Avnet - Q3 2018
April 26, 2018
Transcript
Operator (participant)
Please stand by. Our presentation will now begin. I would now like to turn the call over to Vince Keenan, Avnet's Vice President of Investor Relations.
Vincent Keenan (Head of Investor Relations)
Good morning, and welcome to Avnet's Q3 of fiscal year 2018 business and financial update. As we provide the highlights for our Q3 fiscal year 2018, please note that in the accompanying remarks, we have excluded certain items, including accelerated depreciation, intangible asset amortization expense, goodwill impairment, restructuring, integration, and other items, and certain discrete income tax adjustments from all periods covered in our non-GAAP results. When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US dollar-based financial statements into U.S. dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions. For additional information, refer to the non-GAAP financial information section of our earnings press release, available on our website at www.ir.avnet.com.
Before we get started with the presentation from Avnet management, I would like to review Avnet's safe harbor statement. This call contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Bill Amelio, Avnet's CEO, will provide Avnet's Q3 fiscal year 2018 highlights. Following Bill, our Chief Financial Officer, Tom Liguori, will review some additional financial highlights and provide Q4 fiscal 2018 guidance. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President, Electronic Components.
With that, let me introduce Mr. Bill Amelio to discuss Avnet's Q3 fiscal 2018 business highlights.
William Amelio (CEO)
Thank you, Vince, and hello, everyone. Thank you for taking the time to be with us and your interest in Avnet. We continue to make significant progress with our revenue and earnings momentum this quarter, as both operating groups delivered above seasonal growth in the March quarter. As a result, revenue of $4.8 billion grew in the high single digits year-over-year, and adjusted operating margins expanded 3.7%, the highest level in four quarters. Our transformation and cost reduction initiatives contributed to strong leverage, as adjusted operating income grew three times faster than revenue sequentially, and adjusted EPS increased 31% to $1.02. Our Americas region at Electronic Components continued its turnaround with another quarter of sequential revenue growth and adjusted operating margin expansion.
With our growth initiatives gaining traction and a strong book-to-bill across the regions, we expect to build on this performance and close out fiscal 2018 with revenue and EPS above the original guidance we laid out one year ago. Turning to the future, I would like to provide an update on the four pillars of Avnet's business strategy that will drive shareholder value creation going forward. The first strategic pillar is our unique end-to-end ecosystem, including our recent acquisitions, small order specialist Premier Farnell, design-focused Hackster.io, and manufacturing solutions provider Dragon Innovation. Our communities, composed of Hackster.io and element14, delivered another quarter of strong growth as memberships increased 12% sequentially and 48% year-over-year to nearly one million members.
Online communities are becoming more important to suppliers as they represent an engaged community that not only purchases more product, but provides an unbiased feedback and insight that can lead to an improved brand exposure, awareness, and credibility. For engineers, online communities provide more than just product and technical information, but a forum that they can collaborate, solve problems, and ask questions. The design process has been democratized by the use of the internet and communities. We also continue to make progress realizing revenue synergies across our ecosystem. After significant efforts applying advanced analytics to match and segment our customer bases in all three regions, we're now seeing success through exposing the value propositions of our different businesses to meet customer needs. We also use the output of this analysis to identify potential opportunities to register designs with our suppliers to further grow our core components business.
So far, we found out that one of every two qualified leads from Premier Farnell becomes an approved design registration. This initial effort, which was tested in Europe, has already resulted in $5 million of approved design registrations from a pipeline that we believe will expand as we roll out these tools in other regions. Although early in the process, we have also seen success from our enhanced digital functionality that allows customers to buy inventory from both Premier Farnell and Avnet on our trading websites. These represent just a few of the ways we are leveraging the combined customer base to drive higher margin revenue growth as we add new features and products to our unique end-to-end ecosystem. Our second pillar, the digitization of our business represents a multi-year effort to digitize more of our processes and utilize advanced analytics and tools to improve our business performance.
Our end-to-end ecosystem is a proof point of the impact we are having as our annual run rate of digital revenue grew nearly 7% from the prior quarter to $850 million. We also have tested new tools and systems in the areas of CRM, lead generation, quoting, pricing, and digital commerce that have demonstrated a positive impact on the trajectory of our revenue growth and margin expansion. As we applied workarounds and software upgrades to the current system in the Americas region, we have seen a better-than-expected improvement in system performance, as evidenced by our key performance indicators we track, as well as feedback from customers and suppliers. We're now able to shift our focus to a winning new business.
Many of the digital tools we tested as part of the transformation have shown real promise to improve productivity, realize higher margins, accelerate revenue growth, and improve the customer experience. As a result, we are focusing on systems that can accelerate growth and margin expansion globally while adding enhancements in the Americas system. One of the areas in which we will increase investment on a global scale is CRM. We have tested a cloud-based CRM solution that provides new capabilities and reports, including pipeline visibility, order characteristics, performance, and other key data points by sales rep. We believe the deployment of this system globally will allow us to more efficiently track and share leads across our entire ecosystem to accelerate growth with our evolving customer base. Other areas in which we will accelerate investment include quoting and pricing software.
With our end-to-end ecosystem, we have more opportunities to win business, so it is critical that we provide our employees the tools and systems to quickly and efficiently produce more orders. In summary, we are committed to globalizing our business, processes, and systems, and we have modified our priorities to accelerate growth and financial performance. Our third strategic pillar, our transformation initiative, goes beyond the introduction of new systems that I just talked about. It also focuses on leveraging the strength of Avnet by developing new go-to-market strategies, focused on high-growth segments, while deploying global processes that deliver best-in-class solutions. One of the important growth strategies that our transformation initiative has focused on is the Internet of Things. At the Consumer Electronics Show, we introduced our IoTConnect platform, which utilizes the enterprise-grade Microsoft Azure hybrid cloud for data distribution and analysis.
This quarter, we built on that relationship with Microsoft, who chose Avnet as their first partner to distribute the new Azure Sphere solution. This solution incorporates a highly secure, internet-connected microcontroller that meets all seven properties of a highly secured device. By incorporating this product into their IoT solution, developers will ensure a safe and secure connected experience from the edge all the way up to the cloud. When using Avnet's end-to-end ecosystem for system design, combined with our expertise in manufacturing and supply chain services, customers will be able to deliver the highest standard of security when bringing their next generation of IoT solutions to market. Being selected by Microsoft for this important product launch is further evidence of the value suppliers can realize when they work across our entire ecosystem.
Another transformation initiative we have pursued is how we bring a deep and rich technical expertise to customers in a more streamlined and efficient manner. In the past year, we've globalized our management and alignment of FAE resources to focus on growth technologies and promote key suppliers in our Ask Avnet tool. Our Ask Avnet tool, which provides engineers block diagrams that address common engineering challenges, is continuing to expand the number of solutions and increasing the efficiency of our engineers. Key performance indicators we track have been trending up. We have accelerated growth with many of those key suppliers as we capture two to three times more dollar content with each design.
The value of our breadth and reach in the marketplace has been recognized by suppliers with several awards this quarter. We also added another 11 supplier franchises to our line card while expanding regional coverage with an additional three.
Our focus on providing suppliers multiple paths to the market via our unique end-to-end ecosystem is gaining traction and translating into more growth opportunities in targeted markets, including automotive and industrial. The fourth pillar of our strategy is right-sizing the cost structure of Avnet. As we have told you on prior calls, we expect to realize $120 million of annual savings in fiscal 2018 by streamlining our structure and centralizing functions. We are expanding our fourth pillar to apply the same rigor and discipline to how we manage working capital. By sharing best practices and centralizing decision-making, we can improve our working capital velocity and free up cash in the process. Finally, I'd like to invite everyone to our Investor Day on June 14 in New York City.
Members of the Avnet leadership team will be providing more detail on our strategies and growth initiatives, as well as demonstrations of customer success stories. We hope you can join us, either in person or via the webcast, and please reach out to our investor relations department if you need additional details... Now I'd like to turn the commentary over to Tom, who will provide more color on our financial performance. Tom?
Thomas Liguori (CFO)
Thank you, Bill, and hello, everyone. A very positive quarter for us. Revenues grew 6.1% sequentially and 8% year-over-year. Adjusted operating margins expanded to 3.7%, while GAAP EPS was impacted by tax reform and an impairment charge. Adjusted EPS was $1.02, a significant increase from last quarter's $0.78. We reduced net working capital 7 days, generated $77 million of cash flow from operations, and returned $93 million to shareholders. Let's review the details. Year-over-year, revenue grew 8% and 2.4% in constant currency, with both operating groups contributing. Excluding the impact of the previously announced supplier changes, revenue increased 7.3% year-over-year in constant currency. Sequentially, Americas continues to improve, growing 5.5%. EMEA delivered another strong quarter, growing 20% sequentially and 15% in constant currency.
Asia declined 5% sequentially, 6% in constant currency, which is in line with normal seasonality and the impact of Chinese New Year. Gross profit of $654 increased 23.6 million compared to the prior year quarter. Both electronic components and Premier Farnell contributed to the increase. Selling, general, and administrative expenses increased $21 million from the year ago quarter, primarily due to changes in foreign currency exchange rates. Excluding the currency movement, SG&A decreased $6.5 million from the year ago quarter. Sequentially, SG&A increased $22 million. Of this amount, $10 million is due to currency movements, and the remainder is due to volume-related expenses and a well-deserved bonus to non-executive employees. We remain on track to our goal of $120 million of cost reductions in fiscal 2018, measured on a run rate basis.
Year to date, we achieved 70% of the target, with the remainder expected in Q4. As a result of these efforts, our adjusted operating expenses as a percentage of revenue have declined 32 basis points compared to a year-ago quarter, and we expect this downward trend to continue in fiscal 2019. We recorded a goodwill impairment charge of $181 million in Q3. The goodwill was associated with the Americas region. As part of our planning process, we adjusted certain financial expectations for the Americas. As a result, we concluded the $181 million impairment charge was appropriate in Q3. We are committed to our operating margin target of 4.5%-5%, and the impairment charge is not, in any manner, an indication of a change in our operating margin expectation.
Excluding the impairment charge and restructuring expense, adjusted operating income of $175 million increased $29 million, or 20%, from the December quarter. Q3 adjusted operating margin of 3.7% was a 43 basis points improvement from 3.2% in the second quarter. Our Premier Farnell business continued to perform well, expanding operating margins this quarter to 11.4%. Below the operating margin line, other income of $8.4 million includes favorable currency gains from the remeasurement of balance sheet items to US dollars. Our operating tax rate of 22.3% was 70 basis points better than the midpoint of our guidance range. Due to the recent tax reform legislation, we recorded a tax charge of $230 million, primarily related to the transition tax on foreign earnings.
On an adjusted basis, EPS was $1.02 in the Q3, a substantial improvement from $0.78 last quarter and $0.88 a year ago. Of the $1.02 EPS, 0.07 per share were contributed by the favorable other income of $8.4 million and the lower tax rate. Excluding these two items, adjusted EPS was $0.95, the midpoint of our guidance range. Turning to the balance sheet, we ended the quarter with $430 million of cash. We reduced our debt level this quarter by $141 million, with the objective of lowering interest expense and improving our leverage ratio, while maintaining availability in our lines of credit should the need arise. Net working capital days decreased seven days to 93 in the March quarter, primarily due to improved inventory management.
Cash flow from operating activities was $77 million in the Q3. We sold $45 million of Tech Data stock, which we acquired from the divestiture of the Technology Solutions business. We used these proceeds to repurchase $70 million, or 1.7 million shares, of our stock. We have $78 million of Tech Data stock remaining, which will be sold in the Q4. Entering the Q4, we have approximately $390 million remaining under the current share repurchase authorization. In summary, revenues increased 6% sequentially in the Q3, and adjusted EPS increased by 31%. Net working capital days declined by 7, and we generated $77 million of cash from operations. Looking forward to Avnet's June quarter, we expect sales to be in the range of $4.65 -4.95 billion.
Based on this revenue forecast, we expect adjusted diluted EPS to be in the range of $0.91-1.01 per share. One last item, we are changing our stock listing to NASDAQ, effective May 8. Our ticker symbol will continue to be AVT. Our Investor Day on June 14 will be at NASDAQ in Times Square, New York. Following our management presentations, we will have an aftermarket bell ringing, followed by a reception. We look forward to seeing you all at the event. 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. When asking a question, please limit yourself to one main question and one follow-up. 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 pick up your handset before pressing the star key. Our first question is with Jim Suva with Citigroup. Please proceed with your question.
Jim Suva (Managing Director)
Thanks very much. Can you help us just a little bit, adjust or figure out the gap between sales year over year were very, very impressive, but year over year, it looks like operating margins are down. To bridge that, is that you need to do more restructuring? Is it because of the sale of the TS business that you did? Or how should we think about why sales are growing year over year, yet margins are down year over year?
Thomas Liguori (CFO)
Sure, Jim. This is Tom. So, you know, basically, on a year-over-year basis, we did have this fire losses that affected margins, things of that nature. What we feel very good about is, you know, we're back to the 3.7% range. If you put that in relation to historical, I think before fire losses, we're about 3.9%, so we're pretty much on the way, way back. That said, you know, we have a lot of opportunity remaining for the margins. Target remains 4.5%-5%. That's the Americas continuing to get better. That's expanding our revenues and, and margins of Premier Farnell. We're gonna have a better revenue mix, that's higher margin and continuing with the cost reduction methods. So I hope that answers your question.
Jim Suva (Managing Director)
Yep, and then a quick follow-up, probably more for CFO-type commentary. But on the tax reform that has happened, can you help us understand about, I think, Avnet took a charge for the new tax reform. So is there a future benefit that we'll see your tax rate go down, or how should we think about the tax impact? Thank you.
Thomas Liguori (CFO)
Yeah, no, that's a really good question, and to be honest, we're working through that. But I think it's fair to say, you know, our guidance in the press release is 21%-25%, so let's take the midpoint of 23%. We should be at or better, as we go forward into the next fiscal year. You know, that's one of the challenges, right? Tax rates around the world have come down, and our job is to take advantage of that while being compliant and making sure we do this wisely. I'm looking at my general counsel when I say that.
Jim Suva (Managing Director)
Great. Thanks so much for the details.
Thomas Liguori (CFO)
Thank you, Jim.
Operator (participant)
Our next question is with Param Singh, with Bank of America Merrill Lynch. Please proceed with your question.
Param Singh (VP)
Guys, thank you for taking my question. So, you know, when I look at your guide, implied guidance is for operating margin to be flat sequentially into the June quarter. Now, you know, you have some more incremental margin benefit coming in from restructuring. Americas is improving. Why the flat margin guide? And, you know, how do we proceed to your 4.5% lower end of your target range from here? If you could quantify that a little bit, that'd be helpful.
Thomas Liguori (CFO)
Yeah, and-
Param Singh (VP)
I have a follow-up.
William Amelio (CEO)
Yeah. Okay, this is Bill. I'll start with the second part of the question, and I'll have Tom answer the first part. But as far as we're still guiding to 4.5%-5% in the future, and the way we get there, Tom mentioned a few things on the last question, which was America's recovering, Premier Farnell is. I'll add a couple other things. Digitization of our business is going extremely well. The more we move to the web, the lower cost to serve model that is, both from a cost point of view as well as an improved margin point of view. We're digitizing elements of the process inside the company, which makes us more efficient and more effective and allows us to get a better OpEx position.
We're also continuing to transform the company with plenty of projects that we'll continue to work on that makes us more efficient in pricing, in the way we go to market, in the way we co-qualify leads, in the way we essentially have the funnel of opportunities and how we manage that with new CRM tools. So, Tom?
Thomas Liguori (CFO)
Yes, and Param, so we had a significant step up, right, in performance this quarter, EPS and operating margin, and the midpoint of the guidance is similar revenues, some improvement in the cost leveraging. That said, you know, we have a tremendous opportunity here, right? The EPS accretion. And what has to happen is growth and growing more the front end of the ecosystem, the higher margin business, continue to leverage the cost, and work on our working capital, free up cash, and apply that to reinvesting in the business, M&A, if available, and more importantly, buybacks. So every quarter, we want to focus on discussions of revenue, revenue mix, costs, and our balance sheet. And-...
You know, by doing that and making progress every quarter in those areas, we're gonna have a very good outcome on our operating margin and our EPS. That said, you know, we want to be respectful that, you know, we need to help you and give you our insight and we felt for this quarter coming up, slight improvement in the cost structure with the book.
Param Singh (VP)
Okay. So I guess as my follow-up, you know, how much of your working capital is being negatively impacted by the ERP system in the Americas? And when do you expect to kind of upgrade that system? And what is the working capital level you think you can get the company to longer term?
Thomas Liguori (CFO)
Yeah. So, I don't have a specific number, but it, you know, it's, it's a sizable impact on why the inventory increased. Part of it is also, hey, we had a really good implementation of an ERP system in Europe, and we just want to be careful. You know, there's been a buildup in inventory. That said, we, we all know that our working capital is certainly at high levels. It's over 90 days, even today. Historically, the company's been at 70 days or less. There's no one or two or three items that are gonna get it back. But the good news is, this is fundamental, it's foundational. We have a team. They have action items.
We're putting together the waterfall chart with action items and timeframe, and we actually have a phrase internally: How do we get our working capital down one day at a time? Because every day is worth $45-50 million. We get 10 days, we got $500 million, and that's our path. So I would say, you know, over two years, maybe over three years, historical levels in the 70-day range.
Param Singh (VP)
Okay. And just a clarification on the ERP system in the Americas. When do you expect to start working on that project and any timeline for that?
William Amelio (CEO)
Well, yeah, we're already in the midst of that, and the game plan will be the following: We're going to implement our AIS business first, our Integrated Solutions business first, and then follow up with the rest of the core. That helps de-risk the program significantly. And in the meantime, we're already seeing inventory coming down as we've seen the current system become more stable and allow us to be able to get more efficient.
Param Singh (VP)
Great. Thank you. I'll get back in the queue. Appreciate it.
Operator (participant)
Our next question is with Adrienne Colby with Deutsche Bank. Please proceed with your question.
Adrienne Colby (Analyst)
Hi. Thanks for taking my question. I was hoping you could talk a little bit more about the progression of your turnaround in the business in the Americas, given the region is still seeing mid-single digit year-over-year declines. When are you expecting the region to return to growth on a year-over-year basis? And of the headwinds that you've highlighted in the past for the region, can you remind us where you've seen the most progress and where you still have work to do going forward?
William Amelio (CEO)
Last time we were together, I talked about some of the key performance indicators that are associated with what we're watching in the Americas, and they're all improving. In fact, if you take a look at any one of them, ship and debit discrepancies, customer disputes, negative orders in the system, all have returned to levels that we saw pre going live with the current system that we have in place. So that's when we'd say we've become more stable, that those metrics would demonstrate that. We've also seen anecdotally from our suppliers and from our customers, both who would say that we're doing a lot better. We've won a lot of awards this past quarter, which is another indication that things are going in the right direction. And I'd also point out that sequentially, we actually grew in the Americas.
When you, as you've taken out, that means the supply lots that were taken out, and it's a good compare quarter-on-quarter, and we're starting to see that robust growth happening again in America. So if you normalize and take the supply lots out year-over-year, we actually did grow.
Thomas Liguori (CFO)
Next question?
Operator (participant)
Our next question is with Matt Sheerin, with Stifel. Please proceed with your question.
Matthew Sheerin (Senior Equity Research Analyst)
Yes, thanks. First, I was hoping to get some more color on the demand environment you're seeing in various regions. It looked like you were trending at or above seasonal, at least in a couple of regions. But if you look at your guidance, it looks like more of a return to seasonality. So could you talk about what you're seeing in terms of book-to-bill, lead times and those kind of metrics?
William Amelio (CEO)
Yeah, sure. Book-to-bill is still solid. We're still over 1.1. That's great, and we continue to see robust demand in all regions. Lead times appear to be stabilized. There are some commodities that, of course, are still extending, but in general, it's a more stable environment, and we still see pretty solid demand across the board. I'll let Bill talk about each individual region and give you some more color.
Philip Gallagher (President, Electronic Components)
Yeah. Hey, Matt, thanks for the question, and just a couple comments. You know, Bill, Bill mentioned the book-to-bill. Each region is having a positive book-to-bill, and we say that it's a healthy positive, Matt. It's not crazy. It's just a very healthy, in that 1.1 ± range across the board. You know, Europe continues, I think it's at 19 or so quarters. We're doing extremely well in Europe organically. You know, all divisions in Europe. You know, driven, Europe, really with the automotive and the industrial is extremely strong, and we're continuing to play there and we feel gaining share. Asia Pacific's been steady.
You mentioned the seasonality, so you're correct on that coming out of the March quarter. We actually, Asia, we're pleased with the results, even given the Chinese New Year and some of the drop-off you typically get coming out of the December quarter. But as we discussed in the previous question, you know, that the Americas has been a little bit of our nemesis, and we feel we're really starting to turn the corner, which is great. With Bill's comments on some of the customer response, our Net Promoter Scores, our supplier feedback, we're feeling very confident that we're starting to get our traction back in the Americas and continue to see that moderate growth here at home as well, which is really, really great.
We get all three regions hitting on all cylinders will be terrific. Matt, you mentioned lead times, or, you know, Bill touched on it. I mean, memory is still really, really tight. In controllers, depending on which one, you're kind of anywhere in the eight-24-week timeframe, depending on the, you know, 8-bit, 16- or 32-, 32-bit. And really the toughest area is still in the passives area, you know, and the caps and resistors are still pretty far out there. Nobody uses the A word anymore, but, you know, controlled bookings, you know, 50-week lead times in some cases. So that's been the linchpin, if you will, in much of the supply chain issues, if there are any. Hope that helps, Matt.
Matthew Sheerin (Senior Equity Research Analyst)
Yeah, yeah, absolutely. Just the follow-up question, just following up to Param's question about, you know, why the operating margin is flat sequentially when you still have costs coming out. I think the answer probably is that your gross margin, I think, would be down sequentially because of mix. I would think that Europe is flat to down after that very strong December quarter, and also the mix with Premier Farnell. Is that the way to look at it, or is there other ways to look at it?
Philip Gallagher (President, Electronic Components)
I'll make a quick comment and pass it on to Tom. A couple things. One, we're gonna have a richer mix of Asia in the next quarter, as well as our expenses are more back-end loaded in the quarter versus linear, and that's two major reasons why we're giving the kind of guidance we're seeing.
Thomas Liguori (CFO)
Yeah, thank you, Bill. You know, Matt, it, first of all, it's a range, right? I think it's fair to say that this quarter, the first quarter of our fiscal year, which is September through December, you know, we expect the metrics for operating margin and EPS and others to continue to improve.
Philip Gallagher (President, Electronic Components)
I'll make one other comment, too. Last April, when we gave out guidance, we gave our full year guidance, and it's important to note that we met or exceeded every one of those guide points. And at the end of the year now, beating the guidance that we put in place a year ago, I think that's an important accomplishment for the, for the company, a demonstration that we've got the momentum back again.
Thomas Liguori (CFO)
To follow up on Bill, if you take our Q4 guidance, this is again raising our total year based on where we were last quarter.
Matthew Sheerin (Senior Equity Research Analyst)
Yep. Okay, fair enough. Okay, thanks a lot.
Operator (participant)
Our next question is with Adam Tindle, with Raymond James Financial. Please proceed with your question.
Adam Tindle (Managing Director)
Okay, thank you. First question for Bill or Tom. I know obviously, margin improvement is a key focus in Americas as the primary opportunity. You've talked about the sequential improvement in sales and operating margin in this region. Is there any way you can help us understand the magnitude in which this region is below historical levels? I think historically, Americas was, was once in, like, the 6% type operating margin. Are we currently closer to half that?
Thomas Liguori (CFO)
We're significantly below. I'll give you one piece of information, you know, quarter-to-quarter, we're about 100 basis points improvement. This is, like, really good news. That said, no, there's a lot more we can do.
Philip Gallagher (President, Electronic Components)
I'd add one more thing to your mix there. Premier Farnell continues to, we expand margins with Premier Farnell, and we see that as a still possibility going forward to continue to do better there as well. So that's helping the mix. And then, of course, getting more efficient with all that we do with the transformation project, digitization, working in the ecosystem, we have an opportunity to be able to take out more costs.
Adam Tindle (Managing Director)
Okay. Tom, I wanted to ask for more color on the impairment. I think, you know, Premier Farnell is about 60% of updated goodwill and intangibles and would seem insulated based on strong results. But could you give us a sense of the risk of additional impairment to the other 40% of goodwill intangibles? Because the market today would seem to indicate just about all the rest, ex Premier Farnell, is gonna be written down. Thanks.
Thomas Liguori (CFO)
Yeah. No, that's a good question. So first of all, this, this goodwill is associated with really two pre-2011 acquisitions. It is related to the Americas, and it is related to, you know, changing the expectations that were in it compared to, a prior year test. Let's say, I want you to know that the, the assumption that was used in the impairment is, the same assumption, which is a conservative assumption for Americas in our total company target of 4.5%-5%. Okay? So if we do better, we do even better on that range. You have a really good point, Adam. You know, it's year-end, we do other tests. We don't foresee any other, material changes to goodwill. And we anticipate favorable results from our year-end testing, and especially when you look at Premier Farnell.
You know, they, they continue to, you know, to Bill's point, they continue to do better on revenue, they continue to do better on operating margins, and, you know, they're performing very nicely.
Adam Tindle (Managing Director)
Okay, thank you.
Operator (participant)
Our next question is with William Stein, with SunTrust. Please proceed with your question.
William Stein (Managing Director)
Great, thank you for taking my question. It is a follow-up on the discussion earlier about extended lead times, what we think, you know, pretty clearly are allocations going on in passives. So appreciate the color that you provided earlier, but can you tell us how that's affecting your business today, and how you expect it to affect you going forward? Oftentimes, in these shortage situations, distributors are able to sort of outearn on the margin side from this factor. Maybe that's not happening, maybe it is. How do you expect that to progress going forward? Thank you.
William Amelio (CEO)
Yeah, this is Bill. Thanks for the question. Yeah, so I’ll answer two parts of it. I think you’re looking to get a response on. One is ASP appreciation based on some cost increases. We’re getting some of that. A lot of the contracts we have with customers inhibits us from raising prices. So some of that we have to absorb in our, what I call our core business or our time place utility business. Yes, we absolutely do raise prices in that part of the business, but it’s not an across the board. So it’s kind of a yes and no answer. So we are seeing some of it. We like to be able to do a little bit more, but we have some contractual obligations to our customers.
On the other part of the question I think you're asking is, so if you can't get some products, does that hold up shipments in other areas of the business, you know, where we have supply chain engagements in particular? There's some of that, but it's really not material. It's relatively small. Okay?
William Stein (Managing Director)
Are the suppliers of those shortage materials adding enough capacity to enable you to grow through the rest of the year? Or are you concerned that you could sort of, you know, hit a wall on overall growth 'cause of shortage in, you know, just a small number of parts?
William Amelio (CEO)
Yeah, I'd rather not comment on the suppliers, you know, capacities. I mean, that's. We have some insight into that, but not across the board. I think the more important part of the question, we don't see product constraints as an inhibitor, okay, of us hitting our targets that we've laid out.
William Stein (Managing Director)
Great. Thanks, guys.
William Amelio (CEO)
You got it.
Operator (participant)
Our next question is with Shawn Harrison, with Longbow Research. Please proceed with your question.
Shawn Harrison (Research Analyst)
Hi. Morning. I guess I'm gonna play a little-
Philip Gallagher (President, Electronic Components)
Hi, Shawn.
Shawn Harrison (Research Analyst)
Hi. I wanna play a little devil's advocate here. So how would you get to the bottom end of the guidance range for the June quarter? I'm wondering, like, what could weaken, knowing that the book-to-bill is positive in all regions, you guys sound pretty upbeat. So I'm just, you know, trying to figure out, you know, what within the guidance could potentially weaken sequentially to take you down to the bottom end of that range?
Philip Gallagher (President, Electronic Components)
Well, I made two points earlier. One is the mix shift to the Asia regions as well as back-end loading of our expense reductions that will come out towards the end of the quarter. So we won't get the full run rate inside the quarter. That's two major reasons why. And I also pointed to the full year guidance again that we gave a year ago; we are substantially beating that. So that's, I think, an important milestone for us.
Shawn Harrison (Research Analyst)
Sorry, sorry, Bill. I meant, I meant solely on the sales front, 'cause at $4.65 billion, you'd be down, you know, a little bit sequentially, but it doesn't sound like anything in your bookings run rate suggests a deceleration, you know, from Q3 into Q4, just solely sales.
Philip Gallagher (President, Electronic Components)
I'm sorry. No, that's correct. Yeah, we're not concerned with respect to a big deceleration here, and that's kind of what we're guiding at right now, is that sales number. We hope to beat it.
Shawn Harrison (Research Analyst)
Okay. Tom, I was hoping if you could help me bridge on the OpEx line. I know you have $120 million of annualized savings that will be in there exiting the quarter. But what would be the inflation on a year-over-year basis that we're seeing? 'Cause I'm trying to bucket, you know, bracket the $30 million of, you know, OpEx savings that should be in there, but what will be offsetting that on a year-over-year basis, potentially, as we exit, you know, fiscal 2018?
Thomas Liguori (CFO)
Yeah. Well, I mean, inflation is fair. I would view this more as, and this is why we talked about OpEx as a percent of revenue and the 30, I think it was 32 basis point improvement. You know, that's, that's equal to roughly $60 million. So the way to view these cost reductions are, these are initiatives that are reducing cost, okay? In some cases, it goes to the bottom line, in other cases, it's reinvested. I'll give you. I'll give you two examples, and this is something I lived through this quarter. Our human resources department had an initiative to put more of the function online. When I started, before I even had my first day, I went onto our HR system, and I put in all my personal information, my tax information, my benefits.
They took a very manual and labor-intensive paper process, put it online, and we saved $2 million as a result, globally. We took part of that, and another thing I saw since I started, we reinvested, as Bill said, in the CRM system. So it's taking costs and reallocating them from the non-strategic to the strategic areas, with some dropping to the bottom line. You know, the CRM investment is a very good example of moving things to the market-facing activities. We had a presentation from one of our, well, from our integrated solutions group. They showed us the results. It was very positive. Good, good, good visibility on pipeline and things of that nature. So I would look at the cost initiatives as these are cost initiatives, part of which drop to the bottom line, part of which get reinvested.
Over time, though, we should clearly see that as a percent of our revenue, we're getting good leverage out of these numbers, initiatives. Does that help?
Shawn Harrison (Research Analyst)
It does. Maybe if I could just a quick clarification, the 32 basis points you saw in the March quarter, year-over-year, should that expand then as you enter into fiscal 2019, so that it's more than that because you'll have the remaining-
Thomas Liguori (CFO)
Yeah.
Shawn Harrison (Research Analyst)
- 30% of the synergies? Okay.
Thomas Liguori (CFO)
Without a doubt.
Shawn Harrison (Research Analyst)
Okay, perfect. Thank you.
Operator (participant)
Our next question is with Mark Delaney, with Goldman Sachs. Please proceed with your question.
Mark Delaney (Research Analyst)
Yes, thanks very much for taking the question. First question, I was hoping you could help us think a bit more about the big picture in terms of the expense and spending thought process of the company. You're coming toward the end of that $120 million cost-cutting program, and at the same time, the company's been making some investments in the digital and small batch efforts like Premier Farnell, Hackster.io, et cetera. So, so as you guys start thinking about expense levels into next year, are there other large cost-cutting programs you think you'd may wanna put in place or, or, or maybe even wanna increase investments more towards some of those growth growth areas?
So just, you know, any sort of sense of expenses would be helpful.
William Amelio (CEO)
... Yeah, this is a continuous improvement process. We have a transformation project going in place that you know about. We will continue to attack our cost structure and get it more efficient each and every day, and that's one of the ways that we're gonna help expand our margins to get to that 4.5%-5%.
Mark Delaney (Research Analyst)
Okay. And, for a follow-up question, on margins, in the December quarter conference call, Bill, I think it was in your prepared remarks, you talked about doing a little bit better at capturing some of the margin incentives that some of the suppliers have put in place for Avnet to try and go and achieve. Can you talk a little bit about what that incentive environment is like and how Avnet is doing and executing towards some of those opportunities? Thanks.
William Amelio (CEO)
I'm not clear on the question. Could you repeat that? What do you mean?
Mark Delaney (Research Analyst)
You talked about expanding gross margins, I think, in the December quarter conference call, and, you know, there were certain incentives that, I think some of your suppliers had put in place, and if, you know, if Avnet achieved certain goals that, you know, they think you got kind of bonus type payments. Just-
William Amelio (CEO)
Yep, yep.
Mark Delaney (Research Analyst)
Talk about how that-
William Amelio (CEO)
I got it. That was in regard to demand creation and our continually improving in demand creation. If you look at our demand creation metrics, they're all up. Our registrations are up, our wins are up, and then across the board, we're doing significantly better, which is, as you know, a higher margin opportunity for us. So that's in a lot of our line, a lot of the suppliers on the line card really appreciate that, and reward us for that.
Operator (participant)
Our next question is with Steven Fox, with Cross Research. Please proceed with your question.
Steven Fox (Managing Director)
Hi, good morning. I apologize if this was covered. I got cut off. But, in terms of just the suppliers you're adding back to offset some of the losses you've had, over the last year or so, can you give us a sense for where you are in that process? Do you anticipate having to expand significantly further to cover, you know, what has happened in the last year and a half or so? And can you give us a sense for how that helps growth?
William Amelio (CEO)
I'll give you a little color on that, and I'll have Phil give a little more detail. A couple things. We're always evaluating overlaps and gaps. So we had some gaps. Obviously, we lost those key supply lines last year, but we more than made that back up again. So we have put in place the right technologies in the right places, and we're really executing well against that. And that's why I pointed out earlier that the demand creation metrics are all going in the right direction, which bodes well for us in the future.
Philip Gallagher (President, Electronic Components)
Yeah, Steve, this is, Phil, how you doing? And no, we didn't cover this, so it's a good question. So, you know, the losses were the losses. As Bill said, we're working to make those back up, okay? And the registration design wins are pretty much at all-time highs right now, which is really good news and a good leading indicator for us. As you know, design win revenue is roughly between 25% and 30% of our business. So still a focus there, and we've got great programs with a lot of our suppliers. Those suppliers we're at, and Phil mentioned the line card. We're always looking at the line card, you know, and, you know, there's gaps and overlaps, as Bill talked about. We always wanna have two or three technologies covered, with our suppliers.
Much of the suppliers we're adding now, we don't just wanna add for the sake of adding. That's not good for the suppliers, it's not good for us. But we are adding strategically around certain technologies, particularly in wireless, IoT, areas, areas such as that, that should provide good growth for us in the future. May not move the needle, you know, tomorrow, but we're positioning for the future. Okay?
Steven Fox (Managing Director)
Yeah, that's helpful. I appreciate that color. And then just on Premier Farnell, so what's the easiest way to think about sort of the margin expansion you've seen recently? Is it, is it just volume related? Is there mix in there, or is it cost synergies? Can you just sort of walk through just the Premier Farnell piece of the margins? Thanks.
William Amelio (CEO)
So it's all the above. We've added new supplier supply lines into Premier Farnell. Some of them are higher-margin supply lines, which is great. We've also improved the cost structure. We continue to do that. System performance continues to get better, web speed continues to get better. All these things are adding into our ability to be able to capture more margin in the Premier Farnell space, as well as the efficiency of us being able to take out more cost.
Philip Gallagher (President, Electronic Components)
So, Steve, let me, let me, can I add to that, Bill? And overall, the revenue synergies between the core, we'll call it the core, which is the traditional EM, you know, the component business and Premier Farnell. We're working really closely together with, as Bill pointed out, with the supplier community, to help them add some lines they didn't have before, as well as, new product introductions and, new leads coming in from Premier into the core, okay? And then, the core team working with Premier Farnell to get them into some of our larger customers where they may not have been playing. So some really good revenue synergies there, too, which is resonating, real positive with our customers as well as our suppliers. So a real tight linkage there, for driving growth.
Steven Fox (Managing Director)
Thank you. Appreciate that color.
Operator (participant)
Our next question is with Lou Miscioscia with Pivotal Research Group. Please proceed with your question.
Lou Miscioscia (Analyst)
Okay, great. Thanks, guys. So first question is, what, what do you consider to be normal seasonality going into the June quarter? Obviously, the prior numbers I have going back, I don't know, 10+ years, would suggest that you'd get some growth. And obviously, it looks like you're gonna be, you know, flat at the midpoint. So just trying to understand that a bit.
William Amelio (CEO)
Yeah, normal seasonality and... Well, you have to adjust out the old technology solutions. It's zero to slightly up, 0% to 3%-4%, normal range, historically.
Lou Miscioscia (Analyst)
Okay. Well, but my numbers from 2005 to 2016 are up 2%, which is electronics marketing, so that does not include TS. I'm not sure why, it's just your numbers. Okay, next question, if I could, I guess, if anything going on with ZTE? I mean, did that affect any of it? Some things have changed there?
William Amelio (CEO)
... We took some actions when the United States government had some actions against them several years ago, and essentially, anything going forward is de minimis in our results, because they're not gonna have any impact whatsoever on us.
Lou Miscioscia (Analyst)
Okay, great. With the stuff going on with your IT systems, I'm just curious as to, are we pretty much at a steady state, IT spend? And any visibility as to when that might actually see a material drop-off? I mean, would it be six months, nine months, a couple years, you know, maybe even, 24? I'm not sure how much more you're gonna have to continue to invest in consultants or just, systems in general, as you work through some of these things.
William Amelio (CEO)
In the Investor Day, I'm gonna give you a nice roadmap of what we're gonna do with respect to IT spend over time. We're getting more efficient, as I pointed out, with the current system that's in place now, which is gonna allow us to be able to shave out some costs going forward. That was one of the earlier questions about, are we gonna be doing some more things on taking our expense out of the company? The answer is yes.
Lou Miscioscia (Analyst)
Okay. Last one real quick, I guess on the component side. Any, it sounded from Phil that, that this wasn't going on, but just any double ordering or cancellations going on, given it seems that, that things have been tight?
Philip Gallagher (President, Electronic Components)
Yeah, look ... Yeah, this is Phil. No, we're really not seeing that. We watch it very closely. About 50% of our business is done on MRP sharing from the customers, so we get good visibility there. We're not seeing inflation. We watch out for, you know, inflation of quantities coming in from our customers on the MRP sharing, not seeing that. And the book-to-bills we think are healthy. And what I mean by that, if they were 1.4-to-1, I think that'd be an issue, but they're in that 1.1 range, which is pretty good. And we also track daily our cancellation rate as a percentage of bookings.
You know, we get push-ins and pull-outs all the time, and more than you would expect, and they're right on average right now. So we're not seeing anything. We would see it there first, and we're not seeing it in any of the regions, okay, at this point in time. So we think it's pretty healthy.
Lou Miscioscia (Analyst)
Okay. Thank you, all.
Philip Gallagher (President, Electronic Components)
Thank you.
Operator (participant)
Ladies and gentlemen, there are no further questions at this time, and I would like to turn the call back over to Vince Keenan for closing remarks.
Vincent Keenan (Head of Investor Relations)
Well, thank you for participating in our earnings call today. Our Q3 fiscal 2018 earnings press release can be accessed in downloadable PDF format at our website, www.ir.avnet.com, under the Quarterly Results section. Thank you.
Operator (participant)
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.