Avnet - Q2 2015
January 22, 2015
Transcript
Operator (participant)
Please stand by. Our presentation will now begin. I would like to now turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations. Thank you. Please begin.
Vince Keenan (VP of Investor Relations)
Good afternoon, and welcome to Avnet's Q2 fiscal year 2015 business and financial update. As we provide the highlights for our Q2 fiscal year 2015, 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 for all periods covered in our non-GAAP results. When we refer to the impact of foreign currency, we mean the impact of the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar-based financial statements into U.S. dollars. In addition, when addressing working capital, return on capital employed, and return on working capital, the definitions are included in the non-GAAP section of our press release. Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement.
This call contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's Q2 fiscal year 2015 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide Q3 fiscal 2015 guidance. At the conclusion of Kevin's remarks, a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations are Gerry Fay, President of Electronics Marketing, and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr.
Rick Hamada to discuss Avnet's Q2 fiscal 2015 business highlights.
Rick Hamada (CEO)
Thank you, Vince Keenan, and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. Our team delivered another quarter of steady progress on financial performance, as they leveraged strong seasonal growth into record adjusted earnings per share and strong cash flow from operations. Despite some currency headwinds beyond our expectations, our typically strong December quarter at TS drove enterprise revenue up 10.4% sequentially and 12.8% in constant currency as compared with our normal seasonal range of +8% to +12%. TS increased 29% sequentially and declined 2% year-over-year in constant currency. At a product level, networking and security, services, and storage were all up year-over-year, while our sequential growth was led by software, services, and storage.
EM also delivered above seasonal sequential growth, driven by select high-volume supply chain engagements in our Asia region. As a result, enterprise revenue of $7.55 billion grew 1.8% year-over-year, or 4.6% in constant currency, with both operating groups exceeding our expectations for the quarter. The year-over-year growth in constant currency was driven by a 9.7% increase at EM, where strong growth in Asia and EMEA led to a seventh consecutive quarter of year-over-year growth. Our strong sequential growth and leverage at TS drove adjusted operating income up 23% to $274.6 million, and adjusted EPS increased 25% from the September quarter to a record $1.27.
Adjusted operating income margin increased 37 basis points sequentially to 3.6% and was up nine basis points year-over-year, with both operating groups contributing to this improvement. Another highlight of the quarter was operating cash flow, as the increase in profitability and effective working capital management, particularly at EM, drove cash flow from operations to $265 million for the quarter and $616 million for our trailing twelve months. As a final wrap-up to Q2 for TS, I would also like to acknowledge and offer my personal thanks to Phil Gallagher for his focus and drive for results during our very important December quarter.
When it comes to our perspective on the current environment, our view is that the continuing mixed signals on overall economic growth and the accelerated pace of change in our served market still represents our new norm. Recently increased volatility and weakness in certain currencies and commodity prices around the globe have introduced some new factors to consider as well. Despite these challenges, we also continue to see key areas of the technology world driving growth, including new data center solutions and the pervasive communications and platforms that will underpin the Internet of Things. Our team continues to navigate the challenges and opportunities well while delivering steady progress in our performance. Our key goals remain clear: to innovate, create, and deliver value that accelerates the success of our customers and suppliers from our unique position in the technology supply chain.
Now, I would like to turn the commentary over to Kevin Moriarty to provide more color on the financial performance of our operating groups. Kevin Moriarty?
Thank you, Rick Hamada, and hello, everyone. In the December quarter, EM delivered a seventh consecutive quarter of year-over-year organic growth, led by our Asia region, which grew 17.1% on the strength of the very discrete and select high-volume supply chain engageme-ts. EM EMEA continued a multi-quarter trend of high-single-digit growth as revenue increased 7.1% year-over-year in constant currency.
...As a result, EM revenue grew 9.7% year-over-year in constant currency to $4.4 billion, with Asia being the first regional group at Avnet to achieve $2 billion of quarterly revenue. Gross profit margin declined both sequentially and year-over-year due to the margin profile of the previously highlighted volume engagements, as well as the associated geographic mix shift, as Asia grew to represent 45.7% of total EM revenue, as compared to 41.7% in the year ago quarter. The year-over-year increase in revenue and the impact of cost reductions in prior quarters combined to drive operating income up 11.5% year-over-year, and operating income margin increased 19 basis points to 4.3%, with all three regions contributing to the improvement.
Working capital declined 4.5% sequentially, primarily due to a 10.2% decline in inventory, and working capital velocity improved both sequentially and year over year. The increase in operating income and working capital velocity combined to drive return on working capital up 125 basis points from the year-ago quarter, and economic profit nearly doubled, with our Asia region accounting for more than 40% of the increase. Turning to TS, better-than-expected growth in our EMEA and Americas region led to above-seasonal growth, as revenue grew 29.4% sequentially in constant currency, as compared to a normal seasonal range of +20%–+26%. Our EMEA region grew 34.5% sequentially in constant currency, while our Americas and Asia regions grew 29.2% and 13.7%, respectively.
Revenue of $3.12 billion declined 4.6% year-over-year and was down 2% in constant currency, driven by a 13.4% decline in our Asia region, related primarily to our computing components business. Gross profit margin declined from the year-ago quarter, as the decline in our Americas region was partially offset by increases in EMEA and Asia. The above-seasonal growth in our western regions and continued expense efficiencies resulted in strong leverage, as operating income grew over three times the rate of revenue sequentially, and operating income margin increased 124 basis points to 3.8%, with all three regions contributing to the improvement. Operating income of $117.6 million declined 2% from the strong December quarter in fiscal 2014.
However, operating income margin was up 9 basis points year-over-year, as increases in EMEA and Asia regions were partially offset by a decline in our Americas region. Now turning to cash flow from operations. The team did an effective job managing our balance sheet as enterprise working capital declined $125 million sequentially, even as revenue grew $712 million. During the quarter, we returned $113 million of cash to shareholders through our dividend and disciplined share repurchase program. In addition, our board of directors approved another $250 million for use in our stock repurchase program, which brings the cumulative total approved to $1 billion.
With the $109 million we have repurchased in the first two quarters of fiscal 2015, we have repurchased a cumulative total of $643 million at an average price of approximately, approximately $31 per share, and have $357 million remaining as of the end of our December quarter. With over $900 million of cash on our balance sheet and $2.3 billion of available liquidity, we are well positioned to continue to drive further improvement in our financial performance while maintaining our disciplined approach to capital allocation. Now turning to our outlook. As we closed out our December quarter, our book-to-bill ratio at EM was at parity, and through the first three weeks of our third fiscal quarter, our book-to-bill was slightly below parity, which is consistent with normal seasonal patterns.
While we continue to deal with an uneven growth environment across our end markets, the strengthening of the U.S. dollar is negatively impacting both our growth rates and financial metrics. Since the Q2 of fiscal 2015, the average EUR-to-dollar exchange rate has fallen close to 6%, which is having a growing impact on our guidance, given approximately 30% of our revenue and an even higher percent of operating income is derived in the EMEA region. For the Q3 of fiscal 2015, the translation impact of the strengthening U.S. dollar is having a negative sequential impact of approximately $150 million on our top line and $0.04-$0.06 on our EPS, depending on geographic and product mix.
After adjusting for currency, our revenue guidance for the March quarter is at the low end of our normal seasonal range due to a greater than seasonal decline at EM, driven by an expected decline in our select high-volume supply engagements in Asia that enhanced our December quarter growth. At TS, our March quarter guidance is at the high end of normal seasonality due to the impact of our Q2 fiscal cutoff, as our March quarter includes the last three days of calendar 2014. Now turning to the guidance for our Q3. We expect EM sales to be in the range of $4.15 billion-$4.45 billion, and sales for TS to be between $2.45 billion and $2.75 billion.
Therefore, Avnet's consolidated sales are expected to be between $6.6 billion and $7.2 billion, and based upon that revenue forecast, we expect adjusted EPS to be in the range of $1.04-$1.14 per share. This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 138.5 million average diluted shares outstanding and an effective tax rate in the range of 27%-31%. In addition, the above guidance assumes that the average EUR-U.S. dollar to EUR currency exchange rate for the Q3 of fiscal 2015 is $1.18 to the EUR.
This compares with an average exchange rate of $1.37 to the EUR in the Q3 of fiscal 2014, and $1.25 to the EUR in the Q2 of fiscal 2015. Now, before we move on to Q&A, I'm going to turn the call back over to Rick Hamada.
Thank you, Kevin Moriarty. I would now like to offer some brief comments on one of our recent key leadership moves. In September, we announced our plans for a leadership transition at TS, with the goal of completing our process by the end of the calendar year. On January 5th, we were pleased to announce the promotion of Patrick Zammit, our former President for EM and EMEA, into the TS global leadership role. I would like to welcome Patrick Zammit to his first of what I'm sure will be many earnings calls, and although we will not put him on the spot today regarding the December quarter for TS, I have asked Patrick Zammit to prepare a few comments to introduce himself and share some of his early thoughts and observations.
Patrick Zammit (President of Technology Solutions)
Thank you, Rick Hamada, and let me begin by saying how excited I am about this opportunity. I've always enjoyed working in the world of technology distribution, and now with the chance to get closer to the systems and platforms that are changing how we consume technology as a natural extension of the market I've been involved in at EM. When I look at TS, I see a well-positioned team of very talented individuals who are focused on creating value in the emerging era of Third Platform technologies. While I'm still learning, I'm convinced our strong competitive position and deep partner relationships are a strong foundation to build on. I plan to spend a lot of time with our internal and external stakeholders before I refine the strategic plans to continue our journey in this evolving IT landscape.
I look forward to meeting many of you in the future and sharing more of these plans at our upcoming Analyst Day in June. Thanks again, Rick Hamada.
Rick Hamada (CEO)
Thank you, Patrick Zammit, and welcome once again. Operator, with that, we're ready to open up the lines for Q&A.
Operator (participant)
Thank you. We will now be conducting a Q&A 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to disconnect your handset before pressing the star keys. One moment, please, while we go for questions. Thank you. Our first question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Yeah, maybe just to follow up on Patrick's promotion, and congratulations, Patrick Zammit. Yeah, Rick Hamada, I'll ask you the question: How should we be thinking about his approach to the business relative to his predecessor, and specifically, given his background in Europe, does this give you more confidence that the margin challenges that you've experienced there over the last, you know, few years can be addressed sooner, such that you can get to your longer-term margin targets more quickly? Just any color on how you think his approach to the business might be different.
Rick Hamada (CEO)
Yeah, Brian Alexander, a couple of comments to start. First of all, Patrick certainly brings a more global perspective to our Avnet executive board, our internal senior leadership team, as a starting point. What I would tell you is that, as you're aware, we've had a number of actions in place already, and they're in motion to be able to improve the results of TS EMEA. Patrick will certainly bring a new perspective and a more localized perspective to what's going on there as a starting point. But his overall view will, of course, be how we also accelerate the progress for TS at the global level. He certainly brings a new perspective there that I think is valuable and very relevant to the long-standing dialogue we've had for TS EMEA.
But, as you've hopefully seen in this quarter's results now, there is some momentum building with TS EMEA that we're trying to accelerate on.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay, and then maybe just a follow-up. On the regional outlook in EM, is basically the entire delta versus normal seasonality at the consolidated level, is that all due to Asia, due to the reduction in high-volume fulfillment business? Or are you expecting to see below-seasonal trends in the Western regions? I'm specifically curious if you've seen any degradation in the trends in Europe, given that you guys have done really well there over the last several quarters.
Gerry Fay (President of Electronics Marketing)
Hi, Brian Alexander, it's Gerry Fay. Great question. The seasonal decline that you see in our business is in our select Asia fulfillment business, and that's the reason why our growth is below normal seasonality. In total, our other regions are well within their seasonal range, so, you know, I feel comfortable with that. And our EMEA business continues to operate very well and continues to gain share in that marketplace, so I feel very comfortable where we sit from an EMEA perspective.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay, thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question.
Steven Fox (Analyst)
Thanks. Good afternoon. Just first of all, following up on that, if we're looking out, say, over more than the next quarter, and given how some of the high-volume Asia business seems to be recurring now, can you maybe talk about your confidence that this is now more of a typical seasonal pattern for the EM group to see, you know, an elevated revenue, say, revenue growth in Asia during, like, the Q4 and maybe in the middle of the year? I had a follow-up after that. Thanks.
Gerry Fay (President of Electronics Marketing)
Sure. Steven Fox, it's Gerry Fay. Yes, I would expect a similar seasonality in this business in 2015. The growth is hard to predict because it's based on how the products associated with this take off. But from a seasonality perspective, I would agree with you. I think this is something that we will continue to see. But remember, as we've always said, it will be predicated on this business continuing to be accretive to our overall returns.
Rick Hamada (CEO)
And, Steven Fox, I would just interject here that as part of our preparations for June Analyst Day, we'll actually be revisiting what we consider to be, quote, unquote, "normal seasonality" for both businesses as part of our communications at that time.
Steven Fox (Analyst)
And just to clarify those comments, is there any way to sort of isolate it now so we can understand how much that has grown, say, over the last couple years, or maybe that's something for the Analyst Day?
Gerry Fay (President of Electronics Marketing)
Yeah, I mean, we can certainly talk about our business mix at Analyst Day. But again, I think if you look at, we look at our core business in Asia with and without this business in there, and from a seasonality perspective, we're comfortable that our core business is continuing to perform and continuing to grow at the normal seasonality rates in Asia.
Steven Fox (Analyst)
Great. And then just as a follow-up on the TS side of the business, given some of the seasonal patterns you've seen year-end, can we step back and maybe talk big picture about the opportunities to grow TS in the new calendar year in terms of what you're seeing from enterprise spending and where maybe things are, where you feel more confident or less confident? Thank you very much.
Rick Hamada (CEO)
Yeah, Steven Fox, as you know, we try to refrain from being long-term forecasters here. What I will tell you, I think we've seen many of the same opinions that you have from those that do make a business out of this business of forecasting, that it appears that they have to have a low-single-digit outlook for growth in IT spend. What I will tell you is that our activity levels, conversations with the VARs, the current activity levels are all very consistent with the guidance we gave for TS this quarter, which is at the higher end of the normal, down 16-20. And by the way, part of that was also influenced by the fact that we did start our fiscal Q3 with three very important calendar days of December at the beginning of our fiscal period.
So, again, I'm not trying to make a projection on IT spend for 2015, but from what I'm seeing, it appears most of the experts are circling around a low, maybe just slightly low end of mid-single digit type of IT spend environment.
Steven Fox (Analyst)
Got it. Thanks so much.
Operator (participant)
Thank you. Our next question comes from the line of William Stein with SunTrust Robinson Humphrey. Please proceed with your question.
William Stein (Managing Director and Senior Analyst)
Thanks for taking my question. I actually have two quick ones. First, can you remind us what the operating margin goals are in each segment and your view on timing, both maybe the time you expect to achieve them on a quarterly basis, and whether you think you'd hit them for the full year 2015, or whether that's more of a 2016 event? Then I have a follow-up.
Rick Hamada (CEO)
Yeah. So, William Stein, it's Rick Hamada. Let me start and maybe ask Kevin Moriarty or, or Gerry Fay to jump in. So for our businesses, our stated LRPTs for op margin are 3.4%-3.9% at TS and 5.0%-5.5% at EM. More specifically, anticipating the questions today, you know, we have been talking since the early part of our fiscal year that we felt a return to 5% for EM in the second half of our year was part of our plans based on what I would call normal seasonal patterns throughout the fiscal year. And what wasn't factored in at that time was the impact of currency changing from...
In our Q1, as we were laying out these plans, we were at a dollar-to-EUR exchange rate of somewhere north of $1.30, and now we're headed to, on today's rate, $1.14 and below. So, that interesting part of it, I think Kevin Moriarty shared earlier, that just on a sequential basis, from $1.25 to $1.18, it's costing us $0.05-$0.07 of EPS. And so with that impact to our operating income, all of a sudden, getting back to five, the impact of the currency takes 10 or 15 basis points out of that journey just on a sequential basis.
It's even, it's even a bigger gap if you go back to the way we were thinking, again, back with the dollar north of the EUR north of $1.30. So all that said, the goals are intact. We're very pleased with the progress at both businesses and very much in line with seasonality patterns from a geographic shift and growth by region. But with the wild card for us that came into the equation this fiscal year thus far, has been the strengthening of the dollar.
William Stein (Managing Director and Senior Analyst)
Do you think you're going to hit that in fiscal, the next fiscal full year if currency stops moving? Is that the expectation there?
Rick Hamada (CEO)
Well, by the spot moving, if we stay at $1.15, we can do the calculations for you. It's certainly tougher than at $1.30. What I would tell you is, keep in mind, with EM's normal seasonal patterns, well, we are generally going to experience peak margins for EM in the March and June quarters of any fiscal year. So if we're not back to 5%, in the second half of 2015, no matter what currencies do, even if they improve a little bit, we would be looking to the second half of 2016 at that point, because that 5%-5.5% is a range we want to maintain through cycles and through fiscal years. But the Asian mix is always peaking more in the September-December quarters, and the Western mix is peaking in March and June.
Therefore, we will always experience, on a sequential basis, margin expansion for EM on an intra-year basis in the March and June quarters.
William Stein (Managing Director and Senior Analyst)
Just a brief follow-up, if I can. Is it fair to see the supply chain engagements that you have in Asia that sound like they're now more permanent and maybe even growing part of your business, similar to the way you're going to have to revisit your assumptions on normal seasonality in EM? I would think that this would also have an effect on your margin targets in EM as well. Fair to say that pulls the margin target down as well?
Rick Hamada (CEO)
It is fair to say that the more we engage on these very select high volume engagements, yes, that does put pressure on Asia as well as EM global margin profile. Well, whatever we think is a structural addition to that business, we will be clearly communicated as part of our update on Analyst Day.
William Stein (Managing Director and Senior Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jim Suva, Citigroup. Please proceed with your question.
Jim Suva (Analyst)
Thank you, and congratulations to you and your team at Avnet. If we could, since a lot of the questions have been asked, if we could switch the topic a little bit to mergers and acquisitions and use of cash. You know, M&A has been a very strong part of Avnet's history and heritage of consolidation and reducing costs and growing at scale and scope. But maybe my tracker is off a little bit. It seems like that's kind of been a little bit of a less of a focus recently. So how should we think about, you know, are we changing the chapter on M&A, or is it just, you know, what's going on? You had to focus internally on absorbing the M&As in recent years and restructuring in Europe. Or how should we think about M&A going forward?
It just doesn't seem like to be too topical right now.
Kevin Moriarty (CFO)
Hi, Jim Suva, it's Kevin Moriarty. M&A could continue to remain a core tenet of our pro-profitable growth strategy, and we remain in active engagement and dialogue with our regional presidents. We have an active pipeline. We continue to monitor it and review it. So it still remains a core aspect of what we're trying to do to properly grow the business.
Jim Suva (Analyst)
Okay, but it seems like the cadence has dramatically decelerated, or, or do you disagree with my conclusion from that?
Rick Hamada (CEO)
No, Jim Suva, it's very clear. The fact that we don't produce on this quarter's report, it's been the first one in a while where the difference between, you know, reported and ex M&A has been the same number. So we're with you on that. Certainly has been a lull, but that lull should not be taken as any lack of continued interest on our part to leverage, you know, intelligent capital allocation in pursuit of acquisitions that meet our multiple goals of cultural fit, strategic fit, and expectations for the appropriate financial returns.
Jim Suva (Analyst)
Great. Thank you so much, Jim, and congratulations again to you and the team at Avnet.
Rick Hamada (CEO)
Thanks, Jim Suva.
Jim Suva (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed with your question.
Shawn Harrison (Senior Research Analyst)
Hi, everybody.
Rick Hamada (CEO)
Hey, Shawn Harrison.
Kevin Moriarty (CFO)
Hey, Shawn Harrison.
Shawn Harrison (Senior Research Analyst)
Wanted to go back to the point made about the 10-15 basis point headwind from FX. Was that solely at EM that you're speaking to?
Rick Hamada (CEO)
Yes.
Shawn Harrison (Senior Research Analyst)
Does that imply that EM margins will be down year-over-year, EBIT margins? Does that mean?
Rick Hamada (CEO)
We're thinking, Shawn Harrison, we're thinking flattish year-over-year, even despite that headwind, and that headwind was strictly on sequential basis for EM.
Shawn Harrison (Senior Research Analyst)
Okay, that's very helpful. And then second, inventory came down this quarter. Just maybe you're thinking of how inventory will move throughout the rest of the year, and can you maybe have a range for free cash flow or operating cash flow that you expect now for the year?
Gerry Fay (President of Electronics Marketing)
Sure. Yeah, so I’ll hit the inventory, Shawn Harrison. I see inventory is still very lean in the supply chain, and we continue to manage our inventory for this market reality. I would expect our inventory to be flat to slightly down exiting Q3 from what we exit in Q2.
Kevin Moriarty (CFO)
And Shawn Harrison, it’s Kevin Moriarty. On the cash flow from operations, obviously, we’re very pleased with the team’s performance in the Q2, and you know, the trailing 12 months now above $600 million. And as you know, it can obviously change relatively quickly depending on how we progress with the organic growth and investment and the linearity as we work through quarters. So I’m still holding to around the $400 million number for our full fiscal year for 2015.
Shawn Harrison (Senior Research Analyst)
Okay.
Kevin Moriarty (CFO)
Yep.
Shawn Harrison (Senior Research Analyst)
I'm sorry, you were saying? Apologies.
Kevin Moriarty (CFO)
No, no, I'm good.
Shawn Harrison (Senior Research Analyst)
Okay.
Kevin Moriarty (CFO)
That's it.
Shawn Harrison (Senior Research Analyst)
Gotcha. Thanks again. Congrats on the results, guys.
Kevin Moriarty (CFO)
Thanks.
Rick Hamada (CEO)
Thanks, Shawn Harrison.
Operator (participant)
Thank you. Our next question comes from the line of Matthew Sheerin with Stifel. Please proceed with your question.
Matthew Sheerin (Analyst)
Yes, thanks, and hello, everyone. Just a question, I think you've probably answered this on the currency details, but regarding gross margin, it looks like just sort of backing in to the number, it looks like gross margin is going to be down about 50 basis points or so year-over-year. Is that a combination of the mix shift, geographic mix shift and FX, or is there something going on? Because I know last year, your biggest semiconductor supplier, TI, took more demand creation business directly, and I'm wondering if that's had any negative impact on your business.
Gerry Fay (President of Electronics Marketing)
... This is Gerry Fay. So what I would tell you is that the latter is not a factor for us on the gross margin decline at this point. So I do think, to your earlier point, those two factors, the mix shift, and are the biggest issues that impact our gross margins at this point.
Kevin Moriarty (CFO)
Okay. Nice, Kevin Moriarty. Obviously, the currency impact to the point Rick brought up is obviously having a year-on-year impact on the gross profit line, as well. So the geographic mix shift as well as the currency is driving us in that direction.
Matthew Sheerin (Analyst)
Okay, great. And then, just looking at, in tech solutions, it sounds like you're looking at typical seasonality, and I know you're doing a lot more in terms of the cloud, in the services side. Are you seeing that having a bigger impact in terms of you helping resellers, or is the cloud not a big issue yet?
Rick Hamada (CEO)
No, Matthew Sheerin, well, well, I would confirm for you that it's a, it's a topic everybody is interested in, and in many cases it's creating value, value creation opportunities for our partners as well as ourselves to help customers deal with the options, the choices, the trade-offs, the features, the benefits, the economics. There's a lot going on in this area. Whether it's private cloud, which looks very much like our traditional data center business, or it's hybrid, which is traditional plus new options, or it's more aggregation around access to infrastructure as a service, platform as a service, or whether it's just straight consulting in the form of cloud consulting services or some of our cloud tool sets, it is, it is becoming a very popular part of just about every conversation going on today.
As Patrick Zammit mentioned, the customers deal with this emerging era of what I believe IDC coined the term, moving to the Third Platform.
Matthew Sheerin (Analyst)
Okay, but shouldn't that have a positive impact on your gross margin as you get more involved in services and helping resellers help their end customer? I know you mentioned that gross margin was down, I think, in North America last quarter. Would you expect margins to improve?
Rick Hamada (CEO)
We certainly expect margins to improve as we continue to grow our Avnet-delivered service as part of the equation, yes.
Matthew Sheerin (Analyst)
Okay. Thanks a lot.
Operator (participant)
Thank you. Our next question is from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question. I am sorry. Our next question comes from the line of Amitabh Passi with UBS Research. Please proceed with your question.
Amitabh Passi (Analyst)
Hi. Thank you. Rick Hamada, my first question was for you. You spoke about strength in TS, EMEA, and Americas in the December quarter, but when I look at year-over-year trends, they still look relatively challenged. I just wanted to get your sort of broader perspective in terms of what you think is happening, particularly when we look at these trends on a year-over-year basis.
Rick Hamada (CEO)
Yeah. So a couple of factors there going on the top. First of all, we are doing some disciplined, you know, revenue selection in the computing component space, which we've talked about previously, which does impact both businesses. For TS EMEA, as an example, in our core enterprise IT business, it was a positive growth year-on-year. Also, comparing year-on-year, our fiscal calendar comes into play again, because the cutoff this year, even though we got it very right, and we were very concerned and tried to. We spent a lot of time with all of you trying to telegraph that this three-day cutoff, we weren't sure how much impact it was gonna have. We got it pretty much right on what we thought the share of the fall into Q2 and Q3 was, so that was good.
But keep in mind, when you're looking year-over-year for us, the fact that the year before didn't miss three days and we did in this year, that also makes it really tougher to compare. So one way we've looked at it is six months, you know, to six months, and we're gonna do the same thing here after the Q3 to try to take a look at nine months to nine months on how the overall business is tracking. But there are some anomalies associated with the very unique calendar we had this year that somewhat contribute to some of those comparisons.
Amitabh Passi (Analyst)
Okay. Thanks. I had a question just around OpEx. It declined $8-$9 million sequentially, despite pretty nice performance on the top line. Just wanted to get a sense of how we should be thinking about OpEx for the rest of the fiscal year.
Kevin Moriarty (CFO)
Sure. Amitabh Passi, hi, it's Kevin Moriarty. What I would highlight... I'd highlight, you know, sequentially, there's a lot of factors that will go into it in terms of the currency impact, the... But what I would suggest for the next quarter is a range of around $555 million-$565 million for our Q3. We traditionally don't go out longer than that, and a lot of that will get tied up into what's our organic growth profile and investments required. But directionally, we would expect it in that that same magnitude as we go through the rest of the year. But again, I'll update the team, everyone on our Q3 call.
Amitabh Passi (Analyst)
Then just finally, just on buybacks, I think you have $370 million. Should we still think, should we assume the playbook is, you know, interesting around book value, or can we expect a more consistent pattern over the next few quarters?
Kevin Moriarty (CFO)
We're gonna continue to follow our disciplined approach in terms of how we have historically looked at it, when we think it's a compelling buy, alternative form of M&A. But we continue to update with each quarter, Rick Hamada and myself, we look at it with our board in terms of when we would get in from a buyback perspective. So we're gonna continue and sustain that disciplined approach.
Rick Hamada (CEO)
Yeah, Amitabh Passi, this is Rick Hamada. I would just chime in. You know, I hate to make definitive statements, but I would tell you, you could always think you could always assume we're interested at book value. Kevin Moriarty and I look at it not only in multiple of book value, we look at forward projection, internal projections on PE. We do look at DCF, and we kind of triangulate based on multiple valuation models for us to be able to maintain our standing schedule of participation on a buyback perspective. It's still very much value-based. We do adjust it from time to time when the windows are open, and we look at it from multiple perspectives. So it's not just about, you know, being within 10% of book value. That's not the only way we benchmark.
Ananda Baruah (Senior Equity Research Analyst)
Okay. Thank you, guys.
Operator (participant)
Thank you. Our next question comes from the line of Ananda Baruah with Brean Capital. Please proceed with your question.
Ananda Baruah (Senior Equity Research Analyst)
Hey, thanks, guys, for taking the question. Hey, just going back to the announcement of bringing Patrick Zammit over to TS, and congratulations, Patrick Zammit, from us as well. Rick Hamada , in your initial comments, your earlier comments about Patrick's international experience being advantageous to the senior management team, is that also to say that the experience he has with the numerous initiatives on the margin side in Europe can be helpful in moving towards the TS margin goals, broadly speaking? Or am I reading too much into that?
Rick Hamada (CEO)
No, Gerry, I'm gonna try to take you somewhere in between, Ananda Baruah. So Patrick Zammit has a very solid track record of performance in a very competitive and tough marketplace. And I think we've spoken many times in the past around our EM and EMEA business having the highest growth and operating margins anywhere across the Avnet global portfolio. So, am I expecting Patrick Zammit to try to recreate those types of margins? No. Am I expecting he will accelerate our progress to a sustainable model, where the appropriate level of returns and profitability are part of the long-term outlook for our computer business in EMEA? Absolutely. So I'm gonna take you somewhere in between those two goalposts you've laid out.
Ananda Baruah (Senior Equity Research Analyst)
Okay, that's really helpful. I appreciate it. And can you go through just sort of rank order what the drivers were of the TS operating margins this quarter, the strength there?
Rick Hamada (CEO)
Yeah, I think on a regional basis, we talked about-
Kevin Moriarty (CFO)
Yeah, I would suggest if you looked at the sequential change, right? Our fiscal Q2, traditionally, when you have the sequential less than the budget flush and the calendar close, obviously drove the bulk of the sequential improvement. But in addition, as I commented upon, each of the regions contributed to the op margins and expansion within TS.
Ananda Baruah (Senior Equity Research Analyst)
So, from your perspective, nothing, nothing unusual from normal seasonality?
Kevin Moriarty (CFO)
No, I think we would comment upon, we were pleased with the performance in TS, Americas Europe business, as well as Asia, in terms of the continued progress over the last couple of quarters on extending the op margin. I would call that out.
Rick Hamada (CEO)
In our outlook for Q3, would lead you to conclude we're gonna continue that trend for TS at the global level in the March quarter.
Ananda Baruah (Senior Equity Research Analyst)
Cool. And I guess, just, just last one for me. With regards to the embedded systems business, the one that's at the, you know, $1.5 billion run rate... How was that during the quarter, collectively? Is there anything that stood out, as maybe, you know, sort of particularly strong and accelerating? And can you just give us, you know, sort of a view of what your thinking is for that business as we go through 2016?
Gerry Fay (President of Electronics Marketing)
Sure, Gerry Fay, I'll, I'll take that one. Part of this, I think, goes back to our MSC acquisition, so we've now had MSC for the full year. We believe the embedded space holds great growth potential as customers continue to look to improve their time to market to capture IoT opportunities. We believe that the solution selling will lead to increased margins and increase our ability to attract software and services sales. As you know, this is a long sales cycle for this business, but we continue to be optimistic about the opportunities as we continue to grow. So we're seeing nice growth in that business today, and we're gonna go through this in detail at our Analyst Day in June.
Ananda Baruah (Senior Equity Research Analyst)
Okay, excellent. Thanks a lot, guys. Congratulations.
Gerry Fay (President of Electronics Marketing)
Thank you.
Rick Hamada (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Louis Miscioscia with CLSA. Please proceed with your question.
Louis Miscioscia (Analyst)
Okay, great. Thank you. You know, the components business keeps on being a bit of a drag in the TS side. I'm just wondering what you're thinking about that, I guess, as you look out 12 months. Is it, do we get to a point where you think it starts to grandfather and flatten out, maybe even grow a little bit? Or do you look it to be, just a material decline? And obviously, at 8%-10% of total revenue for that group, it's, you know, still reasonably material.
Rick Hamada (CEO)
Yeah, Louis Miscioscia, it's Rick Hamada. The run rate of this business is now approximately $1 billion a year. And some of that weakness is driven by some of the key suppliers in that business, particularly in Asia. But we're also disengaging from unprofitable business, doesn't meet our long-term goals, and adjusting our expenses, by the way, accordingly with that. At the point that we settle into a sort of a turning point or we think it's leveled out, we'll be very explicit about that again, and we'll give you an update at Analyst Day overall.
I don't think we have much further to go, because as you go back through the transcripts of the last few quarters, you know we've brought a lot of scrutiny to this business about what is sustainable and what is not from the perspective of reaching our goals. I don't know if we're 100% done right now, but I don't think we're gonna drop another 50% from here. So somewhere in between that, we'll settle in, find the right mix and volume, and then try to build it up from there based on the specific strategies for that segment of the market.
Louis Miscioscia (Analyst)
Okay, great. And then, as we think about modeling things out on a sequential basis, obviously, you've had the September quarter, now the December and March quarter, with a couple days shifting around. I guess, once we get past the March quarter, does things get pretty much back to a normal type of calendar year quarter, or do we still have days in 2015, and into fiscal 2016 that might be shifting around? I wonder if you can give us any color on that.
Rick Hamada (CEO)
Yeah, I'll tell you what, Louis Miscioscia, bring your notepad to the June Analyst Day as well. It actually, the short version is, we're gonna have a 53-week year in fiscal 2016 based on the way our calendar, and by the way, this happens every six or seven years at Avnet, based on the way we've constructed our fiscal. Which means we're gonna start the year with a 14-week quarter. We'll lay that all out for you, and what kind of impacts we think that has on the comparative numbers for fiscal 2016 when we're with you in June.
Louis Miscioscia (Analyst)
Okay, great. Look forward to seeing you in June.
Rick Hamada (CEO)
Thanks, Lou.
Operator (participant)
Thank you. Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question.
Sherri Scribner (Director and Senior Sell Side Equity Research Analyst)
Hi, thanks. A lot of questions have been asked already, but I just wanted to get a little more detail on the TS business in terms of the strength you saw this quarter, in which areas. I know that you mentioned networking, security, services, and storage, but wanted to see where you're seeing the strength.
Rick Hamada (CEO)
So Sherri Scribner, not a lot to add to that. You know, if we break down in those categories, you know, servers was our an area of growth, although ISS continues to be the proprietary for us there. The category of what we would call converged solutions continued to be a hot area for us. We think that's the key building block of, today's data center as well. And then we did mention storage already, but the resilience there just, continues to be pretty amazing.
Louis Miscioscia (Analyst)
Networking and security as well.
Rick Hamada (CEO)
Yeah.
Sherri Scribner (Director and Senior Sell Side Equity Research Analyst)
Okay. And then just to clarify, for the March quarter, if you exclude the three extra days, are you seeing normal seasonality in the business? Is that what the guidance implies?
Rick Hamada (CEO)
Yeah, we are. I think normal is down 16%-20%, and our guidance is pretty much narrowed down 16%, if I'm hearing right. Yeah, yeah.
Sherri Scribner (Director and Senior Sell Side Equity Research Analyst)
Right. So excluding those three, it's pretty much normal seasonal.
Rick Hamada (CEO)
Correct. And again, we are gonna look at the six and nine month trends year-over-year once we get a chance to do that.
Sherri Scribner (Director and Senior Sell Side Equity Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.
Mark Delaney (Managing Director and Senior Analyst)
Good afternoon. Thanks very much for taking the questions.
Rick Hamada (CEO)
Hey, Mark Delaney. Hey, Mark Delaney.
Mark Delaney (Managing Director and Senior Analyst)
Yeah, I was hoping I should talk on the margins to begin with. You know, gross margin on a consolidated basis, 11.1%. I mean, in my model, that's the lowest level in 15 years. You know, it seems to me like a lot of the pressure in gross margins was also in the EM segment on a year-over-year basis. I think maybe down 50-60 basis points, gross margins in EM year-over-year, and you know, even the comparable period last year would've had a high mix of some of these consumer, high-volume consumer programs last December, too.
So, you know, I bring it up and just trying to get a sense for what's causing this longer term pressure on gross margins, even within the segments such as within EM, and what you can do on a gross margin perspective that can maybe help you to get to some of those operating margin targets that you talked about within the EM segment.
Gerry Fay (President of Electronics Marketing)
Mark, it's Gerry Fay. I'll take that one. So if you look at, as I talked about earlier, when I got asked about seasonality in this High Volume Select business, seasonality remains pretty constant. The spikes during the seasons have changed. So this is the biggest spike we've had in that business as a percentage of the overall business in Asia in particular. So if you think about it, our business being skewed to Asia in the first half of the year, and then you put this on top of that, that's the primary reason why our gross margins have reduced. But I would also point out that our Asia team provided 40% of our economic profit in the quarter. So we still see that business as providing the right return profile.
To your point, as that business, you know, as Asia becomes a bigger, bigger part of our business over time, it will be more difficult for us to achieve our long-term profit goals of 5%-5.5%. But as we sit here today, if you take out the FX effect, the 10-15 basis points for next quarter, we would be on the trajectory to be able to get back to 5% in the back half of this fiscal year. So I think from a microcosm perspective, if you look at that High Volume Select business we have, that's what's driving that gross margin reduction.
Mark Delaney (Managing Director and Senior Analyst)
Oh, okay. I appreciate the thoughts there. And just with respect to those high-volume consumer programs, in the March quarter, is there any revenue that you're still shipping for any of these programs we should think about impacting quarter-over-quarter into June, or is that completely out of the model, in March?
Rick Hamada (CEO)
No, we always do some of it throughout the year, so I would think of it as our March quarter looks similar in that business to our first fiscal year quarter. It's the December quarter where we get the big spike.
Mark Delaney (Managing Director and Senior Analyst)
Oh, okay. And then just lastly for me, on FX, on the EUR exchange rate, I'm a little confused. I know you guys assumed a $1.18 EUR to dollar in your guidance and quantified an EPS impact. It's just, you know, kind of today, I think you guys also mentioned it's already the EUR at a $1.14 today, and so it seems like there's maybe already an incremental impact to EPS next quarter beyond what's included in the guidance. Can you just help me understand what's factored in, and then maybe how much more, you know, downside there'd be to EPS in the March quarter if we get the same spot rates for EUR versus the $1.18 that's baked in?
Rick Hamada (CEO)
Yeah. So, first of all, you know, a week ago, it was $1.18. And, you know, it's, it's a matter of setting up... You've got to pick a spot to put a stake in the ground and build your plans around it. So, trying to catch a falling knife sometimes is a little bit of a challenge. The way to think about the impact for us, very rough translation. So we, we got $1.18 baked into the guidance that we gave. Every $0.02— Now, and remember now, this is for the quarter, not just what's happening today, but every two-cent impact in the quarter would probably cost us about $0.01 of EPS, okay? On what would happen for the March quarter.
Mark Delaney (Managing Director and Senior Analyst)
Okay. Thank you very much. I appreciate it.
Rick Hamada (CEO)
Okay.
Operator (participant)
Thank you. Again, 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 would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our next question comes from the line of William Stein with SunTrust Robinson Humphrey. Please proceed with your question.
William Stein (Managing Director and Senior Analyst)
Thanks for taking a follow-up. Actually, two quick ones. First, you know, we've talked a lot about FX. I wonder if you have any view as to whether the new lower price of oil is having any impact, either positive on, broader end markets and negative in any of your energy or industrial focused customers. And then, the other one was about end market demand trends within the components business. You tend to talk about this from a geographic perspective, but if we could get any view on comm infrastructure, industrial, military, any other details by end market would be very helpful. Thank you.
Gerry Fay (President of Electronics Marketing)
Hi, William Stein. So I'll start with the end markets for components. So if you look at the end markets by region, so in Asia, for us, green technologies have been strong, and we have seen a pickup in 4G LTE, which is- has been positive for us, and also, BLE applications for IoT. The European market, the auto and industrial orders have still been fairly strong and holding steady. And if you look at North America, it's been fairly stable, mainly on industrial, auto, and medical markets. We have seen a little bit pickup in particular, military programs, but that remains fairly steady. We don't see a lot of growth sequentially there.
William Stein (Managing Director and Senior Analyst)
Thanks for that. Any view on oil, positive or negative?
Rick Hamada (CEO)
Hey, William Stein, it's Rick Hamada. You know, we've been asking ourselves the same question and looking across our businesses. We can't find any material impact across the portfolio, and we're hopeful that hopefully on a macro basis, you know, consumer thing picks up and helps the economy grow. But, we'll, I guess we're all gonna wait to see how that plays out.
William Stein (Managing Director and Senior Analyst)
So, not seeing anything material in either direction at this point that you can detect?
Rick Hamada (CEO)
No, we haven't. The same thing on the currency question, too. We've sometimes had the question around, "Hey, is the currency thing impacting, you know, CapEx in Europe and slowdown on..." We can't point any direct hits on that particular theory at this point either.
William Stein (Managing Director and Senior Analyst)
Well, thank you for taking the follow-up. I appreciate it.
Rick Hamada (CEO)
Thank you, William Stein.
Gerry Fay (President of Electronics Marketing)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Matthew Sheerin with Stifel. Please proceed with your question.
Matthew Sheerin (Analyst)
Yes, just a couple of follow-ups. Just one on the supply chain engagement business. Could you give us an idea how diversified or broad your customer base and supplier base is there? Obviously, there's probably a couple of big smartphone or other consumer kind of programs that you sell into. But could you give us an idea, particularly if we get into, you know, next year, and we don't see a big new product line-product launch, the year-over-year comps are gonna be pretty tough there.
Gerry Fay (President of Electronics Marketing)
Yeah, what I would tell you, Matthew Sheerin, is that it's a very small number of customers and a very small number of suppliers that we deal with in this space. It's very select, it's very manageable, and we continue to look at it from a returns profile perspective, to continue to ask our questions, if it continues to make sense, and at this point, it does.
Matthew Sheerin (Analyst)
Okay, that's helpful. And then just a question regarding book-to-bill. I know you said it was below one in the quarter to date. Could you give us book-to-bill by region so far?
Gerry Fay (President of Electronics Marketing)
I'd say we're at parity across our businesses. We are below parity in EMEA, which is typical for month to date at this point for us. So, we don't see any changes in cancellations or pushouts, so we feel pretty comfortable with where we sit today in the quarter.
Matthew Sheerin (Analyst)
Okay, thanks.
Operator (participant)
Thank you. Our next question comes from the line of Louis Miscioscia with CLSA. Please proceed with your question.
Louis Miscioscia (Analyst)
Hey, with Microsoft's refresh of, or cancellation of XP, obviously drove PC sales, maybe didn't help you all. But now, with the server expiration coming in July on the fourteenth, I wonder if any of your VARs are starting to talk about that being something that should come in to start to help TS, maybe from an upgrade cycle, or most of the VAR sales new sales and not as much upgrades.
Rick Hamada (CEO)
Hey, Louis Miscioscia, this is Rick Hamada. You know, we are hearing more about it from some of our customers and from some of our key suppliers on the opportunity. I think the issue is, you know, there's lots of choices for what you're gonna do with those workloads. You may move out of a Microsoft environment into Linux, for example. You may move into a larger piece of equipment that has a partition available. You may move the application into the cloud. So, we can't draw any particular conclusions today around an expectation just from this issue. But obviously, it does drive a certain amount of decision making in many data centers, and we'll keep you posted if we have more specific information.
It should play out earlier, by the way, than I think what we saw with XP, because obviously people are not going to wait till June to start making these decisions. It ought to show up, I think, earlier in this calendar year rather than later, as they obviously moving and forklifting a server application, a little different proposition than upgrading or not a personal computer.
Louis Miscioscia (Analyst)
And on the three that you mentioned, and maybe there might be even before, do you get the sense that it's leaning one way or the other?
Rick Hamada (CEO)
No, I don't at this point, Louis Miscioscia. But we'll be talking to our partners about that as we talk with them about where we're going to try to help them grow in the March and June quarters.
Louis Miscioscia (Analyst)
Okay, great. Thank you.
Rick Hamada (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.
Brian Alexander (Senior Managing Director and Director of Equity Research)
I had to continue the streak of follow-ups. Just on the gross margins in TS, I noticed they were down in the Americas for the second straight quarter. I don't think anybody asked about that. So is that product mix? Is that change in vendor incentives, or is that something else? And is that a trend we should be aware of or more of an anomaly? And then I just have one quick one after that.
Rick Hamada (CEO)
Yeah, it's product mix to a certain extent, Brian Alexander. It's also reflective of the incentive stack for Q2, but we don't think it's a longer-term trend, but just sometimes you hit eight cylinders out of eight, sometimes you hit six out of eight. And you know, you try to keep things aligned as close as possible to the way the suppliers want us to be able to help develop their channels for them. So it was noticeable. It was part of the equation. The team has been digging through it, and we don't think it's a major secular trend at this point.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay. And then there's been some discussion that one of your largest vendors in TS is possibly going to be selling directly to their largest solution providers, including some of your customers. So I'm just curious if that's a concern at all that you have at this time. Is that factored into your March outlook? And if so, what kind of headwind is that?
Rick Hamada (CEO)
Yeah, so everything we know is factored into the March outlook, Brian Alexander, and you know, I would just put the perspective on it that we're in constant dialogue with all of our partners on their channel plans and strategies. We remain very committed to our VARs, our partnership with our top suppliers, and we'll work with them to execute their programs and provide value in the partnership and go provide the reach and coverage in the parts of the market they deem important for their channel to cover. So it, this is really, I guess I would say, it's normal course of business for us, but at the time that any changes are made that have some definitive and, you know, specifically identifiable impact, we'll be very open and transparent about that.
But at this time, everything we know is baked into the Q3 guidance, and we're not expecting any major impacts from some of those concerns or conversations taking place at this time.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Is that because it hasn't necessarily rolled out in the March quarter, and therefore, it might impact June? Or is basically, is, is it, has it already occurred, and the full effect of that is reflected in your guidance?
Rick Hamada (CEO)
No, I would say that it's these types of decisions are under consideration, being evaluated, conversations taking place around the channel on the impacts and what types of decisions need to be made around supporting their longer-term strategies. It's, I would say it's work in process, and we'll keep you posted.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay. All right. Thank you very much, Rick Hamada.
Rick Hamada (CEO)
Yeah.
Operator (participant)
Thank you. That is all the time we have for questions. I'd now like to return the floor to management for closing remarks.
Vince Keenan (VP of Investor Relations)
Thank you for participating in our earnings call today. Our Q2 fiscal 2015 earnings press release and related CFO commentary can be accessed in downloadable PDF format at our website under the quarterly result, under the quarterly results section. Thank you.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.