安富利 (AVT) 2012 Q2 法說會逐字稿

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

Good afternoon, and welcome to Avnet's Second Quarter Fiscal 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 second quarter fiscal year 2012, please note that in the accompanying presentation and slides, we have excluded restructuring, integration, and other charges from both the current- and prior-year periods.

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 first quarter of fiscal 2012. 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 base financial statements into US dollars. Finally, when addressing working capital, return on capital employed, and return on working capital, the definitions are included in the non-GAAP section of our 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 is 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 second quarter fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Executive Officer of Avnet, will review some other financial highlights, a return on capital performance, and provide third quarter fiscal 2012 guidance. At the conclusion of Ray's remarks, a 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 second quarter fiscal 2012 business highlights.

Thank you, Vince, and good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet. In Q2, the challenging macro environment and continued component supply chain inventory correction resulted in a second consecutive quarter of below-normal seasonal revenue growth. Despite these top-line challenges, the Avnet team did a very good job driving EPS beyond our expectations to a second quarter record and generating strong cash flow in the quarter.

Enterprise revenue of $6.7 billion increased 4% sequentially, while pro forma revenue was roughly flat with the year-ago quarter in constant dollars for the second consecutive quarter. Pro forma revenue was up 5% year-over-year in our Americas region, while EMEA remains the weakest region, with two consecutive quarters of negative year-over-year organic growth in constant dollars.

Gross profit margin, which typically declines in the December quarter due to the higher mix of TS business, was flat sequentially at the enterprise level, as both groups realized a sequential improvement despite the softer revenue environment. These gross profit margin improvements, when combined with our ongoing expense management initiatives, drove significant operating leverage in the business, as our adjusted operating income grew 4.6 times faster than revenue sequentially.

Also on a sequential basis, adjusted operating income increased 19% to $265 million, and adjusted operating income margin increased 49 basis points to 4%. This sequential increase was primarily due to a meaningful improvement in profitability in all three regions at TS, a solid performance at EM, and a temporary benefit related to higher prices for hard disk drives due to supply constraints in the market. On a year-over-year basis, adjusted operating income margin increased 17 basis points, even though sales were down slightly. Adjusted EPS increased $0.08 from the year-ago quarter to $1.15, due primarily to this improved profitability and a lower share count as a result of our stock buy-back program.

In addition to the strong performance on the income statement, the team did a very good job managing working capital through a period of continuing supply chain inventory adjustments and the associated slower growth. In the December quarter, working capital declined $361 million sequentially, or nearly 9%, with over 80% of this reduction occurring at our EM business. Higher income and vigilant working capital management combined to generate $450 million in cash from operations for the quarter, and $715 million for the trailing 12 months. Return on capital employed increased 210 basis points sequentially to 14.3%, and is back within our target range of 14% to 16%.

Even though we have businesses within our portfolio that are still progressing toward their long-term financial goals, our performance this quarter is indicative of the positive impact that our VBM discipline continues to have on our business. Despite the uncertainty that particular elements of the current macroeconomic environment creates, we remain committed to driving operating improvements while investing in markets and opportunities to accelerate profitable growth and shareholder value creation.

Now, let's turn to our operating groups. In the December quarter, the electronic component supply chain inventory correction resulted in a second consecutive quarter of below-seasonal growth for electronics marketing. As a result, pro forma revenue declined 6% sequentially, as compared with a typical range of flat to down 3%. While EMEA declined double digits for the second quarter in a row, Asia declined 6% and the Americas region was up 1%. Reported revenue of $3.6 billion, which was consistent with our expectations, increased 1% year-over-year, although the pro forma revenue was down 3.5%.

EM's gross profit margin declined 7 basis points year-over-year, but increased 30 basis points sequentially, primarily due to a temporary benefit in the Americas of an increase in pricing driven by supply constraints in the market for hard disk drives, and an improvement in our core business in our EMEA region. Increased gross profit margin, coupled with our ongoing expense management activities, resulted in operating income of $175 million, coming in above our expectations for the quarter. Operating income margin of 4.9% declined 30 basis points from the year-ago quarter, primarily due to a lower mix of business from our higher margin EMEA region. However, our Americas region improved both sequentially and year-over-year.

Turning to the balance sheet, EM reduced working capital 9% sequentially, with EMEA and Asia accounting for the majority of the decline. Roughly two-thirds was related to lower accounts receivable, while inventory declined 5% in reported dollars, and 4% after adjusting for acquisitions and currency. Working capital velocity remains below year-ago levels. However, we expect this important metric to improve as we resume growth over the next couple of quarters. Return on working capital declined 483 basis points from the year-ago quarter, primarily due to an increase in working capital and to a lesser extent, lower operating income margin.

As we mentioned on our last earnings call, we were encouraged by an improved booked-to-bill across all regions through the first three weeks of October. That trend continued as EM approached parity for the quarter at 0.97 to 1, up materially from our September quarter. It appears the supply chain inventory correction is nearing its end, consistent with the perspective we have held for the past two to three quarters. While the component supply chain inventory adjustment in the market has negatively impacted EM's results the past two quarters, I would like to highlight that on a trailing 12-month basis, operating income margin is at the high end of our target range, and ROSI is above our target.

To put this performance in a broader perspective, for calendar 2011, EM delivered economic profit dollars slightly higher than calendar 2010, a year that was characterized by strong double-digit growth as the V-shaped recovery in technology was in full swing. With a return to more seasonal growth expectations in the March quarter, we remain committed to growing organically faster than the markets we serve and translating that growth into higher economic profits and shareholder value creation.

As expected, TS experienced sequential growth towards the low end of normal seasonality for a December quarter, as our hardware revenue growth did not keep pace with the typical year-end budget cycle. Revenue increased 19% sequentially in reported dollars, and 21% in constant dollars versus normal seasonality of up 20% to 26%. Sequential growth was led by our EMEA region, with reported growth of 29% and 36% in constant dollars. Pro forma revenue grew 3% year-over-year, led by Asia, which grew 14%, with the Americas up 5.5%, while EMEA was down 5% in constant dollars.

From a product category perspective, industry-standard servers and software revenue grew over 35% from the prior year, while storage revenue was up over 20%. Gross profit margin improved 13 basis points sequentially and 60 basis points year-over-year, led once again by the EMEA region, which was up over 50 basis points sequentially, and 150 basis points year-over-year. Across all three regions, TS leveraged the year-end seasonality into an improved profitability, both sequentially and year-over-year, as operating income grew 4.4 times faster than revenue sequentially, to a record of $119 million.

Operating income margin improved 135 basis points sequentially to 3.8%, and was 56 basis points above the year-ago quarter, with all three regions delivering a meaningful improvement. In EMEA, our continuing focus on profitable growth, coupled with restructuring initiatives resulted in operating income tripling sequentially to an all-time record for the region and operating income margin increasing 236 basis points.

TS Asia also had a strong quarter, as improvements in gross profit margin and an increasing emphasis on returns drove operating income up over 100% from the year-ago quarter, and operating income margin was at its highest level in over three years. In the Americas region, operating income margin and return on capital employed remained well above our target levels, and we continue to see software and services grow as a percentage of our portfolio as we enhance the value of our solutions offerings. In Latin America, where we are building on recent investments, strong sequential revenue growth and expense leverage drove returns up both sequentially and year-over-year.

As a result of the improved profitability at TS, return on working capital increased 861 basis points year-over-year, and over 2,000 basis points sequentially. While all three regions contributed to this performance, I would like to highlight our international operations for the noteworthy progress they made this quarter toward their long-range planning targets.

The EMEA region, which has faced a challenging market while executing a major integration, significantly improved gross profit margin and grew economic profit dollars by 92% from the year-ago quarter. In Asia, where we have invested in value-creating acquisitions and strategic growth, strategic organic growth initiatives, our annualized revenue run rate is now approaching $1.75 billion, while operating income margin has improved year-over-year for five consecutive quarters.

As we continue to leverage our global scale and scope, and apply our value-based management discipline, we are confident TS can continue to make progress towards its long-range targets and grow economic profits across the entire portfolio. Now, I would like to turn the commentary over to Ray Sadowski to provide more color on the progression of our share re-purchase program and shareholder value creation. Ray?

Thank you, Rick, and hello, everyone. As Rick mentioned earlier, we generated $450 million of cash flow from operations this quarter, and $715 million on a trailing 12-month basis. We are putting this cash to good use and took advantage of an attractive stock valuation to re-purchase 4.6 million shares of our stock during the quarter, for an aggregate cost of about $135 million. With a booked value of approximately $26 per share, and a stock price which ranged from $25 to $32 during the quarter, we took the opportunity to make a sound investment in our Company.

Since the onset of the buy-back program in mid-August of 2011, through the end of the second quarter, we have re-purchased a total of 8.06 million shares at an aggregate cost of $226 million. We will continue to execute on the share buy-back program as long as it remains a good investment. However, our rate of investment could decline as the stock price increases.

In addition to the share buy-back program, we continue to invest in value-creating M&A. During the quarter, we announced four new acquisitions -- Pinnacle data systems, Nexicor Services, and Round2 Technologies are expanding Avnet's reverse logistics capabilities, while De2 SAS strengthened Avnet embedded in EMEA. Investments in value-creating M&A will continue to be a key component of our capital allocation strategy.

In Q1, due to the macroeconomic environment and supply chain inventory correction, we fell below our return on capital target range, following several quarters of consistently performing within that range. As Rick mentioned, this quarter we are right back within our target range of 14% to 16% as the quarter came in at 14.3%. In addition, we doubled economic profit dollars sequentially to over $56 million. As the current technology cycle continued to play out, the team did a very good job of adapting to the market conditions and adjusting our business model accordingly. With our commitment to our VBM principles, we remained focused on generating economic profits and performing to our long-term stated goals, as we manage through economic and industry cycles.

Looking forward to Avnet's third quarter of fiscal 2012, we expect EM sales to be in the range of $3.55 billion to $3.85 billion, and sales for TS to be between $2.4 billion and $2.7 billion. Therefore, Avnet's consolidated sales are forecasted to be between $5.95 billion and $6.55 billion. Based upon net revenue forecasts, we expect third quarter fiscal year 2012 earnings to be in the range of $0.94 to $1.02 per share. The above EPS guidance does not include any potential restructuring charges or any charges related to acquisitions and post-closing integrations. The guidance assumes a 148.1 million average diluted shares outstanding, used to determine EPS, 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 third quarter of fiscal 2012 is $1.3 to EUR1. This compares with an average exchange rate of $1.37 to EUR1 in the prior year third quarter, and $1.35 to EUR1 in the second quarter of fiscal 2012. Using the midpoint of third quarter guidance, our sales and EPS would have been roughly $70 million and $0.02 per share higher, respectively, if exchange rates had remained constant for the second quarter of fiscal 2012. With that, let's open the lines for Q&A. Operator?

(Operator Instructions)

Brendan Furlong, Miller Tabak.

Hi, good afternoon, everybody. Thanks for taking the call. Question on the TS in Europe, which came in pretty strongly in the quarter, and conversely, the US TS business seemed a lot weaker than I had expected. Can you walk through what was going on in TS there, be it lack of budget flush or what have you?

Yes, well Phil, if you want to jump in for regional color, maybe I'll have a couple comments at the end.

Yes, thanks, Brandon, appreciate the question. Yes we saw, starting with Europe -- you're talking at the revenue line at this point, I suppose -- that we saw a plus 36%, as we outlined. It was a good quarter for us in Europe. If we look at the historical, Europe typically does come in at the December quarter sequentially greater than the balance of the regions in the world, and it was a positive performance, and we believe we gained some share in the market as well.

In North America, actually a good performance in North America. I would say the close was not as strong as we thought, so slightly a little bit of a tougher December close, but still came in satisfactory to us, okay from a performance standpoint. Then in general, it wasn't overall significant. We did have some backlog that didn't get out. It was nominal in the grand scheme of things, but it certainly added to a little bit of the shortness that we came up with. But overall, North America, we're pleased with the performance and it's been very consistent and look into that in the future as well.

Brendan, this is Rick. I would just add that I think the sequential growth performance was enhanced by a particularly not-so-favorable September quarter for TS EMEA, and on a year-on-year basis, we still have growth in Asia on the Americas. As we pointed out in the script, even with that sequential growth, the year-on-year growth in Europe was still negative 5%.

Okay, great. I guess I'll switch it over to semis. A lot of the semiconductor companies reporting so far this earnings season are saying there's been kind of a bit of a snap-back or pull-in in orders in the last two weeks of the quarter. Wonder if you could maybe shed some light on that for us, too. Thanks.

Harley?

Hi, Brendan, this is Harley. Yes, we did see some relative strength in incoming orders towards the latter part of December. The good news is that activity and strength did continue -- has continued so far at least into January.

Okay. Thanks a lot.

Sean Harrison, Longbow Research.

Hi, everybody. First off, congratulations on the margins at TS this quarter. Kind of when looking into the March quarter and maybe applying I guess typical seasonality to the revenues and then the typical fall-through, it looks as if EBIT margins would still be above 3%. Am I correct in kind of using that assumption for the EBIT margins in the March quarter at TS?

I think that's a little stout, Sean. I think generally speaking, we might expect, say, something in the neighborhood of 100-basis-point decline sequentially there. If you take a note, look back to Q1, we're very focused on landing TS a little better shape than Q1.

September quarter.

September quarter.

Okay. Is it just solely volume, there's no incremental costs coming back on in that period?

No, that's correct.

Okay. Maybe as a follow-up to Brendan's question, when looking at booked-to-bills regionally coming into the new year, I guess what is above parity? What's still below parity? I'm guessing Europe is below parity, but any color you can provide on where booked-to-bills are right now would be helpful?

Hi Brendan, Harley. I assume you're talking components.

Yes, sorry, Harley.

Yes. At this point, we are above parity in America, Asia, and Japan, and at least so far in the quarter we're still below parity in Europe.

Okay. Does Europe have a long way to go, or are we getting close.

They've got some work to do.

Okay. Thanks so much.

Amitabh Passi, UBS Financial Services.

Thank you. I just wanted to clarify if there's a way to break down what the positive benefit was from the firmer HDD pricing in the December quarter, and what are you assuming for the March quarter? I also wanted to clarify whether you saw any benefit from stronger HDD pricing in the PS segment, because I believe your EMEA HDD business is in TS?

You're right, Amitabh, this is Rick. Let me jump in. This is sort of an enterprise-level question, because it does branch over EM and TS and multiple regions. In general, just a rough split, the majority of our HDD business is actually now part of EM in the Americas, but we do have a portion at TS EMEA. Think of it roughly as a two-thirds/one third type of split, if you look at the revenue side of things.

Now, I'm going to get to a number, but I want to provide some context as well. There's one way to look at this, which would be HDDs in isolation, and the volumes were down on units, but the ASPs were up. We also have impacts like what was the impact on TS system shipments at the end of the quarter because of HDD shortages? What associated components, maybe micro processors or boards or other embedded, or et cetera.

I only provided that context to let you know on the best information, the best internal analysis that we have been able to work through, we estimate that the EPS impact for December quarter was $0.05 to $0.07. Hopefully, part of the message there is that it was not the entire $0.10 over consensus or over our guidance. It was certainly a story of solid execution within our businesses, in addition to this temporary benefit from the HDD situation.

Rick, if I could just clarify, so for the March quarter, are you assuming any incremental benefit from firm HD pricing, or is anything embedded in the March quarter guidance?

Nothing really embedded in there, Amitabh. It is an extremely difficult and volatile environment. I think you guys are all watching like we are the updates from Seagate, WD, etc. It's very unclear on what's going on with the supply situation. Remember, we entered the September -- excuse me. we came out of September and entered the December quarter in a much better hands-on inventory situation. We're not depleted. We're still taking care of our top OEM customers along the way. But we're starting this quarter with less than we had. Therefore we're going to be a little more reliant on exactly what the new supply situation's going to be for the March quarter. As already stated, very volatile and dynamic.

Perhaps just as a follow-up for Ray. Maybe this is, I guess, quite subjective, Ray. I'm just curious, why aren't you being more aggressive in terms of buying back stock?

Well, our philosophy -- well, it's a question of how aggressive to be. We think we're being fairly aggressive, and the aggressiveness relates to what the valuation is in the marketplace. Obviously, that's tied to the stock price. So earlier in the quarter, as well as last quarter, we were very aggressive with stock prices, a little bit better than book value. But as a stock price moves up and gets to be at a -- I guess I'll say a different level of valuation, we're just scaling back a little bit. Overall, we believe we're being fairly aggressive in that we're almost midway through with the program, and we've only been at it for less than six months.

Thank you.

Scott Craig, Bank of America Merrill Lynch.

Thanks, good afternoon. Hey, can you guys go through on the TS side, obviously there was improvements. It sounded like in profitability in all regions, outside of perhaps the hard disk drive issue in Europe that helped profitability. Can Phil, maybe take us through some of the steps you're doing? Is it some basic blocking and tackling? Is it getting rid of unprofitable revenue, sort of along those lines? Then Ray, a question for you with regards to cash flow. How do we think about cash flow over the next couple of quarters? If the environment remains somewhat subdued like it appears it may, are we still going to be generating some pretty good cash flow numbers there? Thanks.

Phil, you want to good first?

Yes, I'll go first. Thanks Scott, appreciate it. As we noted, all regions participated in the increased margins and the increased contributions to the overall performance at TS, so very excited about that. More Europe-specific, as I mentioned in December at the analyst day, where really it's a combination of two or three different factors. One is -- and we say it all the time, but we're definitely applying our value principles. We're looking at all costs in the business constantly, and we'll continue to do that, by the way. So we still have work to do on an ongoing basis. But we definitely have reduced operating costs in Europe.

We have de-selected revenues, so while we've got some moderate help from the HDD, as Rick pointed out, the bulk of the improvement was outside of the HDD assistance. So as we got some help there, we continued to de-select non-profitable revenue. And we'll continue to look at investments in Europe as well. Where there's opportunities for organic or acquisition, acquisitive investments in Europe, where it could be incremental to our current performance, we'll continue to look at that. So it's really -- we're really working all the levers, just continue to drive the operational efficiency to really get the scale across Europe, which as we've spoken many times, can be a challenge. And we're really working towards that end.

Okay.

Scott, from a cash flow perspective, as you can tell, we had a very strong cash flow quarter, generating about $450 million from operations. As we go forward over the next couple quarters, obviously depending on growth rate, and also taking into account we have a fairly sizable working capital base, and so therefore it's difficult to pinpoint what our cash flow generation will be, and that's why we typically look at it on a rolling four-quarter basis.

However, having said that, our expectation right now for Q3 is that we will generate cash for the quarter, again absence some anomalies that could certainly happen. We don't think it's going to be at the level of the $450 million we had in the December quarter, but we still think it should be positive. Right now, the expectations for -- I'd say early expectations right now for the June quarter would be -- that would be the same depending upon what levels of growth we actually see in the marketplace overall.

Thank you.

Ananda Baruah, Brean Murray.

Hi, guys. Thanks for taking the question, and congrats on a solid quarter. Harley, just be interested in getting your thoughts on how we should expect the EM margins, I guess the dynamics, the force that will be working on the EM margins as we move over the next couple of quarters? Now that we're back to seemingly typical EM seasonality, but with Europe still below booked-to-bill of 1 and some work to go there. In the past when we've sort of gone through, and maybe this is more of a mini cycle, but when you've go through cycles, you've actually seen the margins go through the higher end of your targeted range?

Yes, hi, Ananda. The way I would think about it is, as you are aware, the March and June quarter are typically the quarters where our regional mix falls back to one with a higher ratio from the west and specifically in Europe. Traditionally, as Phil said about TS Europe in December, that is typically the case for us EM Europe in March.

So though it's coming off a lower base, as I'm sure you've calculated, we were in double-digit decline territory in the previous quarter, we are still expecting, when we say more traditional seasonality, we are still expecting some fairly attractive growth going into the March quarter, and the ratio will favor Europe. I mention that, because as you know, that has a fairly significant impact on our margin. Our expectation in March is that we will return into our target range. As one of you pointed out, we fell out of that in December for the first time in quite some time, but we believe we will be back in that range in the March quarter.

Got it, that's helpful. I guess, I know it's not you guidance, but if something were to cause you to, either in March or June, to go through the top end of that range, would it be purely demand-related, so if kind of current mix of business by region just was stronger, would that potentially --?

I like the idea. I'm not advocating, or I'm not projecting that. I think it is demand. The reality is, as I said with EMEA, and to a somewhat lesser degree, our core business in America, we still are in negative year-on-year territory. As that reverses, and as growth returns, that would be my objective to go back through the top. But I would not be thinking that way in the March quarter.

Got it. That's very helpful, thanks. Just one follow-up for Phil, if I could. Can you -- storage growth was 20% this quarter, I believe you commented, I think it's been north of 30% in prior quarters? Is that correct as a clarification? Just interested in also being reminded when you guys sort of anniversary, some of the new products at EMC begin to ship through the channels, That'd be helpful, thanks.

Yes, Ananda. Storage was in the 20-plus range this past quarter. Yes, might have been a little lighter than some previous quarters, but it's also has become, as I pointed out prior, is right now our largest technology, our largest commodity within the portfolio. As the base gets larger, the growth may slow a bit, but it's not -- we wouldn't call that slowing down. We think storage is still going to be and continue to be an opportunity for us, and one of our growth technologies moving forward. Don't see that slowing down. We're actually very pleased with our performance in storage and very pleased with our performance with the key suppliers within the storage portfolio.

On some of the new products that you're talking about, they're actually going well. I guess you're talking about EMC and some of the lower-end storage products that they've come out for the marketplace with. We're lined up well with the suppliers, and they are going through the channel, and it's going to be positive news for us moving forward.

Thanks. Is 20% a sustainable growth rate through 2012, calendar 2012?

Yes, tough to forecast that far out. We're going to certainly, we're going to certainly work to keep it there, for sure.

Yes, Ananda, it's Rick. I think as our premise has always been, let us know what the economic growth picture looks like, and we'll give you an insight into what's going on in IT.

I hear you. Fantastic, thanks, guys.

Sherri Scribner, Deutsche Bank.

Hi, thank you. I wanted to get a sense -- you did a good job on the SG&A this quarter, Ray. I just wanted to get a sense of where you think SG&A would be moving forward. Will we stay at these low levels, or are we going to see a tick up in SG&A?

Okay. Overall, we've taken some restructuring actions, as we've indicated, and the overall number is in the roughly $30 million range overall. A good piece of that is already out, but we still have some. It's all been executed for the most part, but during the quarter, so we haven't received the full benefit yet. I don't have the specific breakdown between the quarters, but we got a good chunk benefited, certainly, in the December quarter, and we expect the balance to be fully reflected in our results in the March and June quarter.

At this stage, we're not seeing expenses go up. They will go up in dollars. When you start seeing some of the acquisitions that we've announced come online obviously, so if you exclude acquisitions and things like that, we would expect that expenses sequentially, as an example, probably should decline in the roughly $10 million to $15 million range for the quarter.

How much will the acquisitions add?

Don't know. Some haven't closed yet, so I don't know the exact number yet. I don't think at this stage the ones that have closed, the number's not that meaningful that's going to skew it to any great degree. It's covered within that range.

So you would expect SG&A on a dollar basis to go down?

Yes.

Okay, thanks. Then thinking about the TS business in terms of linearity for the quarter, I know that business is very back-end loaded for you. It sounded like from some of the other supply chain companies that we've heard from, that demand really wasn't that strong at the end of the quarter. What did you see in terms of your linearity in that business?

Yes, Sherry, this is Phil. I touched on that a little bit earlier, as well. I used the word softer. It was certainly a little bit softer at the end of the quarter than we expected, which drove us to be about 1% off the low end of guidance. It wasn't dramatic, but certainly a little bit softer.

Okay, great. Thank you.

Craig Hettenbach, Goldman Sachs.

Yes, thank you. Harley, on the component business, can you talk about any influence of the early Chinese New Year this year on orders really in front of that, and your expectations post-Chinese New Year?

Yes, hi, Craig. That's a difficult one because we're sitting right at Chinese New Year now. I think, if the question is do we believe some of the positive booking activity pre-holiday were in anticipation of the holiday, I think that could be. It's really difficult for me to answer that with clarity until we get past the holiday. Indeed, the holiday being at the front end is a little bit different, and so we are anxious to see how business returns for the couple weeks period right after the holiday.

Okay, if I can follow up with Rick, in Europe on the systems side, outside of just seasonal trends and budget flush, what are you hearing there, or seeing from a demand and any expectations in terms of when that demand might bottom out in systems?

Yes. Craig, this is Rick. Phil may want to add a comment or two. As I was saying, the year-on-year growth still, and the story has been consistent for multiple quarters, still has not been very exciting. However, on our scorecard, I will tell you sequentially in the September quarter, Europe was down -- this is now constant currency. They were down 12.5% year-on-year in September quarter, but they're only down 5% in December. So you could make a case, it appears, that some momentum is building back, hopefully to get to a cross-over point in the not-too-distant future.

Overall, I guess I would say the strong sequential performance, which as Phil said is very typical for the regional mix at TS for some reason at the end of the year, seemed to be consistent with our expectations and certainly not a negative indicator from a demand perspective. I don't know, Phil, if you want to add anything.

Not much I could add, other than it's still bumpy. It's still bumpy and it's still uncertain. There are some parts of Europe that are going very well. Other parts aren't. It's tough to talk about it as one fell swoop region. That's why we're going to continue to manage that very closely, make the investments where we know we can get returns, and we'll reduce where we don't think we can. But it's bumpy. We're optimistic, but right now it's just bumpy and a really tough call.

Okay. Thanks, Rick and Phil.

Thank you. Our next question comes from William Stein from Credit Suisse.

Thanks. Hi, wanted to follow up on the Chinese New Year question. When you look at the trend in bookings that you saw, Harley, in particular your business, obviously in December, and then January month-to-date, how China compares to other regions. Did they all move up and approach parity, or did you see a stronger improvement in China relative to the other regions?

Hi, Will. Actually, all regions showed some positive movement toward the latter part of December, and as I mentioned before in the early part of January as well. One comment I would make is relative to China, remember that China is a part of Asia, and there are different stories in Asia. We saw some very interesting positive movement out of our Taiwan operations, more so than China. When we report our numbers here by region, we are talking Asia, which would include all of Asia, with both Taiwan and China. So I guess that -- to sum that up, good activity, we saw some encouraging movement, the strongest of which out of Asia would have been Taiwan.

That's helpful, suggests perhaps it's not a head fake. Then on the HDD side, Phil, perhaps in your area, can you talk to us about expectations for when the benefits that you've experienced in the last quarter should roll off the P&L? Is that how the March quarter is already guided, or is it guided such that whatever benefit you had last quarter will continue?

Hi, Will, it's Rick. I believe I covered earlier, in case I wasn't clear, that, so we took a look at quantifying the December quarter impact. But going forward, a number of conditions, including starting with less supply, a less clear and still very dynamic volatile new supply environment for the short-term future. So net-net, that $0.05 to $0.07 we think should basically drop off immediately, and we did not really bake any HDD upside into the guidance as provided.

That's helpful, thank you.

Brian Alexander, Raymond James.

Maybe one more HDD question, sorry about that. But just from an operating margin perspective, Rick, sounds like it caused maybe 20 basis points or so of operating margin upside in the December quarter. If we back that out, your operating margin guidance for the March quarter would be roughly flat sequentially. Is that the right way to think about it?

You know, Brian, I haven't done the math on the enterprise up margin, but if Ray, you got an opinion on that?

It's -- go to the number again, Brian, to be clear?

Yes, I guess the question is, are the operating margins going to be basically flat sequentially in the March quarter, if we back out the benefit from HDDs in December?

No, we would expect them to be up slightly, but not to any significant degree, but they will be up.

Well another way to look at this Ray, isn't it, is that if you take $0.05 to $0.07 out of the current EPS, that nets out to, say, $1.08, $1.10. Our guidance on a constant currency EPS guidance midpoint would be $1, right?

Correct.

So that's another way to look at it.

Right.

You'll see margins go up a little bit. Make sense, Brian?

Yes. Rick, just on the reverse logistics acquisition, can you talk more about these companies, their key product and customer segments, how they just fit together within your strategy, and just what's the vision for this part of your business over the next few years? Is there any milestones or targets in terms of revenue or color on margin profile, because it seems like it's going to become a bigger part of the story.

Yes, thanks, Brian. We agree with you and actually for real details, I would say stay tuned. Let me give you some context of what we've got. All the announced deals, and again, they're not all closed, as Ray pointed out. If you aggregate them up, it's, roughly, it's under $500 million in total revenues at this particular point. We're staying rather regionally focused in the Americas. We are looking at some key services in market segments.

The earlier-announced deals, the broadband integrated and center cells, you'll remember, were more in the set top box equipment and cell phone equipment basis. I think we've talked also earlier that in Brazil with center cell, we've expanded into some new customer relationships with that business. Now, adding Nexicore Pinnacle, and Round2, are expanding some of our service offerings, but they're still very much North American-centric and oriented, and as we close, we will start to be more specific and more articulate exactly about how it fits, where we're going.

From an overall enterprise perspective, Brian, this is a, I guess I would say a conscious effort, but deliberate, but also walk before we run, pursuit of what we think is a near adjacency for our business, so that we can still leverage some of our existing core competence in the areas of supply relationship, customer relationship, materials handling and management, pure logistics handling, et cetera, of technology products. Taking a look at new customer segments, new services that could be offered a part of our growth story going forward. But before again, we're going to crawl before we walk and walk before we run. As we close these and they start to build critical mass, we'll be more specific about exactly what the long-term plans are there.

Okay. Makes sense.

Brian, before you go, just one clarification, just making clear on gross margin or operating margin. I think the answer to my question earlier relative to margins would be more in the flattish range, as opposed to my suggesting they would be up, if you do make the adjustment that you suggested relative to the impact of HDDs.

Right. So flattish operating margin?

Yes, apologize for that.

Matt Sheerin, Stifel Nicolaus

Yes, thanks. Question on inventory. You worked it down in the quarter. You talked about that. Given the fact that you're going to see some sequential growth and return to seasonality, are you at the levels that you want to be at, or is there more work to be done? Given the fact that lead times on pretty much every semiconductor and component are pretty short here, I guess the question is, why do you really need to build?

I assume that's about the component business, Matt?

Yes, indeed.

Yes, hi Matt, Harley. The way I think I'd answer your question is that we continue to focus on our return metrics as always, and as we bring our margin into our operating range, we also need to bring our asset velocity into our target range. There's still some work to be done there as well. I think we still need to continue to squeeze out velocity improvements as it relates specifically to our inventory.

In other words, on a days basis, you would expect to bring it down?

Correct.

Okay. Looking at the TS again, I know that you closed or are pulling out of Italy. Is that just a small revenue contribution because you still saw sequential growth, and are there are other pockets of Europe that you're looking at either exiting or specific product areas that you're de-selecting?

Yes Matt, this is Phil. Thanks. I'll answer Italy first. We've been in Italy a long time, and we worked very hard with our partners and all the constituents to get that to an operating model that was giving us the returns we needed, and finally just made the decision that we couldn't get there, and we're going to move our resources somewhere else. It was a very isolated, specific move in Italy. We're still doing some business in Italy, just not physically present. Of course EM still has operations in Italy as well.

But this is not something that you can expect us to do often. We don't like to pull out of countries or any place within a region, it's the last resort really. As far as any technology moves, the answer is no. As far as de-selecting certain revenues, that may be by, that could be by customer, by product within a technology, what have you. That's done on a very isolated basis as well. Last comment I want to make is while we exited Italy, we made investments in France, in Amedec, which further built out our portfolio in VMware and in services. It's that constant, the multiple leverage we're driving there to get to the right returns.

Okay, thanks, Phil. Could you give us a ballpark revenue run rate for Italy?

Yes, somewhere, let's call it between $20 million and $30 million a quarter.

Okay, great. Thanks a lot.

Matt, this is Harley again. Let me add one additional point of color on the inventory, because I don't want to give an incomplete answer.

Okay.

Sitting here just three weeks into the quarter, I think it's important to recognize also, as we talked earlier about what looks to be potential ending of the inventory portion, inventory over-supply of the downturn, we want to be very cautious and very aware of what the positive book to bill is telling us. So I would not want to send a message that says we're going to drive down inventory myopicly focused only on the velocity metric, although of course that drives how we manage the business -- always has and always will. But we also want to be very sensitive to the fact that if there is a hinge period coming, demonstrated by continued strength on incoming orders and positive booked-to-bill, we of course would want to adapt to that as well.

Okay. That's fair, thank you.

Jim Suva, Citi.

Thank you, and congratulations and happy new year to you and your team at Avnet.

Thank you, Jim.

The question I had is more also on the component side. Again back to the notion of several chip companies, whether it's Texas Instruments, Intel, whatever, are basically are calling for a bottom in the March quarter. If you factor in the notion of several ship companies, whether it's Texas Instruments, Intel, whatever, basically calling for bottom in the March quarter, and I just wanted to know, you know, I'm sure you're hopeful of it, too. Is that more of a hope, or are you seeing evidence of a true bottom? Are you guys really starting to see the demand rebound here from a component's orders in your visibility? Or do you just not have as much visibility as those guys with the lead time? Just trying to see if you are actually factually seeing that as a bottom and rebound, or more of a hope and still has to come to pass?

Jim, I've never seen much upside in critiquing my suppliers' projections. So I won't comment on that. Nor am I brave enough to call a bottom. We do see -- I think it's fair to interpret an improving incoming order, positive booked-to-bill environment as one that may be signaling that in general our broad customer base has reached some type of bottom relative to inventory excess. I think that's fair. I don't know that I'd be brave enough to call it in March or June or any particular period, but some of those indicators I do think suggest that. Historically speaking, that is what we have found.

One of the things that makes it -- not to be flippant on my earlier comment about supplier guidance -- one of the things that makes this particular quarter maybe more challenging than most is if you track our broadline card and look at their guidance from March, which obviously we do, as I assume most of you do, more than most quarters I recall, the projections are quite diverse.

Even inside of common commodities, you may see a fairly narrow commodity where the principal players have shared with us very divergent views on what their March quarter is likely to look like. We don't know, we're not privy to the details that support their guidance. But we do think that a number of these variances are driven by the industry's largest customers, and those particular suppliers' success or lack of success at some of the key customers. So I do think in mapping our suppliers as a basket, averaging can be a very dangerous approach.

Okay, and then as a quick follow-up on a different topic, but related to the previous question about the inventory work-down, I fully understand how you talked about in the form of components, how you talked about days of inventory that needed to work down, and a lot of that is, there's a numerator and a denominator. The question I have is, given that lead times have been more normalized now, do you need to work down the dollar level, or are you comfortable with that? I know you've been working it down for a little bit, but how do you feel about the absolute dollar level?

I think, with lead times as short as they have been, we tend to manage this particular metric fairly tactically. In other words, we can react to it even inside of a quarter. And that was really the point I was making on booked-to-bill. If we are in a static environment, I would say yes, we should probably look to take down the inventory dollars to a degree, not dramatically. But as I always say every quarter, what we do fixate on is aging and quality. That's remained quite acceptable, because we have not seen dramatic cancellation reschedules this cycle. So I wouldn't advocate a dramatic reduction from a dollar perspective. But if the market stays in what looks like a very modest growth area, I do think there's some room to take down the dollars modestly.

Thank you. Congratulations, and happy new year to you and your team.

Steven Fox, Cross Research.

Thanks. Good afternoon. Two questions from me. First of all, you reference the -- I think Phil referenced the scale on TS Asia at this point. I was just curious if you could talk about the growth prospects you're looking for this calendar year, and how it can maybe buck some of the economic trends? Secondly, with the restructuring that you've mentioned, it occurs to me that the Company's fairly lean at this point, and I was just curious if you made some tough decisions around potentially taking out other services that you might have offered in the past to focus on others, et cetera, besides the Italy factor, thank you.

Steve, the first -- I lost part of the second question. I think it was on expense reduction, whether we've gone too lean?

Well, the question basically is what else have you had to look at in terms of expense reductions this round, given where the efficiencies the Company's already at. Besides going out of Italy, what else are you doing?

Okay. Let me start with the first question, I think was really around Asia-Pac and the growth we're seeing in Asia-Pac. It continues to be pointed out a growth region for us. Part of the issue we're driving in Asia-Pac is controlled growth, as well. So even though it's growing year-on-year and quarter-on-quarter continuously, we're looking to be sure we also manage that growth with the returns. On our end, growth isn't necessarily the issue in Asia-Pac, particularly in China. It's a matter of can we get the appropriate returns.

We have new leadership in Asia-Pac, William Chu. He understands exactly what we need to do and are going to go do. One thing you may have noticed is that we've slowed down some of our acquisitions in Asia-Pac, as well. We've had other opportunities, and we're really focused on the operationalizing of that business across Asia-Pac as it goes from $1.5 billion to $1.7 billion to $2 billion-plus very near future on run rate, going into, as we start to prepare for fiscal 2013. Definitely see it as a growth region and exciting.

As far as expense reductions in Europe, I'll answer the back end of your question first. We're not looking to reduce services, or any that we're in from a value standpoint in any of our regions, by the way. We want to continue to drive the value and the solutions and the specialization we bring to the market. That doesn't mean that we don't need to, particularly across Europe, be sure that we can scale those appropriately in each given marketplace. What Graham and [Wyatt] and his team are doing is continuing to look at all the expense, all the OpEx in each region, each country, and then by brand, to be sure we're getting appropriate returns.

Italy was -- I want to comment again, was a difficult decision. It was the right decision. But at the same time, we didn't do that in a vacuum. We were very much in line with our suppliers on that, very communicated well in advance, and they understood what we were doing, and we also did everything we could to place all of our employees, to be sure they were taken care of. Outside of that, when you're managing the business across any region, let alone Europe, you just got to look at, we break out our P&Ls, again, by country, by brand, and we just look to be sure we're continuing to drive to the returns that we're looking for, without sacrificing the value that we bring to the market.

Steve, this is Rick. I would just add on top of the TS Asia and specific question, I think it's a big part of the TS global strategy. We're very excited about the long-term growth prospects of the footprint in the emerging markets -- not just AsiaPac, but also for example, Latin America. In the short-term now, we've got a $1.7 billion worth of critical mass in AsiaPac, and we've decided to focus a little bit on driving increased returns and moving that bubble up the chart that they're all getting very familiar with. At various times through the development and maturity of a business, we kind of ebb and flow with some of that focus, but the long-term growth prospects for both of those exciting emerging regions, we're very excited about the long-term prospects there.

Great. Thank you.

Thank you.

Lou Miscioscia, Collins Stewart.

Okay. Thank you. Rick, I think you had mentioned that maybe some backlog -- some hardware was put into backlog because maybe it couldn't go out in the December quarter. Maybe you could expand on that just a little bit. Was it due to the hard disk drive situation or just a lack of availability of something else?

Lou, what I was trying to characterize really was the difficulty in trying to assess the net impact of the entire HDD situation on our overall business. From a TS backlog perspective, again, very difficult to pin down specifically, but we believe maybe $35 million to $50 million that could have shipped in December quarter has now slipped into the March quarter. It's not the worst scenario in the world, but if there had been free-flowing supply without any disruption whatsoever, we might have had that kind of revenue impact.

Okay. What category would that be? Was that all hard disk drives or was it a combination?

That's what -- I'm speaking specifically now to more of what TS systems impact.

Okay. Then another thing just to dig in a little bit deeper also on the hard disk drives. I really would have thought you would completely drained your inventory, just given that demand was pretty strong in December quarter for hard disk drives.

The demand was there, Lou. We have been very careful to make sure that the supply that we have, the supply that we can garner, we are allocating very -- I think the day after the announcement of the tragedy in Thailand, we went to a very specific allocation process, which prioritizes our long-term ongoing embedded system integration customers, followed by our long-term OEM customers, followed by looking to attract and build some new OEM relationships, and then the more market-priced oriented customers around perhaps independent white box builders, e-tailers, or other dealers, et cetera. They're way at the bottom of the food chain for us, here. We did carry over consciously to make sure that we're doing our best to be the best supply chain partner for those long-term bread and butter customers.

Perfect. One quick follow-up for Ray. The 30% tax rate -- I realize a lot of business is in US and Europe. Maybe there's not an ability, but do you see any ability, I guess looking out maybe not this year but next year, to maybe get that down, help the bottom line a little more?

We've spent a fair amount of time looking at a tax rate. It's come down from historical levels, but the challenge that we have in terms of opportunities to reduce tax rates, it's really the way we do business and the way we make profits, which is in a country by country basis, so the opportunity of setting up businesses in certain lower tax rate jurisdictions doesn't work for us, because we're going to be where we need to sell product overall. At the end of the day, other than some certain tax strategy we do have, it's really going to be more of a blend of the tax rates in the jurisdictions where we do business.

Okay, great. Congrats on the earnings number.

Thank you.

Thank you, Lou.

Thank you. At this time, we have no further questions. I would like to turn the call back over to Vince Keenan for closing comments.

Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation results presented during our presentation, along with a further description of certain charges that are excluded from our non-GAAP results. 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.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.