安富利 (AVT) 2017 Q2 法說會逐字稿

I would now like to turn the floor over to Vince Keenan, Avnet Vice President of Investor Relations.

Good morning and welcome to Avnet's second-quarter FY17 business and financial update. As a result of the pending sale of Technology Solutions and having met applicable accounting requirements, Avnet began recording the TS business as a discontinued operation in the first quarter of FY17, and prior periods have been adjusted for comparability. Additionally, the year-over-year comparisons reflect adjustments to the second quarter of FY16 for the transfer of the embedded computing solutions business from TS to EM.

As we provide the highlights for our second-quarter FY17, please note that in the accompanying remarks we have excluded certain items, including intangible asset amortization expense, restructuring, integration, 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 prior period to include the impact of acquisitions. 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, Bill Amelio, Avnet's CEO, will provide Avnet's second-quarter FY17 highlights. Following Bill, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide third-quarter FY17 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. Bill Amelio to discuss Avnet's second-quarter FY17 business highlights.

Thanks, Vince, and hello, everyone. Thanks for taking time with us and your interest in Avnet. This was an exciting and very busy quarter at Avnet as we continued our strategic transformation to become a stand-alone electronics supply distributor with a [broad] suite of products and services spanning the entire product lifecycle. After completing the acquisition of Premier Farnell on October 17, our teams went to work evaluating how best to leverage the strength of both companies to accelerate our growth.

While we intend to keep Premier Farnell separate in the market to maintain the unique value proposition in the small order space, we will link digitally the front end of both companies to provide customers a seamless experience as they move from idea to design to prototype and onto volume production. Our goal is to deliver the Avnet experience by allowing designers to tap into our deep technical and supply chain expertise via our digital platform with new tools and innovative services.

On November 14, we further enhanced our digital platform with the acquisition of Hackster.io. Hackster.io provides engineers and makers with a web-based form to learn how to design, create, and program Internet-connected hardware. With a growing community of close to 200,000 users, Hackster.io further expand our reach into the idea phase as technology spreads into more products, especially through the Internet [of things].

Our goal is to build an ecosystem that provides a true end-to-end experience to the widest customer base, the low cost to serve model, and we believe we are well on our way to achieving this vision. We have also been investing in new tools and services to support our demand creation business. Our avail tool, which provides build application engineers quick access to reference designs and product information, allows FAEs to quickly provide customers with plot diagrams that highlight the best solutions for their design challenges. Avail will allow our FAEs to be more productive, which will become increasingly important as our workload grows with the new leads from our digital platform.

We also introduced a new web-based tool that allows engineers to quickly perform parametric searchers to populate their build materials with accurate cost and product availability data. Together these tools will not only help customers speed their time to market, but will also allow us to improve the efficiency of our demand creation resources and convert more leads into design wins and revenue growth.

Before I turn the call over to Kevin, I would like to acknowledge the contribution of our Technology Solutions team. The TS business has been an important part of Avnet's success for many years. Even though there was more work to do to prepare for the carve-out of TS operations, the team stayed focused on running the business and delivering a strong December quarter. TS sequential revenue was near the midpoint of the seasonal range and operating income margin improved materially. I'm confident they will continue to realize future success as they become part of Tech Data. Now I would like to turn the commentary over to Kevin Moriarty who will provide more color on our financial performance.

Thank you, Bill, and hello, everyone. Now I would like to review the financial results for Avnet's continuing operations, which is essentially the combination of our Electronics Marketing business and Premier Farnell. In the December quarter, reported revenue of $4.3 billion was approximately $75 million below the midpoint of our guidance, as a result of a decision to reclassify $92 million of embedded computing solutions revenue to discontinued operations.

This business, which was included in our guidance, was part of the $450 million of annual embedded revenue that we transferred from TS to EM at the beginning of our FY17 when we were consolidating our global embedded business. Given one of the key suppliers of this business was on the Technology Solutions line card, it made more sense to move this business back to TS after we evaluated the customer and financial impacts resulting from the sale to Tech Data. As a result, the business being transferred to EM is closer to $100 million per year on a go-forward business.

Turning to the income statement. Our December performance validates the financial performance and benefits of the Premier Farnell acquisition as both gross profit and [adjusted] operating income(added by company after the call) margin expanded from the year-ago quarter. On the top line, Premier Farnell exceeded our expectations this quarter and contributed to a 2.7% year-over-year increase in revenue. Organic revenue declined 2.9% year over year in constant currency, primarily due to our decision to exit the less high-volume supply chain engagements in the Asia region. If you exclude this decision to exit lower-margin business, organic revenue grew approximately 4% from the year-ago quarter.

At the regional level, our EMEA region continued to see strong growth as reported revenue, including Premier Farnell, increased 21% and organic revenue increased 11.6% in constant currency, the 14th consecutive quarter of organic growth. In our Americas region, reported revenue grew 7.5% from the year-ago quarter, while organic revenue declined 2.1%, primarily due to a decline in the embedded business. Excluding the decision to exit select high-volume supply chain engagements, our Asia region was essentially flat with the year-ago quarter.

Now turning to gross profit. Gross profit dollars increased 16.1% from the year-ago quarter, to $586 million, and gross profit margin expanded 158 basis points, to 13.7%, primarily due to the addition of Premier Farnell and improvements in our Asia region.

Adjusted operating income increased 7.9% from the year-ago quarter, to $164.5 million, primarily due to the addition of Premier Farnell as well as a 15% increase in the EMEA region. Adjusted operating income margin increased 18 basis points, to 3.8%, primarily due to the inclusion of the higher-margin Premier Farnell business. Excluding Premier Farnell, the EMEA and Asia regions increased operating income margin over 30 basis points year over year. Adjusted earnings per share of $0.77 increased $0.02 from the year-ago quarter as the increase in [adjusted] operating income(added by company after the call) was partially offset by higher interest in other expense, which had a $0.04 negative impact on EPS.

The year-over-year comparison of our results from continuing operations were negatively impacted by several one-time acquisition charges. Operating income from continuing operations declined 8.7% year over year due to a $24 million increase in restructuring, acquisition, and amortization expenses related primarily to the Premier Farnell acquisition. On the bottom line, net income from continuing operations was further impacted by $32 million of hedging and bridge financing cost related to the acquisition of Premier Farnell. The cash outlay related to the Premier Farnell acquisition was reduced by approximately $75 million as compared to the original bid price due to our hedge strategy. As a result of these charges, GAAP diluted earnings per share from continuing operations declined 67%, to $0.25.

In the December quarter, our working capital increased 2.3% sequentially due to the addition of Premier Farnell. If you exclude the impact of Premier Farnell, working capital declined 9.7% led by a 13% decrease in the Americas region where working capital had been elevated during the ERP implementation.

Cash flow generated from continuing operations was approximately $192 million in the December quarter and Avnet's total cash flow from operations was approximately $240 million. As a result of the strong cash flow generated from operations this quarter, Avnet's trailing 12-month cash flow from operations increased $122 million sequentially, to $380 million.

On October 17, we used approximately $100 million of offshore cash and $660 million of debt to fund the acquisition of Premier Farnell. On November 14, we issued $300 million of five-year notes at a rate of 3.75%. We used the proceeds of those notes to pay down the acquired Premier Farnell debt, as well as some floating-rate debt.

We still intend to use approximately $1.5 billion of the proceeds from the sale of TS to pay down additional floating-rate debt in order to reduce our credit statistics to a level that solidly supports our investment grade rating. These series of actions will leave us with a strong balance sheet that, when combined with our cash generation, will allow us to fund future growth and consider ways to return additional cash to shareholders.

Going forward, our intention is to maintain the same capital allocation priorities we have pursued in the past: number one, maintain and grow our dividend; two, invest in organic growth; three, pursue value-creating acquisitions that enhance our competitive position; and, four, return excess cash to shareholders via our disciplined share repurchase program.

Now turning to our outlook. Looking forward to Avnet's third-quarter FY17, we expect Avnet sales to be in the range of $4.3 billion to $4.6 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.80 to $0.90 per share. This guidance does not include any additional acquisitions, the amortization of intangibles, any potential restructuring, integration, and other expenses, and certain income tax adjustments.

The guidance assumes 130 million average diluted shares outstanding and an effective tax rate in the range of 23% to 27%. In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.07 to the euro. This compares with an average exchange rate of $1.10 to the euro in the third quarter of our FY16. With that, let's open up the lines for Q&A. Operator?

(Operator Instructions)

Sherri Scribner, Deutsche Bank.

Hello. This is Adrienne Colby for Sherri. Thanks for taking my question. My first question would be just, your comments suggested that Premier Farnell revenues came in ahead of expectations, which would suggest sales north of the $230 million to $250 million range that you had suggested last quarter. I'm just wondering what drove some of that upside, and how we should think about the cadence of sales going forward, and also if you could comment if margins were more in line with your prior projections?

Sure, this is Gerry. What I would say is, yes, Premier Farnell performed quite well last quarter. They met the high end of expectations. As I said on our call last time, they had arrested their margin erosion, and now have actually improved their margin. We look to see continued margin improvement from Premier Farnell going forward.

We are also on track with the synergies that we talked about last quarter call as well, and we are pretty excited with some real good potential there.

Great. Just as a follow-up, I was wondering if you could comment if you are seeing any effect on your Business or you anticipate any effect on your Business from the new White House administrative policies, for example, from tax benefits?

This is Kevin. I guess what I would say, and as you know and have probably been reading, I would describe the topic as a very fluid situation, and I am not going to speculate. Areas we are watching closely are overall tax rates, taxation on past unremitted earnings and future foreign earnings, destination-based taxes, interest expense, deductions, and areas like cash repatriation. One thing I would point out is that for Avnet, often recall that we are not the direct importer of goods.

Thank you.

Matthew Sheerin, Stifel.

Hello, this is [Alan Parks] speaking on behalf of Matt Sheerin. Just in terms of Premier Farnell, could we get some color on the geographic mix of it?

This is Gerry. The geographic mix about -- 50% of the business is in Europe, 30% in the Americas, and the balance in Asia.

I see. Thanks. And in terms of seasonality with the Premier Farnell, do you see significant changes going forward from what you provided in the past? Any color we could see in terms of going forward seasonality in the business?

I think we will be looking at seasonality and will update that in our investor conference that is coming up in May.

Thank you.

Louis Miscioscia, CLSA.

Yes, getting out of the Asia high-volume business, I guess throughout the years we have heard different vendors like yourself in this area, take some of this business and when obviously you discard it, you say it wasn't really worth it -- the margins just were not good. So would you venture to say that now that you are getting out of this, that in the future you will materially shy away from future sales in this area?

No, I think, as I have always said, Lou, we saw that business as opportunistic. And as you know, we continue to look at the financial returns we get, particularly on big deals like that. It had gotten to a point where the financials did not make sense anymore for us, and we moved away from that business.

We also did that planfully, as you remember, we had a big Broadcom win recently and we knew that business, which we felt was much more profitable for us and much more strategic, would offset, more than offset the loss in our high-volume fulfillment business. If you look at that, and you look at some of the change with our margins increasing, we think we made a good decision in that space.

This is Bill. As we look at any business that we take, we look at how fast we can turn a business from an inventory point of view, as well as the margin profile, and we want to make sure we have the right returns. That tends to then drop down to a point where it doesn't meet our returns, that means we will exit the business.

Sure. I guess I understand that; I'm just trying to get to, that very often when business first comes in, everyone is all excited about it and it is good, and then a couple quarters later it becomes bad and then for us to not consider it -- it sounds like you would actually do something like that again, even though you have had a bad experience here.

I wouldn't classify it, Lou, as a bad experience. We had that business for years. We didn't have it for quarters.

It was business that we looked at because of a strategic relationship we had with a partner, and over time as we managed that business, as you can imagine, business runs through cycles and the margins got tight and inventory expectations changed, and we just looked at that and decided from a strategic perspective it didn't make sense for us anymore. We look at our portfolio all the time, and make changes in and out, based on the financial realities of the situation.

In this case, this is business we had for a long time and the financials didn't make sense anymore. So we always look at our portfolio to balance it out based on the opportunities that exist in the marketplace.

And, Lou, this is Vince. I would just highlight, we didn't have a lot of dedicated headcount. It is mostly freight and factoring, so it is not like headcount goes up and down because of this. As Gerry said, it was very select.

(Multiple speakers) just trying to move on to getting a couple of numbers, if we could. From an absolute standpoint, how should we think about SG&A, interest expense over the next couple of quarters, and maybe how fast synergies can kick in on cost cuts as you bring in Premier Farnell?

Sure. Lou, it is Kevin. What I would point to in terms of looking out for the -- our third-quarter SG&A in the range of $440 million to $455 million. When I think about Premier Farnell, what I would say is, we closed the transaction as everyone knows on October 17, and we really have now begun integration in an earnest because at the time we didn't want to run foul of the UK take-over rules.

What Bill highlighted, when we think about the revenue and synergies that we had to highlight it in our October call, we pointed to $90 million to $110 million of revenue synergies. And based on the early result in the engagement across the Organizations, we really feel that is an achievable range at this time.

And on the cost side, we highlighted on the October call, in the neighborhood of $55 million to $60 million of expense synergies. Teams have been working on that, and right now what I would say is we again think that is an achievable target, and as we get to the end of the March quarter, we would expect to have realized approximately $10 million to $15 million of annualized savings. We continue to make very good progress thus far on our integration planning and the execution of our plans.

Okay. And interest expense for this quarter, and then obviously after the deal closes and you are able to buy back that $1.5 billion that you had mentioned?

What I would say, for continuing operations, think in the range -- in the next couple of quarters, in the range of $26 million to $28 million. And then as we go forward on an annualized basis, once we pay down the debt, we could probably reduce that annualized number in the neighborhood of $24 million to $30 million.

Okay. Thank you.

Adam Tindle, Raymond James.

Thank you. You guys talked about a few benefits to EM in terms of less high-volume Asia, you have the Broadcom win, you have the addition of Premier Farnell, but it looks like the March EPS guidance is implying just modest operating margin improvement year over year. Could you just maybe walk through the puts and takes that led you to this, and perhaps any quantification of the ERP issue impact to revenue and/or cost?

Sure. It is Kevin. I will start. I think what I would start with is when you look at the gross profit percent, obviously we are going to be shifting more this quarter to the Asia -- sorry, Europe region, so goss profit percent will continue, we think, to sequentially improve.

The point you may be getting at is on the operating expense side, it will take time for us to really get to the realization of the synergy benefit associated with Premier Farnell. So we are expecting to exit the quarter with some benefits, but I think over the next successive quarters, we would expect to continue to realize and recognize more of those synergy savings.

Even after the synergies, Premier Farnell is still accretive, so that is what I am a little bit confused about.

Sure. I would also point out that in this quarter we also instituted a merit program given it's the beginning of the calendar year, so there is a merit increase as well that you may not be factoring in.

Okay. Maybe on the capital structure, Kevin, how can we think about the right capital structure for continued operations, particularly given your comments on the strong cash generation that it's displayed? I know you talked about the $1.5 billion debt paydown. We just take the existing balance sheet and take this off, plus the remaining cash from the TS sale, think your debt will be just under $2 billion and your cash will also be just under $2 billion, so maybe talk about how you are thinking about capital structure.

What I would point to is, we have been very public on our commitment to maintaining our investment grade rating. And the key thing that we have focused on is our gross debt to EBITDA, not net. It is more how the rating agencies look at it.

As you commented on our -- our intent right now is to pay down a meaningful portion of debt. And as we move forward, we definitely are looking at alternative capital allocation alternatives, returning cash to shareholders we don't think would be impeding our ability to invest in organic or inorganic growth.

But when we look at the buyback, we are definitely going to be taking the continued approach, post the sale of TS, to sustain our disciplined approach on the buyback, and then the actual method of the returns will depend on where the stock is and trading, and the timing and other factors that we are going to consider. So again, our goal is to sustain, given our business model, somewhere between 2 and 2.5 times of leverage. Just given again, we think it is important for us as a company, given where we play in the supply chain and it is really ultimately our goal to maintain our investment grade credit rating.

Okay. Thank you.

William Stein, SunTrust.

Great. Thank you for taking my question. It relates to the cost savings that you are undertaking to deal with the sale of TS. You have this stranded corporate expense that I assume -- I would assume going forward you might not report segments, so that might just go away, but you still have that big expense and I am sure there are expenses in the segment as well that you are targeting reducing as well. Can you remind us again of what the cost savings plan is, and whether you have already achieved any of that savings in the quarter you just reported or in the guided quarter so that we can figure out how much is left?

This is Kevin. I am going to point back to what we had shared in our October call related to broader expense reductions that we are looking to attain partly through the Avnet Advantage Program but also associated with the TS divestiture. We referenced at that time, approximately $70 million to $90 million of expense reduction on an annualized basis.

In the current quarter and as we are guiding, from a timing standpoint, there really is no near-term benefit in a meaningful way that we are guiding to with the numbers we have provided today. Clearly we are working on it, and once the TS sale concludes, we will be going forth with some actions.

We have some TSA agreements that we have in place, so some of the stranded cost will be with us for a while, but we will be compensated for that based on the cost of that service that we give to Tech Data after the sales closed.

Understood, so the $70 million to $90 million is still in front of us and then you have the integration savings from Premier Farnell as well. So maybe the follow-up is --?

That is exactly right.

Okay. So there is still a lot of savings in front of us. When we think about what you have gone through in the last two years operationally, one of the big things is integrating the ERP systems. Is that all done now and then with Premier are they on a different system? Is there a lot of work to do there and maybe just update us on that thinking.

Sure. As we reported, we have had our issues with the implementation of ERP in the Americas. We are just about through the issue, we are still struggling a bit with our embedded business and that is only with the complicated configured order issues that we have. The rest of it is running relatively fine, but we also indicated that we will still have some additional expense in the range of $3 million to $4 million a quarter for some period of time until we work out all of the details and all the kinks associated with that embedded business.

Secondly on the Premier Farnell, that area is one where we will absolutely spend some time with their IT strategy. As far as what will be some investments that we will make there with respect to upgrade some of their systems and that will be in front of us. But it should be included in part of our overall budgeting that we do, and I don't see that as one you have to model any differently than we have modeled in the past.

Thank you.

Shawn Harrison, Longbow.

Hello. Good morning. I guess this question is for Gerry to start off with. Maybe you could just speak to some of the booking trends you saw globally as you moved through the December quarter and now through January? It seems like we're maybe getting some industrial momentum in the world, and wanted to see what you're seeing in the book-to-bills highlights any of that.

Sure, Shawn. We closed the quarter with a book-to-bill ratio of 1.07 to 1 and our current book-to-bill is actually stronger and it is positive in all regions. This is somewhat to be expected given the fact that we are running up to Chinese New Year, so this is a pretty common seasonal phenomenon. But if you think where we ended the quarter, we have had now about three quarters in a row of positive book-to-bill at the end of the quarter.

I do think if you look at it regionally we have seen industrial strength in EMEA and Asia. The Americas is still fairly flattish from the industrial market perspective. That is how I would characterize it.

Okay. Bill, as a follow-up now that you have been -- about six months or so in your tenure as CEO, you brought on Premier Farnell and now you have Hackster. Could you maybe just comment on how you view the portfolio right now? Are there additional holes that you see that need to be filled, and how you can address those areas? Is it organic? Do you have to look at M&A to fill any additional holes in the portfolio?

We are pretty excited about where we sit right now, and we have work to do for us to make these seamless connections between Hackster, into Premier Farnell and into volume production and volume shipments into Avnet. We will continue to look at opportunities as they present themselves, especially in the areas where we think there is potential to disrupt the models of distribution and, therefore, will make the necessary investment.

The other place I would say you could potentially see us through acquisition is in the design area where we have opportunities to be able to reduce time to market of our customers and get the appropriate sold whether they are digital, or whether they are design skills that may augment what we do today.

All right. That is helpful. Kevin, if I may, just one clarification. The $70 million to $90 million, did that include some synergies that would have been associated with TS and are going to transfer to Tech Data, and how much of that $70 million to $90 million stays with Avnet?

It's all of that, Shawn, that will stay -- meaning in terms of reductions that we're going to need to make in the cost structure.

Okay. Perfect. Thank you.

Steven Fox, Cross Research.

Thanks. Good morning. First question, I was just wondering if you could provide a little bit more color on Europe. It sounds like the core Avnet business was up healthy double digits and you also got some gross margin expansion year over year. Can you give us a sense for what markets were driving that, and how that business looks into the new year and whether the gross margins improvement was all related to volumes or was there more cost savings going on and then I had a follow-up.

This is Gerry. I will take that one. In Europe, I congratulate our European team, they continue to perform quite well. We saw growth in automotive and industrial automation particularly in the German marketplace, and then medical and renewable energy markets were strong for us also.

I think if you can think about gross margins, the team continues to do a very nice job of managing their business given the realities today of some prior consolidation and things like that. Our European team continues to be strong and our book-to-bill is supporting that. I look for continued growth out of the region going forward.

Great. That's helpful. Just to make sure that I'm clear on the Premier Farnell improvements on their standalone basis. That was all actions that they had undertaken. Can you give us a sense for how far along those are, or whether you would get some more benefit from some of those cost actions in this current quarter? Thanks.

I think Kevin tee'd it up pretty well what we can expect coming into the next quarter getting to a $10 million to $15 million run rate in the March quarter. We shared with you in our October call, there were two forms of synergies from the transaction Kevin talked about. The revenue synergies at about $90 million to $110 million, and then we have worked well through the integration planning with TS at this point and so we see a clear path to get to the expected $55 million to $60 million of expense synergies going forward.

We feel good about the plan. Premier Farnell had done some things before the acquisition that are now paying off for them. If you look at what they have done, the synergies between our two Companies, we feel really positive about the future of both TS and Avnet together.

That is helpful, and then just a quick clarify on those comments. Is it safe to say that all of the actions at PF, Premier Farnell, was planning before they were acquired are completed?

I would say the ones that they had identified to complete in the time frame before the acquisition were completed.

Okay. Thank you very much.

Mark Delaney, Goldman Sachs.

Good morning and thanks very much for taking the questions. First question was on the embedded business and the additional business that you moved from continuing operations into discontinued operations. Kevin, I know you said $92 million have been included in guidance and ended up not being counted as part of continuing operations. What is the EPS impact associated with making that move for that amount of revenue?

And then related to that, can you help us understand what the plan for that additional business is going forward? Is that a business that you are now looking to divest, or what should we be thinking about there? Thank you.

I will take the first one. It is really negligible. A very minor impact on the EPS standpoint for the quarter.

I will answer the second part. If you look at the business that we had, it was primarily with one big supplier, a TS supplier today, and we did work with them to see if they would give the EM business going forward a franchise agreement. It didn't make sense given the size of the business. I think it was felt between both [Tech Data] and Avnet, the best place for that business to go to support it long-term was to transition it to Tech Data as part of the overall transition.

From a portfolio point of view, we are giving a fresh set of eyes on every piece of our Business and ensuring that we have a strategic way to grow it, and if we don't have a strategic way to grow it and it is not meeting our returns, we will make the appropriate decisions.

Okay. That is helpful. For a follow-up question, just to better understand some of the business dynamics in EM as you guys try to increase your mix of demand creation. It is a two-part question. Can you help us understand how much of your EM business today is demand creation and where that may go going forward now that you have all of these new tools?

And then the second part of the question, Bill, you talked a bit about doing some [farm-in] integration. I'm just trying to understand in terms of the tools that Hackster has and Premier Farnell and Avnet, how much integration work does there need to be in the front end offerings or can you deploy those on an independent basis relatively quickly?

We can deploy them on an independent basis relatively quickly. Each one are a standalone, but what we want to be able to do is make sure that the digital platform seamlessly transfers leads from one part of the company to another part of the company. So that is where some of the magic will come from, and we spent the last 18 months in Avnet really developing our digital platform, and all of the work that we have done there will apply to what we are going to do with Premier Farnell as well as Hackster.

We are pretty excited about the new ecosystem that will be put in place. It will allow us to be able to cast a wide net to capture lots of customers, and it's a very low cost to serve model, and as they grow from small tiny companies into something that is much larger, we will be able to then serve them with our field application engineers more effectively.

On the question on the percentage of overall revenue and demand creation, it is a little over 30% today and our goal is to continue to increase the percentage overall.

Thank you very much.

Jim Suva, Citi.

Thank you very much for all of the details so far. It is quite useful. I have a couple of questions that are probably quite easy. You talked about Premier Farnell doing better than expected in integrations and such, but yet your total sales looked like it came in on the lower end of guidance. Can you help me understand the range that you gave out and bridge why you came in at the lower end?

And then my follow-up question is, I believe that Texas Instruments and some of the chip suppliers were going through some changes to the economics that they are giving to the distributors. Can you help us understand? Has that occurred with you yet? Are you fully adjusted to it or is that yet to come or how we should think about those changes? Thank you.

This is Gerry, so I will take the first question, then answer the second question about Texas Instruments and other suppliers. As we said earlier, our embedded business suffered more than our core business did in the impacts of some of the ERP challenges we had. Bill highlighted, particularly around more highly complex integration business.

We see that business still in the seasonal range this quarter, but remember we are coming off, as we talked about, a lower Q2 number. So while seasonal growth, that kind of talks about some of the improvements we are making, but from a seasonal perspective, it looks seasonal, but it is from a lower base. That is why the number may look a little bit muted.

When it comes to Texas Instruments or other suppliers, there is very limited impact this quarter. We normally don't discuss supplier specific programs, but as you can imagine, when suppliers change their programs and demand creation, there is opportunities that pop up with the other suppliers. There is also usually a grandfather period before the changes occur, so that gives us time to either move our resources to higher margin opportunities with those suppliers or at times we have to reduce those resources.

When you see the investments though that Bill has talked about around our digital strategy, we think that is going to help customers shorten their time to market and enable customers to take advantage of our capabilities. We believe we can also offset the margin by providing solutions to our customers. That is really how we see things going forward. That is why we continue to invest in demand creation with some of the tools that Bill highlighted earlier.

Thank you for the details. Much appreciated.

[Parum Singh], Bank of America.

Hello, thank you for taking my call. Firstly, want to get some color on the margin. If I look at your guide, it would imply you're still below your peak margins you got a little over a year ago, and given the mix of Premier, I would've expected that to be much higher, probably closer to 5%. Longer term in that segment, what would you expect margins to be outside of the synergies you talk about, which means, what benefits can you get from improving current operations, or legacy operations? And then I have a follow-up.

This is Gerry, I will take the question. If you look at gross margins over time, we actually -- first of all, we have a mix change as you can imagine -- you look at what has happened in Asia in our high-volume fulfillment business, so that's going down. That improves the Asian margins overall and ships more of our mix back to the West.

I did speak and highlight about our embedded business, which we have had some struggles with, due to the ERP implementation. So that has muted our core margins a little bit, and as you pointed out, Premier Farnell's margin improvement has helped offset some of that.

Okay. Actually, taking a step back, on the revenue line, one, your book-to-bill is 1.07 and you're seeing a better number, so wouldn't your revenue be a little better, even though you have the high-end of seasonal and when would you expect the negative headwind from Asia fulfillment to overlap? I have one more question.

I will start with the Asia fulfillment piece first. That should lap in Q4. Our fiscal Q4 this year, so that should be totally out of the number.

If you look, it was down 1% sequentially and 72% year over year. You have to bake that into the number. When it comes to guidance, I think you know as you pointed out, we are guiding to the high end of the range, and given where the book-to-bills are, we feel that is a comfortable place for us to be and demonstrates what is happening in the marketplace today.

Okay. My last question was, obviously your (inaudible) cycles [fairly] elevated right now. How much of that is because of the ERP? How much of that is Premier and when do you expect to get back to a 70-something cash conversion cycle range. I guess this might just be for Kevin.

We definitely benefited this quarter from the drop in the working capital, but I do want to thank the broader organization and team for delivering the cash flow from operations this quarter. What I would point to, I would say, going forward as we get into the next fiscal year and would be operating somewhere in the range of 55% to 65% of net income on a cash conversion cycle.

Got it. On this basis, can you give clarity on what were the two factors bringing it up. Thanks. What level out of the [86] (inaudible) what was the ERP and what was Premier?

Generally, what I would point to is Premier Farnell. EM just naturally has a higher working capital number of days associated with a higher level of inventory, and what I would point to is, if you do the math, it would probably elevate it above 80 days right now on working capital. But our goal is to clearly, even with Premier Farnell, to drive that back down to the historical range somewhere between 70 to 75 days.

Thank you, guys. I appreciate it.

There are no further questions at this time.

Thank you for participating in our earnings call today. Our second-quarter FY17 earnings press release and related CFO commentary can be accessed in downloadable PDF format at our website under the quarterly results section. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.