Avnet - Q2 2014
January 23, 2014
Transcript
Operator (participant)
Please stand by. Our presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.
Vincent Keenan (VP of Investor Relations)
Good afternoon, and welcome to Avnet's second quarter fiscal year 2014 business and financial update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event. As we provide the highlights for our second quarter fiscal year 2014, please note that in the accompanying presentation and slides, we have excluded certain items from our non-GAAP results, including intangible asset amortization expense and restructuring, integration, and other items for all periods presented. When discussing organic sales or organic growth, prior periods have been adjusted to include acquisitions, divestitures, and the transfer of certain operations from EM to TS.
In addition, when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar-based financial statements into U.S. dollars. And finally, when addressing working capital, return on capital employed, and return on working capital, the definitions are included in the non-GAAP section of our presentation. Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement. This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause the actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission.
In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's second quarter fiscal year 2014 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights, our return on capital performance, and provide third quarter fiscal 2014 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 Phil Gallagher, President of Technology Solutions, and Gerry Fay, President of Electronics Marketing. With that, let me introduce you to Rick Hamada to discuss Avnet's second quarter fiscal 2014 business highlights.
Rick Hamada (CEO)
Thank you, Vince, and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. Fiscal 2014 continues to gain momentum as both operating groups exceeded our revenue expectations and normal seasonality, while year-over-year organic growth improved for a third consecutive quarter. Strong demand for IT infrastructure in our Technology Solutions Americas region and continued strength in our Asia components business combined to drive revenue up 17% sequentially, and organic revenue increased 14% in constant currency. As a result, enterprise revenue grew 11% year over year to a record $7.4 billion, and organic revenue was up 8% in constant currency, as compared with up 3.5% in the September quarter.
Gross profit increased to $113.5 million, or 15% sequentially, due to the strong double-digit percentage growth at TS and the acquisition of MSC and in EMEA. Our sequential gross profit margin decline of 16 basis points included the impact of the enterprise business mix shift, as our lower gross profit margin TS business grew to represent 44% of enterprise sales, as compared with 38% of enterprise sales in the September quarter. The combination of strong growth in revenue and continued expense discipline drove adjusted operating income up 32% sequentially, and adjusted operating income margin increased 41 basis points sequentially to 3.6%. Adjusted operating income increased 15.2% year-over-year, and adjusted operating margin was up 14 basis points, due primarily to an increase at Electronics Marketing.
As a result of these factors, adjusted earnings per share of $1.17 increased 30% sequentially and 11% year-over-year. Return on capital employed increased 243 basis points sequentially to 12.8% due to the increase in profitability and an improvement in working capital velocity. On a year-over-year basis, ROCE increased 53 basis points due to the growth in income, as working capital velocity was relatively consistent with the year-ago quarter. While we are encouraged by the resumption of positive year-over-year growth in more of our end markets and relatively stable gross margins, we continue to deal with an uneven recovery that impacts our leverage relative to past recoveries.
In this environment, we have leveraged organic growth to expand operating margins and returns year-over-year in the first two quarters of fiscal 2014, and we remain focused on continuing that trend across our portfolio as we enter the second half of the fiscal year. Now let's turn to our operating groups. For the second quarter in a row, Electronics Marketing's revenue came in above expectations, driven by our high-volume fulfillment business in the Asia region. While we are primarily focused on design win business in all three regions, we do selectively participate in specific high-volume engagements where our cost and working capital model allow us to support customers' requirements and achieve our return targets.
Over the past few quarters, these engagements have grown more robustly than our core business in Asia, which, while having a negative impact on margins, are supportive of our return targets in the region. In the December quarter, EM revenue grew 5.5% sequentially to $4.15 billion, driven by a 5.7% organic increase in our Asia region. When combined with a normal seasonal decline in the Western regions, EM organic sequential growth of 1.6% in constant currency was above our normal seasonal range of flat to down 3%. On a year-over-year basis, reported revenue increased 13%, and organic and constant currency accelerated to 11.4%, the first double-digit year-over-year organic growth in over 2.5 years.
At a regional level, organic sales were up 13% in constant currency in EMEA, while Asia and the Americas were up 14.4% and 3.2%, respectively. EM's gross profit margin was essentially flat with the year-ago quarter and increased 26 basis points sequentially due to the acquisition of MSC, which has higher gross profit margins, partially offset by a higher mix of high-volume fulfillment business in our Asia region. The revenue growth and cost reductions implemented last year combined to drive operating income up 20% year-over-year to $171.7 million, and operating income margin improved 24 basis points to 4.1%. On a sequential basis, operating income margin declined 33 basis points, due primarily to a decline in the EMEA region, where we have yet to realize synergies from the recently acquired MSC business.
Looking at our balance sheet, EM grew working capital 5.2% sequentially due to the acquisition of MSC and a decline in accounts payable related to a reduction in inventory. After adjusting for acquisitions and changes in foreign currency exchange rates, EM's inventory decreased 4.9% sequentially, and their cash conversion cycle declined both sequentially and year-over-year. This effective working capital management, combined with the increase in operating income, drove return on working capital up 236 basis points from the year-ago quarter, and economic profit has increased significantly year-over-year through the first six months of fiscal 2014.
With year-over-year growth rates improving, book-to-bill near parity in 2 consecutive quarters of year-over-year expanding margins and returns, we feel confident we can leverage expected growth in our higher-margin Western regions to accelerate progress toward our longer-term goals in the seasonally stronger quarters of March and June. Now moving on to Technology Solutions. TS delivered a strong quarter on both the top and bottom line, as stronger-than-expected calendar year-end spending on IT infrastructure in the Americas region drove sequential revenue growth above our expectations for normal seasonality. Reported revenue grew 36% sequentially to $3.3 billion, and organic revenue grew 35% in constant dollars, as compared with a normal seasonal range of +20%-26%.
Our Americas region, which grew revenue 44% sequentially, achieved well above seasonal growth as the last two weeks of December closed very strong, driven by demand for software and storage. In our EMEA region, which has been dealing with weak demand for multiple quarters, revenue grew 31% sequentially in constant dollars, while Asia increased 11% sequentially. Reported revenue increased 8% from the year-ago quarter, while organic revenue increased 4.1% in constant currency, the first positive organic growth in eight quarters. On a sequential basis, software, storage, and services grew over 30%, while software and storage drove our year-over-year growth. Gross profit margin declined 18 basis points year over year and 34 basis points sequentially, with the sequential decline driven by the Americas and Asia regions.
The significant growth in revenue drove a 92% sequential increase in operating income to $120.2 million. Operating income margin increased 108 basis points sequentially to 3.7%, driven by material improvements in the Western regions. As a result of this sequential increase in profitability, return on working capital increased over 1,500 basis points over fiscal Q1. However, return on working capital was down 432 basis points year-over-year, primarily due to a decline in the EMEA region and the impact of the computing components business transferred from EM at the beginning of the fiscal year. While some end markets are just returning to year-over-year growth, we remain focused on the future and continue to invest in higher-growth markets, including converged solutions, software, and professional services.
With end users remaining highly focused on optimizing their data center investments, including the growing interest in hybrid cloud solutions, the breadth of tools and services that TS has developed will help navigate this dynamic landscape to accelerate progress to results. These investments will allow us to develop and deliver incremental value to our partners that will enable them to address new opportunities and accelerate their growth going forward. Overall, while we delivered another quarter of solid progress at the enterprise level toward our financial goals, we still have work to do in parts of our portfolio. After a difficult fiscal year 2013, where we had to adjust to market realities, including reducing our expenses, we are now starting to realize the benefit of those actions, and organic growth has returned.
Through the first six months of fiscal 2014, our revenue was up 9.5% year-over-year, and adjusted operating income grew almost three times faster, driving adjusted operating income margin up 39 basis points to 3.4%. Even as we grew working capital to support this growth, working capital velocity has improved year-over-year, and return on working capital is up 278 basis points when compared with the first half of fiscal 2013. In addition, we have maintained our disciplined approach to capital allocation as we incorporated a dividend into our priorities, while continuing to seek opportunities to invest in value-creating M&A. With both operating margins and returns at their highest level in six quarters, we remain committed to our value-based management approach to running the business as we drive further improvements across our portfolio.
Now, I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial position and outlook. Kevin?
Kevin Moriarty (CFO)
Thank you, Rick, and hello, everyone. Turning to slide 8. With sales growth exceeding expectations and normal seasonality, the team did an efficient job of translating this momentum into strong profitability and returns. We improved working capital velocity by approximately half a turn sequentially and drove returns to the highest level in six quarters. As a result of this strong top-line growth at both operating groups, our working capital increased 9.8%, or approximately $406 million sequentially, and 7.8% when adjusted for acquisitions and currency. After adjusting for acquisitions and the impact of foreign currency, the primary driver of working capital growth was an $888 million increase in accounts receivable related to the stronger than anticipated December close at TS. Despite the significant increase in receivables, our overall net days declined by approximately 4 days sequentially.
In addition, a sequential decrease in payables at EM, primarily driven by effective inventory management throughout the quarter, also contributed to the increase in working capital. After adjusting for acquisitions and the impact of currency, inventory declined 4.9% sequentially at EM, with all three regions contributing to the reduction. As a result, we used $28 million of cash for operations during the quarter to support this resultant increase in working capital. Even with this investment in our working capital, cash flow from operations over the trailing twelve months was approximately $135 million, and we ended the quarter with roughly $779 million of cash on our balance sheet and over $1 billion of available credit from our short-term borrowing facility.
In addition, we remain focused on returning cash to shareholders, as during the first six months of the fiscal year, we have returned $41.3 million to shareholders through our previously announced dividend and have approximately 225 million remaining in our share repurchase program. Now, let's turn to our outlook. Looking forward to Avnet's third quarter of fiscal 2014 and our outlook, we expect EM sales to be in the range of $4 billion-$4.3 billion, and sales for TS to be between $2.6 billion and $2.9 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.6 billion and $7.2 billion.
When adjusted for the impact of foreign currency, the midpoint of guidance for EM represents flat revenue as compared to normal seasonality of +4% to +7%. The EM guidance reflects normal seasonality in the Western regions and below normal seasonality in the Asia region due to an expected decline in the high-volume fulfillment business that drove much of the region's growth over the past two quarters. The midpoint of TS guidance would represent a sequential decline of 16% as compared to normal seasonality of down 20% to down 16%. Based upon that revenue forecast, we expect third quarter fiscal year 2014 adjusted EPS to be in the range of $1.02-$1.12 per share.
This guidance does not include any potential restructuring charges or any charges related to acquisitions and post-closing integrations and the amortization of intangibles. The guidance assumes 140.1 million average diluted shares outstanding and an effective tax rate in the range of 27%-31%. In addition, the above guidance assumes that the average euro to US dollar currency exchange rate for the third quarter of fiscal 2014 is $1.36 to the euro. This compares with an average exchange rate of $1.32 to the euro in the prior year third quarter, and $1.36 to the euro in the second quarter of fiscal 2014.
Before we turn to Q&A, I would like to proactively provide some brief commentary on this morning's announcement from IBM regarding the sale of their x86 server business to Lenovo. Given that this is a very recent public announcement, we do not have a large amount of definitive information to share at this time. However, we would expect this transaction to be of interest to our shareholder base, and therefore, we'd like to provide some limited perspective at this time. As a point of reference, our IBM x86 server business represents approximately 5%-6% of Technology Solutions' global revenue. As has been our experience with other transactions, continuity of customer relationships and business activities are generally of paramount importance to all stakeholders.
We look forward to being an important partner to support all parties involved to ensure minimal disruption to the channel we serve. Given our long and significant partnership with IBM in this technology area, we believe the breadth and depth of our existing relationships will continue to be of strategic interest from a channel strategy perspective. With that, let's open up the lines for Q&A. Operator?
Operator (participant)
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Please limit your question to one question and one follow-up. Our first question comes from Lou Miscioscia from CLSA. Please proceed with your question.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, great. I've got two questions. I guess when you look at the technology solutions business and you look at the demand level that we just saw here in the December quarter, do you think on a year-over-year basis that same level of demand will roll over into 2014? And if you're getting any visibilities on budgets that are coming in. And then I'll hold to my second question in a second.
Rick Hamada (CEO)
Hey, Louis, Rick, let me start with that. So, you know, far be it from us, I think we always resist the temptation to try to be forecasters in this particular area. You know, our commentary reinforces the perspective that it was very strong year-end close. It was very good to see that. And our guidance for the March quarter, as you see it, down 16%, which is arguably at the higher end of down 16%-20% in normal range. Remember, we factor in all known information at this time into that equation, including what we've seen and already happened in January, what our normal leading activity indicators are in working with our channel, you know, number of quotes, proposals, configuration, what their pipelines are looking like, et cetera.
We can give you some outlook for the March quarter here overall, but far be it from us to try to call a demand call on what's going on for 2014.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, great. And my follow-up question, it looks like that cash flow has been negative for a couple of quarters now. Realize certain things are growing, like working capital. How quickly, and could you give us any kind of magnitude of when it might reverse?
Rick Hamada (CEO)
Hey, Kevin?
Kevin Moriarty (CFO)
Hi, Lou. I think, you know, obviously, number of factors moved within a short time. As you pointed out, these are the working capital requirements. But I think based on the trends I see today, I would expect positive cash flow from operations in our fiscal third quarter, and I would say in the range of roughly $150 million-$200 million.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, great. Good luck on the new year.
Rick Hamada (CEO)
Thanks, Lou.
Operator (participant)
Thank you. Our next question comes from Jim Suva with Citigroup. Please proceed with your question.
Jim Suva (Managing Director and Senior Technology Analyst)
Thanks, and congratulations to you and your team. The first question is regarding your cash and cash flow situation of not being overly robust because you need to use it for working capital. Does that mean in the next quarter or two, you guys need to wait to build some cash for future M&A? As I know, you made some acquisitions last year, and with the growing of the business, just kind of sort through things because the MSC acquisition was pretty big, and it looks like it's going to be quite successful so far. But given your cash balance of where it's at and the consumption of cash, cash flow, just wondering if M&A takes a little bit of a pause here, and if so, how long?
Rick Hamada (CEO)
Yeah, Jim, by the way, thank you for the thanks, and I'll make some comments, maybe ask Kevin to follow up. Yeah, there's no pulling back on M&A from a strategic perspective or a capital allocation priority perspective for us overall. We certainly have ebbs and flows in the cash flow, and we tend to pay attention to what's going on, particularly with trailing twelve months. But we very much enjoy investing in organic growth when we have it, and that's the situation that we have right now. I know, Kevin, anything else you want to add?
Kevin Moriarty (CFO)
Yes, Jim, I think the key point I would highlight is the major contributing factor was the, you know, the linearity of the quarter for us on the TS side. The strong December revenue really led to a real uptick, if you will, in accounts receivable. Just to allude to, you know, that will liquidate, and as I commented earlier, I'm expecting positive cash flow from operations in our third quarter.
Jim Suva (Managing Director and Senior Technology Analyst)
Okay, great. And then as my follow-up, when we start thinking about, you know, you mentioned on the TS side that you're guiding a little bit below normal seasonality because such a robust December quarter, which is a great situation to be in. Am I correct by saying so far in January, you've already seen the orders slow down a little bit? Because I believe it's a pretty back end quarter, and we're talking about the Asia impact of it, you know, the Asia impact is stronger than expected. Or is it you're already seeing the orders, or you just kind of be conservative because you believe as the quarter closes, that things will likely, you know, off such a great strong quarter, it'll be a little bit softer?
Rick Hamada (CEO)
Yeah, Jim, I'm glad you raised the question, so if there any confusion here, we're very clear. Down. When the normal range is down 16-20, down 16 is at the higher end of that range. Do you follow what I'm saying now?
Jim Suva (Managing Director and Senior Technology Analyst)
Yeah. Yep.
Rick Hamada (CEO)
So actually, we're not trying to indicate anything to slow down. If anything, I imagine we'll get a question later about, well, why are you feeling the way you are? And again, our answer is based on what we've seen in January, and by the way, we had a little fiscal calendar spillover that gives us a couple of days that were technically calendar, you know, December thirtieth and thirty-first are part of our third quarter. We have that data, we have three weeks of the business activity. Again, we've got our leading indicators and our conversations with our VARs and our channel. All that is factored in to actually encourage us to provide the guidance, which is at the upper end of down 16-20. It's not at the lower end.
Jim Suva (Managing Director and Senior Technology Analyst)
Gotcha.
Rick Hamada (CEO)
Okay?
Jim Suva (Managing Director and Senior Technology Analyst)
Okay. Thanks for clarifying. Congratulations.
Rick Hamada (CEO)
Thanks, Jim.
Operator (participant)
Thank you. Our next question comes from Mr. Sean Harrison with Longbow Research. Please proceed with your question.
Sean Harrison (Senior Research Analyst)
Hi there. I should say, I wanna get back to a point Rick, you alluded to initially, but, the 5% EBIT margin target for EM, pre MSC, as you look now into the March quarter and into the June quarter, is that still something you believe is achievable, particularly given the strong bookings you have in the West?
Rick Hamada (CEO)
We do.
Sean Harrison (Senior Research Analyst)
All right. MSC is still supposed to be something like a 10%- or excuse me, a 10 basis point EBIT margin drag going into the June quarter, give or take?
Rick Hamada (CEO)
Think of it as 10 or 20 drag today, Sean, and it's gonna mitigate as we actually start extracting synergies. And we'll keep you updated on the timing each quarter on what that looks like as we go through. But if you do the math, you know, look at our overall guidance, and you do the math here, we're obviously expecting some nice op margin expansion for Gerry and team at EM in the March quarter.
Sean Harrison (Senior Research Analyst)
Gotcha. And just to follow up on that, where are book-to-bill ratios, either globally or regionally for EM, here in January, and maybe where were they at this point in time last year?
Rick Hamada (CEO)
Yeah, let me ask Gerry to fill in on that.
Gerry Fay (President of Electronics Marketing)
Sure. Sean, thanks for the question. If you look at where we finished in December, we ended at 0.99. Three weeks through January, right now, we're at 1.05, which is actually a little better than last year. So we feel pretty good about how January is starting off at this point. When we look at our regions, it's pretty much what we would expect. So there's no region that we're concerned about at this point. And based on how we ended December and how we're going into January, we're feeling good about the book-to-bill.
Sean Harrison (Senior Research Analyst)
Okay. Thanks a lot, guys.
Rick Hamada (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Mr. Brian Alexander with Raymond James. Please proceed with your question.
Brian Alexander (Senior Managing Director and the Director of Equity Research)
Okay, thanks. Good afternoon, guys. Kevin, thanks for the information on IBM. I think you said x86 is about 5%-6% of your TS revenue. I think overall, IBM is about 25% of the TS revenue. So I know it's early on in the transaction being announced today, but I think the rumors have been out there for some time, so-
Rick Hamada (CEO)
Right
Brian Alexander (Senior Managing Director and the Director of Equity Research)
... you guys have probably thought about the longer term implications. And so my question would be, is there potentially a spillover effect to other lines that you sell for IBM, like pSeries, like storage, like software, if you see other distributors compete for the x86 business? In other words, have you benefited in the past from bundling x86 with other elements of the IBM portfolio, and therefore, we should be looking at it as more of the holistic IBM relationship than just the x86 business?
Rick Hamada (CEO)
No, I really think, well, yeah, Brian, I would say, again, it's very new news from a public perspective. As you indicated, it wasn't complete surprise in some respects, and obviously, we've had contingency plans available, and there's lots of activity taking place behind the scenes to make sure we understand what kind of opportunity it creates. I believe, actually, Lenovo was holding a con call at 12:15, Hong Kong time, with their CEO to talk about the transaction, et cetera. So lots in play. But at this point, we view it as a very specific set of the technology portfolio at IBM.
They've been very specific in the announcement we've seen regarding which products are going with the transaction, but also which ones are staying, including Power, the zSeries, some of their appliances as well, and their storage portfolio, the majority of their storage portfolio. Lots of moving parts. We'll keep you posted on any impacts or implications at this point. We added Kevin's proactive comments up front just to try to head off the eventual questions and make a commitment that, as we learn about implications or impacts, we'll be forthcoming with more details about that.
Phil Gallagher (President of Technology Solutions)
Yeah, I think, Rick, I can add in.
Rick Hamada (CEO)
Yeah.
Phil Gallagher (President of Technology Solutions)
Brian, thanks. This is Phil. I think it, yeah, this was, the rumblings were out there 6-9 months ago, so we've certainly not been sitting on our heels on this. So we've had multiple different contingency plans and, and talked to, you know, other partners about potential alliances. When you really bundle this in, you look at these solutions, this still plays very much, right, right in the, in the heart of where we're, we're finding our growth. And with our access to the data center and our understanding, we don't know them well, Lenovo's channel-centric type model, frankly, we, we see this as an opportunity moving forward. We deal with this, since the day we've started distribution years ago, and it's about adaptability and agility.
So we're absolutely working with IBM on this, and we think there's gonna be further opportunity for us, and time will tell. But I think the other thing I wanna note is when you look at the IBM portfolio, you know, the fastest part of the growth we've seen with IBM has been in the software, okay? So as we continue to drive solutions and the software that, you know, again, we see this as minimal effect, but we're gonna do everything we can to make it a greater opportunity.
Brian Alexander (Senior Managing Director and the Director of Equity Research)
Okay, and then if I could just follow up on the EM business and going back to the operating leverage. I think December quarter contribution margins in EM was about 6% year-on-year. I think March guidance implies something similar. And Rick, you talked about an uneven recovery impacting the operating leverage, so maybe if you could expand on that comment. But what I'm really trying to understand is, do you think there's anything secular or structural that's impacting your operating leverage during this recovery versus prior recoveries? Perhaps there's a new normal in terms of lead time stability that may be impacting pricing power for all distributors, or something else that's impacting EM margins and the industry margins relative to prior recoveries. That's it. Thank you.
Rick Hamada (CEO)
Yeah. All right. Good question, Brian. Let me offer a high level, and I'll ask Gerry to speak specifically to what's going on in EM as well. Our commentary around uneven recovery, you know, I think there are many examples I could point to. I'll even grab some headlines from this morning. I believe, if I saw my headlines correctly, you know, European PMI was up, U.S. was slightly down, but they were both over 50, and China crossed under 50 for the first time in a while. So that's what I'm talking about, those broader signals for us and, from an uneven perspective. And yes, it's great to return to organic growth here, but some previous recoveries, as you'll remember, have had steeper slopes on the return to that growth. This one seems to be a little more moderate.
By the way, not necessarily a bad thing, because as we learn, you know, fast growth up leads, sometimes leads to reciprocal opportunities on the downside. So, that, when I make those comments on uneven recovery, just putting you know, a little bit of a crimp in our style to extract the leverage, those are the kinds of indicators I'm referring to. And Gerry, if you want to speak specifically to EM and what's going on?
Gerry Fay (President of Electronics Marketing)
Sure. Brian, it's Gerry. I think you know, without lead time expansion, we don't get much in the way of ASP expansion. And customer inventory days now are roughly constant where they were a year ago, so inventories have grown essentially in sync with quarterly revenue growth, so the absolute levels still remain low. Supplier inventories, which have been elevated in kind of an overhang to customer inventory growth, they finally start to come back to normal levels. So we're hoping this will start leading to restocking, which will then drive the lead time expansions, which we haven't seen yet. We've seen some moderate lead time in memory, both NAND and DRAM, but nothing particularly exciting at this point to change pricing.
And then, as Rick mentioned, you know, industrial is moderately better, but still flattish, which is a big play for us. And he mentioned, you know, you look at some of the news today, PMI is constant in the Americas. It was up today in EMEA, down in China, so that recovery is still pretty rocky at this point. And so when we look at the environment, things haven't changed all that much quarter-over-quarter.
Rick Hamada (CEO)
Brian, I would just add more specifically, the couple of drags on leverage, specifically for EM, have been the MSC. That's known and expected. We talked about that for Q2. It boosted the top line. It actually was accretive to the gross margin profile for EM, but it's not on the bottom. We got to get to work on the synergies. And then secondly, that, you know, the high volume, the fulfillment business in Asia, also a little bit of a drag on the leverage.
Keep in mind that what's really happening here, since we've got that guidance that looks like flat for EM, that causes people to say, "What's going on?" Well, remember, we're not gonna have quite the opportunistic growth there in Asia with that fulfillment business, so that's that revenue is actually essentially being replaced by more margin-rich and higher leverage business in the West, in the March quarter, and that's leading to that expectation for some nice margin expansion for Gerry and team in March.
Brian Alexander (Senior Managing Director and the Director of Equity Research)
Great. Okay. Thank you very much.
Operator (participant)
Thank you. Our next question comes from Mr. Steven Fox with Cross Research. Please proceed with your question.
Steven Fox (Equity Research Analyst)
Thanks. Good afternoon, guys. First question, you mentioned that the quarter on TS closed much better than you expected. Sounds like that's what drove the upside the last couple weeks of the quarter, which I don't think we've seen in a couple years. I understand you don't want to forecast out through the whole calendar year, but can you be a little more specific on why the confidence in spending, or was it product specific or certain type of customers? A little bit of color around that would be helpful.
Rick Hamada (CEO)
Steve, let me. It's a really good question. We've spent some time on it here, as you would imagine, and let me offer you a thought or two, maybe Phil will add something to it. What I would tell you is you're right, even for a calendar year end, it was pretty exceptional and fairly strong. Now, remember, in our commentary, in our script, we did highlight the Americas region as leading the charge, and I would offer you there that it was actually North America region in particular. And can I point to specific confidence factors? You know, was there some concern towards the September-October timeframe with all the government potential shutdown threats and issues?
Now, I can't point to any negative in September, but did that actually cause a pause and defer some stuff into the December quarter, which came pouring in at the, you know, calendar year-end? That would be part of our thesis along those lines. And, Phil, I don't know if you can offer any other drill down on specific commodity sets or segments.
Gerry Fay (President of Electronics Marketing)
No, yeah, I think there's a general sense of more confidence in the market, Rick.
Rick Hamada (CEO)
Mm-hmm.
Gerry Fay (President of Electronics Marketing)
-as you noted. And then we just saw extremely good growth in storage and software. Our services strategy, although still relatively small compared to the, to the Avnet branded services, relatively small to the total enterprise, is really changing the conversation around new opportunities with our partners. I think the other thing, Steve, is, you know, you look at us compared to a supplier announcement, I mean, our customer base is really diverse. So yes, we're absolutely still dealing in the enterprise, you know, but the mid-market, it's it's much broader, and and they're they're really utilizing and leveraging the continuing to leverage the channel with us, ourselves, and frankly, our our product offerings. So we have, you know, the multiple brands with the push towards private cloud, hybrid cloud, which leads into converged infrastructure.
You know, that's really a market segment that's fitting right into our sweet spot. So hard to pinpoint any one piece of data, but, you know, as you aggregate that together, it's, you know, there is a cause for optimism. I think I'll leave it at that.
Steven Fox (Equity Research Analyst)
... That's helpful. And then, secondly, just going back to sort of the volume business you did on the EM side, is it fair to say that that would, I know you're not giving a specific scale, but is the difference between what you're guiding to versus normal seasonality, all that volume business, if we wanted to try to scale it? And could you just remind us of the difference in sort of the operating and gross margin structure between that and your traditional business out in Asia?
Rick Hamada (CEO)
So, yeah, you know, in rough numbers, the difference between normal seasonality and flat, you're right, it's kind of in that scope, Steve. The business, the only specificity we've offered on the fulfillment business, in particular, has been that, look, it's not accretive to gross margins or for that matter, operating for Asia, but it is consistent with and supports our return goals for the region. In fact, please take to the bank, everybody listening to Avnet and knowing Avnet, if it does not meet our return goals, we are not interested. All right?
Steven Fox (Equity Research Analyst)
That's helpful. But that also feeds into the idea that it's helping your margin. I think you said your margins in EM should improve nicely this quarter.
Gerry Fay (President of Electronics Marketing)
Well, I think this is Gerry, and if you look at it, so first of all, that business is gonna be down quarter-over-quarter. And then when you think about the mix shift moving from Asia back to the West, we're gonna have a much bigger concentration in the West, where the margins are better. That's gonna skew our margins to the higher side. And so those two, in combination, are gonna improve our overall operating margins for the quarter.
Steven Fox (Equity Research Analyst)
Great. Thank you very much.
Operator (participant)
Thank you. Our next questioning comes from Ms. Sherri Scribner with Deutsche Bank. Please proceed with your question.
Sherri Scribner (Director and Senior Research Analyst)
Hi, thank you. I wanted to dig a little bit into the EM business, particularly the Americas side of the business. I mean, if I look on a year-over-year basis, it looks like the Americas piece of EM has been declining on a year-over-year basis for about six quarters. Can you give us a little bit of detail on what's happening there? Is business transitioning? What are you seeing, and why-when do we see that sort of year-over-year decline turn in the Americas?
Gerry Fay (President of Electronics Marketing)
Hi, Sherri, it's Gerry. Let me jump on that one. If you look at some of that was the transfer of business from the Americas EM to Americas TS. So if you look on an organic basis, actually year-over-year, the Americas has had positive growth. And so, we are looking to continue to see that growth, and we're projecting growth this quarter sequentially over the last quarter in the Americas.
Sherri Scribner (Director and Senior Research Analyst)
Okay. And can you just remind me what the growth was without the transfer?
Rick Hamada (CEO)
About 3%.
Gerry Fay (President of Electronics Marketing)
Three percent.
Sherri Scribner (Director and Senior Research Analyst)
Okay. So still underperforming, but not as much as would be implied by the year-over-year. And then just looking at the TS business, obviously, you've called out storage and software, where you've been doing a good job. Services was up, but you haven't mentioned anything about servers. Obviously, IBM's results were pretty disappointing on the server side this week. Can you give us some detail on what's going on in the server market? It seems like that market is just perpetually depressed.
Rick Hamada (CEO)
Yeah, Sherri, this is Phil Gallagher. Thanks. One other area we don't talk about much is NetSec. It's a growing part of our portfolio as well, and we saw a nice growth year-over-year, quarter-over-quarter in the NetSec area as well. But specific to your question on server, actually, we didn't call it out, but actually, we're pleasantly pleased with the results. So servers were moderately up year-over-year, okay, and quarter-over-quarter were up pretty significantly, which you would expect. And actually, we saw growth in both industry standard as well as in proprietary. It didn't make the headlines because it was just overshadowed with the accelerated growth in storage software-storage and software. But actually, it was our-we were, we were pleased with our server performance overall.
Sherri Scribner (Director and Senior Research Analyst)
Okay, that's helpful. And Phil, could I just follow up with you on the margins in TS? We're now sort of in this past quarter, in the December quarter, within your targeted range. Obviously, the fourth quarter, the fourth calendar quarter is a good quarter for TS generally, but I know you have done a lot of work improving the margins in TS, improving the business in EM. Do you think that the margins now have turned a corner? Do you think that business has turned a corner in profitability? Thanks.
Rick Hamada (CEO)
Yes, Sherri. Yeah, I do. We've done a lot, as I like to say, foundationally, internally in operationalizing the business and getting a lot of the integrations completed, acquisitions I'm referring to. We've modeled the services this year, and we've taken that on. So I'm pleased with the quarter. Can always do better, and that's the marching orders to the team. But as we go into Q3 with our guidance, we are expecting each region to have expanded margins in Q3 versus a year ago. So the trend will continue.
Sherri Scribner (Director and Senior Research Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from Mr. Matt Sheerin with Stifel Nicolaus. Please proceed with your question.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Yes, thanks. I just wanted to go back to the issue of that strength you saw from the component fulfillment business in Asia. Not sure if it's a coincidence or not, but in the last quarter, Arrow talked about selectively walking away from the low-margin supply chain engagements, and you're talking about, you know, big volume increases. Wondering if there is a connection there, and the strength that you're seeing there, is that a handful of customers, a single customer? And then can you remind us your returns targets for that kind of business?
Rick Hamada (CEO)
So, Matt, let us wait. Let me jump in, maybe, Gerry, if you can give some additional... So, you know, as we, we're hopefully reinforcing throughout the call here, the return targets are consistent with the overall returns we want out of that region, all comporting with our enterprise-level ROC commitments and goals, okay? It's a very limited, I won't even say it's limited by customer. In many cases, we're accommodating a supplier who needs our supply chain services to actually service a customer in the region. And the final point I would make is that one of the reasons that these are so spiky and seasonal have to do with the fact that they're very often related to consumer products as opposed to more industrial, which, as you know, is the bread and butter for us overall. Go ahead.
Gerry Fay (President of Electronics Marketing)
Yeah, the other thing I would add, Matt, is, you know, we constantly review our portfolio to ensure these engagements continue to make sense for us. And when we don't, when they don't, we exit them. So I can't, I can't comment on your, on your first part of your question, but I would say we constantly look at the portfolio, and when they don't make sense anymore, we exit them.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, fair enough. And on the TS business, Phil, nice growth in the quarter, obviously. I did notice that gross margin was down 34 basis points or so. You would think that on higher volumes, you'd get some pretty good vendor rebates, which would help gross margin, but it could be a function of mix, perhaps your component business. So could you talk about that?
Phil Gallagher (President of Technology Solutions)
Yeah, Matt, thanks. Yeah, and your latter point was really a big part of that. Product mix, okay, for sure, based on the different commodity quotes and the PC components business and the disk drives that are in the business that shifted in last year. So if you net those out in the enterprise space, our margins held up very well. Then I wanted to just add, we're also continuing to invest in the business. So as we drive growth, you know, we've been very vocal and forthright about making investments further in our converged infrastructure space, driving software, and most recently, the bigger investments in the area of Avnet Branded Services, okay, which are getting good traction.
But we're making those investments up front, and they're not all yielding the operating margin returns that we would expect at this point, or that we would want at this point. Okay, but they're in line to where we need them to be as we close out the balance of our fiscal year.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, and if I could just throw in just a quick third question regarding your EBIT 5% EBIT margin target for EM. It doesn't look like you're going to get there this quarter because of the acquisition. Is there a timetable, Rick, that you're willing to put your neck out for in terms of whether it be June or another quarter?
Rick Hamada (CEO)
Matt, hopefully, I am consistently on record with Gerry and team that we are committed to returning to that 5% goal for the EM business, excluding MSC, in our fourth quarter.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Excluding them. Okay, I'm talking about for the whole business then.
Rick Hamada (CEO)
Well, again, there'll be a little bit of drag. I think we talked about that with Sean earlier on the call. But, you know, we don't provide multi-quarter guidance, but we have provided some insight into what we're solving for as we're continuing to improve our financial performance. And I really believe since the beginning of the fiscal year, we've tried to consistently convey an expectation. We will get the EM business before the MSC acquisition even became a reality, starting, you know, in our first quarter. We're going to get that EM business on a global basis back to 5% in the fourth quarter of fiscal 2014, and we're still committed to that goal.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, thanks a lot.
Operator (participant)
Thank you. Our next question comes from Mr. Amit Passi with UBS Research. Please proceed with your question.
Amit Passi (Analyst)
Hi. Thank you, Rick. Sorry, not to beat a dead horse here, but, I'm just trying to figure out for the December quarter, was MSC actually, loss-making on the operating profit line? I'm just trying to figure out why operating profit dollars declined on a pretty robust sequential increase in sales.
Rick Hamada (CEO)
Yeah, Amit, think of, think of MSC much more as a break-even, a very, very minor plus or minus kind of impact on the December quarter.
Amit Passi (Analyst)
Why were operating profit dollars down?
Rick Hamada (CEO)
Just make sure I got the right framework. Are you talking about sequential or year-over-year, Amit? Let me make sure I got the right framework.
Amit Passi (Analyst)
Sequential, sequential.
Gerry Fay (President of Electronics Marketing)
Yeah, I think, Amit, this is Gerry. If you look at that, if you have the MSC business, which is not providing any drop-through, and then you look at our Asia business, the fulfillment business we've talked about, being on much lower end of our margins, there's not a lot of drop-through there either. So quarter over quarter, that was the big contributor to the difference. Now, again, also on top of that, it was our highest quarter where we had the biggest mix from Asia overall, which are lower margins overall than our Western business. So if you then look at the quarter coming up, our Asia business, fulfillment business goes down, we get a swing to the West.
So if you look at what we're projecting for our profit next quarter, we are starting to move up toward that 5% range.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, perfect. And then I was just curious on the book-to-bill in January, that you talked about at 1.05. I mean, is there any possibility of some impact from Chinese New Year? I'm just, just wanted to make sure. I mean, is that pretty much normal, or do you think some of that's being skewed by the Chinese New Year?
Gerry Fay (President of Electronics Marketing)
Some of it's being skewed by, because Chinese New Year, as you know, is earlier in the year this year, so some of it is skewed. That's actually, I think, a benefit at this point because we have the back half of the, the quarter to continue to ship. So I think part of it is customers pulling in before Chinese New Year, but it's not out of what we've seen on a normal basis, so it's pretty standard.
Rick Hamada (CEO)
Yeah, Amit, I'd say it's a typical, sort of, intra-quarter seasonal, seasonality that we've seen. No matter where it drops, there's a little bit of buildup before, things go very quiet for about a week, and then it comes roaring back, so.
Amit Passi (Analyst)
... Okay, and then finally, I just wanted to confirm, what's implied for OpEx in your March quarter guidance, and then how do we think about any other savings from restructuring actions? Anything else we need to be thinking about for the next couple of quarters?
Gerry Fay (President of Electronics Marketing)
Sure. Hey, Amit, this is Kevin. I think when you when we walk the expenses for the next sequential, we're gonna be roughly up $5 million-$10 million, and that's composed of a few different items. But one item pulling it up is the merger increase, which went into effect January first. As you look forward, there's gonna be a lot of impact potentially from currency and M&A, but the overall sales activity, I would say, as you look out to our fiscal fourth quarter, the run rate, we would expect the impact of our integration and restructuring efforts to lower operating expense in the $8 million-$10 million range per quarter.
Amit Passi (Analyst)
Okay. Thank you.
Operator (participant)
Thank you. Our next question comes from Mr. Mark Delaney with Goldman Sachs. Please proceed with your question.
Mark Delaney (Managing Director and Senior Equity Analyst)
Great. Thanks very much for taking my question. I was hoping we could talk about the margins a little bit further within the EM business. I understand there's some integration impact that's going on right now with MSC that's impacting the operating margins. So I was hoping maybe we could just talk on the gross margins. If you strip out MSC and you think about your gross margins in the March quarter, do you think that those are gonna be up on a year-over-year basis versus last year, you know, on a like-for-like basis for the divestiture of computing components?
Gerry Fay (President of Electronics Marketing)
So-
Rick Hamada (CEO)
Go ahead, Gerry.
Gerry Fay (President of Electronics Marketing)
Yeah. So if you look at quarter-over-quarter, our gross margins, taking MSC out of the mix, will be slightly up year-over-year.
Rick Hamada (CEO)
Yeah, Mark, I think we've made a lot of commentary regarding a stabilized gross margin environment. And what I would say, anticipating perhaps the next question, or the question that may be on somebody's mind out there is, are we counting on any continued gross margin expansion and think of it as the core business as part of our get back to five? And at that point, we're not. We are anticipating we would maintain a stabilized environment at this point, but in an acceleration in the pace of recovery, leading to some gross margin recovery would be additional upside.
Mark Delaney (Managing Director and Senior Equity Analyst)
That's great. That's, that's helpful. And, and then for my follow-up, can you just talk about what your, your plans are in terms of executing upon the remaining buyback?
Rick Hamada (CEO)
Given all, let me. We've got a standing schedule in place, Mark, as we do every quarter, where we will take the latest internal financial projections, do our calculation of intrinsic value. I think I've shared we use multiple lenses to take a look at that. Then heading into the next window, we will, we will put a new schedule in place and have it standing in place with a currently open authorization in the neighborhood of $225 million still open.
Mark Delaney (Managing Director and Senior Equity Analyst)
Thank you very much.
Rick Hamada (CEO)
Any, uh-
Gerry Fay (President of Electronics Marketing)
Any more questions?
Rick Hamada (CEO)
Any more questions? No?
Operator (participant)
Yes.
Can you hear me?
Speaker 15
William Stein.
Rick Hamada (CEO)
Now we had a little dead air there for a while, Will.
Speaker 15
Sorry, I didn't hear the intro. If I missed it, I apologize. Can you describe a little bit more detail of this Asia business, this transaction fulfillment business, that you cited? It sounds like you said it was customer driven, and should we assume that this might repeat every Q4 in calendar Q4 and off in calendar Q1, changing the seasonality, or is this kind of a one-and-done situation?
Gerry Fay (President of Electronics Marketing)
What I would say is it, it's a seasonal selective playing consumer that's not mainstream for us, but in the history that we've had the business, this quarter is usually the largest quarter for that business. It hasn't been this extreme before, so it's all based on customer demand. So that's, that's, you know, how it works. It seems these customers, consumer customers, it's a big quarter, but this was a particularly large quarter for, for those fulfillments.
Rick Hamada (CEO)
Yeah, Will, if you'll remember, I believe at the on our October call, we—I think we mentioned at that time, we had some fulfillment business in the backlog and in the pipeline. And in fact, some of that had contributed to a little bit of the inventory build. We were getting ready to support some of this business, but as Gerry said, it actually came in even stronger than we were anticipating at that time.
Gerry Fay (President of Electronics Marketing)
Yeah, and then, and if you look at what happened to the inventory, the inventory came down, in line with that business.
Speaker 15
Great, appreciate that. One follow-up, if I can. I think the last call, you were asked about cloud, and, Rick, I think your comment was, "Bring it on. Bring on the complexity." Is this part of the result that we're seeing in terms of both better revenue in TS in the quarter, driven by the Americas, and also the better than seasonal outlook as well? Is that, is that part of what's contributing, or is it not clear? Or is it, or is it just kind of a more general expansion and demand as, as you're kind of in line with the better, you know, questionably better global macro?
Rick Hamada (CEO)
Yeah, Will, so first of all, I would say we, we maintain our bring it on attitude. What I would tell you is that, we're still learning and tracking, trying to be more specific about identifying specifically which, you know, portions and segments of our revenue we can specifically tie to either private or hybrid cloud environments. What I, what we, what we are seeing is that these converged solutions, which we believe are becoming the preferred building blocks of many of these clouds, whether they be private or hybrid, that's where we're seeing some exciting growth. So we think there's a connection there. I just can't tell you that 50%, 80%, you know, X% of that, that growth is coming because, specifically because of cloud investments or environments....
So we know that there's a loose connection there, and we're trying to tighten it up a bit to be able to report more specifically going forward. But right now, we just gotta speak to the big trends of growth in software services and converged solutions, all of which we think are consistent with this growing interest in cloud solutions.
Speaker 15
If I could just squeeze one more quick one in. I think you were asked about the negative growth in EM Americas, which I guess excluding a backout, is really positive. But-
Rick Hamada (CEO)
Right
Speaker 15
In TS and EMEA, I think you're still showing negative growth. Any comment as to when you think that'll turn?
Rick Hamada (CEO)
Yeah, this is still Will. I'll jump on that. We did show the aggregate level negative growth in EMEA, albeit improved, okay, and improving. And we are looking for organic growth this quarter, being the March quarter, in all regions, by the way, and expect that to turn around in March.
Speaker 15
Great. Thank you very much.
Rick Hamada (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Lou Miscioscia with CLSA. Please proceed with your question.
Louis Miscioscia (Managing Director and Senior Analyst)
Here we go. Follow-up. So just to clarify, did you say that SG&A, after it being up $8 million-$10 million this quarter, is gonna be down thereafter? And if so, did you actually give the absolute dollar suggestion for down for the next couple of quarters due to the restructuring?
Kevin Moriarty (CFO)
Lou, it's Kevin. What I had indicated in the sequential quarter, so in our third quarter, I'm expecting it to be up $5 million-$10 million from Q2. But given the restructuring and integration efforts underway, thereafter, I'm expecting it to be down $8 million-$10 million on a per-quarter basis.
Louis Miscioscia (Managing Director and Senior Analyst)
For 2-3 quarters or, or, or how long before it stabilizes?
Kevin Moriarty (CFO)
No, it'll be down in our Q4 and then thereafter. And again, that is all based on volumes and things of that nature that go into play.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, last question, I guess, is for Rick. You know, appreciate the fourth quarter EM guidance. Just wondering about the big picture of 5 to 5.5, if that's still the long term—I'm sorry, the four to 4.5 long-term company goal. When do you think you hit that? Even if it's a quarter, let's say fourth quarter of next year. Any chance we can get you to give us a prediction on that?
Rick Hamada (CEO)
Yeah, we do a lot of modeling here, Lou. You know, it's for us first. I think the path to EM back to 5% and 5.5% is fairly clear. We're asking TS to improve on year-on-year margin on the path back to getting to their 3.4-3.9. And I'm telling you, when Avnet's gonna be comfortably in their range is when both groups are operating in their ranges. So that, I mean, do your modeling and pick your scenarios, and keeping in mind, we're trying to share what we're solving for. We'll keep you posted on when we see that crossover point.
Louis Miscioscia (Managing Director and Senior Analyst)
Okay, thank you.
Operator (participant)
Gentlemen, there are no further questions at this time.
Kevin Moriarty (CFO)
Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation, along with a further description of certain charges that are excluded from our non-GAAP results. This entire slide presentation, including the non-GAAP financial information and reconciliation, can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you.
Rick Hamada (CEO)
Thanks, everybody.
Operator (participant)
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.