安富利 (AVT) 2010 Q2 法說會逐字稿

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

Good afternoon, and welcome to Avnet's second quarter fiscal 2010 financial update. If you're 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 2010, please note that we have excluded impairment charges and restructuring, integration, and other items from the current and prior year periods in the accompanying presentation and slides. When discussing pro forma sales or organic growth, prior periods are adjusted to include acquisitions. In addition, when we refer to the impact of foreign currency, meaning the impact due to the change in currency exchange rates when translating Avnet's non-US dollar based financial statements into US dollars. And finally, when addressing working capital, return on working capital, return on capital, return on working capital, and operating income drop-through, those definitions are included in the non-GAAP section of the presentation.

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 second quarter fiscal 2010 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 2010 guidance. At the conclusion of Ray's remarks, Roy will wrap up with closing comments, after which a Q&A will follow. Since we have a larger number of analysts who cover the Company, I would ask that you limit yourself to one question and if we have time at the end of the call, we will take any follow-up questions.

Also here 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; and Phil Gallagher, President Technology Solutions. With that, let me introduce Mr. Roy Vallee to discuss Avnet's second quarter fiscal 2010 business highlights.

Thank you, Vince. Hello, everyone, thank you all for taking the time to be with us and for your interest in Avnet. The second quarter of fiscal 2010 provided further evidence that the recovery in the technology markets we serve is gaining momentum. As the result of a strong close in December, revenue exceeded our expectations at both operating groups, as we delivered better than normal seasonal growth for the second quarter in a row. Importantly, both operating groups also improved gross profit margins sequentially, following several quarters of declines, thereby providing further evidence that business conditions are strengthening.

As we mentioned on our last call, due to our 52, 53-week fiscal calendar, our results for the September quarter included a 14th week as compared with the typical 13 weeks. After adjusting for the extra week in the September quarter, revenue growth accelerated to 22.8% sequentially in the December quarter, as compared with 4.6% growth in the September quarter. As a result of the strong revenue performance in the December quarter, our year-over-year revenue growth rate turned positive at both operating groups for the first time since the first quarter of fiscal 2009. This acceleration of growth at TS in parallel with EM indicates that end demand is growing as the macroeconomic recovery ensues.

While inventories drop, the supply chain appear to be lean and well managed. The operating leverage in our financial model was evident this quarter, as operating income grew nearly 5 times faster than revenues sequentially. The benefits of our cost reductions propelled sequential operating income drop-through to over 100%. Strong top line growth and continued expense control combined to drive operating income margin up 90 basis points sequentially.

Turning to the balance sheet, we had another very strong performance, as both operating groups delivered sequential improvements in working capital velocity. The geographic shift to Asia, which accelerated through the downturn, has contributed to this improvement in velocity. Additionally, I would like to point out that for the December quarter, working capital velocity reached record or near record levels in the Americas and EMEA regions at both operating groups.

As a result, working capital velocity at the enterprise level reached a record 8.2 times. When coupled with the sequential improvement in operating income, drove return on working capital for the quarter to 27.6%, nearing our recently reaffirmed business model target of 30%. Our performance this quarter is further evidence of the operating leverage of our model and the positive impact that our value-based management culture has had on our returns, as we strive to optimize shareholder value creation through this recovery. While we cannot be certain what the rate of growth will be over the next several quarters, we are well positioned to translate growth into higher earnings and returns.

Now, let's turn to the operating groups. In the second quarter of fiscal 2010, revenue at Electronics Marketing was well above both normal seasonality and the revised guidance that we provided in early December. Reported revenue of $2.52 billion grew 11.2% sequentially after adjusting for the extra week in the September quarter. While Asia has been leading this recovery, we did experience a resumption of sequential growth in EM's Americas and EMEA regions.

All three regions delivered double-digit sequential growth after adjusting for the extra week in the September quarter, which is well above our normal flat to down 3% for this quarter. Double-digit sequential growth in the western regions suggest that the industrial markets, which are typically driven by corporate capital expenditures, are experiencing growth in end demand. Due to the broader account base, the western regions operate at higher margins, which will benefit Electronics Marketing's profitability as the recovery spreads beyond Asia.

Below EM's revenue line, sequential improvement in gross profit margin and disciplined expense control drove a second straight quarter of improvement in operating income margin. In the December quarter, EM's operating income grew 13% sequentially to $92.2 million, and operating income margin increased 32 basis points to 3.7%. EM Asia-Pacific, excluding Japan, delivered a third consecutive quarter of operating income expansion and is now running at margins comparable to pre-recession levels, with ROWC above our long-term target for that region. Working capital velocity at EM set a record for the third quarter in a row, as the western regions delivered sequential improvements. These results are being achieved while we continue to invest in inventory to assure we can support our customers' needs and take advantage of every opportunity to gain profitable share. Inventory turns improved over the September quarter to a record seven times, even though inventory was up 10% in dollars.

EM is also supporting its customers' engineering requirements, by increasing its investments in XVest, its worldwide technical customer seminar series. This year's XVest tour, which covers 37 cities globally, has exceeded attendance projections by 20% and drew a record number of suppliers as well, with more than a dozen participating. When XVest concludes next month, we expect to have generated approximately 1200 new design opportunities from the global engineering community of our customers. Higher sequential operating income margin and record working capital velocity at EM combined to drive ROWC up more than 200 basis points sequentially and year-over-year. Similar to previous cycles, as growth combines with operating leverage, we will accelerate progress towards our stated financial goals.

While Technology Solutions typically has a strong December quarter, this year was particularly robust, as revenue exceeded expectations, and we achieved growth that was well above normal seasonality. In the December quarter, CS's revenue grew 38% sequentially after excluding the extra week in the September quarter. All three regions delivered above seasonal sequential growth, with the Americas up 40%, EMEA up 37%, and Asia up 32%. Both storage and software grew over 30% sequentially, while servers were up more than 20%.

Proprietary servers outgrew industry standard servers this quarter and were up year-over-year for the first time since we saw softening back in March 2008. This was also the first time in five quarters that Technology Solutions had positive year-over-year growth globally. For the December quarter, TS pro forma revenue was up 15% over the prior year quarter, and 12.2%, excluding the impact of foreign currency. The downturn started earlier in our TS business and it appears that with capital markets improving and the installed equipment base aging, customers are now committing to new IT investments.

TS operating income increased over 70% sequentially to $88 million, and operating income margin improved in excess of 100 basis points to 3.8%, as margin was up both sequentially and year-over-year in all three regions. The largest improvement was in the EMEA region, where operating income margin was up 179 basis points sequentially and 81 basis points year-over-year. ROWC at TS was well above our 30% hurdle rate for the third consecutive quarter, even though we continue to invest for growth in Asia. Another very important note was that TS EMEA's return on working capital was above our target for the first time in three years. While these metrics will decline seasonally following the peak December quarter, they are a clear indication of the progress TS EMEA is making, as they continue to improve their operating and financial performance. For the quarter, TS overall generated economic profits on a global basis.

Although TS's financial performance was a highlight for the quarter, I would like to also emphasize that we continue to invest in organic growth and expand into new high growth markets. In Asia, where we continue to invest in China and India, we recently completed the acquisition of Sunshine Joint Stock Company in Vietnam. At our analyst day in mid-December, we announced the addition of Cisco Systems as a strategic new supplier partner in North America. We're very proud to be chosen by an industry leader like Cisco, and believe this decision is an affirmation of our value-added solutions model that is vital to IT suppliers targeting the mid-market for complex data center solutions. We expect this relationship to represent growth of between $200 million and $400 million of revenue over the next two to three years.

While the past eight quarters have been difficult in IT markets, the December quarter clearly indicates that the recovery has begun. With a proven business model, strong global supplier relationships, and extensive reseller partner network, and the best team in the industry, we are confident that TS will continue to outperform, as the leader in value-added solutions technology distribution. Now, I would 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 market. In second quarter fiscal 2010, EM revenue of $2.52 billion was up 11% year-over-year on a reported basis and up 7.4% adjusted to diluted impact of foreign currency. Pro forma revenue after adjusting for the impact of acquisitions and foreign currency was up 1.7% year-over-year. Sales in the Americas region were down 8.6% on a reported basis.

For the EMEA region, sales were up 11.8% year-over-year on a reported basis and up 0.9% after adjusting for the impact of foreign currency. On a pro forma basis, EMEA sales were down 1.1% year-over-year and after adjusting for the impact of foreign currency, pro forma sales were down 10.8%. And finally, for EM's Asia region, sales were up 35% as compared with the prior year, and up 28.6% on a pro forma basis. On a sequential basis, EM sales were up 3.3% and after adjusting for the weaker sales in the September quarter of roughly $150 million, sales were up 11.2%, well above normal seasonality. Additionally, bookings continue to be strong with book to bill ratios above 1.1 to 1.

In the December quarter, technology solution sales of $2.32 billion were up 15.8% year-over-year on a reported basis and up 12.9%, adjusting for the impact of foreign currency. After adjusting for the impact of acquisitions and foreign currency, pro forma revenue was up 12.2% year-over-year. At a regional level, revenue in the Americas was up 11.7% year-over-year. In EMEA, reported revenues were up 4.3% over the prior year quarter and down 3.6% when you exclude the impact of changes in foreign currency. Sales in the Asia region were up 136.5% as compared with the year-ago quarter, and are up 105.2% on a pro forma basis, primarily due to the investments made to drive organic growth.

TS sales grew sequentially by roughly 21%, including the estimated 250 million of sales attributable to the extra week in September. Excluding that extra week of sales, TS sales were well above our normal seasonality, with an increase of approximately 38% sequentially. We believe that the extraordinary strength we saw in the December quarter was a result of release of IT budget dollars that were not spent throughout calendar year 2009. Now let's look at the enterprise results for the second quarter fiscal year 2010 as compared with the prior year. The December quarter financial performance reflected meaningful improvement, as we made significant progress towards reaching our long-term financial goals. For the December quarter, Avnet sales of $4.83 billion were up 13.2% in reported dollars and up 10% in constant dollars as compared with the year-ago quarter.

On a pro forma basis, revenue was up 9.6% over the prior year quarter. On a sequential basis, the December quarter sales increased 11%, and excluding the extra week of sales in the September quarter of approximately $400 million, were up 23% due to much better than normal seasonality at both operating groups. Gross profit of $551.9 million was up $18.4 million, or 3.4%, as compared with the second quarter of fiscal 2009, as revenue growth resumed. Gross profit margin of 11.4% declined 108 basis points year-over-year due to a combination of business mix, regional mix, and lower margins at EM. On a sequential basis, gross profit margin was up at both operating groups as the markets recover. However, due to the magnitude of the sequential revenue growth for Technology Solutions, gross profit margin at the enterprise level was down slightly by 5 basis points.

The March quarter, we expect to see an improvement in gross profit margin at the enterprise level, due to business mix as further growth at TM is coupled with the normal seasonal sales decline in TS. Specifically in EM, with the industrial markets in the west improving, regional mix should drive improving gross profit margins at EM globally over the next couple of quarters. Operating expenses excluding charges were $389.6 million, up $9.3 million, or 2.5% year-over-year and down roughly $33 million after adjusting for foreign currency and expenses associated with the companies acquired in the last four quarters. The increase in operating expenses was primarily due to the impact of acquisitions and changes in foreign currency, offset by the benefits of cost reduction actions taken during the downturn. On a sequential basis, operating expenses decreased $3.1 million and excluding the impact of foreign currency, operating expenses were down nearly $10 million due to one week's less expense of the quarter, offset somewhat by incremental variable costs to support the strong revenue growth.

One of the key productivity metrics we use to manage our business is operating expenses as a percentage of gross profit. For the December quarter, we improved this key metric to 79 basis points sequentially and 69 basis points year-over-year. As Roy stated earlier, our operating leverage this quarter was also strong, as operating income grew nearly five times faster than revenue on a sequential basis. Operating income of $162.3 million was up 5.9% as compared with the prior year quarter, excluding charges, with Technology Solutions leading the improvement. On a year-over-year basis, EM's operating income declined 7% to $92.2 million, and operating income margin of 3.7% was down 71 basis points. While the cost reduction actions at EM provided the expected benefits, the year-over-year decline in gross profit margins continued to dampen operating income. However, on a sequential basis, EM operating income increased 13.3% and operating income margin improved 32 basis points to 3.7%.

For TS on a year-over-year basis, operating income of $88.2 million was up 31.8%, as operating income margin improved 46 basis points to 3.8%. On a sequential basis, operating income margin at TS improved 112 basis points, with operating income up 71.5%. Operating income margin at the enterprise level, while down year-over-year, improved 98 basis points sequentially due to the combination of higher sales, firming gross profit margins at EM and TS, and the benefits from the core production actions that we've taken. This was the second consecutive quarter of sequential improvement in operating income margin and another indication that we're past our trough. We expect to see additional improvement in operating income margin as we continue to be diligent about managing our expenses and anticipating a recovery of our gross profit margin the coming quarters. We will continue to manage the business using our VBM principles and disciplined portfolio management by group and by region, prudent investments to accelerate will largely depend upon when and where market growth returns and how a region is performing relative to its long-term financial targets.

Interest expense for the December quarter was $15.3 million, down $2.1 million over the prior year quarter, due to the retirement of the $300 million convertible notes that were put to us in March of 2009. The effective tax rate on income, excluding charges was 31.3% in the current year for the second quarter, as compared with 30.5% in the prior year quarter, due primarily to strong income from higher tax rate jurisdictions. Our tax rate guidance for the remainder of fiscal 2010 remains at between 29 and 32%. GAAP net income was $103.9 million, or $0.68 per share for the second quarter of fiscal 2010 and included a gain of $5.5 million pretax, $3.4 million after-tax, or $0.02 per share related to the prior sale of our equity investments in Cayman L.L.C. excluding that gain, net income was $100.5 million, or $0.66 per share with EPS up $0.56 sequentially or 4.8% year-over-year. During the quarter, we used $97 million of cash from operations, which compares with cash generation of $320 million in the prior year.

On a trailing 12-month basis through the December quarter, we generated cash from operations of $713 million. Working Capital Management continues to be strong Company-wide, as working capital velocity improves significantly both year-over-year and sequentially to record levels. Working capital declined $402 million year-over-year, or 14.3%, even though sales improved 13.2%, resulting in a 2.4 turns improvement in working capital velocity to a record 8.2 times. The year-over-year improvement in working capital velocity came from both operating groups in all three regions, due to the outstanding efforts of our global team. Investing in appropriate levels of inventory and diligently managing our payables and receivables has paid off as net days at the enterprise level were down just over five days sequentially. Receivable days are at near record lows and we continue to see no deterioration in receivable delinquencies.

As growth resumes, we will not generate the same level of cash from operations as we have done over the last four quarters, as we prudently invest in necessary working capital to support the profitable growth in sales. On a rolling four-quarter basis, we expect to maintain significant positive cash flow from operations, despite the ebbs and flows of the market cycles. In the December quarter, return on working capital's 27.6% nearly reached our 30% hurdle rate for the enterprise, as it improved 887 basis points sequentially and 664 basis points year-over-year.

While both operating groups improved sequentially on this important metric, TS Americas led the way by maintaining its return on working capital well above the hurdle rate for the seventh consecutive quarter. And return on working capital improved year-over-year by over 2700 basis points at TS and 250 basis points at EM. Likewise, Avnet's consolidated return on capital deployed improved 487 basis points sequentially to 14.6%, nearing the midpoint of our long-term business model. Despite the turbulent year in our financial results, we have been able to maintain our investment grade credit statistics and have the healthiest balance sheet in years, reflecting our strong financial position.

On a trailing 12-month basis, debt to EBITDA was 1.9 and EBITDA coverage was 8.4. We exited the quarter with $895 million in cash, which, when combined with the availability under our credit agreements, provides us with approximately $1.7 billion of liquidity. The December quarter marks the return of economic profits for Avnet's first time since June of 2008. With recovery in our end markets, our continued focus on expense management, and our progress toward our financial goals, we'll continue to build and deliver higher shareholder values.

Looking forward to Avnet's third quarter fiscal year 2010, we expect slightly less than normal seasonality in TS, coming off a robust December quarter and normal seasonality at EM as the industrial markets in the west continue to improve. TS sales are anticipated to be in the range of $1.55 billion to $1.85 billion and sales from EM are expected to be between $2.55 billion and $2.85 billion. Therefore, Avnet's consolidated sales are forecast to be between $4.1 billion and $4.7 billion for the third quarter of fiscal 2010. Based on that revenue forecast, we would expect third quarter fiscal year 2010 earnings to be in the range of $0.53 to $0.61 per share. The above EPS guidance does not include any potential restructuring charges and any charges related to acquisitions and post closing integrations. In addition, the above guidance assumes that the average Euro to US dollar currency exchange rate for the third quarter of 2010 is $1.41 US to EUR1. This compares with an average exchange rate of $1.31 to EUR1 in the prior year third quarter, and $1.48 to EUR1 in the prior sequential quarter.

Now, let me turn it back over to Roy to provide closing comments for the quarter. Roy?

Thanks, Ray. In summary, the second quarter of fiscal 2010 provided further evidence that the economic recovery is gaining momentum and spreading beyond Asia. While EM grew a healthy 11% sequentially this quarter, TS's business grew seasonally faster, at 38%, excluding the extra week in sales for the September quarter. This TS performance indicate that EM's recovery is being fueled by rising end demand and not just inventory restocking.

While the rate of future improvement remains uncertain, positive sequential growth in the Western regions at EM robust quarter for IT spending are encouraging signs, as the current up cycle unfolds. Similar to the last up cycle, our results are demonstrating the leverage we've built into our model, as growth returns and the benefits of our cost reduction initiatives become apparent. In the December quarter, we delivered gross profit drop-through greater than 100% and grew operating income nearly five times faster than revenue. Working capital velocity continues at record levels and return on working capital is approaching our targeted levels.

Throughout the Avnet portfolio, we're seeing consistent improvement, as our value based management discipline drives our focus on profitable growth. Our counter cyclical balance sheet has not only provided liquidity to weather the credit-driven downturn, but is now providing the flexibility to fund new growth initiatives. Whether it is organic growth initiatives or value-created M&A, there are many opportunities to expand into new geographies and product categories that can accelerate our growth and leverage our scale and scope advantages globally.

Just as we managed our business through the last cycle, we will leverage growth during this recovery to strengthen our market position and optimize our financial performance. With that, let's open up the lines for Q&A. Operator?

(Operator Instructions) Our first question comes from Steve Fox from Calyon Securities.

Hi, good afternoon. Can you talk a little bit, Roy, about the TS business? You commented that you are looking for more than normal seasonal declines in Q1, but what are you seeing that makes you think there's not more cyclical powers at work here that would make your business be stronger in Q1 into Q2?

All right, so I'll comment and perhaps Phil or Rick might add something. But, Steve, what we know is that the sequential growth in December was greater than normal. In fact, it really occurred in the back half of 2009. After a couple of quarters of below normal seasonality, we ended up with a couple of quarters of above normal in a very strong surge in December.

So the conclusion that we're drawing, which I'll admit is subjective in nature, is that budget dollars that weren't spent in the early part of the calendar year ultimately got spent before we ended the year, thereby distorting the size of the December quarter. We do believe that IT budgets in 2010 will be higher than 2009. However, you asked the question what are we seeing.

Yes.

The reality is that January typically gets off to a slow start in IT and we're not actually seeing anything that would either prove or disprove that. We just don't know much from an actual orders and sales perspective based on the first three weeks of January. So we're basing our guidance on what we believe was an inflated December. We're trying to normalize that and then provide normal seasonal off of that slightly lowered baseline.

And then if you -- that's very helpful. And then if you just extend that out to the full year, Roy, you mentioned that you're looking for growth in IT. How would you describe what type of year your customers may be talking about, or is it too early to talk about visibility into the full year?

Yes, I our view on that is that there seems to be a consensus of industry experts that are saying numbers like middle single digits, 4, 5, 6% growth for the overall IT market. Obviously we're going to try to outperform that by focusing on our growth areas like emerging geographies, solutions practices, that sort of thing. But I think we're expecting an IT market that grows in the mid single digits in 2010, and you know me pretty well. If I had to bet the over/under on that one, I'd bet the over, based on what I perceive to be pent up demand coupled with the available liquidity.

Fair enough. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Ananda Baruah with Brean Murray.

Thanks, guys. Roy, and maybe Ray. Revenue upside to the quarter, at least relative to my model, margin upside, and you made comments, Roy, I believe that gross profit dollars drop-through was greater than 100%. It's interesting getting your perspective. I know previously you had made comments around expecting 100%, kind of incremental gross profit dollar drop-through for a period of time. Do you now think that the leverage can be a little bit better than what you thought it would be for, or maybe you're seeing that leverage at work a little bit earlier than what you thought before? Just to get your perspective there.

Well, I, Ananda, I think that part of what happens when these cycles turn is that we have a phenomenon where we have been taking cost actions that are rolling into the expense numbers and they tend to be sort of winding down as revenue grows and thereby creating this greater than 100% phenomenon. What I can tell you, with two comments, one is what actually happens now going forward is going to depend on things like the rate of growth that we experience and perhaps even more importantly, the mix of where that growth comes from. Those are the things that will have the biggest influences on driving how much drop-through or how much operating leverage we have. The other part I wanted to make, and what I can tell you is that the way we manage the business is by group and by region, we have targeted financial models and the amount of reinvestment that they are allowed to make is a function of how that business unit is performing relative to our targets. So no change there. This is the way we've been running the business. It's the way we ran it through the 2003 through 2008 up cycle and it's the way we're going to run it through the 2009 to whatever up cycle that apparently has begun.

Okay, great. Thanks a lot. That's helpful. And then I guess just if I could get your take, I believe kind of the -- deal was closed and I believe that Oracle made some comments about the way they are going to go to market with Sun technologies. So is there any update on your thinking relative to, what this impact might mean to you guys?

Yes, as you might imagine, we've been in heavy dialogue with them and why don't I turn it over to Phil and I'll let him take the lead and then either Rick or I might chime in at the end.

Sure, Roy. Thanks a lot. Good afternoon. First of all, out of the gates, just want to let everyone know we certainly have been very well engaged with the Oracle Sun leadership team and we were actually at the conference yesterday with them, Rick and myself. I just had a call this morning with their executive team again. So we're very aligned, very understanding as to where they are going.

And direct to your question, do we think this has a material impact in the near future, we do not believe so at all. Matter of fact, some of it out of the dialogue, there could be some opportunity for us as well from a value distribution standpoint and stated that in the press and reinforced it again this morning in the call, that they are actually going to be further committed to a two-tier channel strategy and further rationalizing their current distribution base across the world. And with that, strategic value, a solution distribution approach and our geographic coverage, although we're certainly close with the Oracle Sun team to be sure there is minimal impact as they transition, minimal impact to Avnet, in fact could be a growth opportunity going forward. Rick?

Good afternoon, everybody. I would just add on the direct coverage commentary that you've been hearing about, our assessment is that what, what Oracle's really planning to do here is probably bring their model more in line with what is the main stream enterprise coverage model and that as far as direct revenue shifts or impacts, it would be the fulfillment type revenues in the large enterprise account that would be in question at this point.

Fantastic. Very helpful, thank you.

Yes. Ananda, this is Roy. Just to add one more thing, that revenue stream, we're not quite sure how to quantify that, but by definition that would be the lowest margin portion of our formerly Sun now Oracle revenue stream. And there are other changes that they are making that are going to provide us with some interesting upsides, such as no longer will they deal directly with resellers. All of the borrowers will be required to buy from distributors. And on a global level, they are looking to consolidate the number of distributors they work with. So I think at this point, our view is that it's not a material change in our relationship. There actually are pluses and minuses and a person will learn more over the coming weeks and months as the whole integration unfolds.

Great. Thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question.

Hi, thank you. Just a little bit in the prepared remarks, but I was hoping you could talk a little bit about inventory levels, inventory picked up by, it makes sense that that would pick up with strong revenue performance in this quarter, but what's built into that number in terms of -- have we gotten back to normal levels of inventory, do you think, in the channel, and what did you see in terms of component shortages?

Okay, hi, Sherri. I'm going to ask Harley to take that one and Rick and I might do some backup.

Let me think back to your question. Are we comfortable with inventory levels, do we think inventory levels are fairly stable in the channel overall? And I think the answer is yes. Lead times have not changed dramatically from last time we spoke. They are still extended, but we don't see strong movement in either direction. They are pretty stable and consistent with where we have been. The inventory increase that you referred in December was really aimed at fueling our revenues in March and we continue to focus really on the two issues we discuss each quarter, which are our velocity metrics which continue to improve even with the growth and on our aging metrics, which have actually never been better. So we're very comfortable with our inventory and we continue to invest to fuel our future revenues.

So, Harley, there was a question about product shortages as well, but before you take that, let me just comment. Sherri, this may sound like the obvious, but inventory at Avnet and throughout the supply chain is really driven by two things from my perspective. One is unit volume growth and the other one is the extension of product lead times. Both of which are happening as we speak. So it's our belief that inventories in dollar terms are growing, not only in our shop, but in essence throughout the supply chain. However, they are growing at a rate that is slower than sales growth and as a result, you're still seeing very strong and in many cases sort of record level inventory turns and overall working capital velocity, as we just reported in our quarter. So that causes to be quite comfortable, coupled with no evidence of customer cancellations or -- no evidence of double ordering. So clearly double inventories are expanding, but they appear to be well managed in that expansion. Harley, product shortages?

Yes, I think that, again, similar to lead times, Sherri, we're not seeing any dramatic change or shortages. If you look at unit shipments for December including our own unit shipments, they really are quite strong. So our suppliers are providing us with considerable product, considerable units, and that's quite frankly what's fueling the additional growth and the strong revenue results in December.

Okay. All that's very helpful. I just have another question for you, Roy. In terms of the M&A outlook are you starting to see more attractive M&A candidates right now, does pricing become more attractive, or what would you say on that front?

Yes, I would say this. You know, one of the old sayings of M&A is you've got to have a billing buyer and a willing seller. And during the downturn, I guess I would describe Avnet as a reluctant buyer, meaning that we were concerned about forecasts. We were concerned about the availability of capital in the event that we used ours, and as a result we had increased our hurdle rates and in essence, limited the amount of activity that we were willing to get involved in.

So now if you fast forward, we're actually quite comfortable with capital markets. We believe that we can replace our cash if need be. Therefore, we are interested in making investments. We are thinking about a more normalized 12.5% hurdle rate these days as opposed to the elevated 14 that we had during the challenging economic times. So in terms of the willing buyer, I would say Avnet is more willing today than it had been, say, 6 to 12 months ago. On the seller's side there are still substantial strategic competitive pressures in distribution and they tend to favor global scale and scope. So as a result of that, there are lots of opportunities. And we have increased our pipelines and our activity rate, I would describe as resumed at a fairly high level.

As far as pricing, however, this upturn in technology both on the IT side, as well as the component side, has people believing that there are better days ahead, and so with a little less pressure in terms of availability of capital coupled with more positive outlooks, I would say the price expectations of the sellers are also going up. So we will maintain our disciplined approach. We will not do deals that don't generate appropriate returns, and all of that said, I'm reasonably comfortable that our M&A activity will be picking up over the next few quarters compared to the past few.

That's great. Thank you very much.

You're welcome.

Thank you. Ladies and gentlemen, our next question comes from the line of Craig Hettenbach, Goldman Sachs. Please proceed with your question.

Great, thank you. Ray, post the series of cost cutting actions over the last year, can you talk about the pace of OpEx growth relative to sales growth as demand recovers and then maybe just starting with the March quarter split between gross margin and operating OpEx.

Okay. So clearly as business recovers, we're starting to see a little move up in expenses. However, we still have a fair amount of leverage -- I guess the way I'm going to answer the question is to go back and talk about, we've mentioned a number of times and the earlier stages in a recovery, as we are today, that drop-through, again, meaning the incremental GP dollars we saw on the bottom line are certainly going to be higher than lower. And I think it's a question earlier today about our drop-through sequentially being greater than 100%. If you look at it on a year-over-year perspective, a little bit different story because operating income is declining. But I guess as you move forward, I would characterize dropthrough as being pretty high numbers early in the recovery, maybe the 80, 90% range.

Could be different depending upon the business, the business group. So therefore again you'll see expenses start to move up to some extent on a go-forward basis. If you look in the March quarter specifically, we're probably talking about at this stage, flattish to slightly up expenses by a few million dollars, based upon the revenues that we see today. Obviously there's higher revenues, it will bring in a little more cost. If it's lower revenues, some of the very low cost side may come down, but that's roughly what we're planning for at this particular point in time.

Craig, this is Roy. I would like to throw a strategic response on top of the sort of analytic response. We are well aware that this is a recovery phase and that the, many of the economies around the world, including the US economy, are being fueled by stimulus and that at some point, that stimulus needs to be withdrawn and the question is, what will be the growth left in the real economy? And so as I think about expense growth here over the next couple of quarters, I would encourage you to think about first of all, the immediate impact of higher volume and how that affects things like our variable compensation, as well as things like trappings costs, with more packages and boxes moving around.

In addition to that, we are finding areas of our business, such as our warehouses, where we simply need to add staff in order to support the actual transaction volume, so obviously we're taking those actions to ensure we maintain high service levels and also maintain our employee engagement through the up cycle. Because our folks are working pretty hard. In terms of actual new investments in strategic initiatives, we're going to continue to be prudent. I would say it won't be zero, but we're not going to go full throttle ahead until we feel like the economy is sitting on solid ground and able to grow independent of the stimulus packages that are out there. So yes, there will be variable costs associated with volume. There will be some incremental expense to support that volume, and then there will be selected investments in organic growth activities, but we'll be relatively cautious until we feel better about the overall economic environment.

Great. Thanks for that follow-up. If I could just ask a quick one on the strategy front, when we think about gross margin, what are you seeing out there today in terms of demand creation and new products and how should we think about that as the recovery unfolds?

Okay. Let's get Harley to take that one.

Okay. Hi, Craig. From a semiconductor -- component perspective, we're actually -- this is one of the -- your question -- the answer to your question is one of the things that fuels our optimism looking into calendar 2010. And that is that one of the realities of our business is that our investments and our activity and our work load from a design perspective over the last year really did not diminish. So we continued to keep our technical people in place.

We continue to do all the work, but the rewards of production design wins for obvious reasons were minimal, looking specifically, let's say, at calendar 2009. As we just were concluding this week our global technical tour that was alluded to in the prepared remarks, XVest, we couldn't be more upbeat and excited about the opportunities for all of that work to turn into increased revenues, increased design wins, looking forward. Much of that, if you think about where we're looking for growth, connected to an overall improvement in the industrial account base. So we see very good future for us in design win. We stayed, again, committed to it all through the difficult period, and we think we will bear the fruits of that work in an improving environment, especially with the west improving.

Yes, I think Craig, just a quick follow-up, our suppliers have continued to value that activity and have continued to maintain the full gross profit margins in that segment of our activity. The contention we have at our suppliers typically revolves around margins relating to fulfillment activities and not design win activities. As that grows, that should have a beneficial impact on our margins.

Great. Thanks again, guys.

You're welcome.

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

Thank you. Can you remind us, please, whether there are any restructuring benefits that continue from the model in March and beyond, or was December the last quarter then?

It's Ray. We're essentially done with our restructuring charges. For the most part, virtually all complete by the end of the September quarter. A little bit more occurred in the December quarter, as well as some integration, but effectively we are finished with our restructuring.

Okay, great. Then Harley, perhaps you can comment on demand trends within some of the end markets. Clearly, we know that your end markets are broadly the industrial base, at least in North America. Any further granularity in the end market demand some stronger or weaker than others?

It's going to sound like a copout but it really is the actuality. As we saw growth, we saw encouragement, especially in the design area all through the December quarter. So I can't really give you an area that jumps out. Automotive is a good example where we saw some encouraging signs in both Europe and in Asia, but clearly across the broad industrial, it's hard to single a market because it is so broad. But maybe a better way to answer the question, were there any areas that don't appear to be participating? And there really weren't when we look at our December results. It's really pretty much across the board.

And what about March relative to what you would normally expect the trends to be? Any standouts, either stronger or weaker?

No, no. I, I think the riddle that we think about was our growth was really quite exciting through the end of December in Asia, extremely exciting, driven by a lot of the markets you would typically think of, obviously digital consumer, but also industrial, and even as I say, automotive. So our breadth of coverage in Asia is getting much stronger. One of the variables that we think about is, as usual, what impact will Chinese New Year have in the quarter and will that explosive strength continue into the March quarter? Short of that, we see what looks like a much more predictable and typical March in the west.

Okay, great. Thank you.

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

Thanks. Roy, the operating margins apply to the March guidance imply flat sequential trends, desperate positive mix shifts, such as greater mix of EM, greater mix of Americas and Europe within EM and just the benefits of a cyclical recovery. And historically it's not uncommon to see March operating margins up versus December, even though TS falls off seasonally. So could you just talk about the margin trends by segment for the March quarter and what are the factors limiting margin expansion sequentially?

Brian, sure. I think simply put, if we are talking about EM versus TS for a minute, EM operating margin will be up significantly on a sequential basis, sort of well above 50 basis points of improvement sequentially. And that is due to the points you're making. You know, typically we have growth in the west and contraction in the east and then on top of that, we're expecting margin expansion within the regions themselves. So we're going to have nice operating expansion at EM. Then at TS, we're coming off of a 3.8% performance in the December quarter, on a significant number. So there is a decline projected at TS in operating margin, even though there is an expectation for expanded gross margin there. And that decline in operating margin is specifically attributable to volume. It's just volume.

So the biggest issue in the numbers relative to our historical patterns are simply the size of the TS business relative to EM compared to prior periods. Brian, I would only add to that, within the EM leverage, bear in mind that Asia's become a much bigger part of the total, specifically -- I mean that's been a secular trend, of course, but specifically just in the last three, four quarters, Asia's grown dramatically as a percentage of EM's total. So those are the two things that are happening. On a group and region basis, we're very happy with the revenue and the operating leverage that we're getting through the P&Ls.

Great, and just a follow-up, on the corporate overhead line, why was that amount -- I think it was more than you thought, 18 million. I think we thought it would be 13 or 14. Is that related to bonus accruals, or is there some reclassification of -- segments to overhead?

Brian, it's Ray. As you can imagine, it's a number of different items. As you go back, I guess a little bit of history, you've probably seen the run rate of corporate expenses is probably about $18 million or so. Last year down significantly for two primary reasons. One, level of executive compensation down from prior periods, not only from a cash compensation perspective, but also from a stock perspective as well. In addition to that, last year, not only having it's lower level of expenses, as I think we've pointed out a year ago, also some reversals of accruals from prior year related to stock compensation just to compensate for the magnitude of the downturn of the business. So if you look at what we ran last year essentially, which was 13, $14 million quarter, it's more of an anomaly than anything else, just because of the low level of business.

Now as you fast forward today, business is better, so compensation levels from an incentive compensation, both in cash and equity are up by a fair amount and that's accounting for most of the year-over-year increase that you're seeing in expenses. In addition to that, within corporate specifically, we've had some increases in professional fees year-over-year and in addition to that, I'll point out globally, which also, some of which is included in corporate, but also a little bit in the business units as well, is the fact that under the new accounting rules, we are expensing some M&A-related costs that previously would have been capitalized. Again, not a huge number in the grand scheme of things. That's why we didn't point it out anywhere, but on a consolidated basis, I believe we expensed about $1.5 million in M&A-related expenses just because of new accounting rules that we would not have had in the past. Again, not all of that corporate, just a little bit there. So it's a combination of those, I guess three factors that I pointed out overall causing the number to be higher.

And this is the right baseline to model off of?

Yes, this will be the right baseline. It may trend up a little bit. So I'm looking at a baseline in the $16 million to $18 million range on a go-forward basis. So back to what it was, if you go back to the 2008 timeframe.

Thank you very much.

Brian, based on what we know today, it's likely to be down sequential closer to the 16 number, but it would depend, for example, on M&A activity and the expensing of these professional fees.

Got it, thank you.

Okay.

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

Yes, thanks, and hello, everyone.

Hi, Matt.

So I'm going to get back to the issue of inventories, Roy, and Harley. You said that inventory was up I think 10% in the quarter. How much was up in component inventory?

Essentially all of it.

All of it was components, okay.

Yes.

Okay. And--

Let me -- Matt, let me back up a second. I want to say -- yes, so TS inventory globally was up $7 million. The rest was EM.

And as you've built the inventory, is it across the board, or are you basically building inventory on components where lead times are stretching so you are building that buffer because you basically have to get orders in with the suppliers?

Matt, I guess one additional color point I would make to Roy's comment on the inventory, is that the bulk of what we purchased was in Asia, so the majority of the increase was EM and good portion of it was Asia. And so to answer your specific question on the purpose, clearly if we had our druthers, we would buy even more of long lead time opportunities, product, because obviously that affords us a margin opportunity. But I think it really is primarily from a strategy perspective all around raising our pipelines in support of overall improvement in the business.

Yes, and Matt, I would just -- I know it's a little bit redundant. I apologize for that. But we manage inventory from the bottom up. It's handled at a transaction level, by location, by day, by SKU, and there's two drivers. Increased units and extended lead times. And our team is constantly using tools and managing against those parameters. So I would say to your question, yes, it is influenced by lead time, but it's also influenced by higher units.

And do you expect your inventory in the March quarter to be up at a similar rate than as the sales increase, or higher?

I think following the pattern that we have established, we expect it to be up, but probably not as rapidly as sales. Inventory is down in all three regions, Harley, right?

Right.

Okay. So on a day's base, it should be pretty much in line.

I would say we should be flat to improved on a velocity or days basis.

I would agree. Flat would be the high end there.

Right.

Okay, and just following up on one of the questions on your mix of business within components, and as it relates to gross margin, because you're still down 100 to 150 basis points give or take on gross margin because of the mix, greater sales in Asia, weaker sales in Europe, smaller customers and then also there was some pricing competition. So how much do you think you can get back, given that Asia in all likelihood will continue to be greater percentage of the pie, even as you're up in North America cutback?

Matt, I'll take that, Roy, if that's okay. So it's a bit of a moving target, so I want to give a general comment. The reason is it depends on which baseline you're measuring against. But if I use your metric of 100 to 150 basis points, I tend to see it as about two-thirds market pressure, competitiveness, and one third regional mix. So if you take the regional mix aside, because I think as Roy said earlier, we're very proud of the job the team is doing in managing the combination of inventory and working capital velocity as ratio to operating income. So you focus on the portion of it is that is really primarily driven by competitive pressures, the way we tend to think about it is the biggest driver to improvement there clearly will be continued improvement and growth in our broad industrial base, primarily in the west. And as I think we said in the opening remarks, we saw encouraging signs in December. We continue to believe that trend will be positive through March.

So that's as far as I want to predict going out. But we also talked about the impact of demand creation energies and how all the design activity turning to production wins will impact our gross margin and another piece we haven't actually talked about in a while was one of the areas that was hit the hardest for us through the downturn was actually our ability to make upside margin on commodity purchases. And that is a difficult thing to do when everything is zero lead time. So as lead times extend, we see opportunities to place purchases and make upside income. So those are the areas that we -- that give us the belief that that portion of the margin that is not mix related is recoverable and we think we will over the next number of quarters.

So, Matt, it's Roy. It's difficult to forecast the mix part of the equation, although what I would say is that we expect the rate of change in terms of our shift to Asia to revert back to the pre-recession rate. It was accelerated during the downturn because Asia performed better on a relative basis to our western regions. If you exclude that, we still expect to regain most, if not all of our margin, on a by-region basis. And in terms of timeframe, I would say give us three to five quarters to get it fully recovered, with progress being made hopefully in each quarter.

Okay, that's helpful. Thanks.

You bet.

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

Thanks, gentlemen. Quick question. Regarding I believe, if I remember correctly, your operating margin goals for the Company-wide is about 4 to 4.5% operating margin goal. Can you help me understand, first of all, A, does that include more Asia business coming in, which is lower margin, which I assume it does, as it's a long-term goal you have, and B, do we look at we could actually get that in the next year or two, or is that kind of a stretch goal to be reaching out that far to be getting something closer to a 4%, since it's literally been just over a year when you were actually getting in that range?

Yes, hi, Jim. First of all, you're correct, 4 to 4.5 is the enterprise operating margin business model. Secondly, at the time we communicated that, which was only last December, we were talking about that as a three-year goal. What's happening is the recovery is taking place sooner, or more aggressively than we would have anticipated at that time. So today I would say perhaps it's a two-year kind of a goal, depending on how long this rate of recovery or strengthening in the market sustains itself. And yes, it did include the organic Asia growth, but no, we do not include any potential M&A that could skew it either one way or the other depending on the geography of that M&A.

Great, thank you. And a couple housekeeping items. Can you just let us know, there's this line in your income statement called other income and expense items, which has been kind of moving around a fair amount over the past few quarters, kind of what to expect for that going forward as well as now that your restructuring is pretty much over for SG&A, obviously some of it's going to have to grow with sales a little bit, but what type of SG&A level should we be expecting?

So, hi, Jim, it's Ray. First, on the other income line, generally speaking when we kind of look at that line and forecast, we forecast it to be zero. What's in there typically is interest income, which in this marketplace, as you know, is relatively small, and then foreign currency gains and losses, which unfortunately we've had more losses than gains recently, which have somewhat offset the small interest income we've had, and obviously cost of hedging and things like that are thrown on there. So typically unfortunately it does move up and down, as currency is volatile, but that's the main driver to that particular number there.

And Ray, this quarter we had a one-time gain.

This quarter we had a one-time gain, as we pointed out on the sale of an asset of $5 million, I think that was a separate line item in the financial statement. So that's something that's just unusual and unpredictable. So that line shouldn't be more than plus or minus $1 million or $2 million per quarter, unless something unusual happens.

And the SG&A?

Okay. In terms of SG&A, we would expect -- so as I mentioned earlier, restructuring for the most part is finished, as we've talked about, we manage expenses in a number of different ways, but primarily through drop-through, and so expectations for drop-through in the early part of recovery will be fairly high and that, again, depending upon the region, 60, 70, 80%, some cases more than that. So maybe averaging at the Avnet level, roughly in that 70% range from a drop-through perspective. And in addition to that, as Roy mentioned earlier, there are certainly some -- there may be some opportunities from a strategic perspective, making further investments in the business to facilitate organic growth, and as you know, in our business, investment in organic growth means more expense dollars, all right, and so as we move forward, there certainly could be some incremental expenses associated with those initiatives and that would, of course, depend upon what the environment is like as we go forward.

Great, thank you very much.

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

Thank you, and good afternoon to everybody. Question on the EM side, just curious, why Europe continues to be so much better than your US component business, while Europe's doing better or US is lagging, whatever way you want to approach it.

Brendan, I don't think we would describe it that way. I think we would say to you that our Europe business typically runs higher margin than our Americas business. However, in terms of the down cycle and the recovery, our Americas business started improving in the September quarter. Our Europe business has lagged a bit. We had pretty good bookings in the December quarter and we're expecting a good revenue sequential performance out of Europe, and nice operating leverage on that. But I would, I would describe to you our Europe business has been lagging our Americas business for the last couple of quarters here.

I'm not -- sorry. I'm not talking about the margin structure. Just looked like the revenue on a year-over-year basis, if you look at it on a reported basis.

I think that's all about currency.

Currency.

Yes. We run the region, of course, in Euros, and so I think when you look at the reported results, it's typically about currency and then keep an eye on M&A. We had a transaction beginning of last calendar year called Abacus, which is benefiting our European result.

Understood. And then the other question I have is you kind of approach this, alluded to this in TS in terms of two very strong unseasonable quarters and now we've had three, if you include the upcoming March quarter, three unseasonal EM quarters. I'm just curious what your take is on seasonality after that. You said TS is probably going to be your factory gains a little bit of giveback in TS. What do you think in EM, and if you look at it as you approach it your -- as you've talked about in the past what you think about it.

Yes, we think the supply chain has pretty much normalized at this point, and therefore, we think that that the EM piece, which underperformed the end markets for a few quarters is now overperforming the end markets for a few quarters. And as you get into that June quarter and possibly beyond, it is more likely that we're going to see those two businesses move in sync and growth is going to be largely dependent upon what happens from a macroeconomic point of view.

Okay, great. Appreciate it. Thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Amitabh Passi with UBS. Please proceed with your question.

Hi, thank you. I just wanted to clarify one point. I think you had a slide on your prepared comments, you talked about sequential improvement in gross margin in both of your segments. Yet I think at the enterprise level, gross margin was down. So just wanted to make sure I wasn't missing anything and if you could clarify that comment.

You are 100% correct. We had sequential improvement at both operating groups, but the very strong growth at TS caused the enterprise margin to be down sequential by 5 basis points.

Okay, okay, thank you. And just wondering if there's any update or any info on the Cisco UCS opportunity you announced back in December.

Yes, this is Phil. Good afternoon. Actually the latest update is positive. We've launched the Cisco business unit. We've set up a separate business unit within the TS Americas organization. We've named the leader, Chris Swann, who is a seasoned veteran in the industry, and he's currently building his strategy, building his structure, and working day in, day out with the Cisco business unit team to go after the market. So basically hired us to be a value solutions distributor, so it's going to take some time for us to build those solutions and create that demand, so the revenue this quarter negligible, but over time as we built the solutions and drive that demand creation, we see positives in the calendar year.

Great, thanks. Let me just ask one last question. Ray, historically when you've talked about M&A, you've talked about it in the context of geographies or in the context of two major segments. In terms of market adjacencies, are you able to add any other comments in terms of what other areas, you recently acquired Specter seems to get you into this embedded antenna space. One of your competitors acquired a company that gets them into aerospace and defense. Curious how you're looking at maybe some alternative markets and just any additional insights there.

Yes, so we are looking at adjacent markets. However, as I think about our M&A pipeline, all but one opportunity would be within our EM and TS businesses in various geographies, and we have one opportunity that would be more along the lines of an adjacent market. So we are looking at adjacencies but not expecting significant activity there. Most of the activity in calendar 2010 will be within our two groups.

Got it, thank you.

You're welcome.

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

I'll make it quick hopefully. When looking at TS, it looks like the EBIT margins, the operating profit margin was within the target range provided at analyst day, even though looks like gross margins were maybe down 60 basis points year-over-year. I guess the question is, is there upside now to that range, given the performance in the quarter? And if so, where would the upside come from in terms of gross margins as well as EBIT margins?

Yes, Shawn, I'm looking at your year-over-year. You're probably not too far off, due mainly to our growth in Asia. But bear in mind that December operating margin is clearly benefited by the seasonal pattern, and so as we talked a little bit earlier on the call, there's going to be a contraction in that margin in March, June, and September quarters, and then a reload next December. So I think we're still looking at, let's say calendar 2010 or fiscal 2011 trying to get TS globally performing at the lower end of that range on a rolling four-quarter basis. Each December quarter, we would expect to get into the range and possibly even above and the rolling four-quarter number, we're going to need one to two years to get there on a consistent basis.

And the upside there still lies more with EMEA versus any other region?

Well -- our Americas region is performing very well. Mix does move the margin around a little bit, mix of business, but from a margin and return point of view, it's performing very well and in fact literally above that range. EMEA is the business where we are working on both our operational and our financial performance and trying to build scale, so, yes, there is significant upside there. But now as of the December quarter, we have a business in Asia that's clocking $900 million, heading for $1 billion here in the not too distant future, and we're running that business at just slightly positive because we're investing heavily on an organic basis in places like China and India, so as the rate of growth in our Asia business slows, we will begin to harvest the profits in and that region will come up also, so that's why I hesitated on your statement. Yes, EMEA progress will help the TS enterprise margin, but so will the, what I would guess I would describe as the maturation of Asia as we begin to harvest profits there.

Okay, okay. And then just my final question is, looks like we should witness a pretty good release of cash flow from operations in the March quarter, but you may burn cash for the fiscal year?

For the full fiscal year, I still think we will generate cash. Again, the fiscal year ending in June based on what we've done in the first half of the fiscal year, as we move forward for the balance of the year, expectations I guess for the March quarter, probably not going to be robust cash generation, mainly because we'll obviously have cash generation from a TS perspective as the business slows down to just seasonal perspective, but then you'll see some working capital investments in EM, as their quarter moves forward. So when you pull all of that together, I would expect cash from operations to be flattish. Could be slightly up or slightly down, but nothing significant at this point in time.

Okay.

And, Shawn, the drivers there's two things that are going to drive that. One is the rate of growth. So we do -- you know that we took $1 billion of working capital out as the revenue declined. We're going to have to put most of that back as the revenue grows, so depending upon how fast it grows, that will determine the impact on cash flow. The other thing that drives it, of course, is how big are the retained earnings on that revenue, and what drives that is what's the mix? Where's the revenue coming from? So depending on rate of growth and mix of business, that will ultimately drive our cash flow. Meanwhile, we're going to run the Company based on return on capital and continuing to focus on improving both our margins and our working capital velocity.

Okay. Thanks again for taking the questions.

You're welcome.

Thank you. Ladies and gentlemen, our next question comes from the line of Scott Craig with Banc of America. Please proceed with your question.

Thanks. Good afternoon, guys. Roy, maybe I missed this, but did you guys give a rough book to bill number or by region or anything like that? And then secondly, on the operating profit in Asia for TS, how much longer do you run that at let's call it roughly around breakeven before you start to get higher levels of profitability over there?

Yes, hi, Scott. What we're seeing on the EM book to bill ratio is that for the second quarter in a row, we had a book to bill that was above 1.1 to 1. It was actually up sequentially and really the only reason why we don't want to give a specific number is that book to bill ratios are interesting animals and we just don't want too much reaction to that number, but it was -- I would call it robust for the second quarter in a row and actually up sequentially. Okay.

And Roy, if I could add in each region.

In each region. Okay, Scott?

Yes, perfect.

On the investment rate, the variable there for us is the rate of organic growth. If, if the rate of growth stays very high, we're going to want to continue to invest and double-down, so to speak. The way we think about organic investments is as the rate of growth slows, another way to say that is as our business matures, then we will increase the harvest and the profitability that we pull out of the region.

Okay, thank you.

You're welcome.

Thank you. Ladies and gentlemen, there are no further questions at this time.

Thanks 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.

Thank you, everybody. I'm sorry.

This entire slide prevention is available on our website and can be accessed in downloadable PDF form.

Okay. Thanks, everybody.

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