for the year we are going to be very close. We certainly will and should for the December quarter, the seasonally strongest quarter of the year, that should not be an issue. The question is can we do it for the whole year and I think it will be close to the low end of the guidance range.

Thanks very much.

You're welcome.

Thank you. Our next question comes from the line of Steven Fox with Merrill Lynch. Please proceed with your question.

Hi. It is (inaudible) in for Steven. I thought if you can discuss more a little bit more what you were just talking about the improvement in the TS margins and what limited that rebound. Was it just volume? And where do you think they can go by the December quarter?

John, do you want to take that?

So there was certainly a volume impact in this quarter as we were slightly below the low end of what we had anticipated. The gross margins were, as Roy stated, were the best we've seen this year. We are continuing to roll out, and we will realize the full benefits of the actions we took from a cost standpoint in the September quarter, and then that would roll into our quarter which will be the December quarter. We expect and again the highest quarter that we have is our December quarter. We would expect to be at that range for the December quarter.

Okay. Great. Thanks. And then maybe if you could -- what was organic growth rate for the quarter if you can back out both the currency effect and acquisitions?

[Ingrid], at the enterprise level?

Yes.

It was essentially zero.

Okay. Zero. You don't have it for TS and EM?

We do. For EM it was slightly above zero and for TS is slightly below zero.

Okay.

I think clearly this goes back to my comment earlier. We are in a challenging environment for sure. However, what's happening is our team is doing a good job of managing operations effectively and as a result of that producing strong levels of cash flow. And then in addition to that, we are using the cash flow to deal or to generate value-creating acquisitions and those acquisitions are helping revenue and to an extent EPS but, more importantly, strengthening our scale and scope and creating competitive advantage that will benefit us for the long term. So right now we are challenged with the lack of true organic growth and we are managing our way through that with a disciplined portfolio management approach and we are reducing cost where appropriate and reducing working capital where appropriate.

Okay. Great. I guess on the inventory levels that you've been able to achieve are near top record turns, what kind of level of improvement do you think is less? And which business would you think that the most of that will come from?

So the perspective that I have -- first, I have to give you the obligatory speech about our goal is not to have zero inventory in either one of our businesses. This is part of the value proposition that we deliver to the global tech supply change and it's an important value. That is not our goal. Our goal is to make sure that every dollar of working capital investment is productive and every dollar of expense that is invested in our business is productive. Okay?

Right.

So with that as the back drop, the reality is two things drive inventory. One is increased volume and the second one is longer product lead times from our suppliers. Right now the unit volumes are relatively stable, and the product lead times are relatively stable, and in that environment we can achieve higher and higher levels of inventory velocity but what would impact that going forward would be if growth went negative, we would actually generate more cash. If growth goes positive, we would actually use some additional working capital. And the same is true for product lead times. If we get into a situation where products become more difficult to get and, therefore, we need more inventory to meet our service requirements with our customers, then you'll see our inventory begin to grow. Typically when that happens, revenue and gross profit volume is also rising and we are able to improve returns even though we might be increasing the working capital investments.

Great. Thank you.

Just to remind everyone on the call, the P&L in our business is cyclical and is impacted by revenues. The balance sheet is counter cyclical. We carry a large amount of working capital to finance the technology supply chain and when revenue declines, we generate cash from the balance sheet, and when revenue grows, we use cash to invest back in. Okay. Next question.

Our next question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.

Thanks. How much organic growth, just to go back to the earlier comment about TS margins, are going to be driven by growth from here? How much organic growth do you need to see to hit the target at TS margin target for FY '09? I'm just trying to get a sense of how we can ramp to even 3.9% which is the low end of that range given that your gross margins have already covered and are still below the line of that range.

Yes, Brian, I think in the FY '09 plans, we are thinking about something like a middle single digit organic growth rate baked in.

Okay. So mid single digit organic growth should get you up to the 3.9% for the full year?

Roughly.

Okay. And remind me how much of the restructuring actions that you've already announced and the ones that you've announced today how much of those dollars have yet to hit TS?

Ray, can you take that?

Roughly incrementally we'll say $4 million bucks on a quarterly basis. So 16 million on annualized basis.

And then switching over to EM, it looked to me on an organic basis, excluding currency, you saw big year-over-year improvement. I think you were roughly flat and your competitor down closer to 10%. If you can talk about what drove the relative performance there. Are there mixed issues to explain it or sit just execution driven? And then I guess the same question for Asia where it looks like you might have under performed your major competitors. Thanks.

I think it's a good opportunity to turn the call over to Harley.

Yes. Hi, Brian. Obviously I can't comment on how [arrows] numbers are broke out. For us, clearly we believe that we are performing quite well. We believe we gained share in all regions actually. I'll comment on Asia in a minute. And I think what we are seeing is really terrific acceptance in the value based aspect of our offerings to both our customers and our suppliers. And we really think it's allowing us to grow ahead of the market and gain share. Specific to Asia, based on what major suppliers we track, we really did not see any evidence of any share gain in our business in Asia.

I guess I'm looking at one competitor who reported I think 32% growth and you reported 4. Are you suggesting that the 4% growth is above market?

No. What I said, Brian, is that the core suppliers that we track, we were right in with their growth rates. There are other suppliers that may be growing at an accelerated rate in that region local or indigenous suppliers, but not on those that we are principally focused on.

Okay.

So, Brian, as you know we have small exposure in memory is one example. Another example might be a product line like Media Tech where we don't have the franchise and there's some exciting growth rates. But we track market share-based upon -- we do it in a variety of ways but one of the ways is we look at the products for which we are franchised and we accumulate of basket and our team is performing well in Asia and one thing I'll add is that our team is growing gross profit volume faster than sale volume in Asia as well.

Okay. Final one. On your guidance for TS, which I agree look to be a little bit better than seasonal, if I were to just look on a year-over-year basis it looks like you are looking to improve growth there if I pull out acquisitions and if I pull out currency. Is that improvement in year-over-year growth primarily driven by recovery in the issues you saw this quarter IE, CPUs and memory or is that coming from the core enterprises?

Brian, I would say that recovery is coming from across the business. So it's not just in the microprocessor business.

Okay. Thank you.

Your welcome.

Our next question comes from the line of Jim Suva with Citigroup. Please proceed with your question.

Great. Thank you very much. Can you please clarify two points? One is we know this quarter turned in better than expected and congratulations on that. But you continually keep referencing the challenging environment and you are guiding to normal. Can you help us connect that? And then the second connection is when we look at the September guidance where revenue I think was better than everyone expected, it looks like there's a little bit of a disconnection there on the EPS outlook which could have been a little bit better. Is there something more in cost or shipping going on there or why the disconnect of not seeing a couple more pennies down to the EPS line?

Jim, let me go backwards. As you might imagine we scrutinized these numbers. If you look back in history for Avnet the first quarter is clearly our softest seasonal quarter, and there's a variety of factors that contribute to that, but it's our softest seasonal quarter and typically we generate anywhere from 18% to 22% of our annual earnings in Q1. So this number is not actually out of line relative to our expectations. As far as what is driving it this year, I can point to two different issues, if you will. One is that, as I mentioned earlier, a lot of the revenue that you are seeing now is coming from M&A and currency as opposed to organic growth and so we are not getting the same kind of operating leverage that you would typically expect to get. Another way to say that is operating margin is down slightly year on year for the fourth quarter and we are expecting operating margin to be down slightly again for the first quarter. So that is one set of issues.

To get a little bit more tactical for you, Ray mentioned earlier that we have our equity compensation expense and because there's a variety of sort of archaic factors in terms of accounting, but the net-net is that there's a $0.03 sequential increase in expenses due to the L-tip, our long-term incentive plan. Turns out to be a $0.01 change on a year-on-year basis. In addition to that, this is the quarter that we implement our merit pay increases globally and there is a $0.03 sequential expense related to that, and then there's a third item. What's the third? Oh, the tax true-up we had in the June quarter. If you look at the tax rate that we are assuming for the first quarter relative to what actually got booked in the June quarter, there's about $0.03 there, Jim. So there's three specific items that round out to about $0.03 a piece and then on top of that you have a different business mix. More sales coming from EM Asia, lower sales coming from EM Europe. That is what contributes to every year, this being our seasonally weakest quarter. So those are all the factors that are causing the EPS to be where it is on that revenue number.

Great. And the challenging environment comments versus guiding to normal if you can connect that?

Right. The macroenvironment is difficult, but as Harley said, we have got a number of strategies in the EM business. John has a set of growth strategies in TS around solutions practices and vertical markets and our team is performing well. We think that we are gaining share of our served markets around the world and we are doing that while maintaining or even slightly expanding our gross profit margin. So that's part of the issue. And then I think the other thing is our mix of business. In the IT space the SMB is a little bit stronger than the overall IT market and it has been for the last few years and the EM business we have relatively low exposure to the consumer and we are seeing a fairly stable, although not robust but stable, environment in the business spending on CapEx. So all those things are going into our thinking and what we are experiencing.

Great. A quick clarification question. When you mention December 27 year end what normally would you expect that quarter to be on historical but since it's so back loaded can you help us adjust for going back if one were to close the books on December 27, what would be normal?

I don't know if I have that in front of me, but I want to say it's in the ballpark of 25% to 30% sequential growth for the TS business in the December quarter. And we expect that -- we are going to get typically seasonal growth at this point in time based on what we know today. However, we don't yet, Jim, have a handle on the impact of missing four days. If you look at last year, we were two days off from the calendar close, and we had a small impact and we talked about that openly at the analyst day and when we reported the results. We are thinking that because there's four days this year, it's going to be a little bit bigger impact but we don't really know yet how to quantify that. So we are going to do our best when we get to the guidance for the December quarter, but even then we are going to have to give you a range because it will be difficult to determine. What's happens here is normally a lot of activity would take place from that four-day period. Our team is going to work very hard to pull everything possible into our fiscal period and the question is going to be what customers can we not book and what orders can we not get out until the March quarter.

Great. Thank you very much.

By the way Jim let me just wrap by saying just to put it all in context all we are talking about here is whether the revenue shows in the December quarter or the March quarter. If you looked at revenue from October through March, it should be a non-issue.

Great. Thank you very much.

Your welcome.

Our next question comes from the line of Carter Shoop from Deutsche Bank. Please proceed with your question.

Good afternoon. I wanted to ask two questions here. First, housekeeping question on stock option compensation. Thanks for pointing that out being a $0.03 drag quarter-over-quarter. Are we going to see a sequential benefit in the December quarter?

Yes, you will. So the $0.03 sequential increase essentially comes right back down again. I'm not sure if it's exactly $0.03 but let's just for conservative purposes $0.02 but, yet, it will come down again. If you look at last year same pattern last year higher in Q1 and then coming down in Q2, 3 and 4.

Okay, great. One more housekeeping actually. The tax rate going up, I think you said 32% to 32.5%. Can you help me understand why that's going up?

No. 30.5 to 32.5.

30.5 to 32.5. Okay.

So it's just going up marginally.

Got it. And then last question. When we look at the acquisition over the past two years, is that a good way to think about the future acquisition activity for Avnet or do you think that we'll actually see activity above or below that type of a rate?

Carter, hopefully without sounding like I'm avoiding your question, I don't know how to answer it. We have a nice robust pipeline. I believe that the combination of the challenging environment as well as the lack of liquidity in the capital markets is bringing a lot of sellers forward and as a result of that we have a nice pipeline at both EM and TS. We are working on deals but I have got to tell you, forecasting M&A is really, really difficult. So intuitively I would think that the combination of our balance sheet and cash flow and our proven prowess in M&A coupled with the fact that this kind of environment typically brings more deals forward, your assumption might be a good assumption, but I just have to take the fifth on this one and tell you I don't know how to forecast M&A.

That's fine. Thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Matt Sheerin with Thomas Weisel Partners. Please proceed with your question.

Yes. One question a follow-up to Jim concerning the computing revenue at the end of the quarter. So if there's a four days carried over to March, does that affect in any way how you account for when you pay the rebate dollars? That is a big component of your gross margin in the fourth quarter?

That is an excellent question. John, do you want to take it?

It is not. Our rebate dollars are earned in the same calendar.

So Matt we do this every quarter. So we know the answer to this question. Despite the fact that our fiscal period is closed, we will continue to transact business and report that business back to our vendor community and they will include that performance in their fiscal periods and our rebates are based on performance in their fiscal periods. The answer so your question is no impact.

Okay. And then just staying on gross margin, for the September quarter you didn't give any specific gross margin guidance. It's over the years. Some years is down, some years is up, but given that you have the Horizon acquisition kicking in on the computing side you are going to see relatively weakness in EM Europe which is a higher gross margin, and better sales in Asia. So what I assume gross margin would be flat to down sequentially?

Yes. I think historically it tends to be down a little bit sequentially in the first quarter, and I think under normal conditions that would be the right assumption. Our current projections have flat to down just slightly.

Okay. And just getting back to the guidance and the visibility, sounds like you are seeing a return to normal seasonal patterns but not every one of your suppliers, a lot of distributors are seeing continued weakness or not much visibility at all. You've had a few up and down quarters in terms of hitting revenue. So maybe you can talk, Harley, about the book to bill that you are seeing in different region on the component side and what kind of confidence do you have in terms of visibility in both businesses?

Sure. Relative to book to bill in the EM business by region, the way I categorize the June quarter was we closed with slightly below one in the west which for us would be both Europe and America, and subsequently slightly above one in the east in Asia. So overall it rounds up to almost exactly one to one for the quarter with a slight variance between east and west.

And Matt as you know the component business with relatively short product lead times the need for the customers to book more than they are taking it really not there and, as a result, book to bill tends to be close to parity in times when lead times are under control. In terms of visibility, I'll tell you, all I have to do is play back the March quarter conference call. Through 11 out of 13 weeks in the quarter we thought we were on track and then the last two weeks we were very much surprised by the lack of volume. So I have to tell you that the challenge we have in this environment is visibility. Our management philosophy is really to stay on top of our operations on a week to week, month to month basis and be if, I can use this term, hyperreactive as opposed to predictive. So our modus operandi right now is to look at our portfolio, make adjustments where adjustments are needed, keep investing in the organic growth opportunities and we have them by group and by region, and then generate significant cash flow and use that cash flow for value-creating acquisitions. That is the mode of operation that we are in right now.

If I can add on top of that, when we think about the component business specifically and we think about the guidance going forward or the visibility as you said, two factors that we analyze very closely are those we see relative to excess inventory in the channel overall which really looks quite manageable at this point overall, not just within our own business but overall, and we read that as a good indicator and, secondly, we track unit volume. So there's been significant ASP pressure all through the supply chain. Unit volume has held up pretty good and coming into or closing out the June quarter we were pretty much in line with where we would like to be.

Okay. And you haven't seen any abnormal spike in cancellations?

None whatsoever. Matt, historically cancellations would be a good indicator, but we are carrying relatively little backlog these days. There's so much in the supply chain category where we are staging the material based on forecast but we are not booking until we get the ship notice. So I'm not sure that cancellations are as a good indicator as it was in the past.

It's only after business is really good and when you start to see cancellations that is a sign of a slow down.

Yes. That's a fair point.

Thank you.

Our next question comes from the line of [Brendon Ferlong] with Miller (inaudible). Please proceed with your question.

Good afternoon, gentlemen. Just a follow-up question from several callers. The gross margin I have down slightly for the September quarter which means SG&A as a percent of gross profit we are getting a spike. Any kind of directional value or that you can give us in December and March as SG&A percent of gross profit or some such metric?

Sure. This is Roy. My suggestion would be if you just look at the historical patterns, you'll typically see a spike for us in the first quarter period, and then you'll see a nice drop in the December period. We have the revenue spike from tech solutions and then in the March quarter it tends to move back a little bit but gross margin rises as a result of the mix shift. So my expectation for the fiscal year is that we would follow our normal pattern there. If you would like more insight, Vince can get with you after the call. I know you are relatively new to the story and building your database.

Great. Thank you very much.

Thank you. Our next question comes from the line of [Sean Conno] with [FAF] Advisors. Please proceed with your question.

Thanks guys. One quick follow up. On the tech solution side I think you said your organic growth was roughly 0% if you exclude M&A and on a constant currency basis. How do you think that compares to the overall industry? It seems like most of the other hardware companies, excluding Sun, actually are putting up pretty decent year-over-year growth. Can you talk a little bit? Do you think you are maintaining share, losing a little bit of share because of your mix of products versus your peer group?

This is Roy. First of all, my reaction here is to get a little defensive, but let me explain why. We are giving you data that I don't think anybody else is giving. When we talk about organic growth and in constant currency, that's data that is not typically talked about out there. So, for example, if you look at our TS delivered growth, it was up 9.9%. As we look at market share in the products that we are involved in in the mix of business that we got, I think we feel very good about our share performance. John, do you want to make any comments about that?

Certainly we do track share growth certainly in the Americas. We've seen a significant increase in our share especially in [HPBS] as an example who may have taken as much as 10 points over the last quarter. So we feel pretty comfortable that we are continuing to gain share in the areas that we focus in.

And then one other thing I'll point out is a lot of the hardware OEMs that are our suppliers have significantly higher exposure to emerging markets than we do so far. Now you've seen us make moves where we've just announced a deal in India. We are moving into Eastern Europe in a reasonably strong way. So you will see us continue to make progress in that area, but we've been spending our time penetrating the larger more established markets and we are sort of now getting more focus on the emerging markets. So watch for that over the next few quarters as well.

One followup. Yesterday Cicso talked about actually kind of seeing their business in US enterprise that business is finally starting to pick up and at least stabilizing and the order rates are picking up. Can you talk about give a little bit of color on the region US on the hardware versus Asia versus Europe?

Well, I think we can support John's comments. We had a nice June quarter. We are off to a reasonably start here in the summer quarter. On Americas business is meeting and exceeding our financial targets. So we agree with all of his comments. As far as why, that is a tougher question. We speculated last quarter, the March quarter, that IT budgets may have been reduced going into calendar '08 and then on top of that given the macroeconomic environment at the end of March, there were some decisions made to hold on to cash and not use it's for discretionary IT projects. It seems like because we had a normalized seasonal pattern in June, that has loosened up a bit. But as I mentioned earlier, we are still down year on year. So I think that things are returning to a more normalized state in the US and our business is performing well within that environment.

In support of that Roy, we didn't see the pushout of any of the big deals that we saw in the March quarter at the end of the June quarter and we closed most of those that pushed out.

So the pipeline behaved normally.

Thank you guys.

Your very welcome.

At this time this concludes the question-and-answer session. I would like to turn the floor back to management for any closing comments.

Thank you for participating in our earnings call today. As we conclude we will scroll through the non-GAAP and GAAP reconciliation results along with description of our certain charges that are excluded from our non-GAAP result. This entire slide presentation, including the GAAP financial reconciliations, can be accessed and downloadable in PDF format at our website, www.ir.avnet.com, under the quarterly results section. Thank you.

Thanks, everybody.

Thank you. Ladies and gentlemen, this concludes your conference call. You may disconnect your lines at this time. Thank you for your participation.