安富利 (AVT) 2009 Q3 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 third 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 at www.ir.avnet.com and click on the icon announcing today's event. As we provide the highlights of our third 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 for 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 several 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 are 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 third 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 fourth 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; Harley Feldberg, President of Electronics Marketing. Bill Gallagher, President of Technology Solutions is traveling this week, so Rick will handle most of your questions regarding TS. With that, let me introduce Mr. Roy Vallee, who will discuss Avnet's third quarter fiscal 2009 business highlights.

Thank you, Vince and hello, everyone. Thank you all as usual for taking the time to be with us and for your interest in Avnet.

The third quarter of fiscal 2009 was challenging as end demand in our electronic components distribution deteriorated further in the mature markets as the quarter progressed. The impact of this decline was most severe in our highest margin regions, EM Americas, and EM EMEA, where organic revenue in cost and currency declined more than 20% year-over-year. As a result of the weaker revenue expectations that developed over the course of our third fiscal quarter, we lowered our revenue and EPS projections and initiated an additional $50 million of cost savings in March, and another $25 million announced today that should be completed by the end of September. This brings our total cost reductions announced since March 2008 to $225 million.

With our electronic components business continued to be impacted by the global slowdown, our IT distribution business is showing signs of stability as Technology Solutions rate of revenue decline flattened in the March quarter and its operating income margin improved year-over-year after declining for four consecutive quarters. In total, revenue of $3.7 billion in the March quarter was down 16.3% year-over-year and 10.5% adjusted to exclude the impact of changes in foreign currency exchange rates. Operating income excluding restructuring, integration, and other items was $88.2 million, down 50.4% as compared with the year ago quarter and diluted earnings per share declined to $0.30. Since the March decline of revenue was steepest in our most profitable regions, it had a more pronounced impact on profitability. While we cannot control the macroeconomic factors impacting our top line, we continue to focus on the things we can control, primarily expenses and working capital. Ray will update you on our cost reduction progress to date and the impact on our results later in the call.

I'd like to take this opportunity to recognize the outstanding job our teams around the world are doing managing working capital. Working capital, defined as trade accounts receivable plus inventory less accounts payable, declined $401 million or 15% sequentially excluding the impact of currency and acquisitions. While accounts receivable and accounts payable followed their typical seasonal pattern of the sequential decline after the December surge in revenue at TS, inventory came down 11% from the December quarter, excluding the impact of currency and acquisitions. Both operating groups contributed to the $202 million reduction in inventory, excluding currency and acquisitions. As a result of this performance, we generated $474 million of cash from operations in the third quarter fiscal 2009 and $1.05 billion on a rolling four quarter basis. This allowed us to pay off the $300 million of convertible notes that were put to us in March with cash on hand while maintaining our strong cash and liquidity positions, which is now in excess of $1.6 billion.

Now let's turn to the operating groups. In the third quarter of fiscal 2009, electronics marketing sales declined through the quarter as the global macroeconomic slowdown negatively impacted the broad industrial markets that drive our Americas and EMEA regions. In a quarter where EM revenue is typically up 5% to 9% sequentially on the strength of those two regions, pro forma revenue was down 12.5% sequentially with all three regions experiencing negative growth. However, in Asia, we have experienced a pick up in orders since Chinese New Year that we believe is being driven by a combination of inventories being worked down and the positive impact of the China stimulus package. Despite stronger billings in the second half of the quarter, pro forma revenue in Asia was down more than 15% both sequentially and year-over-year. Globally, negative sequential growth drove year-over-year growth down for the second quarter in a row. EM's consolidated pro forma revenue adjusted to exclude the impact of acquisitions was down 26.4% year-over-year in delivered dollars and 21.8% in constant dollars.

While the global slowdown is negatively impacting end demand, inventory reductions at our customers are magnifying that effect at EM. In just two quarters, EM's year-over-year pro forma growth went from plus 4% in September to down 12% in December and down 26% in the March quarter. Although there are signs that inventory is being worked down, it is still too early to call a bottom in the mature regions. We do, however, believe we are getting closer to a bottom and that the global electronic supply chain is benefiting from structural changes which should mitigate the depth and length of the current downturn. We have initiated significant cost reductions at EM, but so far, the impact of actions already undertaken have been more than offset by the sharp decline in revenue, a recent softening in gross profit margin, and the short-term impact of our most recent acquisitions.

In the March quarter, EM's operating income declined 40% sequentially to $59.6 million and operating income margin came in at 2.8%. While the more profitable Americas and EMEA regions accounted for over 75% of the operating income decline, all three regions experienced a significant drop in operating profit margin, both sequentially and year-over-year. As revenue and income have been cyclically impacted by the severe market slowdown, EM's balance sheet is countercyclical. After adjusting for the two acquisitions that were completed in the March quarter and the change in currency, EM reduced working capital $328 million sequentially as inventory declined $151 million or 10%. In Europe and Japan, the integrations of Abacus and NDI are on track; however, due to the macroeconomic conditions, they did not meet their financial targets set just a few months ago.

Our electronics marketing group is reacting quickly and responsively to the slowdown while continuing to stay focused on delivering value to our trading partners and getting paid fairly for that value. Although the market continues to be uncertain, we have an experienced leadership team in EM and believe that the actions we are taking are allowing us to gain profitable market share in the short-term and emerge a more formidable competitor when growth returns.

In the third quarter of fiscal 2009, Technology Solutions saw some signs of stabilization as the rate of year-over-year revenue decline flattened out from the December quarter on an adjusted basis, and TS met the revenue and income expectations established at the beginning of the quarter. On a reported basis, revenue declined 10.8% year-over-year and 3.8% adjusted to exclude the impact of changes in foreign currency exchange rates. The most dramatic sales improvement was delivered in TS Asia, where our investments in China and India are beginning to generate revenue. At a product level, hardware was down in all major categories while software and services were roughly flat year-over-year. Our server business, which was the first to experience weakness back in the third quarter of fiscal 2008, was down in the high single digits for the second quarter in a row with industry standard servers down approximately 3%. Despite the well publicized credit issues, we have not seen a measurable direct 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 higher gross margin and the cost reduction actions that began in March 2008, operating income improved year-over-year to $42.2 million and operating income margin was 2.6%. I would remind you, however, that a year ago, the year ago results at TS were surprisingly weak and marked the beginning of our challenges related to the current down cycle. Most of the improvement in the current quarter was driven by our Americas region, where an improvement in gross profit margin combined with expense reductions drove a 94 basis point improvement in operating income margin year-over-year. TS EMEA, which has had three straight quarters of double digit year-over-year organic revenue declines in constant currency, saw operating income margin decline slightly. The portion of TS EMEA that focuses on enterprise computing products experienced an improvement in both gross profit and operating income margins as the cost actions initiated over the past several quarters are beginning to have a positive impact on our results. In Asia, where we are still investing in our solutions distribution businesses in China and India, operating income margin declined both sequentially and year-over-year. Going forward, we expect to deliver improvements in TS Asia as the people and resources we have invested in translate into growth.

Even though we've been reducing cost in reaction to the market slowdown, we continue to invest in higher growth emerging markets, new product lines, and tools and resources that expand our solutions practices. In the third quarter of Fiscal 2009, TS established the previously announced joint venture with Akora in Turkey, one of the largest IT Markets in EMEA. By combining the local resources and relationships of Akora with the value add model of Avnet TS, we are confident we can extend our global supplier relationships and Avnet's know how to expand the portfolio of products and solutions to grow profitably and faster than the market. When you combine this investment with our acquisition of Ontrack in India and our solutions distribution business launch in China, TS has entered three emerging markets with increasing technical needs and fertile opportunities for growth looking ahead.

In addition to geographic expansion, we continue to increase our portfolio of products and solutions focused on high growth segments. In the March quarter, TS announced enhancements to our GovPath and HealthPath market enablement programs, designed to help solution providers quickly capitalize on opportunities created by the domestic stimulus package. Just recently, TS America launched a SecurePath solutions practice to accelerate partner success in the high growth network security market. While TS has had several difficult quarters, there does appear to be some signs of stability as the rate of decline appears to be flattening. Despite ongoing market challenges, we remain confident that our focus on higher growth segments and the cost reductions executed over the past four quarters should contribute to the achievement of our long term goals when growth returns.

in summary, the third quarter of fiscal 2009 was challenging, as the macroeconomic headwinds accelerated the rate of decline at EM while TS began to see some signs of stability. While indications of stability are a positive sign, we would still characterize IT spending as tepid and continue to monitor end markets to ensure we enable our VAR partners to capitalize on areas where the midsize customers are spending. For our electronic components business the unprecedented speed with which the technology supply chain is reacting to the global demand slowdown, coupled with some pockets of rising demand, suggest that we are going closer to a bottom. Remember, we saw signs of weakness over a year ago at TS, while EM didn't experience a material decline across all three regions until the December quarter of calendar 2008.

Given the significant decline in revenue, we are taking further actions to align our expenses and working capital to lower demand. We remain focused on specific margin and return goals by operating group and region and are applying our portfolio management process to drive resource allocation decisions. While most of the additional cost reductions will focus on areas that have experienced the more significant decline in demand, we continue to apply our operational excellence discipline to streamline processes and eliminate cost throughout the organization. Avnet is a large and complex enterprise, so savings or efficiency gains can be replicated across the organization to further enhance our scale and scope advantages.

Similar to the December quarter, our effective working capital management and countercyclical balance sheet allowed us to generate a significant amount of cash that we use to pay down the convertible notes that were put to us. With $686 million of cash on hand, $1.6 billion of liquidity and no long term debt coming due until 2014, we are in an enviable position given the current state of the credit markets. Our strong balance sheet gives us the strategic flexibility to invest in our business, whether organically or through acquisitions to create long term shareholder value and to capitalize on any unique opportunities that may present themselves during this challenging economic period.

Going forward, we expect another quarter of below normal seasonality as the global slowdown continues to ripple through the technology supply chain. While there are some areas showing signs of stability, parts of our portfolio could take longer to reach a bottom. We will stay focused on providing value to our trading partners while executing on the cost and working capital reductions we have identified. Even though the market is challenging there are opportunities for us to do better than the competition and gain profitable market share. By leveraging our leading market position, global scale and scope, and performance based culture, we remain focused on outperforming during this downturn and emerging much stronger company. Now I'd like to turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer. Ray?

Thank you, Roy, and hello, everyone. Let's start with a review of electronics marketing. In the third quarter of fiscal 2009, electronics marketing revenue of $2.1 billion was down 20.1% year-over-year on a reported basis and down 15.1% adjusted to exclude the impact of change in foreign currency exchange rates. On a pro forma basis, EM revenue was down 26.4% after adjusting for the impact of acquisitions. Sales in the Americas region were down 20.5% on a reported basis and down 22.1% after adjusting for the impact of acquisitions. For the EMEA region sales were down 24.3% on a reported basis over the prior year quarter and down 10.3% after adjusting for the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA sales were down 35.7% year-over-year, and after adjusting for the impact of changes in foreign currency, sales were down 23.8%. And finally for the EM Asia region, sales were down 13.7% as compared with the prior year and down 17.7% on a pro forma basis.

Electronics marketing had another difficult quarter as the impact of the global slowdown lowered revenue across all three regions. Gross profit dollars declined $30.9 million sequentially and $103.2 million year-over-year, including the additions of Abacus and NDI. These declines were due to a combination of competitive pressures, geographic mix, and customer mix in the Americas region. For the March quarter, EM's operating income of $59.6 million was down 61.2% year-over-year and operating income margin of 2.8% was down 301 basis points.

While our cost reduction efforts are having expected beneficial impact, the net effect on profit is somewhat muted by the accelerating decline of sales in the Americas and EMEA regions. Also, the profitability of recent acquisitions was negatively impacted by the slowdown in business; however, the completion of the expense reduction actions and expense synergies for our acquisition integration should have a meaningful impact at EM's operating leverage and bottom line in the coming quarters.

EM's return on capital was down compared to 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 15% and net days grew almost 10 days due to the decline in revenues. However, EM has been able to meaningfully reduce inventory in absolute terms for the second quarter in a ro. With a sequential decline of 6% and on a pro forma basis adjusted for currency and the acquisitions of Abacus and NDI, EM inventory was down 10% sequentially. Although our team has made great progress in lowering inventory, electronics marketing inventory productivity of 5.1 turns still lags our goal and previous achievements in the quarters of six times. This lower productivity is typical during a period of sales decline due to the lag effect of inventory reduction efforts. With revenue projected to be slightly down sequentially for the June quarter, we expect EM inventory to decline further as we end our fiscal year and anticipate inventory turns to improve when sales stabilize.

In the March quarter, technology solution sales of $1.6 billion were down 10.8% year-over-year on a reported basis and 3.8% adjusted to exclude the impact of changes in foreign currency exchange rates. Pro forma revenue after adjusting for the impact of acquisitions was down 16.2%. At a regional level, revenue in the Americas was down 11.1% on a reported basis year-over-year. In EMEA, revenue was down 15.7% over the prior year quarter in reported dollars and up 2.3% if you exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA was down 28.8% year-over-year in reported dollars and 13.6% in constant currency. Sales in the Asia region were up 19.2% as compared with the year ago quarter and were up 15.8% on a pro forma basis due in part to the investments in China and India along with higher sales of micro processors.

Despite the lower revenue, Technology Solutions was able to increase gross profit margin 32 basis points year-over-year with improvements coming from both the Americas and EMEA regions. Operating income of $42.2 million was up 2% as compared with the prior year quarter and operating income margin of 2.6% improved 33 basis points. For the Asia region, while the strategic investments we made in China and India had a positive impact on revenue, they are negatively impacting operating income margin in the near term. In the third quarter, TS's return on working capital improved 685 basis points versus a year ago quarter, primarily due to the improvement in margins and a significant reduction in inventory. Working capital velocity improved 15% over the prior year quarter while net days improved by nearly nine days. TS inventory was down 16% sequentially and 31% year-over-year and inventory turns improved 14% over the year ago quarter.

Now let's look at the enterprise results for the third quarter of fiscal 2009 as compared with the prior year. For the March quarter, Avnet sales of $3.7 billion were down 16.3% in reported dollars and down 10.5% in constant dollars as compared with the year ago quarter. On a pro forma basis, revenue was down 22.3% over the year ago quarter. Gross profit of $462.5 million was down $116.2 million or 20% as compared with the third quarter of fiscal 2008, primarily due to the decline in revenue. Gross profit margin declined 59 basis points year-over-year primarily due to electronics marketing. Excluding restructuring integration and other charges, operating expenses of $374.3 million were down $26.8 million or 6.7% year-over-year. On a sequential basis, operating expenses declined by almost $6 million due to the impact of cost reduction efforts, offset by additional expenses related to the acquisitions that were completed in the March quarter. Adjusted for acquisitions, operating expenses declined by approximately $31 million sequentially.

As Roy mentioned earlier, we announced this morning an additional $25 million of expense reduction actions, which brings our total cost reduction efforts announced to $225 million. To date we have realized roughly $120 million through the end of the March quarter or approximately 50% of the $225 million of total announced cost reductions. We expect to complete the cost reductions announced today along with our previously announced reductions by the end of our September quarter, with the full benefit of these actions being realized in the December quarterly results. Excluding restructuring, integration, and other charges, operating income of $88.2 million was down 50.4% as compared with the prior year quarter while operating income margin declined year-over-year by 164 basis points to 2.4%.

Below the operating income line, interest expense was down just over $1 million as compared with the prior quarter. The other income and expense line had a significant swing year-over-year with an $8.4 million net expense this quarter as compared with $6.2 million income last quarter. The current year quarter was negatively impacted by foreign currency losses, whereas the prior year benefited from income from the Company's equity investment in Calence LLC, which was sold in April of last year, and some foreign currency gains. The negative effect on income of these higher than usual other expenses was somewhat offset by a lower effective tax rate. The effective tax rate on income excluding charges was 28% in the current year third quarter as compared with 30.5% last year. This lower effective tax rate was due primarily to the fiscal year to date impact of certain ongoing permanent tax benefits in conjunction with lower consolidated income, as well as lower income from higher tax rate jurisdictions. Our rate guidance for the June quarter is between 30% and 32%.

Excluding restructuring, integration, and other items in the current quarter, net income for the third quarter fiscal 2009 decreased year-over-year by $70 million or 61% to $44.8 million, while diluted earnings per share declined $0.30. GAAP net income decreased $89.2 million to $18 million or $0.12 per share for the third quarter of Fiscal 2009.

During the quarter, we generated 474 million of cash from operations with a trailing 12 month totaling more than $1 billion. As a result of our effective working Capital management, including lowering inventory of both operating groups, we were able to significantly improve our cash flow from operations, allowing us to pay off with cash on hand the $300 million of convertible notes that were put to us in March. This significant cash flow generation from operations over the trailing 12 months has further strengthened our balance sheet and improved our liquidity position. At the enterprise level, our net days were up just shy of one day as compared with the year ago quarter on substantially lower sales. Despite the economic slowdown we continue to manage working capital very well, with working capital as a percentage of annualized revenue down by nearly 100 basis points year-over-year. And for the first nine months of our fiscal year, we have been able to maintain our working capital velocity at just over six times despite the significant decline in sales. While this is shy of our business model goal and previous results, it is a testament to our VBM culture and the great work that our team is doing around the globe to manage the things within our control.

Although receivable days have moved out somewhat as compared with the year ago quarter, we continue to manage our receivables risk very carefully and have not seen any appreciable changes in delinquencies. In the March quarter, return on capital employed declined 289 basis points to 7.4% as compared with 10.3% in the prior year quarter due to the ongoing impact of the economic downturn. On a trailing 12 month basis, return on capital employed was 9.7%. The equity component of the current quarter return on capital calculation, which impacts the trailing 12 month calculation as well, reflects the decrease in equity as a result of the goodwill impairment charge that we took last quarter. As we continue to manage through this slowdown, our key financial metrics will be negatively impacted in the short-term until we realize the full benefit of our cost reduction efforts, which have been taken to align our costs with current market environments. We remain committed to creating shareholder value and anticipate we'll resume progress toward our long term financial goals as revenues stabilize, and accelerate that progress when growth resumes.

Despite the decline in short-term profitability, we were able to maintain our investment grade credit statistics, reflecting our strong financial position. On a trailing 12 month basis, debt to EBITDA was 1.5 and EBITDA coverage was 9.9. We exited this quarter with $686 million in cash and have approximately $1.6 billion of liquidity. Given some of the encouraging signs we saw during the quarter, we hope that we are getting closer to the bottom. However, we do not know for sure when revenue will stop declining. We continue to manage our business based on the currently available information and are prepared to take further corrective actions where necessary to maintain acceptable levels of profitability throughout our business.

Turning to our expense reduction efforts, we wanted to provide additional clarity on our reactions and timing of those reductions. To date, we have announced $225 million in comprehensive cost reduction efforts. Again, we expect to complete all of these expense reductions announced through today by the end of the September quarter, with the full benefit to be realized in our December quarterly results. The rough estimate of these efforts and the annualized benefit to our bottom line has been outlined on this slide. Through the end of the March quarter, we have completed approximately 65% of our total cost reductions and approximately 50% has been realized in our results to date. The realization of benefits will accelerate over the next couple of quarters as we complete the recently announced initiatives. These reductions are in addition to approximately $40 million of synergy cost savings related to businesses acquired in fiscal 2009. We expect the integrations of the most recent acquisitions to be essentially complete by the end of December of 2009.

Looking forward to Avnet's fourth quarter fiscal 2009, we expect worse than normal seasonality at both EM and TS and once again are providing a wider range of forecast due to the unpredictable nature of the current economic environment. EM sales are anticipated to be in the range of $1.9 billion to $2.2 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 $3.35 billion and $3.95 billion for the fourth quarter fiscal 2009. Based upon that revenue forecast, we expect fourth quarter fiscal 2009 earnings to be in the range of $0.30 to $0.38 per share. This EPS guidance does not include anticipated restructuring and integration charges related to cost reductions noted earlier in this discussion and the integration of businesses acquired. In addition, the above guidance assumes the average Euro to US dollar currency exchange rate for the fourth fiscal quarter is $1.32 to EUR1. This compares with an average exchange rate of $1.56 to EUR1 in the prior year quarter.

With that, let's open the line for Q&A. Operator?

Thank you. (Operator Instructions). Our first question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.

Good afternoon. The first question is just on gross margins and the EM segment. It seems like they were down 80 basis points or more year-over-year, just given the comment that TS was up and the overall gross margins for Avnet were down about 60 basis points. So I understand Asia is a bigger part of the mix, but that can't explain probably more than 25% of that decline. So if you could just talk a little bit about gross margins in EM, I know Ray mentioned competitive pressures in his remarks, it would seem like that's the biggest factor in the decline. So is that pressure coming more from the supplier side or the customer side? How widespread is that pressure and more importantly when do you see that kind of stabilizing? Thanks.

Okay, hi, Brian. Let's let Harley at least take the first crack at that one.

Hi, Brian.

Hi, Harley.

When we think about the gross margin deterioration that you referenced year on year and obviously, we've put a lot of significant thought and research into this, we clearly come back squarely to the significant volume drop off. There really are two areas. One would be the volume and I guess to frame that for you, Brian, if you think about the precipitous nature of the drop off, we track a served SIA data point that we've used on a number of calls and the December number showed about a 15% drop. And our expectations are that March could be as high as double that, maybe 25% to 30%. So the dramatic drop off over that two quarter period really is the primary reason -- the volume drop off is the primary reason for increased competitive pressure. At the end of the day you're really talking about not enough business to go around to feed everybody, so it's created a very challenging competitive environment.

The other second factor that we believe had an additionally large impact on our gross margin performance is the mix of our business. And when we say mix, not only do we mean the regional mix that you referenced but also a mix between the makeup of the customers. If you think about as both Roy and Ray commented, if you think about the Western regions, for us primarily America and Europe being down at disproportionate amounts, therefore being a lower part of our revenue -- the part of that business that really was down in addition to that would be the broad industrial account base, which tends to be the area where we have the highest gross margins. So really those two factors, Brian, from our perspective -- the precipitous revenue drop and the change in mix that makes up -- customer mix that makes up our revenue were the two biggest drivers to the gross margin drop off.

So how are you thinking about that in terms of your guidance for the next quarter? Given that you think we're closer to a bottom, do you think that gross margins are also closer to a bottom?

I believe that although obviously I can't predict with any degree of accuracy when we will start so to see an improvement in the broad industrial account base, it does feel like we are approaching a bottom. Our booking activity as compared to the previous quarter is looking healthier in all regions, and so we're starting to build up a healthier backlog and a broader account base which will contribute to that. But clearly, I'm not in a position to predict the day by which that will return.

So Brian, this is Roy. I apologize for the voice. I'm just getting over a cold. There's a variety of mix issues that's affecting the gross margin for EM, and of course, one of those as you already pointed out is the geographic mix. In the June quarter, our expectations are that Asia will grow while America and Europe will continue to contract somewhat. As a result of that geographic mix, we believe that EM's gross margin will decline sequentially, but at this point in time we think that the gross margin within each region will be relatively flat.

That's helpful. Just one for Rick I guess on TS. In terms of the acquisition by Oracle and Sun, how do you expect customer buying patterns to behave in the short run given it's the fiscal year end there? And are you assuming normal seasonality in that part of your business? Thanks.

Hi, Brian, it's Rick. As you noted, for TS globally we did not assume normal seasonality at this point. We normally would expect more of an uptick, and we're midpoint flat at this point. On Oracle and Sun, so first point, we are the number one partner for both of those OEMs globally. Obviously we've had a lot of communication since the announcement. Within the Sun specific customer base, if anything I think perhaps no news is the worst situation, so understanding where it's going here and feeling there's going to be a strong financially stable parent to absorb this and make it part of a solution focus for the marketplace, I think will help the fourth quarter. However, it's very difficult for us, very unique set of circumstances and very difficult for us to try to handicap a plus or a minus situation overall. So given the current environment as well as more questions and answers right now with the state of the Oracle/Sun combination, we probably tend to be a little more conservative.

And Brian, this is Roy. I'd like to just add to that. Remember the calendar issues and how that created carryover from the December to the March quarter?

Yes, it would seem like you're guiding to seasonality if you adjust for that. Is that right?

Well, it depends on how you would adjust. So there was about $180 million carryover from December to January.

Right.

But the piece of data that you don't have is that there was about an $80 million carryover from March to April.

Oh, okay.

Okay? So the net, you could say that the March quarter was somewhat artificially inflated by this calendar anomaly by about $100 million, and therefore, we're still slightly below normal seasonality, and as Rick said, we just weren't sure how to handicap the whole Sun situation.

Got it. Very helpful, thanks.

You bet.

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

Hi, good afternoon.

Hi, Shawn.

Maybe just to try and put a little bit more granularity in terms of the guidance for both EM and TS. The run rate you're seeing in orders right now for April, knowing that TS is back end loaded but maybe more so for EM, would that put you at the low end of guidance? So that $1.9 billion? )r if not, what has to happen for you to get down there? Is it just your conservatism I guess is the question?

Yes, I think maybe the best way to deal with that is to talk about what's happening with EM bookings, both in terms of the March quarter as well as what we're seeing so far in April, so Harley, why don't you take that one.

Sure. Let me get that information out because I'm sure it will come up at some point in the call. Hi, Shawn.

Hi.

The book-to-bill by region for the March quarter came in just below parity with the Western region generally in the lower 0.9 ranges and Asia being in the higher 0.9 ranges. Now specific to your question about April, and again I always want to offer the caveat that it's three weeks of data, so we need to be very careful with that, but I think your question was designed at what are those three weeks run rate out relative to our guidance? And my answer to that would be that they would suggest we would be comfortably within our guidance. I think your reference was lower end and I think we would be better than that, but again I do want to offer the caveat it's three weeks of data.

And this is Roy. The book-to-bill ratio in that first three week period is now positive on a global level, as you might imagine strongest in Asia, but it's positive globally. And the absolute level of bookings are up materially over the first three weeks of January, but of course remember that first three weeks of January was a very weak compare. So what's baked into our forecast is the expectation that revenue declines somewhat sequentially in our Americas and Europe regions, lagging what we're hearing out of our suppliers in the same way we lagged going in as well. Our business held up longer than our vendors coming in and then it looks like we're going to take a little bit longer to come out. It's hard to say exactly, but poetically maybe there's a one quarter lag. So we've got that baked in along with growth out of the Asia region.

Maybe to change gears a little bit on the restructuring savings, given that you witnessed the recovery in gross margins in TS this quarter, should we expect a greater percentage of the savings going forward maybe than just the breakout of revenues to fall within EM? And then second, within that I think there was a mention of $40 million of synergies tied to the acquisitions. How much of that has been achieved today, if any?

So the first question is clearly, the latest $25 million, the majority of that is directed at EM and the regions where we saw the incremental weakness in March. Ray, on the $40 million, do you have a breakdown?

Yes, sure. So on the $40 million, I would say roughly 30% to 35% is finished. One is almost finished, which relates to Horizon which we acquired at the beginning of the fiscal period, and Abacus which we just completed is the next largest one which we just completed at the beginning of the calendar year. And that's a more complicated integration, a lot bigger company, a lot more facilities and that will take a little bit while longer to complete the overall integration. So I would say of the $40 million, Horizon is mostly complete and others are a little bit of action, so overall I would say about 30% or so has been completed.

Okay, and then just to clarify, that last $20 million of savings targeted for the fourth quarter as well as the first quarter of 2010, that's a little bit more evenly split -- it's the incremental piece that's more targeted toward EM?

That's correct.

Okay, thanks a lot.

You're welcome.

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

Yes, thanks. Good afternoon. I wanted to follow-up on Brian's question regarding gross margin in the competitive environment and it sounds, Harley, like you said it's still competitive because of the big drop in volume. So my question is you being aggressive in trying to take market share or more disciplined so that you're giving up certain revenue opportunities in order to maintain a certain margin or profitability?

Hi, Matt. The way I would respond to that is that we have not changed our general philosophy around driving value. We're still managing towards the same return, but I do think that it's a fair comment that in certain regions, a portion of our revenue, a larger portion of our revenue today because of what I mentioned earlier about the broad industrial being down or lagging the recovery of the Asia business, it is fair to suggest that some of the margin deterioration, some of the pressure is coming from the fact that we have taken some business that I would loosely describe as TAM to DTAM conversion -- business from our suppliers that typically comes at a lower gross margin and also typically has a higher velocity. But it typically comes at a lower gross margin, and we have seen an increase in some of those opportunities. We still evaluate them based on ultimately on our return, but over the short-term in this market environment, they have also had a bit of effect on the gross margin.

And the decision there is to just basically support your infrastructure with a certain revenue number or volume?

Matt, it's Roy. On those deals, we are working to the same ROWC metrics that we've been communicating consistently with you. And so what Harley is saying is if we have a high volume fulfillment order, it's got no engineering expense, it's got a relatively low SG&A. And then on top of that, we get the right sort of working capital velocity -- we can actually have lower gross margins and maintain the ROWC. And if I were to just add one thing to Harley's other answer, first of all, this gross margin thing, there's a lot of moving parts in it. But I think the main question you're asking is have we decided to get any more aggressive based on the decline in revenue. And the answer is categorically no. We are maintaining the same ROWC targets, the same compensation plans, the same metrics, and we're being very disciplined about profitability coming through this. The combination of lower volume and a different mix is what's driving the gross margin in the March quarter.

Okay, that's helpful. And then my second question regarding the cost cutting initiatives and then going back to your analyst day when you provided us with a few slides that talked about operating margin targets at different revenue levels -- at $16 billion for instance, you had the 3.6% to 3.8% operating margin level and then you gave a $14 billion or $15 billion number at a lower level. It looks like you're going to shake out closer to the $15 billion revenue level going into fiscal 2010, so my question is what kind of operating margin targets do you have over that period of time?

So I think, Matt, you're in the right ballpark from a revenue point of view at least based on what we know today. Just to make one comment on that, we see a clear difference between the revenue declines at EM and the revenue declines at TS, indicating that some of the EM is temporary in nature related to inventory reductions by our customers, and that as we get back to the normalized rate of demand, we should see some revenue improvement at EM. Now, circling back. At the rough 15% to 15.3% revenue run rate, we think we can run this Company in the mid 3's based on the actions that we've already committed to take.

And that's when you're basically done with, you are basically out of the September quarter and all those costs are out, right?

Correct. Correct.

Okay, thanks a lot.

You're welcome.

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

Thank you. Switching gears, focusing more on the cost structure, and understanding you've done a lot of restructuring, I guess it's quite a bit of disappointment to investors to see that operating SG&A has come down about 2% quarter-over-quarter and down 7% year-over-year while revenues have come down multiple times at it. It just seems like your SG&A number, and I don't know if you're operating it bare bones and there's not much more room for it to go down, but it seems like maybe that line item isn't as nimble? And what should we kind of expect going forward, because it seems like you're not keeping pace with adjusting the model?

So, Jim, it's Roy. Let me make a couple of qualitative comments and then Ray may want to chime in with some statistical or analytic comments, but first, let me just reiterate to you how we're running the Company. So there has been a rapid rate of change here, and what we've been doing now since the March quarter a year ago is assessing our revenue expectations on a rolling four quarter basis each quarter -- in essence, literally running the Company on a quarter by quarter basis. We then apply those revenue expectations to our return goals and profitability goals by operating group and by region, and then from there, we determine what cost actions are required. Are you with me so far?

Absolutely.

Okay so then we announce those actions and we put them to work, but it typically takes a one to two quarter period of time for us to get those costs in line with that level of revenue. What's been happening, and this last quarter, it's just blatantly obvious where the issues came -- we achieved what we were looking to achieve in our TS business. We're fine with EM in Asia, but EM in America and Europe, the revenue declined coming through the quarter even in the month of March at a rate that we did not bake into the prior cost reduction actions, and that is why you see us coming out of the quarter saying based on what we learned, we now are taking some additional cost actions. Now granted we're down to the $25 million level because we think we're getting close to a bottom, and we're saying give us one to two quarters to get that out, and assuming that revenues stabilize at these levels, you'll see margin expansion come into the P&L fairly quickly. When revenue starts to grow, you'll actually see the operating leverage kick in and margin expansion really accelerate.

And then looking forward what should we expect on the SG&A line then?

Okay, and are you asking in terms of dollars, percents? How are you thinking about it?

I like to think about it both ways.

So a couple other comments. When you look at the numbers year-over-year as an example, from Q3 of 2008 to Q3 of this year, factor in two things that have a fairly big impact. One, currency. So last year the Euro was at $1.49, and this year it's at $1.31. So that has a fairly significant impact, number one. In addition to that, taking into account that we've done a significant amount of acquisition activity, which was increasing the number from an expense perspective. So if you strip out all of that, we've roughly reduced expenses by about 15% year-over-year. If you look sequentially as an example -- so in the beginning of the March quarter, we acquired Abacus. And so if you look at the acquisition of Abacus and the size of that business, it is for the most part offsetting all the expense reductions that you're seeing. So although it's appearing that expenses are not coming out, you need to factor in the impact of currency as well as impact the acquisition that are coming on board as well, and the synergies related to those acquisitions will be coming out later in the calendar year.

And what to expect for the June quarter then?

In the June quarter I would say roughly at this point we're targeting about another $15 million reduction in expenses.

And a quick housekeeping item. The other income line moved, there was about $8 million relative to Forex, which was about a $0.04 hit to EPS. I know it moves around a lot. Should we just model that flat? Or is there any other way to think about modeling that item which again moved about $0.04 this quarter?

We absolutely model it flat. We had a number of different things --

Flat meaning minus $8 million?

I'm sorry, flat meaning zero, not $8 million -- let's be sure of that. Flat meaning zero, that's my idea of flat. So no, we don't anticipate, we have some volatility if you look back quarter on quarter -- and it's obviously in this quarter a little higher than we've seen in a while, but it's typically going to fluctuate plus or minus. But in terms of our forecasting, our assumption is we'll have no currency gains or losses, and generally speaking we've been in a range historically where that might be $0.01 to negative $0.01 one way or another -- this clearly was an unusual quarter.

Jim, keep in mind that interest income comes into that line as well, and of course as the cash builds we get a little bit of benefit from that, and then as Ray said the wildcard is really the plus or minus related to currency.

Great. Thank you very much.

You're welcome.

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

Hi, thank you. I'm wondering if you can talk a bit about sales and booking trends by channel in terms of your OEM customers versus the EM and ODM?

Harley, any big differences this quarter between OEM and EMS?

In the March, hi, Will. In the March quarter, our global EMS, actually all EMS were down at a slightly higher rate than our core business.

And earlier you said there was a mix shift away from your core industrial OEM base -- the mix shift is away from them and EMS is falling faster -- where is the plug? Remind me of what I should be looking for as the remainder there?

There's some fulfillment business, Will, in the OEM space. In other words think of it as supply chain services, more to help them deal with things like VMI hubs and that sort of thing with the OEMs.

Should I think of that as a more consumer focused business, and is that also when you spoke about not getting more aggressive on price, but taking lower price business that was higher inventory turns and there for equivalent ROIC -- is that more consumer focused business? Is that how I think about that?

I don't know I'd categorize it as consumer focused.

Because it was more Americas region, right, Harley?

Yes.

So it was probably not consumer focused. It probably had a lower consumer profile than our current mix of business.

Fair enough, and then just one follow-up. Any credit issues during the quarter? You said there war no significant delinquencies on receivables, but any writedown issues in the quarter?

Not really, nothing out of normal range. There's always something, but nothing of any magnitude to point out. Again just normal type [add debts] -- if it's a couple million higher than normal maybe that's it but that's about it, so nothing significant at all.

Thank you.

You're welcome.

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

Good afternoon, gentlemen. Just going back on a bunch of other questions, but in the TS segment, gross margins up and slightly year-over-year, do you expect them to hold into the June quarter?

Hi, Brendan, it's Rick here. Yes, I would say that's the outlook we have at this time. Remember that a year ago we had that problem in the March quarter and we brought up the R word?

Yes.

And it's turned out to be a one quarter phenomenon, so the margins are up year on year and they are actually relatively consistent on a sequential basis.

Okay, understood. Thank you. And then going back to the broad based customers and I guess EMS as well, from talking to them, what are they saying -- and you mentioned that they are probably lagging everything else by about a quarter or so. So if I'm talking to them and looking into September back half of the year, what any color, what -- you also mentioned that inventory drawdowns are done. You get some normalization pattern, you should get a little bit increase in demand, factor all those things in -- what are you thinking back half of the year in EM?

Harley, do you want to take a shot at that?

Hi, Brendan. Obviously, we're in commentary and opinion territory.

Right.

So that's what I'll offer is my opinion. I believe that we are seeing a bottom in that broad industrial account base. I am encouraged by some of the booking phenomena that we see. Obviously we talk with those customers often. It is the bread and butter of our business, and to Ray's point about credit issues, we don't see a broad swath of those customers being in trouble. We do see them managing their inventory incredibly tight, some of which is driven by the credit issues, but we don't see a lot of customers that we are concerned about for the long haul, so it is some combination of demand and obviously tightness of inventory.

Where I can't speculate is on the impact to some of the government actions that have been taken in the US. I can say that we've seen some activity as many others have in Asia and specifically in China as a result of those packages. So my personal opinion is that we will start to see an improving environment as we get through the summer in our Western regions and that's the way we're planning, where we're watching our inventory very closely. But as I say often on these calls, our intent is not to take it to zero, because we do see on a customer base that's been our core for many years and we think they are generally healthy, but it's extremely conservative right now.

So this is Roy. If I could just take it up maybe to a little bit higher elevation, I think that it's fair to say that broadly speaking, the demand for electronic equipment and for that matter information technology as well is going to be fairly well linked to GDP growth. So I think in order to create a forecast for growth, you need to create a forecast for GDP, and I'm not sure that anyone is prepared to be precise about that. But we certainly get the feeling that the worst may be behind us and that GDP will contract most likely this quarter. But some where in the summer or fall quarters we start to see GDP expansion in America and then follow that with GDP expansion globally, so that's the demand outlook. And then I think in the case of the EM business, you have this other factor, which is the inventory liquidation and as that inventory starts to get replenished as we're beginning to see in Asia this quarter, you get some pick up in component orders independent of an increase or improvement in demand.

Great. Thank you very much. I guess my last question related to that then is on the -- nice job on the working capital metrics this quarter. Inventories, you kind of mentioned you'll take them down again next quarter. How aggressively -- is it going to be significantly less than the last couple of quarters?

Well, I think the way to think about that is we have an inventory velocity that we manage the business to. It is connected to the operating margins quite honestly and it automatically adjusts for mix issues like Asia versus America and Europe, so what we're going to try to do is bring the inventory velocity back to where it was. So depending on revenue mix an that sort of thing it will help determine how much in absolute terms and in what parts of the business it needs to come down. So think of us as trying to get back to that enterprise turn of around six compared to where we are today, which is just over five.

Understood, thank you.

You're welcome.

Our last question is from Steven Fox with CLSA Associates. Please proceed with your question.

Thanks, good afternoon.

Hi, Steve.

Just one question for you. On the inventory turns in the components business specifically, some of your suppliers are talking about an inventory restocking that has to go on at the distribution level. You've talked about your own customers, but your inventories are below what you would consider reasonable levels. So it seems like there's a little bit of a disconnect there. So can you talk specifically about your own stocking levels and how comfortable you are if -- given that you've seen some acceleration in the last month and probably see some for the next few months?

Hi, Steve, it's Harley. One comment I think I heard you say was that our inventory levels are too low and I don't know that we've given that --

No, you haven't. That's sort of an inference from your suppliers.

Yes, we don't see it that way obviously. I think as Roy said and to the previous comment, if EM sales are flattish in the June quarter and in that neighborhood, we believe we will improve our velocity over our March results. So that that tells you how we're going to approach it. We always manage inventory from two perspectives. One is how much inventory we have and the second is our ability to provide proper customer service metrics, and we are meeting those goals quite effectively. I think if anyone was going to suggest the channel was low in inventory the disconnect would be around the return of more significant growth, but based on current sales levels today, our inventory is approximately correct and we are meeting our customers expectations.

And Steve, the only thing I would add to that is currently, product lead times are fairly short, capacity utilization is fairly low. So in other words, our ability to react to any pick up in bookings and get the inventory in place in time to meet all of our service commitments, we still have a strong ability to do that. So the motive is not there for us or for other participants in the supply chain to increase inventories in the short-term.

Great. That's very helpful, thank you.

You're welcome.

Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation along with a further description of certain charges that are excluded from our non-GAAP results. This entire slide presentation, including the GAAP financial reconciliation, can be accessed in downloadable PDF format on our website. Thank you for participating and good afternoon.

Thanks, everybody.

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