安富利 (AVT) 2009 Q2 法說會逐字稿

Our presentation will begin now. 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 second quarter fiscal 2009 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.

As we provide the highlights for our second quarter fiscal 2009, please note that we have excluded restructuring, integration, and other items from the current year period in the accompanying presentation and slides. Additionally, in discussing pro forma sales and 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 this slide are serial factors that could cause actual results to differ materially from those described in the forward-looking statements, more detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Roy Vallee, Avnet's Chairman and CEO, will provide Avnet's second quarter fiscal 2009 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet will review the Company's financial performance during the quarter and provide third 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 are Rick Hamada, Avnet's Chief Operating Officer, and acting President, Technology Solutions and Harley Feldberg, President of Electronics Marketing. With that let me introduce Mr. Roy Vallee to discuss Avnet's second quarter and fiscal 2009 business highlights.

Thank you Vince. Hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet.

In the second quarter fiscal 2009, our financial results were negatively impacted by the global economic slowdown that seemed to worsen as our quarter progressed. This deceleration was most notable at our electronics marketing group as customers reacted with unprecedented speed to reduce inventories and backlogs. In November, we saw a meaningful slowdown in our EM Asia business which was the primary reason we lowered revenue and EPS projections in early December. Our sales for the month of December were weaker than expected, primarily in the Americas, which resulted in revenue for the quarter coming in at the low end of expectations at both operating groups. In total, revenue of $4.27 billion in the December quarter was down 10.2% year-over-year and 6.4% adjusted to exclude the impact of changes in foreign currency exchange rates.

Pro forma revenue after adjusting for the impact of acquisitions was down 14.9% on a reported basis, and 11.3% in constant currency. The decline in revenue had a more pronounced impact on operating income as our most profitable regions, EM Americas, EM EMEA, and TS Americas accounted for over 80% of the year-over-year decline. As a result, operating income, excluding restructuring, integration, and other items, was $153.2 million, down 26% compared with the year-ago quarter. Operating income margin declined to 3.6% and on the bottom line diluted earnings per share declined to $0.63.

Given the double-digit drop in revenue this quarter, and our expectation of continued market weakness, we have decided to take additional actions to reduce our cost structure by another $50 million on an annualized basis. Some of these actions have already started, and we expect to have a significant portion of them complete by the end of the March quarter, with the remainder completed by the end of our fiscal year in June. On a cumulative basis, beginning in the third quarter of fiscal 2008, we have announced total cost actions to date of $155 million, or $145 million at current foreign currency exchange rates, which equates to approximately 10% of our total expenses. These cost reductions impact both operating groups and all regions as the slowdown we initially experienced in the west has spread to Asia. We will continue to react responsibly to any further deterioration in sales while working closely with our trading partners to ensure we take advantage of all opportunities to gain profitable market share.

Although profitability was negatively impacted by the decline in revenue, our cash flow was positively impacted by our counter cyclical balance sheet as we generated $320 million of cash from operations during the quarter. Working capital, defined as accounts receivable plus inventory, less accounts payable, declined $208 million, or 7.3% sequentially, benefited somewhat by currency. The biggest contributor to this performance was a $156 million reduction in inventory with 75% of that decline occurring at electronics marketing.

On a rolling four-quarter basis, we have generated $728 million of cash from operations, which has strengthened our balance sheet and further improved liquidity. At the end of the second quarter of fiscal 2009, we had $671 million of cash which, when combined with our available credit lines, provides liquidity of $1.6 billion.

Now let's turn to the operating groups. In the second quarter of fiscal 2009, electronics marketing revenue declined sharply as the technology supply chain quickly reduced orders and reaction to lower demand and a desire to reduce inventory. This rapid reaction had a significant impact at EM Asia as revenue declined over 20% sequentially and year-over-year pro forma revenue declined over 10% after six consecutive quarters of mid to high single-digit growth.

Both the Americas and EMEA regions were also down which contributed to a 16.1% sequential decline in EM revenue as compared to normal seasonality of flat to down a few percent. Pro forma revenue adjusted to exclude the impact of acquisitions was down 12% year-over-year in delivered dollars and 9.1% in constant dollars. While it's apparent the global slow down is negatively impacting end demand it is difficult to determine the extent of that impact versus the corresponding inventory and backlog reductions. We are definitely seeing the bull whip effect as demand reductions at the front of the supply chain are being magnified by inventory reductions across the supply chain. Although we can't call the bottom an end demand yet, the global electronic supply chain, unlike past down turns, enters the slowdown benefiting from structural changes which should mitigate the depth and length of the current downturn.

Even though the EM global team has been undertaking cost reduction actions for several quarters, the sudden drop in revenue and gross profit volume had a negative impact on operating income and operating income margin this quarter. Operating income declined 21.7% to $99.1 million, and operating income margin of 4.4% was down 74 basis points from the second quarter of fiscal 2008. Our profitable EM Americas region had the biggest year-over-year decline as they accounted for close to 65% of the operating income decline.

Our EMEA region, which has been dealing with negative year-over-year revenue growth in local currency, for six of the last seven quarters, did an excellent job as both gross profit margin and operating income margin improved year-over-year despite lower sales. As a result of the drop in revenue and income, electronics marketing has already initiated incremental activities to reduce expenses in all three regions. Cost reductions started in December, did not have much of an immediate impact, but should benefit the March quarter. In the second quarter of fiscal 2009, EM reduced working capital $136 million sequentially as it -- as inventory declined $117 million or 8%. Our electronics marketing group is reacting quickly to the slowdown and continues to stay focused on our long-term financial objectives.

Though the markets have been challenging, we continue to make strategic investments where they strengthen our market position and meet or exceed our return thresholds. In December we completed the acquisition of Nippon Denso Industry Company in Japan. Nippon Denso is a Tokyo-based value added distributor of electronic components focused on a limited number of franchise suppliers with the prime objective of assisting customers with the design-in of complex semiconductors and subsystem level solutions. In addition to sharing our core strategy of demand creation, the acquisition brings new customers and suppliers and roughly doubles our presence in one of the world's largest markets for electronic components.

After the close of the quarter we completed the acquisition of Abacus Group plc in Europe. Abacus is a value added distributor of electronic components and embedded systems operating in ten countries across Europe. With revenue of 279 million pounds for the fiscal year ended September 30, 2008, Abacus roughly doubles EM's IP&E, interconnect, passive and electromechanical business in EMEA and brings new customers that present additional cross selling opportunities. Although the near-term outlook for growth is subdued, we believe the combination of the actions we're taking, organic market share gains, and strategic investments we have made in key markets positions EM to outperform the market in the short term and resume progress toward our long-term financial goals when growth returns.

In the second quarter of fiscal 2009, Technology Solutions experienced a muted calendar year end as sales came in at the low end of our already below seasonal expectations. Revenue of $2 billion grew 11.7% sequentially as compared with typical seasonal growth of 25% plus. On a reported basis, revenue declined 12% year-over-year and 7.3% adjusted to exclude the impact of changes in foreign currency exchange rates. A weaker than expected close in the last week of December at TS Americas, including the Avnet fiscal calendar December 27, cut-off was the primary reason for the lower than expected growth. On a pro forma basis, revenue declined 18% in delivered dollars and 13.6% in constant dollars with all three regions experiencing a double-digit year-over-year sales decline.

At our product level, servers and microprocessors were down as compared with the year-ago quarter while networking and services grew. Despite the well publicized credit issues we have not seen a measurable impact on our accounts receivable delinquencies, and we continue to work with our suppliers to ensure the channel has adequate liquidity. As a result of negative organic sales growth, operating income declined year-over-year to $66.9 million, and operating income margin declined 103 basis points to 3.3% due primarily to the weakness at our more profitable Americas region. We are, however, encouraged with the performance of our TS EMEA team this quarter as the cost reductions they have initiated to date and the addition of Horizon Technology are having the expected positive impact on performance.

Due to the drop in revenue this quarter, and expected weakness in the March quarter, we have decided the take additional actions to continue aligning our costs at TS with the market realities. The cost reductions being announced today are primarily focused on the Americas region, the majority of which have already been implemented in the month of January. However, all three regions will reduce expenses at the business units that have been most impacted by slower demand.

While growth has slowed in some of the mature markets in the west, technology solutions continued to invest in emerging markets that offer higher growth opportunities in the future. In the second quarter of fiscal 2009, TS announced the joint venture with the Sanko Group in Turkey, one of the largest IP market in EMEA. By teaming up with Sanko's IT distribution business Akora Technology, we will gain an excellent platform to expand our enterprise solutions footprint into the Turkish IT market which is projected to grow at a double-digit rate for the next several years. Akora currently distributes servers, storage, workstations, and computer components to approximately 3,000 resellers throughout Turkey.

During the December quarter, we also launched our solutions distribution business in China. After exploring M&A alternatives to enter the enterprise computing distribution business we decided to build a value-added distribution business that can scale as the domestic bar base emerges in China. Our first major supplier partner for the Chinese business is IBM, and our team is looking forward to building on our global strategy with the local IBM team. Finally, as many of you might have seen on Monday, Phil Gallagher has been promoted to President of Technology solutions, succeeding John Paget. Phil is a 26-year veteran with Avnet who currently serves as President of Electronics Marketing Emeritus. During his career he's held a number of sales, marketing, and operations roles within Avnet with successfully higher levels of responsibility. Phil brings a significant breadth of experience and a strong track record of performance, team development, relationship skills and strategic thinking. We're confident he and the TS team will take our performance to even higher levels as we move forward.

In summary, the second quarter of fiscal 2009 was unusually challenging as the macro economic headwinds intensified and we saw a significant drop in year-over-year sales at both operating groups across all three regions. Therefore, we have decided to further adjust expenses based on lower top line expectations. Our performance and values based culture of excellence is driving our decisions as business unit leaders have been reacting quickly and working with their teams to determine how best to protect our margins and returns. We use our disciplined portfolio management process to ensure we're making decisions that maintain our market competitiveness while positioning Avnet to attain our long-term financial goals.

Despite declining profitability, our counter cyclical balance sheet provides a stabilizing factor which is especially valuable in the tight credit market. As evidenced this quarter, we can generate significant cash flow that strengthens our already strong balance sheet when business slows. This allows us to continue to make strategic investments in an environment where many of our competitors can't.

Looking forward, our end markets, along with the overall global economy, are still searching for a bottom as economic activity slows and consumers and businesses alike cut back on spending. These declines in demand are further magnified by the inventory reductions that are occurring throughout the electronics supply chain. It is actually healthy for the supply chain to reduce inventory quickly in this environment. Overall, the technology supply chain enters this downturn leaner than in the past, which should reduce the depth and duration of the down cycle. Meanwhile, we continue to monitor our end markets and react appropriately to changes in demand. As the environment continues to weaken, our relative competitive position strengthens. With our global scale and scope advantages, strong balance sheet, and deep customer and supplier relationships we are finding more opportunities to gain profitable market share organically and through M&A. With our experienced leadership team and a culture of performance ingrained in the organization we are confident we can continue to outperform during this downturn and strengthen our indispensable role in the global technology supply chain. Now, I would like to turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer.

Thank you, Roy, and hello, everyone. Let's start with a review of electronics marketing. In second quarter fiscal 2009 electronics marketing revenue of $2.27 billion was down 8.5% year-over-year on reported basis and down 5.6% adjusted to exclude the impact in changes of foreign currency exchange rates. On a pro forma basis revenue was down 12% after adjusting for the impact of acquisitions. Sales in the Americas region were down 6.9% on a reported basis and down 8.9% after adjusting for the impact of acquisitions. For the EMEA region sales were down 13% over the prior year quarter and down 3.5% after adjusting for the impact of changes in foreign currency exchange rates. On a pro forma basis EMEA sales were down 16.1% year-over-year, and after adjusting for the impact of changes in foreign currency exchange rates sales were down 7%. And for our Asia region, sales were down 5.6% as compared with the second quarter of fiscal 2008 and down 1 -- 11.1% on a pro forma basis.

Even though electronics marketing was impact by the global slow down with a decline in revenue we were able to hold its gross margin relatively steady, with a 12 basis points improvement sequentially and an 18 basis points decline year-over-year. For the second quarter fiscal 2009, EM's operating income of $99.1 million was down 21.7% year-over-year while operating income margin of 4.37% was down 74 basis points. The softness in our profitable Americas region was a major contributor to the year-over-year decline in operating income dollars and operating income margin. In the EMEA region gross profit margin was up 60 basis points over the year-ago quarter and operating income margin improved 16 basis points.

Based on the results of the second fiscal quarter, and our expectations for the March quarter the EM team will be taking additional corrective actions to adjust expenses to align with the lower revenue expectations. EM's return on working capital was down as compared with the prior year quarter due to lower operating income margins and working capital velocity. On a year-over-year basis working capital velocity at EM declined 12%, and net days grew by almost eight days. EM was able to manage inventory down for the quarter with a sequential decline of 8%. However, due to the lower revenue for the quarter, electronics marketing inventory productivity fell to 5.2 turns.

With organic revenue projected to be down sequentially for the March quarter we expect EM inventory to be down further at the end of our fiscal third quarter excluding the impact of the inventory we had through the acquisitions of Abacus and Nippon Denso. It is our expectation that EM inventory turns should return to previous levels when sales begin to stabilize.

In the December quarter technology solution sales of $2 billion were down 12% year-over-year on a reported basis and 7.3% adjusted to exclude the impact of change in foreign currency exchange rates. Pro forma revenue after adjusting for the impact of acquisitions, was down 18%.

At a regional level, revenue in the Americas was down 12.5%, while in the EMEA region revenue was down 8.1% over the prior year quarter in reported dollars and up 5.2% if you exclude the impact of changes in foreign currency exchange rates. On a pro forma basis EMEA was down 25.2% year-over-year, and after adjusting for the impact of changes in foreign currency sales were down 14.4%. Sales in the Asia region were down 26.2% as compared with the year-ago quarter and were down 29.3% on a pro forma basis.

Despite the lower than expected revenue, gross profit margin at TS was flat year-over-year with both the EMEA and Asia regions showing some improvement. Operating income of $66.9 million was down 32.7% as compared with the prior year quarter, while operating income margin of 3.34% was down 103 basis points. In EMEA the team is gaining traction as cost reduction activities and the addition of Horizon Technology combined to drive a 110-basis-point sequential improvement in operating income margin.

For the Asia region, while we were able to improve gross profit margin both sequentially and year-over-year, the strategic investments we made in China to launch our value-added solutions distribution business has impacted its costs and operating income margin. Nonetheless, given the results of the quarter additional cost reductions will be taken at technology solutions in order to maintain targeted levels of profitability by region.

In the second quarter fiscal 2009, TS's return on working capital declined significantly versus the year-ago quarter primarily due to the impact the lower than expected revenue had on its operating income margin. Working capital velocity was down about 8% as compared with the prior year quarter while net days were up by less than one day in that same time frame. TS inventory was down 10% and 14% sequentially and year-over-year respectively, while inventory turns declined slightly as compared with the year ago quarter. Return on working capital was well above our long-term hurdle rate of 30%.

Now let's look at the enterprise results for the second fiscal quarter 2009 as compared with the prior year. For the December quarter Avnet sales of $4.27 billion or down 10.2% in reported dollars and down 6.4% in constant dollars as compared with the year ago quarter. And on a pro forma basis revenue was down 14.9% over the year-ago quarter. Gross profit of $533.5 million was down $63.2 million or 10.6% as compared with the second quarter of fiscal 2008 primarily due to the decline in revenue. Despite the revenue decline we were able to hold gross profit margin relatively flat with only a 5 basis points decline year-over-year. Our focus on driving profitable revenue and ensuring we get compensated for the value we bring to our customers has helped us maintain our gross profit margin despite the impact of the global economic downturn.

Excluding restructuring, integration, and other charges, operating expenses of $380.3 million were down $8.5 million or 2.2% year-over-year. As we mentioned at our analyst day in December we are on track with our cost reductions and have realized roughly $60 million through the end of December quarter. This represents 60% completion of the previously announced reductions of $105 million or $95 million if you adjust for the changes in currency since we made the announcement initially. We should see further benefit from these cost actions in the March quarter and the full benefit in the June quarter.

On a sequential basis expenses declined by approximately $40 million benefited by the impact of these reductions as well as by foreign currency. As mentioned earlier, we will be taking an additional cost reduction actions of approximately $50 million throughout our business in order to continue aligning our costs with the realities of the current market. We expect these reductions announced today to be completed by the end of the current fiscal year with the full impact being realized in the first quarter of fiscal 2010.

As we have mentioned in the past we will continue to monitor end demand and take appropriate actions based on what we know at that time. Excluding the restructuring, integration and other charges operating income of $153.2 million was down 26.3% as compared with the prior year quarter. While operating margin declined 78 basis points year-over-year to 3.6%.

Below the operating income line interest expense was essential flat year-over-year while other income was down 7.3 million year-over-year due to foreign currency exchange losses, lower interest income, and the elimination of the income from our minority interest in [Calebs] LLC, which was sold in April of 2008. The effective tax rate in the December 2008 quarter of 30.5% was slightly lower than our prior year tax rate primarily due to the mix of business among various locations with different tax rates. But was in line with our continued guidance of 30.5 to 32.5% for fiscal year 2009.

Excluding restructuring, integration and other items in the current period net income for the second quarter of fiscal 2009 decreased by $40.9 million or 30.1% to $95 million, while diluted earnings per share declined by $0.26 to $0.63. GAAP net income which was positively impacted by a net tax benefit of $27.3 million, or $0.18 per share on a diluted basis, primarily related to the settlement of income tax audits in Europe decreased $29.9 million to $112.3 million for the second quarter of fiscal 2009.

During the quarter, we generated $320 million of cash from operations with the trailing 12 months now totaling $728 million. We continue to diligently manage our working capital including lowering inventory sequentially. At the enterprise level our net days were up by almost five days as compared with a year ago due primarily to lower sales at EM while on a sequential basis net sales were down nearly two days. Net days, excuse me, were down nearly two days. Although receivable days have moved out somewhat as compared with a year ago quarter due in part to our using our strong balance sheet to increase profitable sales, we continue to manage the risk very carefully and have not seen any appreciable change in delinquencies.

We have over 250 individuals supporting this activity around the world with experience and expertise in managing this risk. This significant cash flow generation over the trailing 12 months has further strengthened our balance sheet and improved our liquidity position. In the second quarter fiscal 2009, return on capital deployed declined 401 basis points to 8.9% as compared with 12.9% in the second quarter of fiscal 2008 due to the impact of the economic downturn. However, on a trailing 12-month basis, return on capital employed was at least 10% for the ninth consecutive quarter. As we manage through these turbulent times our margins and returns will be negatively impacted in the short term as the benefit of the cost reduction actions required to right size the business will lag behind its decline in revenue.

While we are not pleased with this performance we are committed to taking the necessary corrective actions to ensure our long-term goals are met once growth resumes in our end markets. Despite the decline of profitability we were able to comfortably maintain our investment grade credit statistics, reflecting our strong financial position. On a trailing 12 month basis debt to EBITDA was 1.6, and EBITDA coverage was 11.1. We exited the quarter with $671 million in cash and have $1.6 billion of available liquidity. We hope that demand starts to pick up over the next couple quarters but if business gets worse we are prepared to take further corrective actions by group and region to maintain acceptable levels of profitability. We remain committed to our long-term business model when growth resumes.

Looking forward to Avnet's third quarter fiscal 2009, we expect less than normal seasonality at both EM and TS, and we are providing a wider range of forecast due to the challenging economic environment. EM sales were anticipated to be in the range of 2.15 billion to $2.45 billion and sales for TS are expected to be between 1.45 billion and $1.75 billion. Therefore, Avnet's consolidated sales are forecasted to be between 3.6 billion and $4.2 billion for the third quarter of fiscal 2009. Based upon that level of sales we expect second quarter(Sic- see press release) fiscal 2009 earnings to be in the range of $0.45 to $0.53 per share.

The above EPS guidance does not include restructuring and integration charges related to the cost reductions and integration of businesses noted earlier in this presentation. In addition this quarter guidance assumes that the average euro to US dollar currency exchange rate for our third fiscal quarter is $1.3 to 1 euro. This compares with an average exchange rate of $1.49 for each year in the third quarter fiscal 2008 and $1.32 for each euro in the quarter just ended.

Although the current macro economic environment is proving to be very challenging, based on what we know today regarding the fundamentals of our business we do not believe that the current recessionary environment will have have a long-term material impact on our ability to reach our long term financial goals. However, the drop in our stock price since September 2008, which is in line with the decrease of the overall market has resulted in a market capitalization that is significantly smaller than what it was at the end of our last fiscal year and well below book value. Looking at whether or not a noncash goodwill impairment charge could be required. We expect to reach a conclusion on this in the next couple of weeks. With that, let's now open up the lines for Q&A. Operator?

Thank you. (Operator Instructions) Our first question comes from the line of Steven Fox with Banc of America. Please proceed with your question.

Hi, good afternoon. I guess, first of all, just stepping back on some of the comments you made about the component inventories, Roy, I guess I didn't hear you say that you felt like the channel was clean, but it seems like some of your suppliers are seeming to suggest that. Can you give us your view on inventories in the channel, how you feel about inventories at the customer base relative to expectations for the next couple quarters of demand?

Yes, Steve. By the way, Steve from B of A, welcome.

Thank you.

So look, maybe the best way to talk about that is to just examine what's happening with our own. I think our team reacted admirably in -- sort of on a real-time basis in the current quarter, and we had a nice decline in inventory, and yet our inventory turns fell noticeably on a sequential basis. Our objective would be to get our inventory turns back to where they were. So that would imply that if sales were stable, we'd still have a little bit more inventory to get out in order to get back to our turns, and, of course, the reality is we're projecting that sales are actually going to be down. So Steve, if that applies to the other distributors as well -- in other words, let's say they started the cycle with relatively lean inventory, they got hit with demand declines, so turns are declining, the objective is to get turns back to where they were, it is unlikely that very many got that done in the current quarter. And my expectation is that given that sales are declining further in the March quarter, our inventory will be down, but I'd be surprised if we get back to our turns objective. We're probably at least two quarters out from getting back to that level.

And that turns objective would be around six times?

Yes. In that ballpark.

And then--?

Same place we were.

And then just to make sure I understand on the gross margin side, if the gross margins were holding steady in both businesses, so you are saying that all of the gross margin decline, which seems a little more than normal for the mix, was a result of mix issues on the corporate level?

I'm looking at five basis points of year-over-year decline. Are you looking at sequential or year-over-year?

I'm looking sequentially. This is usually a quarter where gross margins are down from the prior quarter because of the TS business, but it seems like it was a little bit more than normal decline in the gross margins. Would you attribute all that to mix? Or is there anything else we should have considered?

Well, it's got to be dramatically mix, because as we pointed out, the margins are relatively stable. I think we indicated the EM margin year on year was down what did we say, Ray?

18 basis points.

While the TS margin is down -- looks like two basis points.

Essentially flat. Essentially flat. So, Steve, there's basis points of decline in both, and the rest is mix.

Okay. Then just last question, on just to clarify, on the EM margins going down this quarter, that's all volume related, or what else -- was there anything else that caused that pressure?

It is all volume related.

Okay.

We actually should have -- under normal conditions, we should have a slightly favorable business mix in the March quarter, with the western regions being a bigger share of the total versus Asia, but based on our current projections, we're seeing weakness in America that is more significant than what we're seeing in Asia or Europe, and that's part of what's driving the issue.

Okay.

Steve this is Harley. How are you?

Hi, Harley.

I wanted to add an additional point, somewhat marrying your first two questions together, relative to inventory, and then margin pressure. Obviously we're not privy to our largest competitor's inventory performance in the December quarter just yet, but one of the indicators that I tend to think about when we're looking at the existence of too much inventory in the channel, is pricing pressure. So although we did see, as Roy said, basis points of year on year, we actually were up slightly sequentially. So I don't sense, at this point that when all the results are in, there's going to be a significant story in the channel relative to excess inventory in the December results.

Got it. Thank you very much.

You are welcome.

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

Good morning. This is [Jason Pierski] calling in for Jim.

Hi, Jason.

Just a real big picture question for the group, perhaps. If it hadn't been for the $15 million in cost savings that you experienced during the quarter, SG&A actually would have been up about 2% year on year relative to a sales decline of about 10%. And while I can understand that SG&A is not necessarily going to come down at such a clip as the revenues in this type of environment, but I would have thought that perhaps we would have seen it come down and not actually increase. I was wondering if could you talk a little bit about that dynamic and what's going on there, then just as kind of a follow-up to that you did a nice job on slide 14, demonstrating that gross profit dollars came down $63 million, and then operating expenses came down 8. And if I take the quarterly run rate on the savings that you have outlined of $155 million, it looks like we might get to a quarterly savings rate of roughly $40 million. Just wondering if there isn't some way to continue to bridge the gap there and close that so that the gross profit dollar decline that you are seeing in the SG&A decline that you see could perhaps get us back to break even?

Yes, so, Jason, on the first question, there's a very straightforward answer. M&A is in the mix. As you compare those year on year figures, so had it been 100% organic, I think you would have seen expense declines much more in line with the level of sales decline. But part of what's happened here is we have inherited expense infrastructures, some of which we're integrating and getting out in the form of cost synergies, and some of which is now permanent cost into the cost structure. Okay? So the explanation is that expenses are not down consistent with sales, or more specifically, expenses were up year on year while sales were down. That is due to M&A. Make sense?

Yes, it does. Maybe just a quick follow-up specifically to that statement then. I know that you have been struggling to integrate some things in Europe. Maybe you could just give us an update on that since a lot of the M&A has come in Europe, and when the timing and progression of those integrations might happen as far as bringing some of that SG&A down?

Yes, actually, as of the last couple quarters we feel very comfortable with the status of our integration. I think we had referenced back in the March and June time frame, specifically in March, that we hadn't gotten as far along as we would like. But I can certainly say as of this quarter we are very comfortable, and, in fact, that has shown itself in the results of our TS EMEA operation. For electronics marketing, there was nothing to work on last quarter, but as of last week, they now have the opportunity to begin the integration of Abacus. That integration plan is completely done, laid out, documented, and is in the process of being executed. So they are working rapidly on that, and in addition to that, we are integrating Nippon Denso over in Japan. So that activity is underway.

Just on the question about being able to bridge the gap between the $40 million per quarter and the $60 million, $40 million a quarter and cost savings that you have announced, and the $63 million declining gross profit dollars we saw?

Right. So I want to answer that this way. As our annual analyst day, we provided our investors with some scenarios. And essentially what they said was, through the September time frame, our intent was to remove enough cost from the business to protect the margins that we had operated at in the fiscal '08 time frame. And then we said that if, in fact, revenues get worse, we will take more costs out of the system, and we stated margin targets. I want to say that we talked about operating income margin and the 3.6 to 3.8 range at the enterprise level if sales declined by another 10%. And based on what we're seeing, interestingly enough, we weren't trying to be clairvoyant at that time, but we're seeing a slightly greater decline than that, but roughly in that ballpark. So, Jason, we're -- we have specific margin and return targets by group and by region based upon a variety of circumstances surrounding those business units, but in aggregate, we're not saying that we can hold to our existing levels of profitability at any level of sales, but at this point, we're saying that we would expect to keep operating margins above 3.5% once we have the benefit of the expenses coming out of the P&L.

Okay, great, that's helpful. Thank you.

You are welcome. I should make a comment there about assuming that revenues don't decline further than our current expectations.

Our next question comes from the line of William Stein with Credit Suisse Group. Please proceed with your question.

Thanks. Good afternoon.

Hi, Will.

TS guidance. I think in the press release and in the script you guys said that in both segments guidance is a little bit below normal seasonality but I think that the guidance is actually a hair better than normal. Do I have that right? I think the midpoint is down 21 normally, and you are guiding down 20, so the question is, first, is that right, and then do you think that we'll continue to see that later in 2009? In other words, TS, on organic basis, perhaps we've bottomed in terms of the sequential growth relative to normal seasonality?

Will, I think I'll ask Rick to take that question, just explain to you what's in the guidance. I think what you will see is that there are some anomalies, or some specifics that are driving those numbers. Rick.

Thanks, Roy. Hi, Will.

Hello.

On the specific guidance for Q3, keep in mind that we had a fiscal cut-off for our calendar -- excuse me, our fiscal year cut-off on December 27, and we were shipping, obviously, through calendar year end with many of our suppliers. We had talked about that when we were in New York. We expected a neighborhood of 100 million to $200 million of spillover. We billed about $180 million those first three days. By the way, that was about 2x the spillover from a year ago calendar when there's only one day, one calendar day we missed. Keep in mind that's getting us off to a good start for Q3. Therefore, quote unquote, normal seasonality is actually handicapped a bit.

Okay. Great. Any thoughts on when we might start seeing a normal seasonal progression? Do you have any -- maybe it goes to the point of visibility, and I recognize it's a bit murky now, but any comments on both sides of the business, whether there's kind of an end to the worse than normal seasonality progression in each part of the business?

Yes, Will, think there's a common denominator, then there is a specific uniqueness between the two groups. So from our perspective, the common denominator is that it is unlikely that end demand is going to stabilize or improve until economic growth stabilizes or improves. So at this point I don't think we know yet whether the December quarter was the trough or economic growth or if it is going to continue to worsen in the March quarter. I think your guess is probably far better than mine, but I don't think we're going to see a resumption of growth until we see a stabilization or growth in the macro economy. So as a result of that, this notion of limited visibility I think applies until we get into a stabilized macro environment. So that applies to both groups.

The part that's different is, I think it's crystal clear that the December results in the component part of the business is a function of both the decline in end demand as well as the reductions of inventories across the supply chain. So from an Avnet point of view, we're being affected by the decline in our customers' demand, plus any inventory reductions that are occurring at the OEMs or the EMS companies that we're selling to. And then for our suppliers, they're susceptible to all that plus the declines in inventory that are taking place at distribution. So there, I think as long as the economy stops getting worse, and demand stabilizes, you could actually see an improvement in orders and even revenues from the components business prior to end demand actually increasing. Okay? In other words, when inventories stop contracting, you could see a rebound in components even if end demand has not begun to rise.

Makes sense. One more quick one. Can you talk a bit about the -- maybe one or two-year goals of the new TS business that you established in China?

In China?

Yes.

I guess the way we would classify that is we're currently making an investment, Rick, what's the magnitude?

About 50 people, a little less than $1 million a quarter expense right now.

So, Will, we've got 50 people in the country, with the IBM franchise. We're actually being pursued by other global supplier relationships that would like to go with us in China. I think that expectations for, say, calendar '09 would be tens of millions of dollars of revenues, and perhaps fiscal '10 maybe start thinking about $100 million kind of revenue, in that market.

Great. Very helpful. Thank you.

You are welcome.

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

Okay. Just on the issue of credit, credit issues still haven't had an impact on your business, Roy, in particular in TS where I think there's more potential risk. I'm just wondering why you think that is? Do you think it's because we're too early in the cyclical downturn? In other words, your TS business just started to decline by double digits in the December quarter organically, so maybe your customer base hasn't yet experienced a significant contraction in their revenue and profits, and therefore their banks haven't become more restrictive on their credit lines? I'm just trying to see if maybe there's more risk to come or if you are still comfortable two to three-quarters from now if we're still contracting at this rate that the credit risk will intensify?

Let me -- I'll take a first pass. Rick, feel free. Brian, you know the business model of the reseller. It's essentially a group of people and an office, little or no working capital employed, no inventory whatsoever, and limited capital expenditures. So what they're managing, from a cash flow point of view, is salaries. And the propensity for that kind of an organization to get out of whack between cash flow and its P&L is relatively limited. And the remediation action is a matter of reducing staff. So I think that the ones that I worry about are the ones that are doing enough business, tens of millions, where there's significant amounts of cash flow going through the operation, and they're not recognizing the timing difference between the cash flow and the reality of their P&L, and they find themselves spending tomorrow's finances today, and then having no place to go for liquidity when they need it the most. So the point I'm trying to make is that I think the nature of their model lends itself to have limited capital requirements, to therefore limited bankruptcy potential, but if it is going to happen, it is going to happen where the reseller allows -- spends tomorrow's cash flow today. Rick? You want to add anything?

Roy, only thing I'd add, Brian, I think you're on to something that as we look at the growth rates in the region with the TS business, I think that's where it will show up. In other words, if liquidity becomes a problem, it is going to prevent the orders from getting placed rather than causing a delinquency or a back end problem. It's more of a front end than a back end problem, in my opinion. By the way, we've watched very very closely the pipelines and opportunities and the only place we've seen any indications of changes in shifts in spending patterns and having things drop out is primarily related to the financial services sector.

Rick, didn't we have sort of a medium-sized reseller liquidate but without liability?

That's correct.

Because he kept his cash flows in balance.

That's right.

He's just closing the operation and laying off the team.

Maybe as a follow-up, Roy, any changes with credit insurers in terms of incremental cost for credit insurance and/or them scaling back coverage in any particular segments or regions?

Hi, Brian, it's Ray. Probably a little of both. I think I'd say more on the cost side. Obviously in this environment there's more risk out there. So to the extent we use insurance, which is primarily outside of the US, costs have risen. But we have not yet really had an issue where we're having difficulty getting the insurance, where they're really pulling back to any great degree. But certainly pricing is going up, and do we hit a wall at some point in time where our ability to get the appropriate insurance we would like starts that impact? At this point it hasn't happened. We certainly have some isolated pockets of that, but overall, it's more of a cost issue than an availability issue.

Great. Then just one final one for me, back to the OpEx question that Jason touched on, and specifically in EM, could you remind us how much of the operating expense structure there is variable? Because given the negative 13% contribution margin you had year-over-year in EM and the fact that gross margins were relatively stable, it would just appear that the variable cost ratio is well below 50% in that business, and I thought historically it was higher than that. Thanks.

Hey, Brian, I think it depends on your definition of variable costs.

What's your definition of variable?

Yes, I think that, one definition would be what cost declines automatically when revenue declines, and you start thinking about things like commission expense and transportation charges, those are things that move up and down directly with the volume. But, our perspective is we've got a little over 70% of our total costs in people. On top of, we have some costs that are just classically variable, and so something like 80% of the total cost is variable, but we have to choose to take actions in order to get that cost out.

How much do you think the pure variable component is what you alluded to earlier in terms of commissions and transportation?

It's pretty limited. I'm going to say it's below 10% or in the 10% range. Of cost.

Thank you.

You are welcome.

Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question.

Hi, good afternoon. Just getting back to a point that was touched on earlier regarding pricing, I was hoping you could maybe delve in a little bit further in terms of maybe what you are seeing in terms of pricing pressure regionally both at EM, then maybe at TS, if there's anything abnormal in the December quarter as we've looked here early in the March quarter?

Shawn, I'll let both of the guys talk about that but typically pricing is more of an issue at EM than it is at TS. In fact, Rick, why don't you comment first, then we'll flip it over to Harley.

Sure. Hey, Shawn, just refreshing on the TS business model overall, generally speaking we have longer term engagements with these resellers, with contracted pricing arrangements that are generally not driven deal to deal. Sometimes special bids come into the deal. Sometimes special pricing comes in for certain customers but it is generally pretty stable there. As we talked about earlier, year on year, TS overall margin globally was really really flat. The only place we might be subjected to it is some of our computer components business, sometimes in the process or memory segment. By the way, that's been on the decline. But business that we have been booking there, haven't seen a major shift, certainly noticeable, but it's a smaller part of our business, and when it gets below a certain level, we have the discipline to not participate.

So, Shawn, just one summary comment on TS, and I'll flip it over to Harley for EM. So we could be affected by things like, industry standard or commoditized products being a bigger part of our mix and therefore ASPs declining, but that doesn't reflect in a gross margin percent decline. It's just that the devices we're selling, in fact, frankly, it seems like every quarter, the devices we sell this quarter are cheaper than the devices we sold last quarter, so on and so forth, but it doesn't affect gross margin. Does that make sense?

Correct. It would just be a gross profit dollar impact.

Correct. Unless we sell more units.

Okay.

Okay? And that's -- but that's a long-term multi-quarter phenomenon, and that's baked into the growth rates. So, Harley, EM, that's where there's a lot more potential anyway for pricing action.

Hi, Shawn. Your question originally, I believe, was about pricing pressure overall but also any variances or significant variances by region. And I would say, in response to the second question first, although we're in a very price sensitive competitive market, I don't know that I could point out any significant differences region to region. To the larger question on competitiveness, it's a bit of a puzzling one, actually, in that I would say if one could measure, which I don't know that you ever can, pricing pressure is not as severe as one would think, considering the radical drop-off in revenues that occurred throughout the quarter. And I can only go further on a comment and speculate and obviously offer an opinion. The opinion is really back to where we were earlier in the call, which is that in this environment, maybe fueled by liquidity issues and cash flow concerns, we find companies are very focused on their overall supply chain, and really it's not an environment where we're seeing a lot of auction activities where in order to hold on to the business we have to cut price. People are really focused on managing their working capital, and we just have not seen the degree of pressure that one might think considering the reduction in revenues.

So Shawn, I'll make one summary comment there. In the western regions, the distribution industry has become fairly highly consolidated. So the old saying that you can only be as good as your worst competitor, we have limited numbers of competitors in the western regions. So typically in today's time frame, when you think about price competition, you think more about Asia, where the marketing is more fragmented. It is consolidating, but it is more fragmented than the west. The interesting thing is that the credit squeeze has many of the Asian distributors a bit defensive about what revenues they're taking on. And as a result of that, they're not being particularly price aggressive. So I think all of that is sort of combining to help us hold our ASPs and margins.

And, Roy, if I could, I want to be very clear relative to my remarks. It is a very competitive market environment. Let us not mislead anyone. Very competitive market environment but it does puzzle us when we think about that compared to the rapidity of the drop-off.

Shawn, there's other factors, too, like the amount of demand creation we're doing as a percent of our total and the margin is, therefore, being enhanced by the vendors who are compensating us for that work, beyond the traditional distribution role. There's a variety of factors.

Okay. Then maybe switching gears to the savings from some of the initiatives you have implemented over the past two quarters. My math was correct, maybe there was something like 15 million to $20 million in annualized savings in the December quarter, implying that there would be something like 35 million to maybe $40 million plus of annualized savings in the March quarter. I was hoping just maybe for some comment on, A, whether those numbers are correct? B, the linearity of those savings. Are they going to be back end loaded in the March quarter?

Shawn, it's Ray Sadowski. Let's summarize where we are overall from an expense perspective. And blending all the announcements that we have put together, which is roughly $145 million. As we mentioned in our prepared remarks, we have removed, since we started back in the, let's say April time frame, $60 million on an annualized basis, or $15 million per quarter. Okay? Right now, I would say, based upon the actions and where we are today, we would remove or be impacting in our March statement probably another $10 million per quarter. So that's $25 million per year, and that will get us up to $100 million out of $145 million by the time we get through the March quarter. Assuming everything holds to plan the way we are right now. The balance of the benefit will come out in Q4 and Q1 of the following -- Q4 of the next quarter, obviously, then Q1, beginning of our fiscal year.

Okay. And then just the timing of this. It looks like that $10 million this quarter, is it going to be a little bit more loaded to the back end, and should we kind of expect that?

That $10 million is what we expect to impact the quarter. So the -- actually taking place, some have already been done towards the end of the December quarter, additional ones are taking place in the quarter, so the impact to our expenses during the quarter will be an incremental $10 million.

Okay. Then tailoring that maybe into a mix question, just because--?

Let me just mention one thing before I forget. Just for the sake of when you do modeling and everything else, recognize the fact that we have the two acquisitions we've mentioned earlier, so there are expenses, that was just incremental sales dollars, GP dollars, expense dollars will offset that to some extent.

Okay. I guess the follow-up I just had, looking at kind of where the numbers shook out in terms of an all-in basis this quarter, it appears mix is maybe the biggest factor quarter to quarter, in terms of maybe driving, I think, people's numbers lower than where the consensus would be. Is that a fair statement, or is there something else I'm missing beyond, say, the acquisitions?

Are you talking about Q3, Shawn?

I'm talking about the March quarter, correct.

No, I think the overriding factor is that we are feeling uncertain about revenue, and we feel that we needed to take the revenue guidance down. The overall revenue I think is perhaps flatter, if you could use that word, by the M&A that's coming in. So that's perhaps making it look a little better than it is. But we are clearly below seasonal revenue guidance on an organic basis for both groups. And that's what's putting pressure on the margin. Now, we're taking the cost actions to get the margins back up, but that's what our current view of the March quarter looks like.

Okay. No, that was helpful. Thanks for the clarification.

You bet.

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

Thanks. Most of the questions have been asked, but just to touch on the guidance, if I can, just one more time, Roy, what is -- has your visibility gotten any better, particularly in the component business in the last two months?

Well, Matt, I think you know I love that word, visibility. I don't know how to define it. Even when we have backlog, it's fungible in that the customers can manipulate it, and they do frequently. No, I would say, if anything, it's gotten worse. Our book to bill went negative in the December quarter on a worldwide basis. It was most negative in Asia, still in the greater than 0.9 in America but below 0.8 in Asia for the quarter as we cleaned out some backlog that was no longer valid. So we go into this quarter, I would describe it as more naked, needing more turns business as a result of the debooking that was going on pretty rampantly across the supply chain. If anything, I would say visibility is even more limited right now than we thought it was 90 days ago.

Okay. Then why do you think America is weaker right now now than the rest of your regions in components? And then as a follow-on to that, would you say that the larger EMS customers are the weakest area right now? And if that's the case, wouldn't that help your gross margin in that business?

Let me give it to Harley.

Hey, Matt, how are you. Surprisingly, what we categorize as global EMS, revenues in that sector did not deteriorate in the December quarter at any rate higher than our overall business. Pretty consistent with the total business. We would've expected otherwise and it did not. So we really didn't see a margin benefit from that. Relative to why the Americas region is weaker than we would have expected and probably weaker than the other two regions I'm not sure I know the answer to that honestly. Other than it's a macro environmental issue, which really falls a bit out of my expertise. I can't give you a market segment, it's still a very diverse market. As I said, the PMs held up. Honestly, I don't think it's more -- I don't think will you find specific answers in our industry, is my opinion.

And, Matt, it's Roy, one anecdote I can give you, is that different from prior years in America, we had more customers close their factories for the extended holiday period. I think that's just the manifestation of the point Harley is making about the macro environment. So my guess is we're going to see some fairly negative GDP data relative to the US for the December quarter.

As an additional data point, Matt, in preparation for that question, I looked at the global transfer business that we track, which, in essence, is business that's migrating primarily from the west to Asia. And it did drop off a bit in the quarter, but again, nothing real dramatic. Pretty consistent with the overall business. What I was looking for was did we see another wave of global migration in either direction. Did it drop off abruptly, or did it increase, and it really didn't, which led me to my conclusion that it's a regional macro issue.

Okay. That's helpful. Then just a follow-up for you, Harley, on the earlier question concerning ASPs in components and semiconductors. In most cycles, when there's a lot of inventory at the supplier base and demand is weak, when volumes start to come back we start to see ASP erosion, if not severe erosion, and we haven't really seen much ASP erosion at all in the last couple years. So wouldn't you expect, as volumes come back that we're going to see pricing pressure at the supplier level on semiconductors, and won't that impact your revenue pass-through?

I think the answer is -- we're prognosticating now. The answer is probably yes. If you asked it do I think it's going to be significant, my answer would be no. Our ASP data that that we track actually showed an increase in December, although in all fairness, it is heavily mix driven. So, no, we just don't have any indicators yet, Matt, that we're heading for that kind of environment.

Hey, Matt, it's Roy. I think we've got to keep one thing in mind, and that is, more of the industry's wafers, and, again, let's exclude memory from this for a minute, because I think memory is a different category and is behaving differently from an ASP perspective. But outside of memory, what the vendors are now doing is reducing wafer orders from the foundries as opposed to a couple of cycles ago where they were trying to figure out how to fill their own factories. And without that motive to fill their own factories, they're less inclined to drive average selling prices lower.

I think, Roy, playing off on that if I think back over the last four quarters or so, the only segment of our product mix that has really followed the traditional pattern is memory. And you can see the health of that particular industry. Our biggest product category, as you are probably aware, is high performance analog, or analog in general, and you don't tend to see that type of behavior from those suppliers. On the digital side of what we sell, high design in content, we're not seeing it, not yet. Not seeing it in significance yet.

Matt, just real quickly, what I think is, to the extent, depending on how load demand goes and how much inventory is accumulated, to the extent that there's excess inventory to be liquidated you could see some price pressure there. But I think that's very different from the price pressure associated with trying to fill factories. And as a result, to Harley's point, there's probably going to be some but it's probably going to be mild as opposed to severe.

Roy, I don't want to keep beating this. I think you and I are having the conversation now. But I would not discount the theory you brought up earlier for a different question around the impact of our Asian competitors, vis-a-vis the credit issues.

That could be helping it as well.

I would not discount what that's doing.

That's helpful. Just my last question, Roy, switching to technology solutions and the Management change announced this week. Looks like part of it was for operational reasons, but can you just talk about any potential changes of strategy in general from Tech Solutions, how different that might look?

Rick, you want to take it?

Hi, Matt, it's Rick. I would tell you at this point, the fundamental strategies, when you think of what's going on at TS, regarding focus on solutions distribution, the continued growth of the global footprint, and then some of the internal operational issues we're doing with our operational excellence and internal information systems, these are all solid, on track and as far as I'm concerned, very consistent going forward. Finer points of strategy regarding the components part of the business, should we focus more on M&A or perhaps focus on the core to get some things working in some of the troubled areas, those will be the finer points of detail we'll work through, but the fundamental strategies you've heard from us consistently now for the last couple of years, are very, very solid and still intact.

Matt, the change was made not for ideological reasons but for performance reasons. So I think you are going to see the strategies, as Rick said, largely stay intact, although we certainly give Phil the right to come in and do his assessment and determine where he wants to go from there.

Oh, got it. Thanks a lot.

Okay. Ladies and gentlemen, we know we're running late. I think we're going try to squeeze in two more questions.

Our next question comes from the line of Brendan Furlong with Miller Tabak.

Hey, guys. I'll try not to keep you too long. Quick question, one on EM, one on TS. On EM, if you look at, particularly analog, but semi guys in general, down, call it 25 to 30% sequentially, and your as reported basis, down 16% sequentially, for that delta, any thought process on, as the calendar year progresses, how that delta continues to go for the next three, four quarters?

Hi, Brendan this is Harley. From our perspective, the variance is primarily driven by two issues. One, we've already talked about, and that is what we internally call the bull whip effect whereby they're hit from both sides, both end demand as well as distributors buying less inventory.

Right.

The other piece that's a significant variance, at least for the December quarter is regional mix, in that the vast majority of our suppliers get over 50% of their revenue from Asia. Where as our mix is fairly evenly split between our three major regions. So we're less impacted by an Asia slowdown, which clearly was the largest contributor to our results in the December quarter. How will that play out over the calendar year? I think the real answer is how do we think Asia will react in calendar '09. And it's very difficult to make a call today, especially today, sitting here, a day or so before the onset of Chinese new year. So I think until we see the impact of Chinese new year on the Asia business overall, and not just our own, but the market, it will be difficult to make a call past current state.

Understood. Actually, that's a good explanation. On the TS side, just if you can maybe talk to the dynamics on obviously servers continue to be weak across the board, so to arm it within your TS business, between servers and pretty much everything else, like networking and storage and software?

Hi, Brendan. Rick Hamada here. If I use the overall down 12% reported growth rate as sort of the benchmark, what grew faster or what didn't decline as fast and what was above the bar, overall servers were down at the global level high teens. However, industry standard serves within that segment were still very close to growth plus or minus a couple of points of growth year on year within that category. Networking was strong for us up about 39%. Storage was down very low single digits. So again, compared to the tide it was still doing relatively well. And overall, hardware was down 13%. Services were up about 20%. So there are certainly winners and losers throughout the portfolio, but for the major categories, servers, storage, networking, et cetera, that's what the report card shakes out.

Do you think that kind of dynamic continues for the next two or three-quarters?

I'm not sure which particular dynamic you're picking on, but the relative strength in areas like industry standard servers and storage, absolutely.

Okay, great, thanks.

Okay, last question.

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

Hi, guys. Two quick ones. Within the EM, where do you see the most opportunity to reduce inventory levels by geography and component type?

Where do we see the most opportunity to reduce the inventories?

By region.

What kind of component?

By region and also by component type?

Carter, the way we manage inventory globally, is exactly the same. And that is all the regions have a turns objective that is consistent with the realities of that region. So as you would guess, Asia is going to be higher, America would be second, and Europe is third, because of their broad industrial base. So we will stick to those ratios, and we'll take action on all three, to adjust accordingly to get back to our goals, as we said earlier, we obviously are not satisfied with where we ended December, although we think we made good progress overall. I can tell you I don't have an inventory issue in any region more significant than another. So I don't really have a regional differentiated answer to your question. Relative to component types, again, we don't really differentiate, we don't speculate a hell of a lot on inventory types, so we are really following our algorithms for all commodities. So I don't think there's a lot of variance in any of those.

As a follow-up question, how much incremental revenue do you expect your two recent EM acquisitions to contribute in the March quarter on a sequential basis?

Roughly, we'd say $100 million.

That's all I have. And congratulations to the Cardinals. Nice to see someone from the NFC West representing the league in the Super Bowl.

Anything is possible.

Hell has indeed frozen over.

Thanks for participating in our earnings call today. As we conclude we will scroll through the non-GAAP to GAAP reconciliation results presented during our presentation along with a further description of certain charges that are excluded from our non-GAAP results. The entire slide presentation including the GAAP financial reconciliations can be accessed in downloadable PDF format at our website under the quarterly results section.

Thanks everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.