安富利 (AVT) 2016 Q1 法說會逐字稿

I would like to turn the conference over to Vince Keenan, Avnet's Vice President of Investor Relations.

Good afternoon and welcome to Avnet's first-quarter FY16 business and financial update. As we provide the highlights for our first-quarter FY16, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization expense, restructuring, integrations, and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or 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. When we refer to organic sales, we have adjusted the current period to exclude an estimated impact of the extra week of sales, as our first quarter included 14 weeks, compared to historical quarters which contained 13 weeks. In addition, when addressing return on capital employed, return on working capital, and working capital velocity, 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 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 first-quarter FY16 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide second-quarter FY16 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 first-quarter FY16 business highlights.

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

Our team delivered a strong performance in our September quarter, as revenue came in at the high end of expectations in both operating groups, driven by strength in our EMEA region. Both EM and TS EMEA grew revenue over 15% year over year in constant currency, and even when you adjust for the estimated impact of our extra week, our combined EMEA regions' organic growth was over 11% in constant currency. Driven by this strong growth in EMEA, revenue grew 8.4% year over year in constant currency to $7 billion, which equated to a 1.9% reported increase.

Our Americas region grew revenue 4.8% year over year, but declined 3.5% organically after adjusting for the estimated impact of our extra week. In our Asia region, revenue declined 1.7% year over year and 8.4% organically, primarily due to a decline in our TS computing components business and a slower rate of growth in our high volume supply chain engagements at EM.

Gross profit margin decreased 20 basis points sequentially, primarily due to a decline in our EMEA region, where both operating groups were coming off a relatively strong June quarter. On a year-over-year basis, gross profit margin declined 27 basis points, primarily due to a decline at EM, in part due to a higher mix of high volume supply chain engagements.

Operating expenses declined 3.6% year over year, due to the impact of changes in foreign currency exchange rates and from expense efficiencies, including our Avnet Advantage program, both that were partially offset by the impact of the extra week in our first quarter of FY16. In the September quarter, we realized approximately $7 million in savings from our Avnet Advantage program, and we still expect to achieve an annualized run rate of $50 million in savings as we exit FY16. This combination of revenue growth and continued expense discipline helped to grow our operating income nearly 4 times faster than revenue, as adjusted operating income of $240 million increased 7.5% from the year-ago quarter.

Adjusted earnings per share of $1.12 increased $0.10 from the year-ago quarter, and if you exclude the negative impacts from changes in currency exchange rates, adjusted earnings per share would have increased 19% year over year to $1.21. Finally, our return on working capital increased 100 basis points to 21%, as we held our velocity consistent with our year-ago quarter.

As you can see in this quarter's results, our year-over-year organic growth rate moderated after two straight fiscal years of mid-single-digit growth. While some of this slowdown is related to slower growth in our select high volume supply chain engagements at EM Asia, we continued to navigate a global market place characterized by mixed regional indicators and the challenges of a stronger US dollar. We are, however, encouraged by the fact that our December guidance essentially reflects normal seasonality after excluding the estimated impact of the extra week in our September quarter. Despite slowing growth, we remain committed to further expanding margins and returns, while continuing to invest in our growth initiatives and executing on our ongoing, disciplined approach to expense management.

Now I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial performance. Kevin?

Thank you, Rick, and hello, everyone. EM started FY16 on a strong note, as our revenue and operating income in the EMEA region grew double digits year over year in constant currency, which helped to drive operating income margin up 13 basis points year over year to 4.8% at the EM global level. Revenue increased 2.2% year over year to $4.5 billion and was up 8.7% in constant currency. If you exclude our estimated $300 million impact of the extra week, organic revenue grew 1.8% year over year in constant currency, driven by an approximately 14% organic growth in our EMEA region.

In the Americas and Asia regions, revenue increased 4.2% and 1.2% year over year, and declined 2.5% and 5.6% organically. On a sequential basis, revenue grew 3.6%, while organic revenue declined 3.4% in constant currency, which is below our seasonal range of down 2% to up 2%, primarily due to a sequential decline in our high-volume supply chain engagements in Asia.

Gross profit margin decreased year over year, primarily due to a higher mix of these engagements in Asia and a decline in our EMEA region, strong leverage in EM EMEA and disciplined expense management, combined to grow year-over-year operating income more than twice as fast as revenue to $213 million. Operating income margin of 4.8% was flat with the June quarter and up 13 basis points year over year. If you exclude the select high-volume supply chain engagements in Asia, EM's operating margin would have been at the low end of our target range, or 5%.

In the September quarter, EM's working capital was flat with the year-ago quarter and increased 6.3% in constant currency to support the top-line growth. On a sequential basis, working capital increased 5.2% in constant currency, driven by a 13% increase in inventory to support expected growth in our high-volume supply chain engagements in the December quarter. While return on working capital was flat with the year-ago quarter due to the inventory build in Asia, EM's economic profit increased 7.3% year over year, driven by an over 200-basis-point improvement in return on working capital in our EMEA region.

Now turning to TS, the September highlights are similar to EM, as strong growth and leverage at TS EMEA contributed to a fourth consecutive quarter of year-over-year margin expansion and an over 500-basis-point increase in return on working capital from the year-ago quarter. TS EMEA grew revenue 16.1% in constant currency year over year, and organic revenue increased 6.4% in constant currency, driven by growth in our central and eastern regions.

At the global level, TS grew revenue 1.3% year over year, or 7.8% in constant currency, while organic sales declined 1.4% in constant currency after adjusting for the estimated $225-million impact of our extra week of sales. TS Americas grew revenue 5.3% year over year and organic revenue declined 4.3%. At TS Asia, revenue and organic revenue declined 16.3% and 22.7%, respectively, due to a decline in our computing components business and the strengthening of the US dollar against local currencies. We believe that our computing components revenue is stabilizing, with an operating income margin that is consistent with the year-ago quarter as a result of our deliberate focus on higher gross profit margin engagements.

At the TS global level, gross profit margin declined modestly year over year, as declines in the western regions were partially offset by an improvement in our Asia region. In addition to a third quarter of organic growth in our core data center solutions business, TS EMEA delivered strong leverage, as operating income more than doubled year over year, and operating income margins set a record for September quarter. This performance, combined with another quarter of operating income growth in the Americas region, drove TS's operating income margin up 45 basis points year over year to 3%. Working capital decreased 9.7% year over year, or 3.6% in constant currency, and working capital velocity increased both sequentially and year over year.

Now turning to cash flow from operations, in our September quarter, we used $34 million of cash for operations. The team did an effective job of managing working capital, as working capital velocity was consistent with the year-ago quarter. Excluding the impact of changes in foreign currency exchange rates, working capital increased 3.7% from the year-ago quarter to support growth at EM. Working capital increased 4.8% sequentially in constant currency, primarily due to an increase in inventory at EM Asia to support expected growth in our high-volume supply chain engagements.

As we continue to navigate in an environment of mixed signals across regions, our cash-flow generation remains strong, as our trailing 12 months cash flow generated from operations was over $590 million. In this slow growth environment, our trailing 12 months cash flow from operations has grown to an average of over $525 million for the past four quarters. Our continued focus on operating expense efficiencies, including our Avnet Advantage program, contributed nicely to our leverage this quarter, as our adjusted operating expense to gross profit ratio declined 225 basis points from the year-ago quarter to 69.6%.

Also, our commitment to returning cash to shareholders remains aligned with our capital allocation priorities, as our Board of Directors increased our cash dividend for the second consecutive year and expanded our share repurchase program by $250 million to an aggregate of $1.25 billion in the September quarter. During the quarter, we paid a cash dividend of $0.17 per share, or $22.6 million, and we repurchased 3.5 million shares, representing an investment of $145 million. Entering the second fiscal quarter, we still have $407 million remaining in our existing authorization. With improving profitability and strong cash generation, we are well positioned to invest in our growth strategies, while maintaining our discipline in how and when we return capital to shareholders.

Now, turning to our outlook. Looking forward to Avnet's second quarter of FY16, we expect EM sales to be in the range of $4.1 billion to $4.4 billion, and TS sales to be in the range of $2.8 billion to $3.1 billion. Therefore, Avnet's consolidated sales are expected to be in the range of $6.9 million to $7.5 billion. If you exclude the estimated impact of our extra week of revenue from our September quarter, the midpoint of our guidance would be within the seasonal range at EM and at the high end of the seasonality range at TS.

Based on this revenue forecast, we expect adjusted EPS to be in the range of $1.20 to $1.30 per share. This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 135 million average diluted shares outstanding and an effective tax rate in the range of 27% to 31%. In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.12 to the euro. This compares with an average exchange rate of $1.25 to the euro in the second quarter of FY15.

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

(Operator Instructions)

Thank you. Our first question comes from Shawn Harrison from Longbow Research.

Hi, everyone. I just wanted to delve into your views on seasonality, considering what your peer reported yesterday and some of the volatility and cautiousness versus what you're seeing in your order book here in October, and even just expectations of budget flushes on the IT side. So any elaboration on just general component demand and then also your expectation of a budget flush, which looks to be pretty strong this year.

So Gerry and Patrick, why don't you give points of view?

So Shawn, I think as, we reported that we finished Q1 below parity from a book-to-bill perspective at 0.95 and we're back over parity at this point. When we look at the backlog or backlog seems strong, I think Kevin did a nice job of laying out where we will be from a seasonality perspective. Our seasonality this quarter in Q2 is 0 to plus 3, and we will be well within that range based on the backlog we have in place today.

Patrick, the budget flush and pipeline?

On the TS side, we see EMEA market conditions remaining solid. That's one of the first reasons. And then we looked at the pipeline, and in view of the pipeline we're having at this stage, that explains the guidance for this quarter. So we feel pretty confident across-the-board on the guidance at this stage.

With the pipeline being strong, can you subdivide that between software services, traditional hardware, maybe where you're seeing some of the better -- almost better than seasonal trends?

So we see, of course, the hot technologies I would say continue to drive the demand, so we have a solid pipeline, for example, on the converged infrastructures and software and that's the main drivers.

Okay, and then as a follow-up, the $7 million highlighted from Avnet Advantage this quarter, was that an annualized number or is the annualized number close to $30 million so you have $20 million of incremental savings to achieve through the end of the year, the end of the fiscal year?

It's the latter, Shawn. So annualized it would be $28 million, so $7 million realized in our fiscal first quarter annualized would be closer to the $30 million number, and then we still have $20 million more to realize.

And how does that trickle in over the next three quarters?

I would estimate our additional savings this quarter, our current quarter in the $3 million to $5 million range, and I'll just continue to update everyone as we work through our fiscal year.

Thank you very much.

Thank you. Our next question comes from Brian Alexander from Raymond James.

Okay, thank you. Good afternoon, guys. Why do you suppose Europe is so strong in both segments when the macro picture over there doesn't really support this magnitude of acceleration? Is it related to currency at all, just given the movement in the euro and other currencies? And I was struck by the fact that revenue was up double digits in Europe in both EM and TS, yet gross margins were actually down in both segments. So if you could just talk about that. Thank you.

Brian, let me make comments, and I'll ask Gerry and Patrick to weigh in as well. So for EMEA, the way I think about our performance in EMEA, it certainly does seem to be a bit of a point off the curve, but as you know, we've had this conversation going for a number of quarters. From my perspective, first of all, we've got an element of excellent execution going at both businesses. Our components team has established a very nice market positioning and leadership role that they continue to sustain. And then you add the element for us, that obviously for our computer business in EMEA, its been more of a recovery story. But as they have recovered, I think the momentum has built for them as well.

So from a high level for me, I want to start with giving the EMEA teams on both sides credit for some real good execution. And for those that are long-term Avnet watchers, the recovery, particularly in the computer business in EMEA, is just really good to see the sustained momentum there. So Gerry, comment more on EM.

Yes, so I think Rick did a nice job of laying out. We're still seeing strength in industrial and automotive for us, less so in coms and mil-aero. You mentioned the margins, if you look at the margins, I think one of the challenges we have had is as the dollar has strengthened, suppliers have created price increases for us in the marketplace. As you recall, we talked about doing some pre-buying in Q4 to try to offset some of that, which we did.

But if we look at it, we still had headwinds from supplier price increases that we have contracts with customers for a year. So the timing of getting those price increases to the customer is going to take us some time and that had a little bit of an adverse effect in our margins this quarter. But we do see that stabilizing since exchange rates have stabilized, and we see margin expansion going forward.

And for TS, Patrick?

Okay, go ahead.

On the TS side, so one thing is Europe came out of the crisis much later than in the US, and we believe the investment cycle has been delayed. So what we see companies have delayed investments because of cash flow issues and uncertainty about the future. Outlooks are improving in Europe, and so the investment cycle, especially for IT, is accelerating. So that's one thing. On the margin, the reason for the slight decline in margin is a pure mix issue. In fact, we had significant growth in Central Europe and Eastern Europe, and the margins are slightly lower than in the west and in the south.

So Gerry, when you roll those price increases through to your customers, do you expect demand to suffer at that point, as maybe the customers are anticipating that and perhaps scheduling more orders today than they otherwise would?

No, I don't think so. I think we had a very strong summer quarter, and I think that demand that we see is going to continue. We don't see any moderation due to the price change. I think since it happens over a long period of time, the customers become accustomed to that and we pass that through over time. So no, I don't see any demand changes into the price increases. So I don't see them buying earlier or staging later.

Okay, thank you.

Thank you, our next question comes from Steven Fox from Cross Research.

Yes, thank you, good afternoon. First question, just on the inventory that you're staging for the fourth calendar quarter. It's going into a region that has obviously been under economic pressure. Can you just talk about the risks of actually realizing that business in the quarter and give us a sense of what it's related to? And then I had a follow-up.

Steve, I assume you're talking about the EM side, so I'll answer the question.

EM, yes, the high volume, thanks.

So the bulk of the inventory is in regional specific support of our high volume fulfillment engagement. I think given what we expect in demand this quarter, I think we have our inventory at appropriate level. I think if you take that out of the mix, we feel the balance of the inventory that we have is appropriate to support the core business demand that we see at this point.

Okay, and then in terms of just the TS business looking at this year's seasonality, say compared to the prior couple years, is there anything you would point out? I understand your mix is changing, but is there anything else you would point out that's different in terms of what you're seeing in terms of customer order patterns than maybe a year or two ago at this time of year?

No. The simple answer is no.

Right, and keeping in mind Patrick wasn't in charge of those business two years ago, Steve. I would echo that. And in fact, if you look at our normal seasonality range of plus 26 to 30 sequentially, TS in the December quarters, even the past couple of years, has exceeded more of the high end of that. And remember now based on the leap year that we've just experienced for Avnet in Q1, we are now back to catching full calendar year close as part of our plans.

Got it, and then very quick question, just relative to the guidance you just provided, Kevin, what -- can you give us a little bit more specificity around the cash flows for the current quarter?

Sure. I would range our cash generation in the upcoming quarter approximately of $100 million to $150 million rough range. And Steve, I think as you know, the cash flow from operations can move within a short period of time due to the working capital requirements of the business. The way we're thinking of it, we want it, we're going to target staying within the $400 million to $500 million cash flow from operations as a trailing 12-month metric.

Got it. Thank you so much.

Thank you. Our next question comes from Louis Miscioscia from CLSA.

Lou, are you there or are you on mute? Lou, do you have us on mute or did we lose you?

We'll go to the next question. Our next question comes from Sherri Scribner from Deutsche Bank.

Hi, thank you. You guys have done a great job in TS Europe improving the results there. Impressive results, I know that we've been paying attention to that segment for awhile. Is there more work for you to do in that segment? You mentioned the margins were off a bit on mix. There's not really a lot that you can do about mix from quarter to quarter, but is there any additional restructuring or additional actions you need? Or do you think you're at pretty good levels now in TS Europe?

So we are on the continuous improvement journey, so that means we continue to improve our operational efficiency. So at the moment, of course, the focus is twofold. It's continuing to accelerate on the top line and optimizing margin levels by changing the mix, and the second thing is continuing to work on operational efficiency. And we are also making very nice progress there. So you should expect some more improvements coming in the next quarters.

Yes, Sherri, this is Rick. I would just add a couple of comments. First of all, I think to use an American vernacular term, I'd say the heavy lifting is over but there's still work to do absolutely. But the team has moved to more of an external focus from internal, and some of the hard work that was done, including the ERP conversion we talked about last year, is behind us now and you get into second and third gear, so that heavy lifting is done.

Second, we're still investing in our TS EMEA business, as you saw this quarter with our announcement of the Orchestra acquisition. And hopefully, that's another indicator for how we feel about the prospects for that business overall. And very pleased to see, as you pointed out, the sustained momentum now that we've built there. But the year-on-year compares for TS EMEA will get tougher soon.

Okay, and do you think that the revenue growth that you're seeing there is share gains or do you think it's your mix of business being in higher growth segments?

So we haven't got yet the market data to give an exact answer on that. I would say at this moment, it's -- one, the market is favorable. Second, I think with some partners we've gained some share.

Okay, great and then, Kevin, I was just hoping you could give us a little bit of guidance for SG&A. With the extra week, I assume SG&A was up more significantly this quarter. I assume it will come down a somewhat decent amount in the second quarter. But maybe you could give us some magnitude for SG&A. Thank you.

Sure, Sherri. I would range the operating expense in the $530 million to $540 million range for our upcoming second quarter.

Thank you.

You're welcome.

Thank you, our next question comes from Lou from CLSA.

Okay, thank you, sorry. I stepped out for a second so I missed things. If we look at the TSI, maybe you could make some comments. It seems that when you obviously back out the quarter, the Americas just really isn't growing that much. Could you give us that number again, and maybe why it's been so tepid? And then do you expect much of a pick up as we go into the December quarter? And then I have a follow-up.

So Patrick, for TS in the Americas in particular?

So in TS in Americas, so if I heard the question properly is correcting for the extra week; correct?

Yes.

That was your question, so in fact, so again, it's mix related. If you look at our core data center solution business, we had a slight decline, again more related to a product mix issue we continue to work on, I would say. So we have our strategic priorities, and that's where we put the focus. And when we see business which is not meeting all our return criteria, we are making -- we are becoming selective. But if you look at the components, computer component business, here we saw a double-digit decline. This is due to the PC market conditions and the gain of solid execution on selecting the business, okay?

So on one hand, the top line is declining. On the other hand, margins and operating margins continue to improve for that business as we continue to improve all of our metrics. So that's for the Americas. And then for next quarter, we expect to be in line with normal seasonality, okay? So at the moment, based on the pipeline we have, we feel comfortable with the guidance we have provided.

Let me just throw in there that a lot of very big tech companies, EMC, VMware, IBM and obviously even Arrow yesterday, thought about declining demand going into the December quarter and in the US, I guess not so much EMEA as per all of the comments from before. Do you get the impression that you're not seeing that and any thought, if so, that would be the case why?

So hey, Lou, let me jump in a little bit on this. We've anticipated a theme during the call with some of the questions around this element of, let's say bullish guidance on our part overall. And first of all, we want to acknowledge no matter how you handicap for this leap year that we just had, we do think that growth has slowed. We've built that into our assessments, and just like every quarter at this time when we're on the call, the outlook we're providing is our best assessment of all of our data points, everything off our dashboards, our leading indicators, and our coincident indicators including what's happening with our key suppliers, et cetera.

So what I'm trying to do is just reassure you that we factor in all those data points, including some announcements this morning from some of our suppliers, into the outlook that we provided. But what we are providing you is the best information we have from what we're looking at today, and certainly not trying to create controversy, but just trying to be open and transparent as part of our overall themes in addressing these questions.

Okay, great. Maybe just switching a little bit of a different explanation. Obviously, we understand the extra week, but I'm just wondering given the extra week was an October 3 close and your competitor closed on the 26th, not only the extra week, do you think that the timing of the extra week was very helpful in that? Because they've talked about in their EM business or components business that book-to-bill, even though they missed their number, is now back above 1.2 and that's what you said. So I'm really just trying to understand the linearity around that.

Yes, Lou, I think if you check the transcript from the August call, you'll see my commentary and I'll repeat here. The way we plan for, and actually, I think the way we experienced the leap year impact for us, it's much more linear at EM and it certainly was much more acute at TS. Because to those last few calendar days of the quarter, are certainly heavily weighted days from a daily revenue point of view, vis-a-vis the quarterly overall average. So I do understand the point that you're making there. But I do think that it's two different tales of impact regarding the relative impact for components versus computers. And once again, factored all of those known factors into the type of outlook we're providing today.

Okay, thank you guys, good luck the rest of the year.

Yes, thank you.

Our next question comes from Matt Sheerin from Stifel.

Yes, thank you. Just regarding the supply chain volume business that you talked about being up in the December quarter. You also talked about that being weak in September. So was that a function of expected revenue in September, and it just got pushed out? Or was that just timed for the end of the year? And I know you've been in that business now for going on three years and it sounds like it's working from a return standpoint. But are you seeing growth in that business, and are you able to squeeze costs at all so its helping your operating margins?

Great question, Matt. It's Gerry. We have always said that business was opportunistic for us. So at some point where it wasn't accretive anymore to our results, we would move to get out of it, so it continues to be accretive. The December quarter has historically and will again this year be the high watermark for that business. Due to the introduction of some new products in this model, our June quarter was unseasonably high. So when you look at the September quarter, demand moderated back down to historic levels. So it may have given the experience that the business was off. Again, the December quarter is a big quarter for us and we're projecting that strength in this December quarter will happen again also. So for us, it's historically been a business that December was a high watermark and it went down from there. This year those results were a little bit different, but we believe we'll be back to normal seasonality in that business in the December quarter.

Okay, and then on the, well actually just related, Gerry, to EM, you've obviously had lots of consolidation from a lot of your big suppliers. And I know in the last couple of years, you've basically said that you don't see that as an issue for Avnet. But now we're seeing, obviously, an acceleration, so what does that mean for Avnet over the next couple of years?

Matt, it's a really good question but it's a hard one to answer, because it's different by supplier. Because the activities that they go under generally take three forms: classic consolidation where they're just trying to grow, the need for scale, and then customer market diversification. So really depending upon the type of acquisitions that happen, the impacts are different. Generally, we've been positively impacted by this trend, because as the consolidation occurs, the suppliers generally look to their biggest partners who can service them on a global basis. And we usually, if anything, pick up more business than we lose in those transactions.

But again, every one of them is different so you can't predict how it's going to come out. The top 25 of our suppliers are about 65% of our overall business, so even if that consolidates to 20%, I don't see an overall negative impact to us. I think the trends are actually more favorable for us as a large distributor than they are for some of the other smaller distributors.

Okay, all right thanks a lot.

Thank you.

(Operator Instructions)

Our next question comes from Jim Suva from Citi.

Thank you and congratulations to you and your team. On the guidance, I believe I heard some commentary about the TS seasonality that your guidance is going to be better than seasonality. Maybe my knowledge is a bit old or maybe you can refresh me of what it is, but I had historically thought that TS sales like the last month, and specifically the last few weeks, are extremely important to hitting the quarterly numbers for the TS business. So my question is, A, is that still true about the linearity within the quarter? And B, if it is, why or what type of confidence or end markets or geos from TS or orders or something gives you a reason to really go much higher if it is back-end loaded?

Jim, it's Rick. So let me try to clarify I think a little bit of what I heard you say. First of all, we've said that, again, handicapping for this leap-year impact that we had, we believe that the TS guidance reflects the upper end of normal seasonality of plus 26 to plus 30. The other comment I had made historically is that for the past two fiscal years at least, and those are the data points in front of me right now, the sequential impact of TS has actually exceeded the high end of that. But at the same time, I think there were also weaker September quarters as a base point for the last two fiscal years. So that's what we're thinking overall. But our statement for this quarter was the way we've normalized for our leap year, we think the December guidance at TS represents the upper end overall.

Regarding, the quarterly linearity, we can absolutely confirm that for a normal 13-week quarter at four, four, five weeks, 50% in that first eight weeks, 50% in the last five weeks, with over 50% of those five weeks happening in the last two weeks, that's still the type of intra quarter linearity that we expect at TS.

Great, and then my follow-up question is on the SG&A. I believe you mentioned $530 million to $540 million outlook. Is that the number then that we should just basically each quarter be reducing by $3 million to $5 million, given your savings program and your initiatives there? Or are there any other factors that we need to be considering that could impact that for the longer term?

Hi, Jim, it's Kevin. I think I'll continue to update everybody as we get into each quarter. Because as an example, coming out of our current quarter, we had the impact of our equity comp grant that sequentially increased from our [end of] fiscal year to this quarter roughly in the neighborhood of $10 million. So clearly, we can continue to update, because depending on volumes and the variable cost impact, that will be an ongoing thing. But you can bank on that incremental $3 million to $5 million.

Well incremental in the sense though, Kevin, you baked that into that expectation of $530 million to $540 million. That's what you've put into that expectation

Yes.

Yes, I was referring to beyond the December quarter. Are there any other things we need to be aware of, whether it be management grants of bonuses or annual wage increases or opening or closing, any type of initiatives or things like that?

There will be a slight merit increase that will take place on January 1 for the majority of the organization. And those were built into the fiscal-year budgets and plans. And of course, in January, as we're talking about Q3 guidance, we'll be able to set your expectations around SG&A at that time.

Great, thank you very much and congratulations to you and your team.

Thank you, Jim. By the way, notice we did an acquisition, Jim.

Thank you. Our next question comes from Mark Delaney from Goldman Sachs.

Yes, good afternoon and thanks very much for taking the questions. On the acquisition topic, just a quick housekeeping one. Does the TS guidance assume the benefit from the Orchestra acquisition? If so how much revenue and EPS impact is baked into December?

Mark, it's Kevin. It's a relatively small annualized. We indicate it's around $90 million to $100 million, and then think about the [proffer] from that. So as you think about we're likely going to close that within the next couple of weeks, so we'll get a small uptick from a revenue standpoint and limited impact from EPS for this quarter.

Okay, that's helpful. And I was hoping to talk more on the EM segment outlook and two-part question. First, if you could clarify the book-to-bill commentary about what you're seeing in October. Was there some above seasonal pick-up in the bookings or is part of the getting back to parity comment related to just billings came down and so the ratio got back to one? And then part two of the question is maybe you could just elaborate on what you're seeing in terms of inventory levels, more holistically in the EM market? Clearly estimate your competitors -- NXP this morning was talking about a 25% increase in inventory dollars in the distribution channel. And wondering if you're seeing any excess inventory at your competitors? And if so, how that may impact sales and margin?

Great, so Mark what I'd say first looking at the book-to-bill, so yes, we were below parity at the quarter end, and in this month we're back to parity. So I would say I think your consensus is generally correct. The billings came down, so the bookings have come back in line. And but I will tell you, it continues to strengthen as the month goes on, so that feels good.

Back to the inventory perspective, I think if you take out our select high volume supply chain engagement, I think our inventory's in pretty good shape. We have lots of detail conversations with our suppliers about our inventory. I won't specifically talk about any particular supplier and what we're doing from an inventory perspective. But when I look at my demand and I look at my inventory outside of what we've built for the high volume supply chain engagement, I feel pretty good where we are from an inventory perspective right now. So I don't foresee, unless something changes dramatically in the market, an inventory growth for us this quarter, outside of to support the demand that we have today.

Okay, and just in terms of inventory your competitors do you have a view there? I understand you guys feel good about your inventory. Really the question was do you think there's other distributors that are maybe carrying too much?

I wouldn't speculate on what other distributors are doing around their inventory.

If I could just ask one last one or just a quick follow-up. The comment about planned increases for some of the EM business in the EMEA region, can you just give a sense for what percentage of the revenue there you expect to be increasing prices on, the magnitude of price increases that you're hoping to be able to pass through?

Yes, if you think about it, it's generally related to suppliers who went -- either moving from a euro to a dollar perspective. So it's from a magnitude perspective, it's going to go out over probably a 9-12 month period. I think you'll see a very small impact to our overall results because of it. So I want to be fully transparent about what's happening from a margin perspective, but it's not a huge impact to our business today.

Mark, what we don't know, I think when we face this literally 20% plus euro-dollar disconnect, how long was it going to last, and then at what pace will the suppliers try to introduce incremental price increases to eventually respond to it or would it eventually revert back and et cetera? Those are the variables you don't understand. And we commented I think a couple of calls ago that we were trying to get ahead of some of these price increases with some smart inventory investments. So it's a little bit of a matching game going on there as part of our overall mix. But as Gerry said net-net, not a major impact issue.

Yes, there's all kinds of variables that play into that, what suppliers decide to do from a timing perspective, if we see any more strengthening or weakening. So it's hard to predict what's going to happen from here on out.

Thank you very much.

Thank you. Our next question comes from Ananda Baruah from Brean Capital.

Hi guys, thank you for taking the question. Appreciate it. Just two if I could. The first is can you remind us if you intend to pass all of the $50 million run-rate savings to the bottom line? And if so, over what period of time we should expect that? And then I have a follow-up.

Yes, the $50 million annualized we would expect to be entering our next fiscal year with that as part of the reduction of our cost base.

And does that whole $50 million pass down to the bottom line?

Yes.

Got it, thank you. And just on the TS side, I would just love to be able to get any of your context that you think is useful around hybrid cloud adoption, really how do you see your customers really engaging in hybrid cloud today? What do you see as, to the extent you can talk about, what do you see as the headwinds or maybe the process that they're working through and just really overall what your guys' temperature on what the hybrid cloud opportunity looks like over the -- I don't know -- the intermediate term? That would be really useful, thanks.

So first thing I would say is that our cloud activities went very well last quarter, so we had a significant growth in our cloud activities. What hybrid cloud offers now to customers is the opportunity to optimize basically their data center and create more flexibility at the lower cost. So in fact, so our strategy is we are exposing our partners to the new opportunities, and I would say that the traction is there. We see a lot of traction, a lot of interest. The thing is I would say the CIOs need to get also used to that new technology. And it's true that decision-making process is taking some time, because this is something which is relatively disruptive. But we see enormous interest. Our vendors are coming up to the market with very interesting technologies, and this is part of our key strategy so we are pushing it hard in the market. And I would say that I'm pretty happy with the results so far.

That's really helpful. Yes, sorry go ahead.

No, I would just add a little bit of more color commentary, because there's the issue of go-to-market with TS, but there's also Avnet, the IT customer as well. I'd just reinforce, hey look, we're believers in the cloud. We're adapting and taking advantage of it, also as Avnet the IT customer. And just anecdotally, from the conversations the VARs, I think I would share that the hybrid is still becoming the preferred environment. There's less what I would call full fork lifting of existing production apps into the cloud. But if there's an opportunity for an update or a conversion or a consolidation of apps, these are giving entry points for more, for example, SaaS offerings to be considered and implemented. Within our four walls of nearly, rough numbers, 300 production apps within Avnet's portfolio today, some 10% and growing are actually what I would call in the cloud app support at this point.

That's all really useful context, guys. So just one last question on that. If it's possible to actually answer this question in a useful way. When CIOs begin to work through some of those dynamics, moving them closer to adoption, when that adoption really starts to happen in a much more normalized way, do you envision the growth rate of your cloud business actually accelerating? And then really, just maybe we can just use the industry dynamic that you guys think can manifest, do you think the industry growth rate of cloud adoption can actually accelerate at that point? Or is it, would it be more a situation of, we just continue to get for a long period of time, adoption at current rates of hybrid cloud architecture? And I'll just leave it there, thanks.

Ananda, as much as I would love to provide a forecast on that for you, it is way out of my pay grade. So I'll leave that to the forecasters and the specialists that are tracking that. But we, like a lot of our customers, are looking at data from some of those specialists, looking at the rates of cloud adoption, looking at the percentage of work loads moving into the cloud. By the way, are there any patterns in the types of work loads or the type of applications that have a higher share in the cloud, so to speak? But far be it from us to try to forecast it, but we are incorporating the trends into our strategic planning, and the plans and investments we're making at TS today to be relevant in that future at whatever pace it actually materializes.

I just would like to add one more thing. It's in fact, private cloud, we believe that private cloud will continue to be extremely relevant and probably will still represent more than half of the total cloud opportunity. And private cloud, in fact, is driving as we speak, some nice demand, especially for converged and hyper-converged infrastructures. So what we see is this move to the hybrid cloud environment is not only opening opportunities for public cloud, but also private cloud for the latest technologies and also for services.

Got it. That's all really helpful guys, I really appreciate it. Thanks a lot.

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

Thank you for participating in our earnings call today. Our first-quarter FY16 earnings press release and related CFO commentary can be accessed in downloadable PDF formats at our website under the quarterly results section. Thank you.