安富利 (AVT) 2012 Q1 法說會逐字稿

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

Good afternoon, and welcome to Avnet's first quarter fiscal year 2012 business and financial update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event. As we provide the highlights for our first quarter fiscal year 2012, please note that in the accompanying presentation and slides we have excluded the gain on bargain purchase associated with an acquisition, and restructuring, integration and other items from the prior year period. When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of a divestiture. As well as the transfer of the Latin America computing components business from TS to EM in the current quarter.

In addition, when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US dollar-based financial statements into US dollars. And finally, when addressing working capital, return on capital employed, and return on capital, the definitions are included in the non-GAAP section of our presentation.

Before we get started with the presentation from Avnet's management, I would like to review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. Listed on the slide are several factors that could cause 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, Rick Hamada, Avnet's CEO, will provide Avnet's first quarter fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review some other financial highlights, our return on capital performance, and provide second quarter fiscal 2012 guidance. At the conclusion of Ray's remarks, the Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President of Technology Solutions, and Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Rick Hamada to discuss Avnet's first quarter fiscal 2012 business highlights.

Thank you, Vince. And hello, everyone. Thank you all for taking the time to be with us, and for your interest in Avnet. Our team delivered a very solid Q1 performance despite a challenging macro environment. Enterprise revenue of $6.4 billion increased 3.9% year-over-year. And pro forma revenue was roughly flat with the year-ago quarter in constant dollars, following seven consecutive quarters of strong year-over-year growth. While Q1 is typically our weakest revenue quarter each year, our sequential revenue decline was more than normal seasonality, due primarily to the double-digit sequential revenue declines experienced in our EMEA region at both operating groups, after adjusting for the impact of acquisitions and currency. As a result, on a year-over-year basis, operating income dollars were roughly flat, while operating income margin declined 13 basis points.

On a sequential basis, due to the greater than expected sequential decline in revenue, our adjusted operating income dollars declined 17.7% to $223 million, with margin declining 45 basis points. This sequential decline was primarily due to softness in the EMEA region, as both operating groups experienced double-digit declines in revenue. Gross profit dollars increased 4.2% year-over-year, and gross profit margin of 11.7% was essentially flat with the year-ago quarter.

On the bottom line, EPS declined $0.03 per share from the year-ago quarter, to $0.90, due primarily to the year-over-year change in other income, which was driven by foreign currency losses, and the costs associated with hedging. Return on capital employed declined sequentially to 12.3%, and was also down from the year-ago quarter, as we worked to align our businesses to current market conditions. While this is the first time in seven quarters that we fell below our target range of 14% to 16%, ROCE is still well above our cost of capital and we remain committed to delivering performance within our target range through business cycles.

As we announced last quarter, our board authorized a $500 million share repurchase program. We initiated buying shares during the quarter. And Ray will update you on our specific progress later on the call. While we believe our share repurchase program represented a good investment opportunity last quarter, we also continued to invest in value-creating M&A this quarter, as we completed three acquisitions that will strengthen our competitive position and provide additional opportunities for growth in the future.

At TS, we strengthened our position in France with the addition of Amosdec, a value-add distributor of enterprise IT products with a strong virtualization practice. In Asia, EM added two Taiwan-based distributors that will add new products and customers, while strengthening our demand creation capabilities and our IP&E market position in the greater China region. Our longstanding capital allocation policy continues to prioritize profitable organic growth first, followed by value-creating M&A. And when we find ourselves in the position of excess liquidity, we will opt for returning cash to shareholders. Accordingly, we remain committed to investing in long-term profitable growth opportunities. And are comfortable we have adequate liquidity to pursue these opportunities in conjunction with our stock repurchase program.

Although it is difficult to forecast future demand in the current macro economic environment, we are encouraged by the speed with which the electronics supply chain is rebalancing, and the relative strength of our computer business outside of EMEA. We remain confident that our experience through many industry cycles will continue to serve us well as we work through the current environment, and we continue to focus on driving long-term shareholder value creation.

Now let's turn to the operating groups. In the September quarter, Electronic Marketing's revenue came in towards the low end of expectations, primarily due to the continuing impact of the current supply chain correction that affected our book to bill ratio in June, resulting in slightly lower than expected billings. As a result, pro forma revenue declined 7% sequentially as compared with a typical range of plus 1% to minus 3%. While EMEA was our weakest region, we also saw slightly lower than expected revenue in the Americas and Asia. Reported revenue of $3.82 billion increased 5.4% year-over-year. And pro forma revenue was roughly flat from the year-ago quarter after six consecutive quarters of strong double-digit growth.

EM's gross profit margin declined 107 basis points sequentially and 27 basis points year-over-year. The sequential decline was primarily due to the double-digit decline in revenue in the higher gross margin EMEA region. And the transfer of the lower gross margin computing components business from TS Americas to EM Americas during the quarter. This transfer also contributed to the year-over-year decline. EM's operating income was roughly flat with the year-ago quarter. And operating income margin of 5% declined 30 basis points, due primarily to lower sales and the previously mentioned transfer of the Latin American computing components business from TS. This represents the seventh consecutive quarter that EM has been within or above our target range for operating income margin globally.

Operating income margin declined 85 basis points sequentially, which was worse than a typical September quarter, strongly influenced by the higher than normal seasonal decline in revenue. Return on working capital declined 823 basis points from the year-ago quarter, primarily due to an increase in working capital and, to a lesser extent, the decline in operating margin. In the first quarter of FY '11, our inventory was below a normalized level, because of the extended product lead times and shortages. Sequentially, EM's inventory increased 3.5% on a pro forma basis, after adjusting for acquisitions, the transfer of the computing components business from TS, and changes in foreign currency exchange rates. In total, EM working capital increased 8.1% sequentially and 6.5% pro forma. The sequential increase in working capital was driven by a significant decline in accounts payable due to reduced orders to our suppliers.

While EM's book to bill declined for the second consecutive quarter, we are encouraged by an improved book to bill across all regions through the first three weeks of October. Even though it is still difficult to determine how much of the below-normal seasonality in September was due exclusively to the supply chain correction, it appears the industry is making rapid progress in rebalancing inventory and backlog during a period of decelerating growth.

Similar to EM, TS experienced a more than normal seasonal revenue decline in the September quarter. Reported revenue increased 1.9% year-over-year to $2.61 billion. And pro forma revenue grew 6.3% from the prior year quarter in constant currency. Asia continued to lead, with pro forma year-over-year revenue growth of 35.6%. While our largest region, the Americas, was up 13.3%, while EMEA was down 12.5% in constant currency.

From a product category perspective, software grew over 40% from the prior year quarter, while hardware was up over 30%, led by industry standard servers and storage. Gross profit margin improved 75 basis points sequentially and 37 basis points year-over-year, with all three regions contributing to the improvement. Somewhat benefited by the transfer of the Latin American computing components business to EM.

Despite the top line challenge, TS delivered improvements in operating income margins and returns, both sequentially and year-over-year. Operating income dollars increased 14.7% year-over-year to $65 million. And operating income margin improved 28 basis points, with all three regions contributing. In the Americas region, operating income margin improved 37 basis points year-over-year. And return on working capital remains comfortably above our long-range target. TS Asia's gross profit margin improved 66 basis points year-over-year, while operating income margin increased 60 basis points from the prior year quarter.

In EMEA, which has been dealing with a weak demand environment for multiple quarters now, the focus on profitability was evident this quarter, as gross profit margin increased significantly, both sequentially and year-over-year, despite the declines in revenue. This improvement, along with our continued expense efficiencies, drove operating income up 36% year-over-year, as operating income margin expanded by 35 basis points. As a result of the improved profitability at TS, return on working capital increased 364 basis points year-over-year, and 231 basis points sequentially. While we still have a gap from our long-term profitability goals in portions of the TS portfolio, these improvements demonstrate the potential for increased profitability as we continue to apply our portfolio management discipline across the business and leverage the investments we have made in the higher-growth markets.

Now, I would like to turn the commentary over to Ray Sadowski to provide more color on the progression of our share repurchase program and shareholder value creation. Ray?

Thank you, Rick, and hello, everyone. As we stated in our earnings release, we used $204 million of cash for operations this quarter, which was more than we expected. As our business slowed, we in turn reacted quickly to reduce the purchases on our suppliers, which pushed working capital higher as accounts payable declined significantly. As we know from previous cycles, lower sales and shorter product lead times ultimately result in lower working capital requirements and our cash flow should improve noticeably. Although we used cash from operations this quarter, on a trailing 12-month basis, cash from operations remained positive at $186 million.

As we announced in August, Avnet's board of directors approved a $500 million share repurchase program. During the quarter, we repurchased 3.45 million shares for an aggregate cost of $90.9 million, $81.9 million of which was settled during the quarter. We mentioned on our last quarterly earnings call that we would repurchase shares more aggressively, as our stock price approached book value. Consequently, with a market value range during the quarter of roughly $24 to $28 per share, and a book value of approximately $26 per share, we took the opportunity to make a sound investment in our Company. From August 15 when the program was made effective, through the first three weeks of October, we have repurchased about 5 million shares. It should be noted that the impact on average shares outstanding used to calculate earnings per share for the first quarter was relatively small due to the impact of daily averaging. However, it will more positively impact our EPS calculation next quarter. Going forward, we will continue to execute on a share buyback program, as long as it remains a good investment.

For the past several quarters, we have consistently been delivering return on capital within our target range and generating economic profits. As Rick mentioned earlier, this quarter we fell below our target range of 14% to 16% for the first time in seven quarters. However, at 12.3%, we are generating returns above pre-recession levels and above our weighted average cost of capital. We tend to see a drop in performance in our first fiscal quarter, as revenue declined in the weaker summer quarter, following our June year end, which is generally one of the highest performing quarters. While we believe that this cycle is primarily driven by inventory customer backlog adjustments, there are still macro uncertainties about global GDP going forward that could impact our business. Nevertheless, we have navigated through various market cycles before and are confident that our board market exposure and portfolio management discipline will allow us to outperform on a relative basis. With both a strong balance sheet and liquidity position, we have the ability to continue our focus on investments that will drive long-term shareholder value creation.

Looking forward to Avnet's second quarter fiscal 2012, we expect EM sales to be in the range of $3.45 billion to $3.75 billion, and sales for TS to be between $3 billion and $3.4 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.45 billion and $7.15 billion. Based upon net revenue forecast, we expect second quarter fiscal 2012 earnings to be in a range of $1.01 to $1.09 per share. The above guidance does not include any potential restructuring charges or any charges related to acquisition and post closing integrations. The guidance assumes 150.6 million average diluted shares outstanding used to determine earnings per share. And an effective tax rate in the range of 29% to 31%. In addition, the above guidance assumes that the average Euro to US dollar currency exchange rate for the second quarter of fiscal 2012 is 1.39 to 1. This compares with an average exchange rate of 1.36 to 1 in the prior year second quarter, and 1.41 to 1 in the first quarter of fiscal year 2011.

With that, let's open the lines for questions. Operator?

(Operator Instructions) Shawn Harrison with Longbow Research.

I wanted to first just dig in on TS EMEA in terms of the demand environment looking forward, given how poor it is right now. Then also some of the cost cuts that were announced last quarter, whether you're looking for additional cost reduction actions as you move through the end of the year?

Shawn, this is Rick. And I'll ask Phil to jump in, as well. As we've talked about on previous calls, the situation regarding the overall IT spend and growth for TS in EMEA has been a pretty rough patch. It continued obviously through September quarter. And on the overall cost issue, we did mention some actions we had taken there. But on an overall basis managing through costs and managing our portfolio, making changes to keep in line with business, that's standard course of business for us, something we work through all cycles and at all particular times. Let me turn it over to Phil and add some more color, specifically on EMEA.

Yes, thanks. Thanks, Shawn. I'll pick up where Rick left off. We're constantly looking at the cost structure in all of our regions, frankly, as we move forward to adjust the costs and while we're continuing the line for investments, as well. In EMEA, we're continuing to do that. On the market softness, yes, the market overall as a broad term, EMEA, certainly a bit softer still.

However, at the same time, also touch on the guides moving forward, we've also committed to deselect revenue as well strategically. So in some cases, we've actually made decisions where if it's not revenue that's going to add value or hit the hurdle rates that we have internally, and we can't not make it better, we will deselect that revenue. And I'll give the team credit in Europe. Some of the additional softness was inflicted by our own VBM principles around deselecting revenue. But we are cautious moving forward. We think we're on the right track. We know we're on the right track. A little bit of market cooperation would help additionally, but that's the story right now for Europe.

And then just as a follow-up to that and then a separate follow-up. Maybe if you can talk about the impact of Thailand on that business. And then also, the other question I had was, with the accounts payables declining, but inventory was up, typically I thought the payable in inventory is somewhat related. Maybe if I could just get a little bit more information on that and the expectation for inventory in the December quarter.

Shawn, let me talk about Thailand and HD business a little bit. And I'll ask Ray maybe to comment more on the payables inventory. So, first of all, just to remind everybody, our HDD business is really concentrated, for the Americas it's at EM, and for EMEA it's actually at TS. And in rough magnitude for the September quarter, the total HDD revenue for us globally was just somewhere below $200 million. We're staying very close to the developments with all of our key suppliers there, so we have relationships with Seagate, WD and Hitachi. We're keeping an eye on the developments overall, try to make sure we stay close to the expectations. In the short-term here, we don't expect any material impact on our overall business. And in the very short-term, any impacts from a units or shortage point of view, seems to be somewhat offset by the fact that we've got rising ASPs. And particularly for those that are buying on the spot market, some margin increase opportunity. So in balancing out the potential impact from any of the Thailand impact through the HDD business to us in this December quarter, we think there's very little impact on the horizon.

Ray, do you want to talk about the--

Sure. So relative to AP and cash flow, we curtailed placing orders during the quarter. And as a result of that, a lot of the accounts payable came due and we didn't get more built up, quite frankly, that would have offset that to some extent. But as we move forward, if you look at it from a cash flow perspective, we would look in Q2 to be cash flow positive. And we would also expect that inventory would decline. And as you know, inventory, primarily a factor within EM more so than within the TS organization. And just very roughly speaking, we would think that inventory would decline in a range similar to what you're seeing the sales level declining sequentially. So just to give you a rough idea of what we would expect inventory to decline going forward into the December quarter.

Amitabh Passi from UBS.

Rick, or anyone else, any way you can quantify what the operating margin impact was to your EM in the September quarter, given the whole move of the line of computing business into that segment?

Yes, so Amitabh, if you try to isolate that out overall, roughly 10 to 20 basis points would be a good number.

And then if I look at it on a year-over-year basis, the 30 bits decline, should I assume that on a year-over-year basis as we move forward that you'll probably continue to see some year-over-year downward pressure on margins -- IE, in the 20 to 30-basis points range?

Due to the transfer?

Yes.

Or in general?

Are you talking about in general due to being below seasonal?

Mainly due to the transfer. I'm just saying on a year-over-year basis, EM margins were down 30 basis points. Can we assume that delta persists over the next two to three quarters on a year-over-year basis?

You can assume that, but I think it's a combination of factors, which may include Latin America.

Just as my follow-up, for Harley. Harley, you talked about booking strength improving in the first three weeks of October. Are we now back above 1 on a book to bill basis? Then can you just give us any sense of how bookings, lead times and cancellations trended throughout the quarter?

Lead times continue to be normal to low, so really hasn't been any change in that. ASP's fairly stable. So not a big story in either one of those through the September quarter. Relative to the comment, the opening comments around booking activities, we have currently seen what I would call an improving environment in all regions. I, again, would caution, as you just said. It's three weeks of data. But we have seen an improving environment and what encourages us, we have seen that phenomena in each region over the last three weeks or so.

Scott Craig from Bank of America.

This is probably a question for Phil. But when you look at the TS business in Europe, Phil, when I look at Arrow's performance versus yours, there is quite a gap and you mentioned deselecting as being, deflecting some revenues as being part of the reason. But can you maybe try and break that out a little more and why we're seeing such a wide discrepancy in year-over-year pro forma performance with you guys and Arrow So maybe how much of the decline is deselecting versus the broader general market? And then I have a follow-up, too.

Scott, this is Rick. I just want to jump in. When you talk about the pro forma comparison, are you talking about op margin?

Sorry, revenues.

Scott, it's Phil, thanks. I don't have that insight into our competitors' business by country and by product line. If you look at the portfolio, there's certainly some portfolio in product lines that they have that we don't. That certainly drives some of the growth. And there are some reasons that we're not. So it's really tough to look at an apples to apples comparison. And we also have the impact of some of the deselection in the area -- most notably within HDD. Nothing to do with Thailand, but in HDD and the processor space, where we saw, frankly, the biggest commodity, if you will, decline. And to my knowledge, they don't play in that area. So it's really tough. We are really focused, I can tell you, in Europe, frankly, on driving the op margin to a greater rate. And we're going to continue to be focused on that.

And then maybe a quick follow-up here for Rick. Rick, on the M&A side of the environment, are we seeing any changes with people's expectations as far as valuations go or anything like that? I know the market's been rebounding here for a few weeks and I don't want to hold you to a couple weeks of stock market performance on what's happening on the M&A front. But maybe you can provide some flavor around that. I would appreciate it. Thanks.

Yes, so I think we probably get this question just about every quarter on the call. I would confirm, we remain active with an active pipeline, for looking at opportunities across geographies, white space and operating groups. And I would tell you that despite all the changes in the last 90 days, there has not been any major shift regarding either accelerating or decelerating the conversations at this point. The estimates or the expectations on valuations tend to be fairly constant through ups and downs. And of course, as you know, we apply very strict guidelines, which include an analysis of the expected returns to our hurdle rate out in the one, two, and three-year timeframes. There has not been a major shift regarding any of the targets, regarding valuations, either accelerating or decelerating any of the activity.

Ananda Baruah from Brean Murray.

Probably for Rick and for Ray. What is the best way to think about OpEx investment trends over the next few quarters? Ray, I believe you mentioned that always looking for ways to get more efficient and things like that. But given the macro is slowing, given the demand is slowing, at least a little bit in the near-term here, and you still have programs that you're investing in, can you give us some sense of how you think about your framework for investing in OpEx as we go forward, assuming that the environment stays a little softer for the next few quarters? Thanks.

Ananda, I'll take a stab, maybe let Ray add on a few things. So when it comes to funding growth in continued investments and our opportunities, the way we think about it here, we talk a lot about drop-through, and you hear us talk about that quite a bit. In an up environment, we talk about performing businesses, we expect a 50% drop-through, et cetera. So in a more normalized, or shall we say a more consistently upward trajectory environment, we utilize drop-through quite a bit. But in all environments, up, down or sideways, we also tap into productivity gains and repurposing as sources of funding to keep our profitable growth strategies going.

And when it comes to an overall impact from an expense point of view for Avnet, keep in mind that we really do manage a portfolio of businesses. So very often, we will have expense impacts that maybe at the aggregate level, or very small digits, in single-digit percentages types of impacts. But what's going on in particular parts of the portfolio in Europe or Latin America or Asia, et cetera, these are very specifically defined and determined based on driving our overall portfolio goals across the globe. So when we think about investing for growth here, it's not always just drop-through, although that's a popular topic. Sourcing it from productivity gains and repurposing is a very important part of the equation. I don't know, Ray, if you want to add anything?

The only thing I would add, Ananda, is we are a services company at the end of the day. And therefore the way we manage our expenses, not only from productivity, as Rick just mentioned, but also what we need to do to service our customers overall. And as you move forward, we're not looking to make big investments from an expense perspective in this uncertain environment. But at the same time, we don't want to be overly Draconian in an environment that's just slowing to a relatively mild degree, all things considered. And so we're watching things very cautiously. And as we've done in the past, we'll manage expenses appropriately based upon what's happening in an environment. And so in the current environment, it's not growing expenses. It's more moderating expenses, watching them closely, and then selectively making adjustments that are necessary in those areas of the business that are underperforming.

And just a follow-up on the EMEA line card exercise. Is this just part of an ongoing scrubbing of the line card that you're doing, or is this a little bit of incremental broader initiative that you've undertaken? And how far through it do you think you are?

I assume that's for me, Technology Solutions. Part of it's pruning of the line card, which we constantly do. Both groups. I don't want to speak for Harley. But we're always evaluating our line card for not only technology and solutions, but for the lines that align well with us from a value standpoint. And it's also by customer, frankly. So it may be by line or by contract with customer and into a country. So it's a little bit more complex than just the line card. So the answer -- Yes, we're always evaluating the line card. We're also going to evaluate the business relationships we have by customer, as well.

And Phil, I might add that very often when we speak about revenue deselection, we're actually talking about specific customer engagements, that very often there are profitable parts of certain engagements with suppliers that are profitable, some segments that are more volume or less oriented to our value proposition. So very often with revenue deselection, it's not just about line card pluses or minuses. It actually is specific customer engagements.

So with what happened this quarter, it sounds like you guys are saying it was a bit of the routine process, but it just happened to manifest itself in such a way that it was felt a little bit more this quarter?

We've been clear that we have higher expectations for the performance for TS EMEA. And we are pleased that we're able to actually talk about some tangible progress there. And the team is really working hard and very focused on we believe the right goals for the long-term.

Sherri Scribner from Deutsche Bank.

I wanted to ask about what you're seeing in the TS business as we move into the fourth quarter. I think your competitor talked about expecting a budget flush. And you are guiding for generally normal seasonality in that segment. But it looks like revenue is down year-over-year. So wanted to see what you're seeing in that segment of the group.

Yes, Sherri, I'll ask Phil to make a comment, as well. And, by the way, there's a reminder that the TS business is typically very much a quarter to quarter driven business. And we do have some insight into some indicators as the VARs are working their deals, regarding quotations, proposals, configurations, et cetera, that often give us some headlights into what we're seeing and expecting for the quarter. But Phil, anything you want to add there?

And we don't typically give regional guidance, but certainly we'll give you a bit of color with regards to the question. So, in the Americas, including Latin America, we continue to see, frankly, bright spots. It's been very positive, it's been very consistent. The rich point on the VAR base and the pipeline, it looks solid going into this quarter. So we feel good with the guidance, very good with the guidance within the Americas. As well with Asia-Pacific. Asia-Pac has continued to show growth, which is positive, and looks that way going into the December quarter.

If there's a little bit of yellow light that we just talked about, that might pull our guidance down a little bit more to mid point or just a couple points less than mid point, would be Europe. Again, that's as we see it today. So we're overall pretty confident about the quarter. We're confident with the guidance. We may be a little bit more cautious than others, but that's just how we're looking at the business, given what we see today. And understanding what we know about what's happening in our business and specifically in Europe.

And Sherri, I would add, I think you mentioned your quick calculations reflected a year-on-year flat. And if you take a look, on a pro forma basis, most notably the process business was part of TS last year. And then the Latin American transfer business that we've moved to EM. We actually believe it's more of a mid single-digit year-on-year growth for TS at the midpoint of the guidance.

And then I had a question about your expectations for any changes to your business in terms of head count reductions. We've seen slowish growth here. It sounds like EMEA is somewhat soft. Do you have any plans to reduce head count or make changes to your employee base?

So, Sherri, this is Rick again. I think, as Ray alluded to earlier, at the end of the day, if we have major expense issues to address, with 70% of our SG&A in people, it's going to be impossible to not have an impact. However, there are various steps, and I think we've talked about these on the previous calls, that we are taking to be able to manage the discretionary expense. And then the differences between having an expense freeze versus a head count freeze versus a hiring freeze. Hiring freeze, for example, a little more dramatic because then you typically use attrition to be able to generate some savings in the shorter term.

So depending on the performance of the businesses in the portfolio, where they are at in relation to the long-term goals and where they are at, by the way, based on recent developments in their marketplaces, various elements of the portfolio are implementing various responses to the reaction to the market conditions. So there isn't a Company-wide or a broad Avnet base, we've got to do this. What we're doing is working through the portfolio and where we have the gaps, we're making sure they use all the levers and tools available to respond.

Okay, but it doesn't sound like there's anything that's so bad that you would expect to have a significant headcount reduction at this point?

That's the way we see it right now.

Craig Hettenbach from Goldman Sachs.

Rick, can you just talk us through just your customer interactions and their tone as you went through the quarter? How a change in any particular products or segments that stand out in terms of ways--

Yes, Craig, I'll also let Harley and Phil chime in along the way. We talked about some of the product and segment highlights, particularly I think in the TS sector. Won't repeat those right now. We talked on the August call, I think, about a cautious tone and environment. And I would tell you from my perspective, and the opportunity I did have during the quarter to actually talk to some customers directly, I would say that that tone continued through the September quarter. Nothing notable on a shift one way or the other. And, by the way, the fact that we were still coming in here now on the September quarter, with the revenue within the guidance and EPS just within the guidance that we laid out, there were no new developments that brought any particular concerns, or for that matter positive changes to the type of outlook that we had been portraying. I don't know if, Harley, Phil, you guys want to speak any more detail around the customer interface, reactions, or highlights?

Yes, I'll answer that Rick. We touched on it a little bit earlier. The overall bar base, customer base we're interacting with are pretty optimistic about the future. And were through the September quarter. We're seeing good growth in government, frankly. Financial markets are still going well and healthcare of course, our HealthPath and things we're driving in that regard around that vertical. From a technology issue, as mentioned, we highlighted that. Storage. The networking security continues to grow and is going to continue to be a bright spot of opportunity from a TS standpoint. That's the high level coverage anyway.

Harley, on EM?

Rick, I would agree with your opening comments around a cautious tone from our customer base. It's difficult in this environment not to contrast it to the last downturn we shifted through, or the last change in environment of any significance. And what I think about how it feels today and where our data is telling us in contrast to previous, I think the biggest difference for me, Rick, to maybe reinforcing your comments around caution, is we are not spending a lot of time discussing canceling backlog, taking back parts, swapping out inventory for other inventory. And that has been, or that was a reality in the last significant change we had in the market. So for us, that signals to us, really reinforcing your comment, that our customers continue -- maybe similar to Phil's comment about VARs -- continue to feel positive about their position in the market. But clearly, they are acting relative to management of their working capital in a very cautious and measured way.

And just as my follow-up for Harley, you mentioned that bookings pick up, and components, in October. Did you state the book to bill for that period? And then also if you can give any color around what the pricing environment you're seeing in the components business, given that you are taking inventory down and demand has slowed a bit.

A positive note at this point is that we have not seen significant pressure on ASPs in the market. And I would theorize that that may be due to the fact that in this particular environment, a higher portion of the inventory available for sale today, or a lower portion might be a better way to say it, is in finished goods, with the higher portion being in unfinished dye, et cetera. So we think that may be impacting, positively impacting not recurring what we've seen before relative to pricing pressures. So far, there has not been significant ASP impact. Some. I wouldn't mislead you, there's been some, but not a dramatic amount. And the other part of your question?

Book to bill.

Yes, as I mentioned before, clearly we see improvement across our multiple regions, at least through the last three weeks or so. And I would say, no, I didn't mention the number only because I'm cautious to make a strong statement on three weeks of data. But since you asked, it is in the neighborhood of parity.

William Stein.

Harley, maybe in your sector, in your business, can you talk about strength and weakness by end market? And then in the TS segment, TS business, maybe if we could hear a little bit about the weakness in EMEA. Is it different by product or product category, or is this more of a caution around enterprise spending? Thank you.

Okay. Hi, Will. As we often say, EM's business is so broad and our customer base is so broad, that we don't typically monitor by end segment. One that does jump out to me that produced very strong results actually in the September quarter was the growing business we're seeing around alternative energy customers, all around the world actually. So that one actually posted a fairly strong quarter. One interesting data point that may surprise you actually is we saw a relatively good quarter, at least relatively from the perspective of our overall business, in our global contract manufacturing space. So they turned in a relatively strong quarter. Geographically, I would say, similar to what I believe Rick mentioned in his opening remarks, I would call Asia and America as slightly less than what we would expect from a seasonality perspective. And maybe the greatest weakness from a geographic standpoint at this point would continue to be in Europe.

Will, this is Phil. Let me just give you a little color on the TS Europe, you asked from technology, and maybe geographic. Overall -- a general statement. Europe, you really need to break out by region within Europe and then by country within Europe. So it might be a very different story on what you see happening in Eastern Europe than what you see in Southern Europe, as an example, or what you might see in the Middle East. So it really does come down to different pockets or regions within Europe. And, we did see some weakness in Southern Europe, and we did see some weakness in UK. Other parts of Europe look pretty good. So you really need to look at the whole portfolio.

Sorry to interrupt, but I meant more by product category. Are you seeing, for example, servers or storage or software, any of those categories, particularly, let's say, driving an outside portion of the weakness you saw in TS EMEA?

Actually that was my next comment. As we look year-on-year, in servers we're up close to 50%. On storage, was in the 50%-plus range. So that's going to be the second part of the question you had. From an enterprise, from a commodity or technology standpoint, we're not seeing an all-out drop or reduction there. So it's actually not too far off from what we see as a percentage, anyway, for the Americas, or Asia for that matter.

Brian Alexander from Raymond James.

Harley, how much credence do you place in the improved book to bill? You've said a few times it's only three weeks of data. Couldn't it just be that we're comparing to a weak September billings period? Or is there something else you could point to in the bookings patterns themselves that make you more confident that we're at an inflection point?

Brian, first, I'm not sure I used the term inflection point. I was cautious a couple times in three weeks, because three weeks is three weeks. But, no, I don't believe it is reflective of a weak compare. And the reason I say that is, it would be very atypical, and it would be unusual to see it across all regions. So I do think there is a stabilizing environment. Our business, again, is so broad that we do have that luxury of looking at thousands of customers across four major regions. And it just would be entirely coincidental to see it across all regions.

Are the bookings moving out further in time?

As a general comment, they did prior to this period. But, no, that's not the phenomena that's causing this to happen, no.

And then a follow-up on the drive, it doesn't sound like you're adjusting your outlook, Rick, for the disk drive situation in Thailand. Could you maybe talk about the expected allocation percentage you would receive in December and maybe the magnitude of price increases that you would expect?

Yes, so again, Brian, it's a very fluid, very dynamic situation overall. We do believe there could be something in the neighborhood of -- as I told you, the overall business, just less than, say, $200 million for the quarter. Even if we were going to be down in the neighborhood of say 20% to 30% on an apples to apples basis, we've still got ASPs rising and potentially profits going up on this opportunistic, more of the spot buying business that's been part of our equation. Because our team did do some strategic buying towards the end of the quarter prior to all this news breaking out that's put us in a good position. So, net-net, that's why we believe there's really not a material impact to project. And we'll keep you posted as we continue to learn, as we all continue to learn, what the ripple effects from this latest disaster are.

Matt Sheerin from Stifel Nicolaus.

Just to ask a question on the inventory. I'm just curious why the EM inventory was up sequentially when you had guided the revenue to be at the low end. I know it turned out to be worse than that. Just trying to figure out at what point did you start pulling back orders to the suppliers? And how far along are you now in terms of the inventory, three weeks or so into the quarter?

Hi, Matt. This is Harley. We started adjusting our pipelines, our inventory quantities, as we saw the book to bill turn negative right at the end of June. So if you think of that behavior occurring through the July-August timeframe, that would tell you why I think Ray earlier commented that we have a strong expectation that inventory will come down in the December quarter because of that behavior that occurred in that July-August timeframe.

So is there just backlog coming in? Is that why?

Absolutely. Remember, it is never our strategy or our culture to treat inventory in an abrupt manner. Inventory is our life blood. It's what we sell. And unless we believe we are in a strong recessionary environment, we would manage pipelines, as opposed to shutting back doors. So we adjusted those pipelines. That does not take effect immediately. The inventory increase that we saw really is more primarily resultant or driven by the fact that revenues came in at the lower end of what we expected.

And is that skewed more towards actives or passives, or is it across the board?

Typically in this kind of environment, Matt, non-semiconductors, passive electromechanical fluctuate at a lower rate than semiconductors do. So therefore, the behavior modification in this kind of environment would be stronger on the semiconductor side.

Is that just because of the dollar value basically?

I think it's the nature of how customers typically manage that product. Oddly, it's always been that way.

And then just a question, again to you, Harley, regarding the semiconductor business. TI's recent acquisition of National, I know had some changes in their distribution channel. They had a big distributor National did, that's no longer selling those products. Is that a benefit for you and have you seen any share gains there?

It is a significant benefit for us and we're very excited about the future. Those share gains which will occur would not have happened this quickly. Keep in mind, there's inventory in the pipeline. The particular distributor you're referring to typically carries a strong backlog of inventory. So I would expect you'll start to see positive benefits of that move probably the latter part of this quarter.

Jim Suva from CitiGroup.

The question I have is, maybe my memory or age is getting a little slow or old, but I remember, I think we're coming up now on close to a year of when you started doing work for Cisco. And maybe you can update us on the progress, the magnitude? And importantly, is that above or below corporate average profitability? Thank you.

Yes, Jim, this is Phil. How are you doing? Actually, it will be two years this December at our analyst day in New York that we found out, got the press release from Cisco that we were awarded that RFI here in North America. And I can say, at that conference, we estimated that within two to three years, the revenues from Cisco would be between $200 million and $300 million run rate. And I'm pleased to say we're on that track and the relationship is going well and it's meeting the hurdle rates for Avnet.

And then just a quick follow-up on Oracle, as they have been going through some changes, both taking work away from the North America region for both distributors. Now we're hearing that they may be giving some work back in Europe, or something. Can you just update us on that relationship?

Yes, I think it's, like anything, the pendulums tend to swing. The last year, 18 months prior, following the acquisition of Sun, make no mistake, it was a challenged business relationship. And today, it's certainly markedly improving. They are rationalizing their value distribution channel around the world. And we are starting to see a better performance with Oracle in all regions of the world, including Europe. So the trend and compares year on year will certainly look better as we get on track with Oracle. And they implement and execute to their plans for distribution of the channel as well that they've put in place.

And Phil, they put those stakes in the ground concurrent with their new fiscal year, which was June 1, right?

Yes, that's right. It was talked about, discussed, et cetera, and they are really just several months into play.

Brendan Furlong of Miller Tabak.

Question for you on the gross margin. Apologize if I missed this. The swing between EM and TS gross margins in the quarter. So let's say the EM gross margin's down 107 bips, I believe you said. How much of that is related to the shift in revenues from TS in and out of EM?

So Brendan, I'll let Harley comment, as well. Generally, I think there were three influences contributing to that 107. There was the mix shift of less western influence overall. And then there was the Latin American transfer that we talked about. And then there was also, in my opinion, it was a great fourth quarter on behalf of the EM team overall. There's some great performances and numbers in there that contributed. Harley, anything else?

That's it.

That was really the story.

You can't quantify what the mix shift--

I think we would prefer not to quantify.

I thought I would just keep on asking until you said that. So then the other question I have for you is the TS margins we saw in the September quarter, should we see TS margins improve like we normally see in the December quarter?

By margins, are you talking about operating again?

Gross, I'm sorry.

The plan right now is for us to, from an operating margin standpoint, given the current guidance, that we'll get the leverage that we typically get in the quarter in December, from an operating margin standpoint.

Yes, Brendan, what I would add is historically -- put the historian hat on from TS point of view -- there wouldn't be a reason to expect a margin expansion. However, as Phil has talked about, some of the portfolio improvement process will include some deselection of revenues, et cetera. You may assume in many cases we're deselecting probably lower margin business. That would have a beneficial effect. But that's just part of the portfolio management process, not really due to a seasonal expectation for December.

And then my last question is on inventory again. So if you take inventories down, call it 77%, in December quarter, you're getting your days back to below historic levels, call it 37, 38 days. Do you think that's a bottom, and your inventory's in good shape heading into the March quarter, it's not going to go down any further?

Brendan, the real question there is can we expect normal seasonality for the March quarter. Something we're not calling at this particular point. But yes, if we had normal seasonality coming out of it and we can keep inventory in line with the sales for December quarter, then we ought to be able to hold inventory turns relatively flat here, and then maybe get a little of a boost heading into the March quarter.

Steven Fox from Cross Research.

Two quick questions. You've covered a lot of good detail on the call. Given what little we know about the economy going forward. But distribution within the channel, are you seeing any changes in terms of competitive environment? Not necessarily the whole market, but within the channel, maybe smaller distributors getting more price competitive? And then secondly, Ray, just to be clear, on working capital flows, the rest of the year, are you saying that you expect working capital, if revenues are in similar ranges we're in right now, to be positive for the rest of the year, or it still depends?

Are you talking working capital or cash flow?

Working capital, cash flow. So the cash generated from working capital is a negative and you're saying it's going to get better. But are you saying that for the next three quarters, rest of the year, it's going to be a positive?

I wouldn't go as far as the next three quarters because a lot depends upon what happens with the environment. We'll go as far as, as Rick just said, we're not forecasting what's going to happen in March yet. But if I look at the December quarter, certainly it will be a positive cash flow generation overall, with working capital coming down a little bit.

And Steve, back to the question on the distribution developments, obviously doing business in 70 countries, there's quite a different set of overall competitors and different competitive marketplaces. I'm not sure exactly how to answer the question. But there's not been any major new entrants or developments that hit our radar that caused any particular change in strategy or response on our part, at this particular point. I don't know if Harley or Phil you want to add anything else?

Yes, I think your comment, your question was around are we seeing some competitive behavior from small distributors.

Yes, because you guys are seeing negative cash flows from working capital. I would imagine there's other guys that are as well. And maybe you're seeing some pricing pressure.

Yes, I don't think so. I haven't seen much again. My theory, and again, it's my theory, as I said before, is those pricing pressures are often more resultant from having inventory you got to get rid of than trying to steal. We typically -- not to sound arrogant -- we typically don't lose a lot of business to a small competitor on price. So that's not behavior we're seeing a lot of.

Ladies and gentlemen, we have come to the end of our Q&A session. I would like to hand the call back over to management for closing comments.

Thank you for participating on 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 reconciliations, can be accessed in downloadable PDF format at our website under the quarterly results section. Thank you.

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