安富利 (AVT) 2016 Q2 法說會逐字稿

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

Good afternoon and welcome to Avnet's second-quarter FY16 business and financial update. As we provide the highlights for our second-quarter FY16, please note that in the accompanying remarks we have excluded certain items including intangible asset amortization, restructuring, integration, and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results. When we refer to consistent currency or the impact of foreign currency, we mean the impact due to the translation of 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 prior period to include the impact of acquisitions and exclude and estimated impact of the extra week of sales as our first-quarter FY16 included 14 weeks compared to historical quarters which contain 13 weeks. In addition, when addressing return on capital employed, return on working capital, 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 second-quarter FY16 highlights. Following Rick, our Chief Financial Officer Kevin Moriarty will review some additional financial highlights and provide third-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 second-quarter FY16 business highlights.

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

Even with the softer demand we experienced in our Americas region in the December quarter, our teams stayed focused on profitability, and our gross profit and adjusted operating income margins expanded year over year.

Revenue of $6.85 billion was near the low end of expectations due to weak demand in our industrial markets and EM Americas and a softer than expected close at TS Americas. As a result, revenue increased 6.4% sequentially after adjusting for the impact of foreign currency changes and the extra week in our September quarter as compared with our normal seasonal range of plus 10% to plus 14% growth.

Our EMEA region continued their multi-quarter positive growth trend as revenue increased 3.5% year over year in constant currency, led by continued strength in our electronics marketing business. Despite this EMEA performance, organic revenue declined 5.5% year over year in constant currency, as our Americas region decreased 9.9% and our Asia region declined 9.5% in constant currency.

Gross profit margin increased 27 basis points from the year-ago quarter to 11.4%, driven by improvements at TS across all three regions. Operating expenses declined $40 million or 7.1% year over year due to the translation impact from the stronger US dollar and from ongoing expense efficiencies, including our Avnet Advantage initiative.

In our December quarter we realized roughly $5 million of expense savings from our Avnet Advantage initiative which, when combined with the realized benefits from our first fiscal quarter, equals a cumulative total of approximately $45 million of annualized savings fiscal year to date toward our originally communicated goal of $50 million as we exit FY16. Given that we are executing faster than originally planned, we now expect to exit our fiscal year with $60 million of annualized savings.

Our decline in revenue led to a 7% year-over-year decline in gross profit and operating income dollars. The strengthening of the US dollar had a significant impact on our reported results as adjusted operating income declined just 0.8% in constant currency. While our reported results reflected the impact of the decline in the euro during the second half of our FY15, the strengthening of the US dollar now against additional currencies such as the Australian dollar, Japanese yen and other emerging market currencies is having a larger impact on our reported results in FY16.

Adjusted earnings per share of $1.22 decreased $0.05 from the year-ago quarter. In constant currency, adjusted earnings per share would have increased $0.02 year over year to $1.29. Despite the recent weakening of certain economic indicators, particularly those that relate to manufacturing activity in the Americas and Asia regions, the technology markets we serve continue to offer exciting growth areas that span the breadth of capabilities across Avnet. Even in an environment where we have to realign our resources to current market conditions, we continue to invest in our organic growth initiatives including IoT, embedded solutions and third platform technologies.

In our December quarter we expanded the offerings our partners can leverage through our Avnet cloud marketplace and invested in two acquisitions. Earlier this quarter we enhanced our commitment to embedded solutions and IoT with the appointment of new leaders for these initiatives.

We continue to execute on our Avnet Advantage initiative to deliver additional efficiencies that will both reduce cost and free up investment for future growth. And, in addition to funding these growth initiatives, we are taking advantage of the current market pullback to increase the investment in our equity through our disciplined share repurchase program.

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.

I would like to start with some commentary on EM. In our December quarter weakness in industrial markets in our Americas region resulted in revenue at the low end of expectation as EM Americas organic revenue declined 4.9% sequentially and 6.3% year over year.

When combined with slower than expected sequential growth in high-volume supply chain engagements at EM Asia, EM's organic revenue declined 1% sequentially in constant currency, which is just below our typical seasonal range of flat to plus 3%. As a result, EM's revenue of $4.1 billion declined 7.2% year over year in reported dollars and 3.4% in constant currency.

EM Asia declined 8.3% year over year in constant currency driven by declines in our high-volume fulfillment business as well as softer demand in our core business. Contrasting the other regions, EM EMEA delivered a tenth consecutive quarter of high single-digit to low double-digit growth as revenue increased 7.5% year over year in constant currency. Gross profit margin experienced a modest decrease year over year, primarily due to a decline in our EMEA region, partially offset by an improvement in our Americas region.

Operating income declined 9.1% year over year to $174 million, driven by the translation impact of the stronger dollar and declines in our Americas and Asia regions. Operating income margin declined 9 basis points year over year as an improvement in EM EMEA was offset by declines in our Americas and Asia regions. The EM team in EMEA delivered strong leverage as year-over-year operating income grew nearly twice as fast as revenue in constant currency. And operating income margin expanded for the seventh consecutive quarter.

Even with the inconsistent growth by region and quarterly fluctuations in high volume supply chain engagements the EM team has done a solid job of aligning resources as operating income margin on a trailing 12-month basis has approximated 4.6% over the past four quarters. In the December quarter, EM's inventory declined 5.6% sequentially and working capital was flat with the September quarter.

On a year-over-year basis, working capital increased 5.2% primarily due to an increase in inventory to support organic growth in EMEA, as well as the lower than expected revenue in our Americas and Asia regions. As a result of the decline in operating income, return on working capital declined 207 basis points from the year-ago quarter.

Now, turning to TS, our Americas region experienced a weaker than expected close, which led to below seasonal growth in the December quarter. Declines in storage systems, computing components and Latin America led to a year-over-year decrease of 12.2% at TS Americas. As a result, organic revenue grew 19.6% sequentially in constant currency as compared with our typical seasonal range of up 26% to 30% growth. On a year-over-year basis, revenue declined 12.3% to $2.7 billion, as organic revenue declined 8.5% in constant currency.

In TS EMEA, a fourth consecutive quarter of year-over-year organic growth in our core business in constant currency was offset by a decline in computing components as organic revenue declined 10.6% in reported dollars and 2% in constant currency. At TS Asia, the strengthening of the US dollar against local currencies accounted for roughly one-third of the 23% year-over-year decline, with the remainder related to softer demand in computing components and China.

Gross profit margin increased both sequentially and year over year at all three regions driven by portfolio actions and product mix. TS EMEA delivered another quarter of strong leverage as operating income grew double digits year over year, which was offset by declines in our Americas and Asia regions as TS operating income dollars at the global level were roughly flat with the year-ago quarter. The improvement in gross profit margin and continued expense management had a positive impact on operating income margin, which grew 51 basis points year over year, with all three regions contributing to the improvement.

Working capital decreased 6.8% year over year or 3.6% in constant currency, and return on working capital increased 318 basis points. Calendar 2015 was an important year of progress for TS as every region undertook a combination of portfolio and expense management actions to improve profitability and returns. You can see the impact of these actions as TS grew operating income 7.1% over calendar 2014, even as revenue declined 5.8%. Additionally, operating income margin increased 40 basis points to 3.3%, representing meaningful progress toward our target range of 3.4% to 3.9%.

Now, turning to cash flow from operations, during the December quarter we generated $118 million of cash flow from operations and $444 million now for the trailing 12 months. Excluding the impact of changes in foreign currency exchange rates, working capital increased 5.9% from the year-ago quarter and 2.1% sequentially. The sequential increase was primarily due to the typical calendar year-end increase at TS. The year-over-year increase was due to the previously mentioned inventory growth at EM.

Our continued focus on operating expense efficiencies, including our Avnet Advantage initiative, contributed to our leverage during the first half of our fiscal year, as adjusted operating expense as a percentage of gross profit declined 106 basis points to 68.4%, as compared to the first half of FY15. In addition to our continued focus on this important initiative, we are developing limited but incremental expense plans in response to the current market conditions. In this slower growth environment, our cash flow generation remains strong as our trailing 12-month cash flow generated from operations has averaged approximately $484 million over the past four quarters.

During the December quarter, we paid a quarterly cash dividend of $0.17 per share or $22.4 million, and have repurchased approximately 900,000 shares, which represents an investment of $40 million in our equity. In addition, quarter to date we have invested an additional $65 million in our disciplined share repurchase program and still have approximately $303 million remaining in our current authorization.

We remain committed to returning cash to shareholders. And during the first half of our fiscal year we have returned approximately $230 million through our dividend and disciplined share repurchase program. We ended the quarter with approximately $916 million in cash and have ample liquidity to fund our ongoing growth initiatives as well as invest in our equity when it presents a compelling value. Now, turning to our outlook, looking forward to Avnet's third quarter of FY16, we expect EM sales to be in the range of $3.85 billion to $4.15 billion, and TS sales to be in the range of $2.15 billion to $2.45 billion. Therefore, Avnet's consolidated sales are expected to be in the range of $6 billion to $6.6 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.93 to $1.03 per share.

This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 134 million average diluted shares outstanding and effective tax rate in the range of 26% to 30%. In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.09 to the euro. This compares with an average exchange rate of $1.13 to the euro in the third quarter of FY15.

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

(Operator Instructions)

Our first question comes from Ananda Baruah from Brean Capital.

Hi. Thanks, guys. Good afternoon. Thanks for taking the questions. What I would just love to have, if we could, is a little more context around some of the softening dynamic that you mentioned, both in TS and EM, particularly in the Americas, and then in Asia, as well.

And then how long do you think that the firmness in EMEA can continue, as well? Just a couple next-level dynamics behind the drivers that you saw. Thanks.

Ananda, this is Rick. I'll actually turn it over to Gerry and Patrick for some regional color on a group basis. The EMEA question, we anticipated. We know it's been a sustained regional story that's very positive and continues to get questions every quarter.

But I would start with an acknowledgement that our components team continues to execute very well in a tough market there, and of course the recovery story, multi-quarter recovery story going on with TS EMEA to add to that, has been adding up to some exciting results there. Somewhat muted when it gets translated but on the local currency basis very excited there overall.

For the overall softening, what we saw, it was very regional for the Americas but I'd say generally speaking two different types of causes. For EM it was much more about a general softening in the industrial sectors, particularly with, depending on whose PMI you follow. I think for both November and December there were successive downgrades on PMI.

For TS it was more about a little bit of a late-quarter surprise with the final closure on the pipeline that we had identified, as well as some particular sub stories where software and services continue to grow, yet hardware, particularly in the storage systems area, stood out to us as one of the areas of surprise. But let me ask Gerry and Patrick to add. Gerry?

Sure, Ananda, this is Gerry. Starting with the Americas, we were below seasonality in Q2, really, as Rick said, due to broad overall weakening in what I would call the mass market. And our bookings weakened throughout the quarter. This is actually strengthened in January to get us over parity at this point. If there was any bright spots in the market for us they were automotive, mill, aero, but those were not anywhere near enough to offset the core industrial weakness we saw.

Book to bill, again, has strengthened during the current month and we are projecting seasonal sequential growth in the Americas, but that's coming off a lower base, of course. And I would say at this point visibility is just not that robust due to lead times being short. Our customers know they can pick up the phone and order, so we're not getting a lot of future visibility there.

When it comes to Europe, again, I would echo Rick's comments. Our European team has really been performing quite well. I think in Europe they started quantitative easing much later than they did in the Americas, so overall the market is performing well, and I think we're performing well in that market. So, I would also like to give a round of applause for our EMEA team on their execution there.

Just overall, as Rick talked about, the PMI and ISM data, if you look at our served markets, we think we've got low single-digit growth going forward. If there's any bright spots in the markets for us going forward we're still very excited about IoT and embedded. Patrick, I'll turn it over to you for TS.

For TS, what happened at the end of the quarter, we were a little bit surprised by, I would say, some softness in closing deals on storage. And to be very specific, it's legacy technology storage. In fact, if you look at the next-generation technologies like converge, hyper-converge, or flash arrays, we grew very nicely at double digit, in some cases even high double digits. So, here we see traction. But, unfortunately, the positives were not enough to offset the decline on the legacy storage technology.

In EMEA, we have market conditions which for the moment remain positive. I would just add that companies have delayed investments because of the sluggish market environment. They have a better visibility now so they have to invest and they're investing so that's helping the market.

In addition, in that market, we continue to execute very well. We've made some management changes, and so all the regions now within Europe, all the regions are nicely recovering. We have some record results in some of the regions like Eastern Europe and Northern Europe. Central Europe continues to develop very well. And Southern Europe, which was an issue for us, is now turning around.

That's really helpful. I appreciate it. Thanks for the context.

Thank you. Our next question comes from Will Stein from SunTrust.

Thanks for taking my question. I'm wondering if, as happened once or twice in the last few years, rebates were any issue in TS in the quarter? And then I do have a follow-up.

Will, I think the short answer is no, because, frankly, if there had been some anomalies there it probably would have had more impact on the operating margin expectations. And, as you can see there, there was some nice expansion year on year despite the softness. Patrick would like to --?

Just add one more thing. As you know, the rebates, every supply's got its program and has got its focused list of products. Of course, for us, we are paying a lot of attention to the product mix to maximize the rebates. And that's exactly what happened this quarter again. We've been able to perform well where the supplies are putting the focus and so to maximize the rebate.

Great. And then a follow-up, if I can. On TS, of course naturally the concern longer term is something that you seem to have seen this quarter where the legacy products had a problem selling, and the more current or newer technologies are doing better for you.

With transition to cloud infrastructure, investors are, of course, concerned that perhaps what you saw in this quarter is an acceleration of a trend that could continue for some time. I'd love to hear the discussion as to what the Company is seeing in the market and then what it can do to anticipate or react to that trend. Thank you.

We have been anticipating that trend. In fact, since many quarters already, we are investing in the next-generation technologies. Just to mention one is hybrid cloud. We just launched our cloud marketplace. We had both companies specialized in cloud orchestration.

We have just finished creating practices for each of the next-generation technologies to come to market and support our partners with innovative solutions. So, we've seen the trend. We are anticipating the trend. Indeed, it's the crossover. Are we going to see fast enough the traction on the next technologies to compensate for the decline on the legacy technologies? I would say so far so good.

As you can see from our results, despite the decline in sales we've been able, thanks to better margins and good cost management, to maintain the profitability and even to increase it in constant currency. But, yes, there's a market change. We recognize it, we've made the investment, and we are making the investment to be very well positioned on the next technologies and take advantage. Because in fact both new technologies, we believe, are going to create a lot of good opportunities for us, and profitable opportunities, because our vendors are going to reward us better on selling those technologies.

Will, this is Rick. I'd echo, first, we have been adjusting. I agree with Patrick 100%. We continue to monitor closely and making sure we're staying close to the developments.

And perhaps I'm going to be a bit of a historian here, but I would tell you from a TS change management perspective, I see a lot of similarities to what's going on in this transition from legacy storage to the new technologies, similar to what I think TS faced as the world moved from proprietary service to more industry standard. It's not an exact copy of the play book, but I think there are some similarities that give us some ideas to make sure that we stay in tune with this transition.

Thank you.

Our next question comes from Lou Miscioscia from CLSA.

Great. Sticking on the question of margins for a second, maybe if you could give us some idea as operating margins going forward for both groups. Do you think TS now -- I understand obviously that it is seasonal -- but is TS now taking a bit of a step function higher getting into your 3.4% to 3.9% bracket? And maybe a comment also on the EM side since that was obviously a little bit lower than expected.

Lou, this is Rick. I would tell you, I think our consistently communicated expectations is that, as we continue our progress towards our hopefully well-understood target ranges in op margin by the group, it is reasonable to expect that we are looking for year-on-year progress in op margin from the groups as they progress to their target ranges.

So when you're thinking about the way we're planning and executing and developing response to the marketplace for our businesses, that's the evergreen goal we keep in mind. Gerry, any other particular comment on EM margin expectations?

This is Gerry. We will expand our op margins in the March quarter sequentially given the decrease of our high-volume supply chain engagement this quarter, causing a mix shift back to the West, and the work that our teams are doing on expense management given the current environment we're in. With the weakened Americas and Asia market we are going to be challenged to get to the 5% goal this fiscal year. But we do believe that our current action plans will get us back in a trajectory to achieve the 5% goal in FY17.

Historically the March quarter's about 20 to 30 basis points up from the December quarter. We expect that trend to continue. But we're not going to claw back all of that from a year-over-year perspective.

For TS, as of today, we are on plan in terms of improving our operating income percent. I would say that all the regions and all the business units are contributing to those improvements. For the next quarter, we have again planned to improve our operating income percent year on year as we continue to execute on, I would say, portfolio management, so going after product, product mix and the customer mix, which is a little bit richer in terms of GP percent, and of course continuing working on efficiencies and productivity.

Okay. One follow-up on the TS EMEA side of things. When you look at the year, which was obviously better than expected, given the impression that the European economy stayed weak, and understand the reason why, how long can that last in the sense of now for Europe on the TS side, all of tech has tougher year-over-year comps? Do you think that spending there will be flat year over year? Or do you think that given the under spending for X number of years that we could still see growth again this year?

Hey, Lou, it's Rick. I'll jump in. I think this is the point in the call where I typically give my disclaimer that we are not economists or forecasters here over the long term.

What I would tell you is that the best guidance we can give you is what's reflected in the March quarter guidance as a starting point. I would also tell you that when we get to April and report on the March quarter, we may have a little more insight here because I do think the first calendar quarter of the year can give some clues as to what people are thinking for overall IT budgets and spending in a calendar year, being as we just finished the calendar year-end budget flush overall.

So, as much as I'd like to give you an opinion, it's really beyond our scope to try to give a call for the year here right now. But, as you can see, that we built into the TS guidance sequentially, we are at the higher end of would be normal seasonality at down 16%. That information obviously was baked into that expectation.

Okay. Thanks, guys. Good luck on the new year.

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

Hi, everyone. I'm going to beat the dead horse and go back. The sales shortfall of $250 million, I understand the secular headwind in traditional storage, but the question I have is, do you believe you under performed the market, particularly in the Americas in the quarter? And then, secondarily, what is the sizing now of the computing components business, knowing that it looks like it's going to be another rough year for HD and microprocessors?

A few answers. First thing, we don't have yet network share figures, so difficult to comment if it's market related or if we have lost share. The only thing I know is we dropped in storage but we grew on all other product families. So, software, services, servers, networking, we grew year on year single digits. So, future will tell.

So, we are going to make the analysis, of course, as soon as we have the figures if it's market related or if it's our performance. Storage was one of the issues. The other thing is our product mix is changing and is going more and more towards more services and more software. And this is an area where we are, I would say, from an accounting standpoint, net treating some of the transactions. That has also an impact on the top line -- not on the margin, not on the profitability, but on the way we report vendor revenue.

The third thing which happened in the Americas is Latin America was a little bit softer than expected. Currency was one issue and then we had some difficulties in Mexico. So, I would say three main reasons for the decline in the Americas, I would say, to GAAP versus guidance.

Shawn, I would add, I think there have been a few notes published regarding some data from VAR surveys which indicate there was a good year-end budget flush experienced by many of them along the way. I would also add that TS Americas has historically been a very strong and top performer among our overall portfolio. And, as Patrick said, we will get the facts and make sure we're dealing with an objective view on this overall.

Initial expectation is that a top-performing team didn't have a major stumble here on execution as a big contributor to the quarter. And then your question regarding the total size of computing components now, it's now hovering just under 10% of TS global revenues.

Okay. And then as a follow-up, maybe if you could just discuss the appetite for the buyback. I know historically your appetite increased, and maybe that was evidenced by what's been purchased quarter to date. Valuation got closer to book value. But has anything changed in how you view the buying of stock when it's close to book value in terms of increasing the appetite?

Shawn, hi, it's Kevin. I think for those of you that have been following us for a while, our approach remains the same and consistent. When we look at our internal projections, we're going to continue to follow our disciplined approach. And when we get closer in terms of value, obviously we accelerate the amount we're buying, but we do look at our forward internal projections and have a schedule in place that we buy against. So, nothing has changed in terms of our approach.

Thanks.

Our next question comes from Brian Alexander from Raymond James.

Okay, thanks. Good afternoon. Going back to the EM weakness in industrial, I'm not surprised that you saw that but it seems like maybe you saw it later or at least at an accelerated pace later than many of your suppliers who have talked about weak industrial for many quarters, and we've seen weakness in a lot of the industrial OEMs. But now some of those suppliers are pointing to more stability. So, help us understand the disconnect there and maybe why you're seeing more weakness now when they saw it earlier.

Yes, Brian, it's Gerry. I think you're correct. We actually did see softening happen late into the quarter in both the Americas and in Asia. Again, I can't talk about the difference between our suppliers' business and our business. Some of it has to do with where they're focused from a market perspective.

But if you think about the size of our customers versus the size of the customers they deal with direct, so China for example, our sales dropped off in China. Part of it was liquidity in China for our customer base, where maybe some of our suppliers don't deal with that given the size of the customer base they're dealing with.

Two quarters ago when we were counter to what the suppliers were saying, again, I think it has a lot to do with segment focus and things like that. But it seems like now, to your point, we saw weakness late into the quarter where some of them have seen industrial start to pick up again.

Okay. And maybe just two quick ones. For TS, for the revenue outlook, given the weakness that you just saw in the December quarter and the weak close there, just curious why guide that to the high end of seasonal for the March quarter?

Was there anything on the backlog side that gives you confidence there? Why high in the seasonal? And then just for Kevin on DSOs, why were they up 3 days year over year if the quarter wasn't back-end loaded? Thanks.

Brian, I'll jump in first. Yes, on the TS revenue outlook, despite the fact that our fiscal quarter closed on January 2, we were a little surprised that some of those late bookings actually moved into the Q3 billings. So, a little bit of that crossover on a fiscal boundary is part of the reason that we're at that higher end of sequential seasonality.

And, Brian, on the DSO, if you break down our geographic revenue mix during the quarter, that was really the main contributing factor on the DSO.

Okay. All right. Thank you very much.

Thank you. Our next question comes from Sherri Scribner from Deutsche Bank.

Hi, thanks. Rick, I think I heard you say that you thought the markets overall were going to grow in the low single digits this year. I just want to make sure I understood that correctly. Because I'm trying to understand, if I look at your business, the guidance for March suggests you guys are down 6%, 7%. And I know there's some currency in there, but why would your business not be growing that much? Are you losing share or what's happening?

Yes, Sherri, not sure exactly what data point in time. Maybe it's going back to the Analyst Day in June when I think I was trying to illustrate that, according to the forecasters, I think I showed global semiconductor growth and then trends in IT spend. If we look at 2015 now, in early 2015, I believe the forecasters said global semis would be up 4% to 5% for the calendar year. It kept coming down. It kept coming down. It kept coming down. And I believe I saw a report by one of the forecasters in January that global semis were down 1.9% for calendar 2015 now.

So, if you're referring back to our Investor Day, I think I was trying to paint the picture of some of the growth trends being forecasted in the overall marketplaces. And if that was the data point, by the way, I think six, seven months has definitely brought a change in the air, so to speak, with some of those outlooks.

Just like we had the conversation earlier about making sure we understand what's going on, on a relative basis in the network shares for TS, we'll be, of course, doing the same for EM on a regional and breakdown by supplier basis, make sure that we're understanding that, as well. But I do think that even some of those data points I showed from an overall market growth perspective have been adjusted since mid-2015.

No, it wasn't related to something you said before. It was the question in the EMEA segment when you were talking about EM business in part of the Q&A earlier. You said low single-digit market growth going forward.

What I said, Sherri, was that the analysts show our served TAM growing low single digits. What I would point out is, yes, our EMEA business is growing in constant currency, but if you look at it in dollars, it's reduced. Also, what I would really point to -- and I think Rick made the good point -- analysts have projected a growth but, as he said, last year they projected it was going to be 4% and it wound up being minus 1.9%. So, what I would point to is our March quarter guidance really as what our current thoughts are on growth.

On the overall market growth.

I would say the Avnet TAM, served TAM growth, for EM.

Sherri, it's Rick. Just one more thing. When you're looking particularly at the total revenues for EM, also remember there's some anomalies there because volume engagements in Asia, and some of the differentials in the growth rates in specifically that part of EM's revenue. So, sometimes you'll hear us in some of the script, if you take a look at the transcript, you'll see us talk about growth rates in the core for EM versus the high-volume engagements, as well, and sometimes when you look at EM in total, some of the distortions there can cause you to scratch your head a little bit when you look at the market rates.

Okay. That's helpful. And I wanted to ask a little bit about the different FX impact in the EM business versus the TS business. It seems to be a bigger impact for TS and I'm trying to understand why there's that delta between those two. It's probably structural. And how should we think about FX impact going forward? Thanks.

Hi, Sherri, it's Kevin. I would actually point to, if you were to break down geographically certain emerging markets that have really experienced weakness in the calendar fourth quarter, we have a higher percentage of revenue for the TS business in those markets versus EM. And that's really what I would point to.

Australia too. Emerging markets, for sure, but even in Australia, TS has a much larger revenue than EM.

We have Latin America, also.

What would you expect the impact to be going forward?

It really depends on the movements from here. Things seem to have been recently stabilizing since the end of the year, but it really depends on movements from here, Sherri.

Okay. Thanks.

Thank you. Our next question comes from Jim Suva from Citi.

Thank you. And congratulations, especially on the year-over-year operating margin improvements. My question is on that, and I'll also ask my follow-up at the same time. When you look ahead, given the overall deterioration or pause in the markets, should we expect operating margins Company-wide to face some headwinds and not be able to grow year over year, or grow year over year?

Because you mentioned some initiatives you're doing in your different segments and strength, but then when we bring it back to the Company total wide you also have overhead of headquarters there. So if you can help us. Again, it looks like you've been making two years in a row of operating margin improvement. Should we expect that trend to continue Company-wide or start to pause out more from macro factors?

And my follow-up question is on the stock buyback. You mentioned you're looking more aggressively at it. But actually speaking, your stock buyback has been relatively consistent the past quarter or two. So, I think your comment, I assume, was how you mentioned in January month to date that you've accelerated the stock buyback. Should I think about that as a more going-forward statement as opposed to the reported December quarter? Thank you.

Yes, Jim, it's Rick. Let me start with the buyback, then I'll back into margins here, too. When you say we've accelerated the buyback, you've got to understand it's not really a conscious decision where we changed our approach. We have a standing schedule in place.

What we tried to connect was, with the recent market pullback, even before today's call, in rough numbers I believe we're down about 7% from January 1 to today. And based on our disciplined approach to our buyback, the fact that, that pullback has occurred would, based on all the expectations we've said, hopefully very consistently, you would expect that we would be more aggressive with our allocation of capital for that purpose.

So, we're trying to just paint a picture there of consistency to our hopefully clearly and consistently communicated goals on the buyback. It wasn't a conscious decision to accelerate. It's just when we have a pullback you can expect acceleration there.

On the margin profile, I think we have already confirmed earlier, TS is looking for a continued year-on-year margin expansion. With EM, it's more of a flattish to slightly down, some of it impacted by the mix of business at EM. We're watching that high volume engagement rate in Asia to see what kind of geo mix will actually come out for EM.

Because the biggest wild card, really what's going on at EM from an overall long-term margin perspective, is how the geo mix starts to come out. Because, keep in mind, even if we isolate the high volume engagements, in general terms, our Asia components business runs about half the growth and half the operating of the West.

Just to add onto that, though, to Rick's point, if you take out the high-volume fulfillment engagement out of the EM numbers over the last 12 months we would be at 4.9%.

Got you. And then on the rebates, you'd mentioned that things look pretty normal there. The question is, is normal good enough? Meaning, if we've seen a big pause here, do rebates need to be renegotiated for you to continue to meet your operational profit goals just because the big pause we're seeing here in the market, especially as you saw the last few days of the quarter.

Yes, Jim, this is Rick. I'm very proud of the way that the TS team is managing their mix. And rebate is more impactful on the profitability of the business. Again, with the year-on-year progress and the full-year progress at TS, I think that speaks for itself.

TS has a revenue issue that is more important at this point than whether or not the revenues we've got have the appropriate rebates. I think they're demonstrating their focus on profitability is paying off. I'm not overly concerned. You can't take anything for granted. We've got to manage it carefully and we will.

But I think, despite the revenue shortfall, the continued margin expansion gives you confidence we've got a good job going on there. And I think growth on the top line, as well as managing these transitions as we talked about earlier, such as the move to more newer technologies and third-platform technologies versus some of the legacy technologies, I think those are more strategically interesting right now as to how quickly we're adapting and moving for those transitions.

Thank you. Congratulations to you and your team there at Avnet.

Our next question comes from Steven Fox from Cross Research.

Thanks. Good afternoon. Just first question on the Avnet Advantage cost savings. Can you give us a sense of where those cost savings are in the segment breakdown? How much do you get from TS this quarter versus EM and corporate expense?

And then looking at the $60 million new target, where is the bulk of the incremental new savings expected to come by fiscal year end? And then I have a follow-up.

It's Kevin, Steve. What I would point to is, in the most recent quarter, I'd say 60% from TS and 40% from EM. Go forward, I think if you reflect back on what we shared at our Investor Day, I would point a higher percentage coming from TS. But both operating groups are very focused on the program and are contributing, but it would probably be in the same 60%-40% range as we move forward.

Okay. And then, I'm sorry, just a clarification on this because you've talked about all the great performance at TS the last couple quarters. Is that 100% related to Avnet Advantage or is some of that separate from what's going on with that program?

No, much more than that. Obviously over the last calendar year, very focused on portfolio actions, revenue management, a lot of focus areas that Patrick's been bringing some discipline into the organization. Some help from Avnet Advantage but a lot of other actions that are being ongoing within the operating group.

Great, that's helpful. And then just as a follow-up, on the embedded business, since you've mentioned industrial weakness, I'm just curious if that industrial demand weakness affected your embedded business during the quarter? And can you give us a quick overview on these prospects for that business for 2016, now that you made those management changes?

This is Gerry. Great questions, Steve. Yes, the market had an impact on the embedded business. And, as you said, we just named Ed Smith to be the full-time leader of that business.

But we're very encouraged by it because we think, particularly as our suppliers continue to consolidate, they're very interested in distributors who can sell solutions, and embedded is a big strategy for us to be able to sell solutions going forward. So, we do believe it provides us both better than core market growth and better margins over the long term.

Great. That's very helpful. Thank you.

Thank you. Our next question comes from Matt Sheerin from Stifel.

Thanks. I wanted to ask a few questions regarding the inventory -- up year over year despite the lower revenue. You talked about some of the puts and takes there, including the fact that you missed revenue in the high-volume business. And it also sounds like there was some strategic inventory build. But given short lead times, are you expecting inventories to come down on a dollar basis despite the fact that essentially you're going to be flattish to down a little bit on the components side in revenues?

Matt, this is Gerry. Our inventory was down 5.6% sequentially, so I think we're adjusting our inventory based on the market realities that present themselves. Inventory was up 10% year over year, and that was really due to much less velocity. As you said, we saw the velocity in the high-volume fulfillment engagements slow, particularly in December. That created a different dynamic for us.

If you look at what drove the year-over-year difference, it was that, because, remember, last December quarter we had a high watermark in our high-volume fulfillment engagement and the velocity was quite high. So, that's the main difference, if you look at our inventory on a year-over-year basis. The balance of the inventory we have we believe is appropriate to support core demand. And I would expect inventory to be flat to slightly down sequentially.

Okay. Because if you listen to a bunch of the semiconductor and components suppliers that have reported so far, most of them appear to be saying that, while distribution and sell-through was weak, getting stable to improving, they're also talking about inventory levels getting back to normal levels.

And it sounds like, at least for you guys, you're really not there yet. And I know perhaps there was some outlier reasons, particularly on the volume business. And then just also in line with that, Gerry, your business also seems to be lagging the semi guys in terms of by a quarter or so. It's still seeing relative softness where other guys are seeing a little bit of a bump up.

Do you think it's because of the mix of business -- you're focused more on industrial, the mid to smaller companies on the component side? Or do you think maybe this is the last cut and indeed you may see a recovery going into the June quarter?

Matt, let me start with the difference between maybe what we're seeing in the market and the suppliers. Again, if you remember a couple of quarters ago, a lot of our suppliers had negative outlooks and we had a more positive outlook. And at that time, a lot of that was related to weakness in coms in automotive.

And now, if you look at what a lot of the suppliers who have been a little more bullish this quarter are talking about, they're talking about improved coms and improved automotive. Those aren't big markets for us. I think when it comes to core industrial, I think that's the big difference between why we're not as bullish as some of the suppliers who have come out this quarter are.

When it comes back to inventory, again, like I said, I think inventory -- we took inventory down 5.6% sequentially, and I think it's in line with where we see the business. And we do believe that inventory will be flat to slightly down this quarter. I think our inventory, as a lot of the suppliers have said, they're starting to see distributor inventory come back in line. And if you take out our high-volume fulfillment business, that really from a velocity perspective came down this quarter. I think that's the big difference when you look year over year.

Okay. That's very helpful. Just as a follow-up, regarding the ERP implementation that's been ongoing, and it looks like in the later innings of that, where do we stand? And is there any heavy lifting going on the next quarter or two that could cause any issues on top line or distractions?

As you say, we've had an ongoing process for ERP systems, so we've rolled them out in multiple businesses around the world up until now. We are rolling out the ERP in our Americas business here. Our plan is to roll that out, to kick that off in April.

So, we're on track at this point. We don't perceive any issues with that. We don't believe it will have any major impact on our business at this point. And we look forward to getting on that new system to give us some efficiencies that we don't have based on our current outlook. Rick?

Yes, Matt, this is Rick. I would just reinforce, we have very robust change management plans in place. Over the last three to four years, we successfully pulled this off with our computer business in the Americas, followed by our computer business in Europe, and now moving to the components business in the Americas.

We take nothing for granted, but it's been two years of planning and preparation. User acceptance testing actually going on right now, and we're keeping a very close eye on it. We do understand the potential impacts and got a top-notch team with some experience here that we have a high degree of confidence in. So, all systems go and we'll keep you posted.

Okay. Thanks a lot.

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

Yes, good afternoon, and thanks very much for taking the question. The first question is on the EM segment. I was hoping you could talk on the margins. Specifically it looks to me like gross margins came down year over year, even though the high-volume engagements were lower this year. Maybe you could just help us understand what's driving that and if any of that has to do with either pricing pressure that you're seeing or any impact from the number of semiconductor companies that have been undergoing M&A?

Thanks, Mark. Actually, our gross margins year over year were up in the Americas and were up in our core Asia business if you take out the high-volume fulfillment engagement. Year-over-year gross margins were down in our EMEA business. And, again, we had talked about over sequential quarters of price increases that suppliers put on us that we're passing through to customers over time because we have contracts with them.

Sequentially, our gross margins in EMEA actually went up. We see the improvement in those gross margins, and we'll continue on that march of improving gross margins in Europe over the balance of the fiscal year.

Very helpful. And then for a follow-up question on the TS segment, I was hoping you could understand to what extent the Company maybe is making growth tradeoffs in order to get to these higher margin. I noticed the margins were nice at TS this quarter, but organic revenue fell 8% year over year. So, maybe you can just talk on that topic generally.

And then if you could specifically also size how big storage is as a percentage of TS and how much is legacy, how much of the TS revenue is tied to some of these more legacy types of storage systems that have been causing growth challenges?

There are two -- in general, we are now very careful what type of deals we go after. We are really carefully looking at what's the return, so what's the margin, and what's the return on working capital. So, we are really paying attention to it.

The main business unit which has been impacted by that approach has been the component business. The component business sales dramatically dropped. The main reason -- you have some market conditions but you have also the selection from business which was not profitable. So, yes, there is, I would say, at the moment we are paying a lot of attention to profitability to build a very sound base for future growth.

When it comes to storage, storage is roughly half of our hardware business. Now, the split between legacy technology and new technology, I would say it's something around 75%/25%, 25% for the new generation, 75% for the old one. I can tell you that in that space there is no reason to be selective. You have market conditions and we want to play fully in that space.

It's really more a volume issue. It is not linked to a strategy to be more selective. The quarter end, that surprise was, as far as we are concerned, more market-related and timing-related because, in fact, we built backlog which is going to bill in the next quarter, but nothing linked to a strategy to the select business here.

There are some other areas of our core data center business where we have been deselecting. Six months ago we did a strategic review of our portfolio. And, yes, indeed, we decided to deselect some business. Nothing material for sure that contributed to the profitability.

So, our component business, absolutely. Our core data center business, we are selective, but in storage in particular, we play completely, we are full in.

That's all super helpful color. If I could just ask a quick clarification -- of TS, how much is hardware?

Roughly 50%. It was just under 50% for December quarter, Mark.

Okay. Thank you very much.

And I would just add, sorry, just add one thing -- the trend is very clear. Hardware is going to become less and less of our total business. And especially as the market is moving to cloud and hybrid cloud, it's very clear that software and services is going to continue to gain weight in our total sales, which will help us again in terms of margins and profitability.

Thank you.

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