安富利 (AVT) 2015 Q2 法說會逐字稿

I would like to now turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations. Thank you, please begin.

Good afternoon and welcome to Avnet's second-quarter FY15 business and financial update. As we provide the highlights for our second-quarter FY15, please note that in the accompanying remarks we have excluded certain items, including intangible assets, amortization expense, restructuring, integration and other items and certain discrete income tax adjustments for all periods covered in our non-GAAP results.

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. In addition, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our press release.

Before we get started with the presentation from Avnet management, I would like to review Avnet's Safe Harbor statement. This call contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. There are several factors that can 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 FY15 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty will review some additional financial highlights and provide third-quarter FY15 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also, here today to take any questions you may have related to Avnet's business operations are Gerry Fay, President of Electronics Marketing; and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr. Rick Hamada to discuss Avnet's second-quarter FY15 business highlights.

Thank you, Vince, and hello, everyone. Thank all for taking the time to be with us today and for your interest in Avnet. Our team delivered another quarter of steady progress in our financial performance as they leveraged strong seasonal growth with a record adjusted earnings per share and strong cash flow from operations.

Despite some currency headwinds beyond our expectations, our typically strong December quarter at TS drove enterprise revenue up 10.4% sequentially and 12.8% in constant currency as compared with our normal seasonal wins of plus 8% to plus 12%. TS increased 29% sequentially and climbed 2% year over year in constant currency.

At a product level, networking and security, services and storage were all up year over year, while our sequential growth was led by software, services and storage. EM also delivered above seasonal sequential growth driven by select high volume supply chain engagements in our Asia region.

As a result, enterprise revenue of $7.55 billion grew 1.8% year over year, or 4.6% in constant currency with both operating groups exceeding our expectations for the quarter. The year-over-year growth in constant currency was driven by a 9.7% increase at EM, where strong growth in Asia and EMEA led to a seventh consecutive quarter of year-over-year growth.

Our strong sequential growth and leverage at TS drove adjusted operating income up 23% to $274.6 million, and adjusted EPS increased 25% from the September quarter to a record $1.27. Adjusted operating income margin increased 37 basis points sequentially to 3.6%, and was up 9 basis points year over year with both operating groups contributing to this improvement.

Another highlight of the quarter was operating cash flow, as the increase in profitability and affected working capital management, particularly at EM, drove cash flow from operations to $265 million for the quarter and $616 million for our trailing 12 months. As a final wrap up to Q2 for TS, I would also like to acknowledge and offer my personal thanks to Phil Gallagher for his focus and drive for results during our very important December quarter.

When it comes to our perspective on the current environment, our view is that the continuing mixed signals on overall economic growth and the accelerated pace of change in our served market still represents our new norm. Recently increased volatility and weakness in certain currencies and commodity prices around the globe have introduced some new factors to consider as well. Despite these challenges, we also continue to see key areas of the technology world driving growth, including new data center solutions and the pervasive communications and platforms that will underpin the Internet of Things.

Our team continues to navigate the challenges and opportunities as well while delivering steady progress in our performance. Our key goals remain clear to innovate, create and deliver value that accelerates the success of our customers and suppliers from our unique position in the technology supply chain. Now I would like to turn the commentary over to Kevin Moriarty to provide more color on the financial performance of our operating groups. Kevin?

Thank you, Rick, and hello, everyone. In the December quarter EM delivered a seventh consecutive quarter of year-over-year organic growth, led by our Asia region which grew 17.1% on the strength of the very discreet and select high-volume supply chain engagements.

EM EMEA continued a multi-quarter trend of high single-digit growth, as revenue increased 7.1% year over year in constant currency. As a result, EM revenue grew 9.7% year over year in constant currency to $4.4 billion, with Asia being the first regional group at Avnet to achieve $2 billion of quarterly revenue.

Gross profit margin declined both sequentially and year over year due to the market profile of the previously highlighted volume engagements, as well as the associated geographic mix shift as Asia grew to represent 45.7% of total EM revenue, as compared to 41.7% in the year-ago quarter. The year-over-year increase in revenue and the impact of cost reductions in prior quarters combined to drive operating income up 11.5% year over year, and operating income margin increased 19 basis points to 4.3%, with all three regions contributing to the improvement.

Working capital declined 4.5% sequentially, primarily due to a 10.2% decline in inventory, and working capital velocity improved both sequentially and year over year. The increase in operating income and working capital velocity combined to drive return on working capital up 125 basis points from the year-ago quarter, and economic profit nearly doubled with our Asia region accounting for more than 40% of the increase.

Turning to TS. Better than expected growth in our EMEA and Americas region led to above seasonal growth as revenue grew 29.4% sequentially in constant currency, as compared to a normal seasonal range of plus 20% to plus 26%. Our EMEA region grew 34.5% sequentially in constant currency, while our Americas and Asia regions grew 29.2% and 13.7%, respectively.

Revenue of $3.12 billion declined 4.6% year over year and was down 2% in constant currency, driven by a 13.4% decline in our Asia region related primarily to our computing components business. Gross profit margin declines in the year-ago quarter as the decline in our Americas region was partially offset by increases in EMEA and Asia.

The above seasonal growth in our Western regions and continued expense efficiencies resulted in strong leverage, as operating income grew over three times the rate of revenue sequentially. And operating income margin increased 124 basis points to 3.8%, with all three regions contributing to the improvement.

Operating income of $117.6 million declined 2% from the strong December quarter in FY14. However, operating income margin was up 9 basis points year over year as increases in EMEA and Asia regions were partially offset by a decline in our Americas region.

Now, turning to cash flow from operations. The team did an effective job managing our balance sheet, as enterprise working capital declined $125 million sequentially, even as revenue grew $712 million.

During the quarter, we returned $113 million of cash to shareholders through our dividend and disciplined share repurchase program. In addition, our Board of Directors approved another $250 million for use in our stock repurchase program, which brings the cumulative total approved to $1 billion.

With the $109 million we have repurchased in the first two quarters of FY15, we have repurchased a cumulative total of $643 million at an average price of approximately $31 per share, and have $357 million remaining as of the end of our December quarter. With over $900 million of cash in our balance sheet and $2.3 billion available liquidity, we are well positioned to continue to drive further improvement in our financial performance while maintaining our disciplined approach to capital allocation.

Now, turning to our outlook. As we closed out our December quarter, our book-to-bill ratio at EM was at parity. And through the first three weeks of our third fiscal quarter, our book-to-bill was slightly below parity, which is consistent with normal seasonal patterns. While we continue to deal with an uneven growth environment across our end markets, the strengthening of the US dollar is negatively impacting both our growth rates and financial metrics. Since the second quarter of FY15, the average euro to dollar exchange rate has flown close to 6%, which is having a growing impact on our guidance, given approximately 30% of our revenue and an even higher percent of operating income is derived in the EMEA regions.

For the third quarter of FY15, the translation impact of the strengthening US dollar is having a negative sequential impact of approximately $150 million on our top line and $0.04 to $0.06 on our EPS, depending on geographic and product mix. After adjusting for currency, our revenue guidance for the March quarter is at the low end of our normal seasonal range, due to a greater than seasonal decline at EM, driven by an expected decline in our select high-volume supply engagements in Asia that enhanced our December quarter growth. At TS our marked quarter guidance is at the high end of normal seasonality, due to the impact of our Q2 fiscal cutoff, as our March quarter includes the last three days of calendar 2014.

Now, turning to the guidance for our third quarter. We expect EM sales to be in the range of $4.15 billion to $4.45 billion, and sales for TS to be between $2.45 billion and $2.75 billion. Therefore, Avnet's consolidated sales are expected to be between $6.6 billion and $7.2 billion. And based upon that revenue forecast, we expect adjusted EPS to be in the range of $1.04 to $1.14 per share.

This guidance does not include any potential restructuring and integration charges, or the amortization of intangibles. The guidance assumes 138.5 million average diluted shares outstanding and an effective tax rate in the range of 27% to 31%.

In addition, the above guidance assumes that the average US dollar to euro currency exchange rate for the third quarter FY15 is $1.18 to the euro. This compares with an average exchange rate of $1.37 to the euro in the third quarter of FY14, and $1.25 to the euro in the second quarter of FY15. Now, before we move on to Q&A, I'm going to turn the call back over to Rick.

Thank you, Kevin. I would now like to offer some brief comments on one of our recent key leadership moves. In September we announced our plans for leadership transition at TS with the goal of completing our process by the end of the calendar year. On January 5, we were pleased to announce the promotion of Patrick Zammit, our former President for EM in EMEA into the TS global leadership role. I would like to welcome Patrick to his first of what I'm sure will be many earnings calls. And although we will not put him on the spot today regarding the December quarter for TS, I have asked Patrick to prepare a few comments to introduce himself and share some of his early thoughts and observations.

Thank you, Rick. Let me begin by saying how excited I am about this opportunity. I have always enjoyed working in the world of technology contribution, and now view the chance to get closer to the true sense and platform of a changing how we consume technology as a natural extension of the market I've been involved in at EM.

When I look at TS, I see a well-positioned team of very talented individuals who are focused on creating value in the emerging area of [said platform] technologies. While I see learning, I am convinced our strong competitive position and deep partnering relationships are a strong foundation to build on.

I plan to spend a lot of time among internal and external stakeholders before I refine the strategic plans to continue our journey in this evolving IT landscape. I look forward to meeting many of you in the future, and sharing more of these plans at our upcoming Analyst Day in June. Thanks again, Rick.

Thank you, Patrick, and welcome once again. Operator, with that, we are ready to open up the lines for Q&A.

(Operator Instructions)

Brian Alexander, Raymond James.

Maybe just a follow-up on Patrick's promotion and congratulations, Patrick. Rick, I'll ask you the question. How should we be thinking about his approach to the business relative to his predecessor? And specifically, given his background in Europe, does this give you more confidence that the margin challenges that you've experienced there over the last few years can be addressed sooner? Such that you can get to your longer-term margin targets more quickly? Any color on how you think his approach to the business might be different.

Brian, a couple of comments to start. First of all, Patrick certainly brings a more global perspective to our Avnet Executive Board and internal Senior Leadership team as a starting point. And what I would tell you is that, as you are aware, we've had a number of actions in place already and they're in motion to be able to improve the results of TS EMEA.

Patrick will certainly bring a new perspective, a more localized perspective, to what's going on there as a starting point. His overall goal will, of course, be to accelerate the products for TS at the global level. He certainly brings a new perspective there. I think it's valuable and very relevant to the long-standing dialogue we've had for TS EMEA. As you've hopefully seen in this quarter's results now, there is some momentum building with TS EMEA that we're trying to accelerate on.

Okay, and then a follow-up on the regional outlook in EM. Is basically the entire delta versus normal seasonality at the consolidated level? Is that all due to Asia? Due to the reduction in high-volume fulfillment business? Or are you expecting to see below seasonal trends in the Western regions? I'm specifically curious if you've seen any degradation in the trends in Europe given that you guys have done really well there over the last several quarters.

Brian, it's Gerry, great question. The seasonal decline that you see in our business is in our select Asia fulfillment business. And that the reason why our growth is below normal seasonality.

In total, our other regions are well within their seasonal range, so I feel comfortable with that. Our EMEA business continues to operate very well; it continues to gain share in that marketplace. I feel very comfortable where we sit from an EMEA perspective.

Okay, thank you very much.

Steven Fox, Cross Research.

Good afternoon. First of all, following up on that, if we're looking out, say, over more than the next quarter, and given how some of the high-volume Asia business seems to be recurring now, could you maybe talk about your confidence that this is now more of a typical seasonal pattern for the EM group to see elevated revenue growth in Asia during the fourth quarter, maybe in the middle of the year? And I had a follow up after that. Thanks.

Sure, Steve its Gerry, I would expect similar seasonality in this business in 2015. The growth is hard to predict because it's based on how the products associated with this take off. But from a seasonality perspective, I would agree with you. I think this is something that we will continue to see. But remember, as we've always said, it would be predicated on this business continuing to be accretive to our overall returns.

Steven, I would just interject here, that as part of our preparations for June Analyst Day, we will actually be revisiting what we consider to be, quote-unquote, normal seasonality for both businesses as part of our communications at that time.

Just to clarify those comments, is there any way to isolate it now, so we can understand how much that has grown, say, over the last couple years? Or maybe that's something for the Analyst Day?

Yes, we can give you -- we can certainly talk about our business mix at Analyst Day. But again, I think if you look at -- we looked at our core business in Asia, and without this business in there. From a seasonality perspective, we're comfortable that our core business is continuing to perform and continuing to grow at the normal seasonality rates in Asia.

Great. Just as a follow-up on the TS side of the business, given some of the seasonal patterns you've seen year-end, can we step back and talk big picture about the opportunities to grow TS in the new calendar year in terms of what you're seeing from enterprise spending? And when maybe things -- will you feel more confident or less confident? Thank you very much.

Steven, as you know, we try to refrain from being long-term forecasters here. What I would tell you, I think we've many of the same opinions that you have from those that do make a business out of this business of forecasting, that it appears that they have a low single-digit outlook for growth in IT spend.

What I will tell you is that our activity levels, conversations with the VARs, the current activity levels, are all very consistent with the guidance we gave for TS this quarter, which is at the higher end of the normal down [to negative 16% to negative 20%]. And by the way, part of that was also influenced by the fact that we did start our fiscal Q3 with three very important calendar days of December at the beginning of our fiscal period.

Again, not trying to put the projection on IT spend for 2015. But from what I'm seeing, it appears most of the experts are circling around a low, maybe just slightly low end of mid-single-digit type of IT spend environment.

Got it, thanks so much.

William Stein, SunTrust Robinson Humphrey.

Actually I have two quick ones. First, can you remind us what the operating margin goals are in each segment? And your view on timing, both the time you expect to achieve them on a quarterly basis and whether you think you'd hit them for the full year 2015? Or whether that's more of a 2016 event? And then I have a follow-up.

It's Rick. Let me start and ask Kevin or Gerry to jump in. For our businesses, our stated LRPT to op margin are 3.4% to 3.9% at TS and 5% to 5.5% at EM.

More specifically, anticipating the questions today, we have been talking since the early part of our fiscal year that we felt a return to 5% for EM in the second half of our year was part of our plans, based on what I've been told was normal seasonal patterns throughout the fiscal year. What wasn't factored in at that time was the impact of currency changing from -- in our first quarter, as we were laying our these plans, we were at a dollar to euro exchange rate of somewhere north of $1.30. And now it appears we're headed to, on today's rate, $1.14 and below. That interesting part of it I think Kevin shared earlier, that on a sequential basis, from $1.25 to $1.18, is costing us $0.05 to $0.07 of EPS. So with that impact to our operating income, all of a sudden getting back to 5%, the impact of the currency takes 10 or 15 basis points out of that journey.

Just on a sequential basis, it's even a bigger gap if you go back to the way we were thinking, again, back with the euro north of $1.30. All that said, the goals are intact. We're very pleased with the progress at both businesses, and very much aligned with seasonality patterns from a geographic shift and lowered by region. But with the wild card for us that came into the equation this fiscal year thus far, has been the strengthening of the dollar.

Do you think you could hit that in the next fiscal full year if currency stops moving? Is that the expectation?

By stop moving, if we stay at $1.15, we can do the calculations for you. It's certainly tougher than at $1.30. What I would tell you is keep in mind with EM's normal seasonal patterns, we always -- we are generally going to experience peak margins for EM in the March and June quarters of any fiscal year. So, if we're not back to 5% in the second half of 2015, no matter what currencies do, even if they improve a little bit, we would be looking to the second half of 2016 at that point. Because that 5% to 5.5% is a range we're going to maintain through cycles and through fiscal years.

But the Asia mix is always peeking more in the September, December quarters and the Western mix speaking in March and June. Therefore, we will always experience, on a sequential basis, margin expansion for EM on an inter-year basis, in the March and June quarters.

Just a brief follow-up, if I can. Is it fair to see the supply chain engagements that you have in Asia, doesn't sound like they are now more permanent, maybe even growing part of your business, similar to the way you are going to have to revisit your assumptions on normal seasonality in EM? I would think that this would also have an effect on your margin targets in EM as well. Fair to say that goal is the margin target down as well?

It is fair to say that the more we engage on the very select high-volume engagements, yes, that does put pressure on Asia as well as EM global margin profile, Will. Whatever we think is the structural addition to that business, we would be clearly communicating as part of our update on Analyst Day.

Great, thank you.

Jim Suva, Citigroup.

Congratulations to you and your team at Avnet. If we could -- I think a lot of the questions been asked -- if we could switch the topic a little bit to mergers and acquisitions and use of cash. M&A has been a very strong part of Avnet's history and heritage of consolidation, reducing costs and growing experience.

Maybe my tracker is off a little bit. Seems like that's been a little bit of a less focus recently. How should we think about -- are we changing the chapter on M&A? Or is it just -- what's going on? You have the focus internally and absorbing the M&A in recent years and restructuring? How should we think about M&A going forward? It just doesn't seem like to be too topical right now.

Hi, Jim, it's Kevin. M&A could continue to remain a core tenet of our core profitable growth strategy we'll remain in active engagement and dialogue with our regional Presidents. We have an active pipeline and continue to monitor it and review it. It still remains a core aspect of what we're trying to do to properly grow the business.

Okay, but it seems like the cadence has dramatically decelerated, or do you disagree with my conclusion from that?

No, Jim, it's very clear. The fact that we don't produce -- on this quarter's report, it's been the first one in a while, where the difference between reported and ex-M&A has been the same number. We are with you on that. Certainly has been a lull. But that lull should not be taken as any lack of continued interest on our part to leverage intelligent capital allocation in pursuit of acquisitions that meet our multiple goals of cultural fit, strategic fit and expectations for appropriate financial returns.

Great. Thank you so much, [gentlemen]. Congratulations again to you and the team at Avnet.

Shawn Harrison, Longbow Research.

Wanted to go back to the point made about the 10 to 15 basis point headwind from FX. Was that solely at EM that you were speaking to? Does that imply that EM margins will be down year-over-year, EBIT margins?

Shawn, we're thinking flattish year-on-year, even despite that headwind. That's strictly on a sequential basis for EM.

Okay, that's very helpful. Second, inventory came down this quarter, you're thinking of how inventory will move throughout the rest of the year. Can you maybe have a range for free cash flow, operating cash flow that you expect now for the year?

I'll hit the inventory, Shawn. I see inventory still very lean in the supply chain and we continue to manage our inventory for this market reality. I would expect that inventory to be flat to slightly down exiting Q3, from what we exited Q2.

Shawn, it's Kevin. On the cash flow from operations, obviously we are very pleased with the team's performance in the second quarter and the trailing 12 months now. Above $600 million. And as you know, it can obviously change relatively quickly depending on how we progress with the organic growth and investment and linearity as we work through quarters. So I'm still holding to around the $400 million number for our full fiscal year for 2015.

Okay, and it has -- (multiple speakers) I'm sorry, you were saying?

No, no, I'm good.

Okay, got you. Thanks again. Congrats on the results, guys.

Matt Sheerin, Stifel.

Just a question, I think you probably answered this, on the currency details. Regarding the gross margin, it looks like backing in to the number, it looks like gross margin is going to be down about 50 basis points or so year-over-year. Is that a combination of the mix shift -- the geographic mix shift, and FX? Or is there something going on?

Because I know last year your biggest [simi extra] supplier, TI, took more demand creation business directly. And I'm wondering if that's had any negative impact on your business?

This is Gerry. What I would say is that the latter is not a factor for us on the gross margin decline at this point. I do think to your earlier point, those two factors, the mix shift are the biggest issues that impact our gross margin at this point.

Matt, it's Kevin. Obviously the currency the impact, the point Rick brought up, is obviously having a year-on-year impact on the gross profit line as well. So the geographic mix shift as well as the currency is driving us in that direction.

Okay, great. Just looking at tech solutions, it sounds like you are looking at typical seasonality. I know you are doing a lot more in terms of the cloud, in services side. Are you seeing that having a bigger impact in terms of you helping resellers? Or is the cloud not a big issue yet?

Matt, what I would confirm for you that it's a topic everybody is interested in. In many cases, it's creating value creation opportunities for our partners as well as ourselves to help customers deal with the options, the choices, the trade-offs, the futures, the benefits, the economics. There's a lot going on in this area.

Whether it's private cloud, which looks very much like our traditional data center business, or it's hybrid, which is traditional plus new options, or it's more aggregation around access to infrastructure as a service, platform as a service, or whether it's just straight consulting in the form of cloud consulting services or some of our cloud tool sets. It is becoming a very popular part of just about every conversation going on today. As Patrick mentioned, as the customers deal with this emerging area of what I believe IDC coined the term, moving to the third platform.

Okay, shouldn't that have a positive impact on your gross margin, as you get more involved in services and helping resellers help their end customer? I know you mentioned that gross margin was down, I think, in North America last quarter, would you expect margins to improve?

We certainly expect margins to improve as we continue to grow our Avnet delivered service as part of the equation, yes.

Okay, thanks a lot.

Amitabh Passi, UBS Research.

Rick, my first question was for you. You spoke about the strength in TS EMEA and Americas in the December quarter. When I look at year-over-year trends, they still look relatively challenged. I just wanted to get your broader perspective in terms of what you think is happening, particularly when we look at these trends on a year-over-year basis.

A couple of factors there, Amitabh. First of all, we are doing some disciplined revenue selection in the competing development stage, which we talked about previously, which does impact both businesses. For TS EMEA, as an example, in our core enterprise IT business, it was a positive growth year-on-year.

Also comparing year-on-year, our fiscal calendar comes into play again. Because the cut off this year, even though we got it very right and we were very concerned and we spent a lot of time with all of you trying to telegraph that this three-day cutoff, we weren't sure how much impact it was going to have. We got it pretty much right on what we thought the share of the fall into Q2 and Q3 was, so that was good.

Keep in mind, when you're looking year-on-year for us, the fact that the year before didn't miss three days and we did in this year, that also makes it a little tougher to compare. One way we've looked at it is six months to six months. And we're going to do the same thing here after the third-quarter, to try to take a look at nine months to nine months on how the overall business is tracking. There are some anomalies associated with the very unique calendar we have this year that somewhat contribute to some of those comparisons.

Then I had a question around OpEx. It declined $8 million, $9 million sequentially despite a pretty nice performance on the top line. Just wanted to get a sense of how we should rethink about OpEx for the rest of the fiscal year?

Sure, Amitabh, hi, it's Kevin. I'd highlight sequentially there's a lot of factors that will go into it in terms of the currency the impact. But what I would suggest for the next quarter is a range of around $555 million to $565 million for our Q3. We traditionally don't go out longer than that.

A lot of that will get tied up into what's our organic growth profile, the investments required. Directionally, we would expect it in that same magnitude as we go through the rest of the year. But again, I will update everyone on our third-quarter call.

Finally, on buybacks, I think you have $370 million. Should we still think -- should we assume the play book is interesting or on book value? Or can we expect a more consistent pattern over the next three quarters?

We're going to continue to follow our disciplined approach in terms of how we have historically looked at it. When we think it's a compelling buy, alternate form of M&A, but we continue to update with each quarter, Rick and myself. We look at it with our Board in terms of when we could get in from that buyback perspective. So we're going to continue to sustain that disciplined approach.

Amitabh, this is Rick, I would just chime in. I hate to make definitive statements, but I would tell you, you can always assume we're interested at book value. Kevin and I look at it not only in multiple book value, we look at forward projection, internal projections on P/E. We do look at [DCF] -- we triangulate based on multiple valuation models for us to be able to maintain our standing schedule of participation on a buyback perspective.

Still very much value-based. We do adjust it from time to time when the windows are open, and we look at it from multiple perspectives. So it's not just about being within 10% of book value. That's not the only way we benchmark.

Okay, thank you, guys.

Ananda Baruah, Brean Capital.

Just going back to the announcement of bringing Patrick over to TS. Congratulations, Patrick, from us, as well. Rick, in your initial comments, your earlier comment, about Patrick international experience being advantageous to the Senior Management team, is that also to say that the experience he has with the numerous initiatives on the margin side in Europe can be helpful in moving towards the TS margin goals, broadly speaking? Or am I reading too much into that?

No, I'm going to try to take you somewhere in between, Ananda. Patrick has a very solid track record of performance in a very competitive and tough marketplace. I think we've spoken many times in the past around our EM EMEA business having the highest gross and operating margins anywhere across the Avnet global portfolio.

So am I expecting Patrick to try to re-create those types of margins? No. Am I expecting to accelerate our progress to a sustainable model where the appropriate level of returns and profitability are part of the long-term outlook for our computer business in EMEA? Absolutely. So I'm going to take you somewhere in between those two goalpost you laid out.

That's really helpful. I appreciate it. Can you go through rank order what the drivers were of the TS operating margins this quarter? Is the strength there?

On a regional basis, we talked about --

I would suggest that you look at the sequential change. Our fiscal Q2, traditionally when we have the sequential [left] than the [budget] at calendar close, obviously drove the bulk of the sequential improvement. In addition, as I commented upon, each of the regions contributed to the op margins and expansion within TS.

So from your perspective, nothing unusual [other than] normal seasonality?

Well, I think we comment upon we were pleased with the performance in TS in the Europe business, as well as Asia in terms of the continued progress over the last couple of quarters, on extending that margin. I would call that out.

Our outlook for Q3 would lead you to conclude that we are going to continue that string for TS at a global level in the March quarter.

Cool. Last one for me. With regards to the embedded systems business, the one that sets a $1.5 billion run rate, how was that during the quarter, collectively? Is there anything that stood out as particularly strong and accelerating? And, can you give us a view of what your thinking is for that business as we go through 2016?

Sure, it's Gerry, I will take that one. Part of this, I think, goes back to our MSC acquisitions. We've now had MSC for the full year. We believe the embedded space [looks great as] growth potential as customers continue to look to improve their time to market to capture IoT opportunities. We believe that the solution selling will lead to increased margins and increase our ability to attract software and services sales.

As you know, this is a long sales cycle for this business. But we continue to be optimistic about the opportunities as we continue grow. So we are seeing nice growth in that business today. We are going to go through this in detail at our Analyst Day in June.

Okay, excellent. Thanks a lot, guys, congratulations.

Louis Miscioscia, CLSA.

The components business keeps on being a bit of a drag in the TS side. I'm just wondering what you are thinking about that, as you look out 12 months? Can we get to a point where you think it starts to grandfather or flatten out, maybe even grow a little bit? Or do you look it to be just a material decline? And obviously at 8% to 10% of total revenue for that group, it's still reasonably material.

Lou, it's Rick. The run rate of this business is now approximately $1 billion a year. Some of that weakness is driven some of the key suppliers in that business, particularly in Asia. But we're also disengaging from unprofitable business, doesn't meet our long-term goals and adjusting our expenses, by the way, accordingly with that. At the point that we settled into a turning point, or we think it's leveled out, we'll be very explicit about that. Again, we'll give the update at Analyst Day overall.

I don't think we have much further to go. Because as you go back to the transcripts of the last few quarters, you know we've brought a lot of scrutiny to this business about what is sustainable and what is not, from the perspective of reaching our goals. I don't know if we're 100% done right now, but I don't think we're going to drop another 50% from here. So it's somewhere in between that we'll settle in, find the right mix and volume, and then try to build it up from there based on the specific strategies for that segment of the market.

Okay, great. Than as we think about modeling things out on a sequential basis, obviously you've had the September quarter now, the December and March quarter -- there were a couple days shifting around. Once we get past the March quarter, does things get pretty much back to a normal type of calendar-year quarter? Or, do we still have days in 2015 and in the FY16 that might be shifting around? I don't know if you can give us any color on that.

I'll tell you what, Lou, bring your notepad to the June Analyst Day as well. Actually the short version is, we're going to have 53-week year in FY16, based on way our calendar -- and by the way, this happens every six or seven years. It [happened in] the way we've constructed our fiscal. Which means we're going to start the year with a 14 week quarter. We'll lay that all out for you and what kind of impacts we think that has on the comparative numbers for FY16. When we're with you in June.

Great, look forward to seeing you in June.

Sherri Scribner, Deutsche Bank.

A lot of questions have been asked already, but I wanted to get a little more detail on that TS business, in terms of the strength you saw this quarter in which areas. I know that you mentioned networking, security, services and storage, but wanted to see where you are seeing the strength.

So Sherri, not a lot to add to that. If we break down in those categories, servers was [not] an area of growth, although ISF continues to [build on] proprietary for us there. The category of what we would call converged solutions continues to be a hot area for us. We think that's the key building block of today's data center as well. And then we did mention storage already, but the resilience there just continues to be pretty amazing.

Networking and security, as well.

Yes.

Okay. Just to clarify, for the March quarter, if you exclude the three extra days, are you seeing normal seasonality in the business? Is that what the guidance implies?

Yes, we are. I think normal is down [to negative 16% to negative 20%] and our guidance is pretty much near down [to negative] 16%, if I remember right.

Right. So excluding those three, it's pretty much normal seasonal?

Correct. We are going to look at the six-month to nine-month trends year-on-year once we get a chance to do that.

Okay, thank you.

Mark Delaney, Goldman Sachs.

I was hoping you could talk on the margins to begin with. Gross margin on a consolidated basis, 11.1%. In my model, that's the lowest level in 15 years. It seems to me like a lot of the pressure in gross margins was also in the EM segment on a year-over-year basis, I think maybe down 50, 60 basis points, gross margins in EM year-over-year. Even the comparable period last year would have had a high mix of these high-volume consumer programs. Last December too.

I bring it up trying to get a sense of what's causing this longer-term pressure on gross margins, even within segments, such as within EM, and what you could do on a gross margin perspective that could maybe help you to get to some of those operating margin targets that you talked about within the EM segment.

Mark, it's Gerry, I'll take that one. If you looked at, as I talked about earlier when I got asked about seasonality in this high-volume select business, seasonality remains pretty consonant, but spikes during the seasons have changed. This is the biggest spike we've had in that business as a percentage of the overall business in Asia, in particular. If you think about our business being skewed to Asia in the first half of the year and then you put this on top of that, that's the primary reason why our gross margins have reduced.

But I would also point out that our Asia team provided 40% of our economic profit in the quarter. So we still see that business as providing the right return profile. To your point, as Asia becomes a bigger and bigger part of our business over time, it will be more difficult for us to achieve our long-term profit goals of 5% to 5.5%. But as we sit here today, if you take out the FX effect, the 10 to 15 basis points for next quarter, we would be on the trajectory to be able to get back to 5% in the back half of this fiscal year. I think from a microcosm perspective, if you look at that high-volume select business we have, that's what's driving the gross margin reduction.

Okay, I appreciate the thoughts, there. With respect to those high-volume consumer programs, in the March quarter is there any revenue that you're shifting in front of these programs that we should think about impacting quarter on quarter into June? Or is that completely out of the model in March?

We always do some of it throughout the year. So I would think of it as our March quarter looks similar in that business to our first fiscal-year quarter. It the December quarter where we get the big spike.

Okay. Lastly for me on FX and on the euro exchange, I'm a little confused. I know you guys assumed $1.18 euro to dollar in your guidance and quantified an EPS impact. Today, I think you also mentioned already euro is at $1.14 today. It seems like there's maybe already some incremental impact to EPS next quarter beyond what's included in the guidance. You just help me understand what's factored in and maybe how much more downside there would be to EPS in the March quarter if we assume spot rates for euro versus the $1.18 that's baked in.

First of all, a week ago it was $1.18. It's a matter of setting up -- you've got to pick a spot to put a stake in the ground and build your plans around it. Trying to catch a falling knife sometimes is a little bit of a challenge. The way to think about the impact for us, very rough translation. We got $1.18 baked into the guidance that we gave. Every $0.02 -- remember now, this is for the quarter, not just what's happening today. Every $0.02 impact in the quarter would probably cost us about $0.01 of EPS, okay, on what would happen for the March quarter.

Okay, thank you very much. I appreciate it.

(Operator Instructions)

William Stein with SunTrust Robinson Humphrey.

Thanks for taking a follow-up, actually two quick ones. First, we talked a lot about FX. I wonder if you have any view as to whether the new lower price of oil is having any impact, either positive on broader end markets and negative in any of your energy- or industrial-focused customers.

Then, the other one was about end market demand trends within the components business. You tend to talk about this from a geographic perspective. But if we could get any view on comm, infrastructure, industrial, military, any other details by end market would be very helpful. Thank you.

Hi, Will, it's Gerry. I'll start with the end markets for components. If you look at the end markets by region, so in Asia for us, green technologies have been strong and we have seen the pickup in [4 LTE], which has been positive for us. Also, BLE applications for IoT. European market, the auto and industrial orders have still been fairly strong and holding steady.

If you look at North America, it's been fairly stable, mainly on industrial, auto and medical markets. We have seen a little bit pickup in particular military programs, but that remains fairly steady. We don't see a lot of growth sequentially there.

Thanks for that. Any view on oil, positive or negative?

Hey, Will, it's Rick. We've been asking ourselves same question and looking across our businesses, we can't find any material impact across the portfolio. And we're hopeful -- that hopefully on the macro basis, the consumer [thing] picks up and helps the economy grow. I guess we are all going to wait to see how that plays out.

Not seeing anything material in either direction at this point that you can detect?

No, we haven't. The same thing on the currency question too. We've sometimes had the question around -- hey, is the currency thing impacting CapEx in Europe and slowdown, and we can't point any direct hits on that particular theory at this point, either.

Thank you for taking the follow-up, I appreciate it.

Matt Sheerin, Stifel.

A couple a follow-ups. There's one on the supply chain engagement business. Could you give us an idea how diversified or broad your customer base and supplier base is there? Obviously there's probably a couple of big smartphone or other consumer kind of programs that you sell into. Could you give us an idea, particularly if we get into the next year and we don't see a big new product launch, the year-over-year comps are going to be pretty tough there.

What I would tell you, Matt, is that it's a very small number of customers and a very small number of suppliers that we deal with in this space. It's very select; it's very manageable. We continue to look at it from a returns profile perspective to continue to ask our questions if it continues to make sense. And at this point, it does.

Okay, that's helpful. And then question regarding book-to-bill. I know you said it was below 1 in the quarter, to date. Could you give us book-to-bill by region so far?

Today we are at parity across our businesses. We are below parity in EMEA, which is typical for month to date at this point for us. We don't see any changes in cancellations or push-outs and we feel pretty comfortable with, obviously, today and the quarter.

Okay, thanks.

Louis Miscioscia, CLSA.

Microsoft's refresh of, or cancellation of, XP obviously drove PC sales. Maybe it didn't help you all. But now with the server expiration coming in July on the 14th, I wonder if any of your VARs is starting to talk about that being something that should come in to start to help TS, maybe from an upgrade cycle? Or are most of the VAR sales new sales and not as much upgrades.

Lou, this is Rick. We are hearing more about it from some of our customers and from some of our key suppliers on the opportunity. I think the issue is, there's lots of choices for what you're going to do with those workloads. You may move out of a Microsoft environment into Linux, for example. You may move into a larger piece of equipment that has a partition available. You may move the application into the cloud.

You can't draw any particular conclusions today around an expectation just from this issue. But obviously it does drive a certain amount of the decision-making in many data centers. And we'll keep you posted if we have more specific information. It should play out earlier, by the way, than I think what we saw with XP. Because obviously people are not going to wait until June to start making these decisions. It ought to show up, I think, earlier in this calendar year rather than later. As they obviously moving and forklifting that server application is little different proposition than upgrading or not a personal computer.

On the three that you mentioned, maybe there might be even four, do you get the sense that it's leaning one way or the other?

No. I don't, at this point, Lou. We'll be talking to our partners about that, as we talk to them about where we are going to try to help them grow in the March and June quarters.

Okay, great, thank you.

Brian Alexander, Raymond James.

I had to continue this streak of follow-ups. On the gross margins in TS, I noticed they were down in the Americas for the second straight quarter. I don't think anybody asked about that. Is that product mix? Is that change in vendor incentives? Or is that something else?

Is that a trend we be aware of, or more of an anomaly? And then I have one quick one after that.

Yes, it's product mix to a certain extent, Brian. It's also reflective of the incentive stack for Q2. But we don't think it's a longer-term trend. Sometimes, you hit eight cylinders out of eight, sometimes you hit six out of eight. We try to keep things aligned as close as possible to the way that suppliers want us to be able to help develop the channels for them.

It was noticeable. It was part of the equation. The team has been digging through it and we don't think it's a major secular trend at this point.

Okay. Then there's been some discussion that one of your largest vendors in TS is possibly going to be selling directly to their largest solution providers, including some of your customers. I'm just curious if that's a concern at all that you have at this time. Is that factored into your March outlook? If so, what kind of headwind is that?

Everything we know is factored into the March outlook, Brian. I would just put it into perspective on it that we are in constant dialogue with all of our partners on their channel plans and strategies. We remain very committed to our VARs, our partnership with our top suppliers. And we will work with them to execute their programs and provide value on the partnership and go provide their reach and coverage in the parts of the market they deem important for their channel to cover.

This is really, I guess I would say, it's normal course of business for us. At the time any changes are made that have some definitive and a specifically identifiable impact, we will be very open and transparent about that. At this time, everything we know is baked into the third-quarter guidance and we're not expect any major impacts from some of those concerns or conversations taking place at this time.

Is that because it hasn't necessarily rolled out in the March quarter and therefore it might impact June? Or, is basically -- has it already occurred and the full effect of that is reflected in your guidance?

No. I would say that it's these types of decisions are under consideration, being evaluated. Conversations taking place around the channel on the impacts and what types of decisions need to be made around supporting their longer-term strategy. I would say it's work in process and we'll keep you posted.

Okay, all right. Thank you very much, Rick.

That is all the time we have for questions. I'd now like to return the floor to Management for closing remarks.

Thank you for participating in our earnings call today. Our second-quarter FY15 earnings press release and related CFO commentary can be accessed in downloadable PDF format on our website under the quarterly results section. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.