Avnet - Q4 2016

Transcript

Operator (participant)

Good morning, and welcome to Avnet's fourth quarter and fiscal year 2016 business and financial update. As we provide the highlights for our fourth quarter fiscal year 2016, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization expense, restructuring, integration, and other items, and certain discrete income tax adjustments from all periods covered in our Non-GAAP results. When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US dollar-based financial statements into US dollars. When we refer to organic sales, we have adjusted the prior period to include the impact of acquisitions and other items.

In addition, when addressing return on capital employed, return on working capital and working capital velocity, the definitions are included in our Form 8-K filed today. 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 interim CEO, will provide Avnet's fourth quarter fiscal year 2016 highlights. Following Bill, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide first quarter fiscal 2017 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 is Gerry Fay, President of Electronics Marketing, and Patrick Zammit, President of Technology Solutions. With that, let me introduce Mr. Bill Amelio to discuss Avnet's fourth quarter fiscal 2016 business highlights.

William Amelio (Interim CEO)

Thank you, Vince, and hello, everyone. Thank you for taking the time with us and your interest in Avnet. Having just completed my first month, I'd like to start by giving you an idea of what I've been, we've been concentrating on in the near term. One of my first priorities will be focusing on execution. We have not performed to your expectations or our full potential. I'm working on installing a business management system that will emphasize accountability, address organizational barriers, and that will allow us to use our collective operating groups and allow them to work more effectively. And we'll be instilling a greater sense of urgency within the organization. As you know, we participate in a rapidly changing technical marketplace, and it is imperative that we make steady progress towards our strategic initiatives.

When that progress stalls, we must quickly correct course to ensure that we have the right people and adequate resources to win in the marketplace. An additional area I intend to focus on is talent development. We will build a stronger bench for the future. There are many skilled and talented employees at Avnet with technical knowledge and a deep understanding of the markets that we compete in. My goal is to work with the management team to position these future leaders in challenging roles, where they can develop their leadership capabilities in high-growth markets that are critical to Avnet's future. That leads me to my final near-term focus area, a review of our strategic initiatives and our go-to-market plan.

As many of you know, I've been on the Avnet board of directors for two years, so I am familiar with the key strategies to grow our business, including embedded systems, the Internet of Things, enhancing our digital experience from design chain through supply chain, and finally, investing in Third Platform technology and capabilities and solutions. These are the strategies I agree with, but we need to accelerate our progress towards long-term financial goals for both margin and returns. Growth is a key component of how we're going to get there. Over the next couple of months, I plan to visit Avnet locations around the globe to meet with the team and to get a better understanding of the local markets and what it takes to succeed.

As part of that process, I and the leadership team will develop detailed plans that include growth strategies, resource allocation, and the metrics we will use to measure our progress. Avnet possesses unique strengths in technology supply chain, including sales effectiveness, efficient operations, and most importantly, a deep relationship with both our customers and our suppliers. My goal is to leverage these strengths to deliver industry growth, consistent execution, and steady progress towards our long-term financial goals. I will have more to share with you as these plans come together. Even with my short time here, there are two areas I'd like to highlight that demonstrate our commitment to investing in the future and to accelerate growth and expand margins. At TS, Patrick and his team recently unveiled a solution specialist approach worldwide. This is to drive growth in software-driven technologies.

While much of our current business will fall in the data center solutions business, TS is creating new business units focused on cloud solutions, security and networking, data analytics, and mobility solutions. These business units will have more than 450 dedicated solution specialists to help our partners capitalize on new opportunities in the Third Platform technologies that are driving change on how companies purchase and consume IT resources. We are reallocating resources to align with market growth and deliver the solutions and services that will define our future success. At EM, we recently announced a cash offer to acquire Premier Farnell, a leading catalog distributor with a market-leading digital platform that engineers rely on all around the world. Although there are several steps required before we can complete the transaction, we are very excited about the possibilities.

A combination of the two companies will offer and will give us great strength in the marketplace. By combining Premier Farnell's innovative online services with EM's world-class design and supply chain services, we will create a customer service experience unparalleled in this industry, while engaging with engineers earlier in the design cycle. As I want to reiterate, Avnet has a lot of strengths embodied by talented employees who help our partners grow across the breadth of technology markets that we serve in. My goal is to leverage these strengths to deliver top-line growth, higher returns, and consistent cash flow, and to create long-term shareholder value for our investors. Now I'd like to turn over the commentary to Kevin to provide more color on our financial performance. Kevin?

Kevin Moriarty (CFO)

Thank you, Bill, and hello, everyone. I would like to start with some commentary on EM. Sequential growth was below seasonal at EM this quarter, driven by a continued decline in high volume supply chain engagements in Asia, and roughly $100 million revenue miss in our Americas region related to our ERP implementation, which we commented on in our early July fiscal Q4 earnings pre-announcement. Primarily, as a result of these two factors, revenue declined 2.5% sequentially, as compared with our normal seasonal range of flat to up 4%. These two issues also impacted EM's year-over-year compares, as revenue of $3.9 billion declined 8.7% from the year-ago quarter, driven by double-digit declines in our Americas and Asia regions.

Our EMEA region delivered their 13th consecutive quarter of year-over-year growth, as revenue increased 3.9% in reported dollars and 2.2% in constant currency. Gross profit margin was essentially flat with the year-ago quarter and declined sequentially, driven by a decrease in the Americas region due to inefficiencies in our integration center during the ERP implementation. Operating income declined 24.4% year-over-year due to $155 million, primarily due to a decline in the Americas region due to lower gross profit dollars and higher expenses related to the ERP implementation. Operating income margin declined 58 basis points sequentially and 82 basis points year-over-year, primarily due to a decline in our Americas region.

In addition to the higher level of expense driven by the ERP implementation, EM Americas also added additional inventory to support the business and ensure we meet customer deliverables as we continue to resolve the remaining issues. The increase in inventory, along with the reduction in accounts payable, driven by our fiscal close of July 2, ending after the calendar quarter, drove a 9.6% sequential increase in working capital. Working capital increased 17.1% year-over-year, with roughly half the increase related to inventory, while the other half was due to a decline in accounts payable. Before I turn to TS, I would like to provide some additional commentary on the EM Americas ERP implementation that had a significant negative impact on our fiscal fourth quarter.

As you know, we have deployed multiple ERP systems in the past without this level of disruption. The deployment in the Americas region was certainly one of the more challenging in that it addressed our distribution business, our embedded business, and the complex supply chain services we provide to both customers and suppliers. While there were significant issues in April, our pick, pack, and ship business is operating at normal levels, and our supply chain business has a few remaining issues that will be resolved shortly. Most of our time and energy is focused on our embedded business, where we are working to resolve the remaining technical and operational issues.

We are meeting customer deliverables and do not expect any impact to revenue, but the higher level of expense will continue through the September quarter, and we expect the additional expense to temper off as we work through our December quarter. While we are not pleased with what happened and the resulting impact to our customers, suppliers, and employees, I would highlight that our entire EM Americas teams have stepped up to ensure minimal customer impact as we work through this project. Now, turning to TS. TS revenue came in at the higher end of our expectations, led by the Americas region, which grew 11.4% from the March quarter. As a result, revenue increased 7.2% sequentially, as compared with a typical seasonal range of up 4%-7%.

Revenue of $2.3 billion dollars declined 7.6% year-over-year, organically in constant currency, with Asia, the Americas, and the EMEA region declining 17.8%, 8%, and 3% respectively. Year-over-year growth in services, software, and networking was offset by declines in servers and legacy storage. Gross profit margin increased year-over-year, driven by improvements in the Asia and the Americas regions. Operating income dollars declined 8.8% year-over-year due to the decline in revenue, and operating income margin declined 3 basis points as improvements in Asia and EMEA were offset by a decline in the Americas region. Working capital decreased 13.8% year-over-year, or 10.4%, excluding acquisitions and the impact of changes in foreign currency exchange rates, and return on working capital increased 66 basis points from the prior year quarter.

Despite the significant declines that TS experienced in certain legacy data center technologies in fiscal 2016, we are seeing significant growth in newer technologies, including flash storage and converged systems. For the full fiscal year, TS revenue declined 8.8%, and gross profit margin increased 47 basis points as a result of portfolio actions and product mix. When combined with expense reductions in the Western regions, operating margin increased 21 basis points to 3.3%, nearing our long-range target of 3.4%-3.9%. Now, turning to cash flow from operations. In the June quarter, we used approximately $73 million of cash as working capital increased 4.4% sequentially, and net income declined due to the ERP implementation.

For the full fiscal year, our cash flow from operations was $224 million, as compared with $584 million in fiscal 2015. The decline from fiscal 2015 is primarily due to an increase in working capital as the EM Americas regions built inventory to support the ERP implementation, and our accounts payable declined as our fiscal quarter ended after the calendar quarter. We do expect EM inventory to decline as we work through the remaining issues in our ERP deployment and contribute to stronger cash flow from operations in the September quarter. During the fiscal year, we returned $466 million to shareholders via our disciplined share repurchase program and dividends. Entering fiscal 2017, we still have approximately $175 million remaining under the current share repurchase authorization.

We ended the quarter with over $1 billion in cash and have approximately $1.2 billion of available liquidity under our credit facility and accounts receivable securitization program. With our strong balance sheet and dedicated financing already committed for the Premier Farnell acquisition, we are confident we can complete the transaction and still have adequate funding to support future growth. Now, turning to our outlook. Looking forward to Avnet's first quarter of fiscal year 2017, we expect EM sales to be in the range of $3.9 billion-$4.2 billion, and TS sales to be in the range of $1.9 billion-$2.2 billion. Therefore, Avnet's consolidated sales are expected to be in the range of $5.8 billion-$6.4 billion.

Based on this revenue forecast, we expect adjusted diluted earnings per share to be in the range of $0.84-$0.94 per share. This guidance does not include any acquisitions, the amortization of intangibles, any potential restructuring, integration, and other expenses, and certain income tax adjustments. The guidance assumes 130 million average diluted shares outstanding and an effective tax rate in the range of 26%-30%. In addition, the above guidance assumes an average US dollar to euro currency exchange rate of $1.11 to the euro, consistent with the first quarter of fiscal 2016.

In alignment with Avnet's goal to build a global embedded solutions business, which we commented on at our last Investor Day, we transferred a portion of our embedded computing solutions business to EM Americas from TS Americas at the beginning of fiscal 2017. As a result of this transfer, approximately $450 million of annual revenue that had previously been reported in TS will be included within EM beginning in fiscal 2017. The above guidance for the first quarter of fiscal 2017 takes into account the transfer from TS to EM of approximately $100 million of revenue.

When adjusted for this transfer and the impact of foreign currency, the midpoint of guidance for EM would represent sequential growth of +1%, as compared with a normal seasonal range of -2% to +2%, and TS sequential growth would be -5%, as compared with a normal range of -10% to -5%. As you are aware, on July 28, we announced an offer for Premier Farnell, a U.K.-listed company. That transaction is subject to the U.K. Takeover Code that places a number of restrictions on what we are allowed to say in relation to financial details of the transaction, including synergies, forward projections, and timing.

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

Operator (participant)

Hey, ladies and gentlemen, if you would like to ask a question at this time, you may press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and 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 keys. One moment while we hold for questions. Please limit your question to one question and one follow-up. Our first question comes from the line of William Stein with SunTrust. Please go ahead with your question.

William Stein (Managing Director and Senior Analyst)

Great, thanks for taking my questions. First, Bill, I'd like to hear your view as it relates to the use of cash flow generally and specifically as it relates to M&A, and maybe more specifically, should we view the Premier Farnell acquisition as sort of symbolic of what you think the direction of the company should move, should go to as far as use of cash?

William Amelio (Interim CEO)

That was a really packed question. Congratulations. That was really great. The, I think the company has a great capital allocation strategy. We've had it in place for a long time, and I think the way we think about use of cash is, is, is that we find a better use of cash than investing in ourselves, and it has to really demonstrate to us it's got significant value. So that's why we have continued to do, you know, buy back our stock, and we plan to continue to do that in the future. However, when there's an opportunity that's as transformative as we found with Premier Farnell, that's a great opportunity for us to transform the trajectory of the company. So we see that as a, not just a one plus one equal two, but a one plus one equal four.

We think there's all sorts of ability for us to ensure that we take advantage of that acquisition and get more successful with it as we move forward. Additionally, I would say that we'll continue with our dividend strategy. I think we've got a solid process in place, and it's been well thought out, and I think that's important to the value for our shareholders. And finally, when you think about M&A, our strategy will be the following, is that when you look at the company and you look and you say that the marketplace is changing very rapidly, we've got to think through, as that change happens, what do we need to do as a company to pivot? In some cases, we can do it organically.

In other cases, there might be a property out there that will allow us to make that pivot a lot faster. Every acquisition doesn't fit perfectly, but a lot of them do fit really, really well, and those are the ones like Premier Farnell, we would like to take it and have it part of our company. So with that said, I'll turn it over to the next question. Thank you.

William Stein (Managing Director and Senior Analyst)

Sure. Can I get a follow-up? I'd love to hear about whether there's anything that you might consider either divesting or walking away from, in particular, the supply chain engagements in Asia, which I believe have been a drag on performance and certainly drag on, on margins. Any, any change in the company's outlook as to that business?

William Amelio (Interim CEO)

Well, I'm not in a position today to make any announcements on any divestitures, as you can imagine, but rest assured, I'm looking through all of our strategic initiatives today, all the places where we'll reap profit, and we will make the necessary changes in order for us to shore up the company and become the best-in-class operator there is in this distribution space.

Gerry Fay (President, Electronics Marketing)

Hey, Will, it's Gerry. I'll comment on the high-volume supply chain engagement. As you know, we've always said our high-volume supply chain engagement, you know, was opportunistic for us, and when it no longer made sense, we would walk away from it. So we started to disengage with the majority of it last quarter, and it will be negligible for us this quarter. Some of our most recent wins, like Broadcom, have gotten us to relook at our portfolio, and we made the decision to move resources supporting our high-volume supply chain engagements to more accretive opportunities for us.

William Stein (Managing Director and Senior Analyst)

Thank you very much.

Operator (participant)

Our next question comes from the line of Shawn Harrison with Longbow Research. Please go ahead with your questions.

Shawn Harrison (Senior Research Analyst)

Hi. If I may follow up on, on that, that prior answer to Will's question. Is there a way to, if you would be able to characterize how, how much revenue that business brought in, both last quarter as well as last fiscal year? Because if, if I look at the guidance, 1% is better than seasonal, but it's coming off a much worse than seasonal quarter. And so is that all the, the, the supply chain engagements or, or are there other factors at work? So I guess a two-part question.

Gerry Fay (President, Electronics Marketing)

Yeah, Sean, it's Jerry. So our high-volume supply chain engagements were down 5% sequentially and 38% year-over-year. So if you think about it in those terms, that, you know, if you looked at what percentage of our business it was previously, obviously it's become a lot smaller piece of the business. So again, I would think of it in terms of we looked at our portfolio, we decided that given the returns and the limited velocity that that engagement has today versus when we first took it, and looking at some of the other opportunities we have with supplier consolidation, we thought it was time for us to move away from that. We still have a little bit of it, but we've moved away from the majority of it.

Shawn Harrison (Senior Research Analyst)

Okay. Very fair. And I'm gonna try a stab at Premier and see what you guys can answer. Two-parter question. The financing of it, I know there's a bridge loan in place, but is there a way you could comment on how much cash Avnet would like to use to finance that transaction? Obviously, it would impact the accretion. And then second, they do have a more industrial-esque distribution business and just your thinking on how that fits Avnet long term.

William Amelio (Interim CEO)

Sure. Sean, I'll take the first part. You know, currently, we plan to finance with consideration with debt and cash on hand, primarily located in our foreign subsidiaries.

... For the cash, offshore cash, we will use to fund the transaction. We view it as an efficient cash use of, for us. Can't really get into specifics in terms of how much we will be using of offshore cash, but as the transaction gets closer, I'll be able to provide more commentary on it.

Kevin Moriarty (CFO)

Similarly, on your second question, we're not yet in a position, given the current rules that are in place, to be able to discuss that. But as the transaction unfolds, we'll be able to tell you a lot more about what our plans are.

Shawn Harrison (Senior Research Analyst)

Okay. Is there a way to tell me how much offshore cash Avnet has currently?

Kevin Moriarty (CFO)

Well, approximately, $600 million.

Shawn Harrison (Senior Research Analyst)

Okay, thanks so much.

Gerry Fay (President, Electronics Marketing)

Do you want me to add? Sean, this is Jerry. I'll answer the second part of your question.

Shawn Harrison (Senior Research Analyst)

Sure.

Gerry Fay (President, Electronics Marketing)

If you look at Premier Farnell's annual report, 86% of their business comes from the element14, which is the piece that we're most interested in. That's their high-value distribution business. And if you look at what they've done over the last year, they've really refocused on that business. They sold off Akron Brass for a little over GBP 250 million, and so they've really refocused there. From an industrial piece, it's a small percentage, I think, of their overall business today.

Shawn Harrison (Senior Research Analyst)

Very helpful. Thanks so much.

Operator (participant)

Thank you. Our next question comes from the line of Lou Misianos with CLSA. Please go ahead with your question.

Louis Misianos (SVP, Sales and Trading)

Yes, if you could maybe just comment a little bit more in detail about the acquisition. It seemed that last year for them was rather turbulent. You know, their gross margins were down, they had management changes. You know, I guess I'm just trying to understand that they might have some attractive pieces, but are you more or less stepping into a turnaround situation for them here? Or just what your thoughts are, and maybe also just go into a little bit more detail to why you think that this is transformational for you all.

Gerry Fay (President, Electronics Marketing)

So first of all, if you look at their, so the thing we're most attracted to is their ability to service design engineers. If you look at their online community, they have over 300,000 registered engineering users. And if you look at what they do for engineers, from ideation to prototyping, they've been very successful in that space. Again, as you saw, based on some of the moves that they've made, getting out of non-core businesses and focusing back on the core, we think that that's a huge opportunity for us to help an engineer today move from ideation and prototyping, where they would've then had to try to find a high-volume distributor to be able to help them get to market.

By coupling our value proposition in finalizing designs with engineers and being able to help a customer design anywhere and build anywhere in the world, we think putting these two pieces together accelerates both of our strategies and allows us to provide a differentiated opportunity for both design chain and supply chain customers in our space. We think by putting what Premier Farnell brings to the table and what Avnet brings to the table, a differentiation that doesn't exist in our industry today.

William Amelio (Interim CEO)

I would add, you had to notice that the catalog growth has been pretty substantial over the years, and something that we wanted to capture for a long time. But the problem is the fact that we're a scale company. We know how to do lots of volume, and we do it extremely well. One of the things that's great about Premier Farnell is their ability to have the small lot DNA. I think that brings a real advantage to our company that then can handle, as Gerry pointed out, those engineers' needs and wants early in the cycle, and as they grow, we'll be able to transition and move them to Avnet seamlessly. And I think that synergy is just a terrific position between the two companies.

Louis Misianos (SVP, Sales and Trading)

Okay, great. And then switching over to the TS business, I guess you put a new manager in there, gosh, it was a year and a half ago, and it seems, you know, results haven't really turned around there, maybe as some had hoped or expected. Bill, I realize how new you are to all this, but, you know, any initial thoughts what the main problem is? Is it product? I know you mentioned on this call that you've added in over 400 specialists. Is it the delivery? Just, you know, anything that you could help there, explain that and just where we are in the transformation of that, would be helpful.

William Amelio (Interim CEO)

Sure. If you look back in history, you know that the TS business once upon a time sold into the First Platform, which was mainframes, and then the second, and then the Second Platform, which is the data center today, is the lion's share of where our revenues come from. There was a clear-cut turn in the road that happened several years ago, well before Patrick took over, and that was the fact that the sale went from a hardware-led sale to a software-led sale, and I think you're very well familiar to that. So what Patrick's put in place with the specialized business unit strategy is to go after that software sale a lot more effectively. So I think that pivot that we're making is going to help the TS business become a lot more effective in the future.

Patrick Zammit (President, Technology Solutions)

It's Patrick. So just one more remark. In fact, we're starting to see the benefits of the strategy which we have presented to you in June last year. So we've started one year ago already to refocus our energy on the next-generation technologies on the Second Platform and on the third platform. And one of the reasons for the results this quarter is that clearly we are seeing the weight of software and services in our mix continuously increasing, and that's also driving. That's starting to bear fruit. And, of course, with the SBU concept, the intent is to accelerate that trend. Just one more remark. We've tested, in fact, this concept in the U.S. with cloud and in Europe with security and networking.

...And after seeing very positive results, that's the reason for we decided to now globalize the approach around those four new business units without losing the focus, by the way, on the data center, which continues to be really the core of our business. But also in the data center, we are embracing all the new software-defined data center technologies, and here again, it's going to be more software-driven than hardware-driven going forward.

Louis Misianos (SVP, Sales and Trading)

So would you say that's all been implemented, and now it's really just waiting for those changes, strategic changes to take effect?

Gerry Fay (President, Electronics Marketing)

Absolutely.

Louis Misianos (SVP, Sales and Trading)

Okay. Thank you. Good luck.

Operator (participant)

Our next question comes from the line of Jim Suva with Citi Please proceed with your question.

Jim Suva (Managing Director and Senior Analyst)

Thank you very much for all the details thus far. You mentioned that you're implementing things such as, you know, talent management as well as, you know, feedback and things like that. I guess a question is what milestones should we, as external analysts, look at for evaluating your progress? And the second point is, when do you think organic growth will start to be positive again?

William Amelio (Interim CEO)

Well, as you can imagine, with respect to organic growth, we're in a very uncertain time with respect to election year. That causes all sorts of fear, doubt, and uncertainty in the system, and the market forces play a lot on what on our potential future growth. With that said, within our control is to get ourselves to the most efficient and effective as we possibly can and to win the biggest share of the wall we possibly can with our customers because we are executing better than everybody else in the industry. So that's what the game plan is as far as us to get more successful.

So what you'll be able to watch for is, in fact, as we progress to get the Evolve SAP issue behind us and be able to reduce our inventory levels to get our working capital velocity a lot more, a lot quicker, and to see some of the key growth areas that we'll be reporting on to demonstrate that we're, we are in fact growing at the rate and pace that we expect.

Jim Suva (Managing Director and Senior Analyst)

Okay. You've mentioned the election year and market year forces. I mean, your competitors out there face similar things also. Do you feel like you're maintaining share or the, the numbers look like, you know, you're, you're losing share, and the election year and market forces really aren't the cause, that it's truly, you know, within your, your own execution?

William Amelio (Interim CEO)

I 100% agree with that. We have over the course of the last several quarters, we've lost a bit of ground, and we are in place to go regain ground. So one of the metrics you can look at is our ability to close that gap rapidly.

Jim Suva (Managing Director and Senior Analyst)

Okay. Thank you so much for the detail. Okay.

Operator (participant)

Our next question comes from the line of Steven Fox with Cross Research. Please proceed with your question.

Steven Fox (Managing Director)

Thanks. Good morning. Just to follow up on that question a little bit more, and just this is my takeaway from your prepared remarks, Bill. It sounds like a lot of what you're focused on is gonna be more top line than actually operational. I know you mentioned things like sense of urgency, et cetera. So maybe if you could just sort of qualify your biggest priorities out of the box, whether it's evaluating, staying in businesses or et cetera, that would probably be helpful for all of us. And then I had a follow-up.

William Amelio (Interim CEO)

So as you can imagine, any company has lots of strategic initiatives, but clearly one of them is to be able to find out where's the profit-generating sources in the company and double down on those. Where are the areas where we're leaking profit, and either fix them or exit those businesses. So that's clearly part of the strategy. I, I'm sorry I gave the impression that we're not working on the operations. We clearly are working on the operations, and there's a lot to build on. I mean, we have a solid supply chain recognized by our customers to be, if not best in class, close to best in class. Is that good enough? No, I actually think we can do better in our supply chain. Regarding the design chain that Gerry mentioned, that's a great way for us to capture higher margins. We have some very talented FAE.

In fact, the strategy with Premier Farnell actually doubles down on that thought process because now we'll be able to capture more of that kind of design chain wins with the capabilities that'll be built into the web and our digital - our whole digital transformation is another area where we're double downing, double downing on the fact that we want to have the right tools in place in order for us to be able to capture that kind of design chain value earlier instead of later.

Steven Fox (Managing Director)

That's very helpful. And then just a quick follow-up on the embedded business. Can you just sort of describe overall how big that business is and your expectations for it going forward? Thanks.

Gerry Fay (President, Electronics Marketing)

Sure. Go ahead.

William Amelio (Interim CEO)

I'll start, and then Gerry will jump in. It's roughly a $2 billion business. In the past quarter, Gerry has put a focused leader on the embedded business across the world because we think that's an important growth sector for us, and we believe that will drive the future returns for us. I'll let Gerry comment some more about some of the specifics in the embedded business. Gerry?

Gerry Fay (President, Electronics Marketing)

Yeah, so if you look at, Steve, this is Gerry. If you look at what we're doing in the embedded business, part of the transition is we actually, in EM, we're servicing that business on behalf of Patrick's business, so the whole idea of bringing it over was the fact that we do now have a dedicated global leader on that business, and the idea was to make sure it was all under one tent so we could drive the growth. If you look at, well, we're gonna project this year that the growth's gonna be somewhere in the mid to high single digit growth in our embedded business, which is one of our highest growth opportunities. So, that's why we're doubling down there, because we see growth in that portion of our business that's higher than overall market growth.

Steven Fox (Managing Director)

Thanks very much. That's very helpful.

Operator (participant)

Our next question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander (Senior Managing Director and the director of Equity Research)

All right, thanks. Could you guys just talk about the, or maybe Bill, talk about the search for the permanent CEO and when the board will make that decision? And Bill, should we assume that you're the front runner for that role, or how exhaustive is the search?

William Amelio (Interim CEO)

Well, I would assume I'm the front runner, but, but with that in mind, the, the fact is that... Look, I've had some of the most exciting times I've had in a long time in the last four weeks of being able to be associated with a really world-class team. And I think we're in a great market. I think this is a great opportunity, so I'm very interested in it. And the board, of course, has their fiduciary responsibility to make sure that we do a credible search and to make sure that we leave no stone unturned. I expect the search to be done relatively rapidly, and I'm hopeful for good news sometime in the future.

Brian Alexander (Senior Managing Director and the director of Equity Research)

So just to follow up on that, talk about how you would plan to drive more consistent execution and greater accountability, which you talked about earlier. What would you do differently? How might you change the incentive structure to accomplish your goals? What, what's gonna change? And then I have one more follow-up.

William Amelio (Interim CEO)

Well, this company, as I mentioned, got fantastic strengths and storied history. One of the things that made it successful was the ability to be able to handle the local needs by having the management team be decentralized to handle those needs rapidly. But as you can imagine, as the company grows bigger and bigger, one of the things that we need to make sure we take advantage of is scale. And there's plenty of opportunities across the company where we're not taking as effective use of our scale as we can. And in fact, if you looked at our business management systems, we effectively run the company in the regions, and we have 25 P&Ls across the organization.

As you, you'll see, as time goes on, in fact, very rapidly, we will put a business management system at the center, so that we will have monthly ops reviews, where we will go through in pretty deep detail, what's working, what isn't working, where the profit generators are, where the profit leakers are, and we'll make decisions in order to improve in both areas.

Brian Alexander (Senior Managing Director and the director of Equity Research)

Okay, one more for Kevin. On the ERP issues, we know what the revenue impact was for the June quarter. Sounds like it won't be an issue for revenue in the September quarter. But could you talk about what the margin impact was for EM in the June quarter, and how that will play out in September? How much of a drag this will be in September and beyond? Thanks.

Kevin Moriarty (CFO)

Sure. Give me a second, Brian. I think if you were to look at it from a gross profit level, it clearly was a headwind of close to 30-40 basis points. As we went through, obviously more in the April, the month of April, and then as we look forward, really we're thinking near term, more just of an operating expense headwind for us, and I would range that between $5 million-$10 million in the September quarter.

Brian Alexander (Senior Managing Director and the director of Equity Research)

It's a $5 million-$10 million quarterly OpEx drag, revenue and gross margin should be normalized, and then beyond September, would you still expect there to be a lingering OpEx impact in December?

Kevin Moriarty (CFO)

Yeah, and Brian, what I commented on in the, in the script would be, we expect it to temper off as we work through the December quarter, and I'll clearly provide an update on our, September call. The other thing I would talk to is, obviously, we saw the growth in inventory, as we worked through this quarter, and that's another key focus area for, for our team, is to continue to lead that down, that investment down as well.

Brian Alexander (Senior Managing Director and the director of Equity Research)

Okay. All right, thank you.

Operator (participant)

Our next question comes from the line of Ananda Baruah Brean Capital. Please go ahead with your questions.

Ananda Baruah (Director, Research and Senior Equity Research Analyst)

Hey, thanks, guys, for taking the questions. Two, if I could. I guess the first is understanding that there's a number of things that you guys are working on across the organization. On the last earnings call, you spoke to some fairly specific areas from a revenue perspective, programs, let's call them, and initiatives that you guys were gonna focus on. And then GTDC, you guys talked to us a little bit more as well. I'd love to, sort of at this point, just get a quick update on where you are with those, and if you've added any more. So maybe what are the key ones kind of going forward through both the businesses?

You've spoken to one or two of them on this call, but just wanna make sure that we're clear on all of them. And I guess where are you in those? And then I'd just love to get a sense, if you could, of how long we should expect those to take place. And I have a follow-up. Thanks.

William Amelio (Interim CEO)

Okay. I'll have each of the business areas give their update on the growth initiatives, starting with Patrick. Patrick?

Patrick Zammit (President, Technology Solutions)

So growth initiatives for TS in the data center is to support converged infrastructure, flash-based storage, and anything which has to do with software-defined data center. And then on the Third Platform, we declared that our focus would be on cloud, would be on mobility, would be on big data and analytics, and then security to support both the data center and all those new technologies. So that's what we declared during the Analyst Day last year, and basically, nothing has changed. We are maniacally now executing on growing both technologies. And by the way, I can share with you that with one exception, we are growing at least double digits on all those initiatives. So it's going, it's going very well. Again, the SBU should accelerate that trend, okay?

The fact that it's going to be software driven means that the specialization is going to facilitate the implementation or the acceleration of the implementation of the strategies and the recruitment of the specialized partners, in some cases, vendors, so that we can improve our value proposition. But basically, I mean, we feel very good about the progress we are making. Still, I mean, our legacy business, the weight of our legacy business is very high, so that's the reason for you don't see yet all the benefits from a top line and margin standpoint, but we are very confident on the progress we are making.

Gerry Fay (President, Electronics Marketing)

Hi, now, this is Gerry. I'll talk about EM. So our evergreen strategies around design chain and supply chain, we continue to make investments there. And as we said earlier, Premier Farnell is going to help us engage more deeply with design engineers, plus the digital design tools that we put into place, starting in the Americas and now rolling out around the world, are helping us increase both our, our registrations and our design wins. If you look at our funnel for FY 2016, registrations were up 11%, and our design wins were up 5%, so our investments there are paying off.

If you look at what we're doing around digitally transforming our business, both our organic efforts, which are helping customers dictate the experience they have with Avnet, both online and offline, coupled with Premier Farnell, we think will be a game changer for us. I've already talked about our embedded strategy and the growth opportunities we see there. There's also a focus, as Patrick and I both talked about in our Investor Day, on a focus on IoT. In EM, we continue to look to grow the three building block technologies, and those will grow faster than the market, again, for us this year. We think we are executing well against our strategies, and as we get past our ERP issues, we'll start to show up in our results.

Ananda Baruah (Director, Research and Senior Equity Research Analyst)

That's helpful, guys. And then just a follow-up from me. So does the when as you—I guess maybe it's as we get through the December quarter, but as you get ERP kind of wrapped up and operational as you would like, should we also think of it as a revenue amplifier, number one? And then secondarily, regardless of what the timing is, because I know you guys have a lot of things that you're working on, but what would be the reason that you couldn't, when you get back to normalized kind of rev run rate, actually begin to grow stronger than typical seasonal, since you're seeing it sub-subseasonal on the way down? So I'd love those two. Thanks.

Gerry Fay (President, Electronics Marketing)

I think it's, I think it's a great point, and now, because if you look at our quarter, this quarter, even with our ERP issues, we're gonna be in our normal seasonal range. So if you project that past, getting past our ERP issues and then getting the benefits from the ERP system around pricing and inventory management, things like that, that should only accelerate our performance. And we have not backed off on the budget we've committed to the corporation for the fiscal year.

Ananda Baruah (Director, Research and Senior Equity Research Analyst)

Got it. Thanks. That's helpful. Thanks a lot, guys.

Operator (participant)

Our next question comes from the line of Matt Sheerin with Stifel. Please go ahead with your question.

Matthew Sheerin (Managing Director)

Yes, thanks. Most of the questions have been asked and answered, but just following up on the last question regarding your seasonal guide for the September quarter for EM, which did seem a little bit better considering the headwinds you have both on the ERP side but also your decision to walk away from the supply chain engagements, which is obviously seasonally stronger in the September quarter. So are you just feeling better about the demand environment in general? Are -- is there some products that didn't get shipped because of the ERP implementation issues that will ship this quarter that makes up for that? Just trying to figure out what you're seeing in the markets in general.

Gerry Fay (President, Electronics Marketing)

Yeah. So let me start with Avnet specifics, then I'll talk a little bit about what we're seeing in the market, Matt. So if you think about our ERP issues, April was not a very good month for us. Things started to improve in May, and then June was fairly typical. So when you look at the guide, seasonality-wise, you know, we had a very poor April, so that's part of it. But if you look at our book to bill, book to bill for us is fairly strong at this point. We ended the quarter at 1.09, and it's continued at 1.08, with all regions above parity at this point. So we are seeing that the market is a little stronger than we have seen typically.

So I think those two things combined, coming out of our ERP issues, with the fact that the market, you know, I would say sentiment seems a little stronger, I think bodes well for us to hit our budget and our seasonality this quarter.

Matthew Sheerin (Managing Director)

As we look out to the December quarter, should we adjust assumptions on seasonality for Asia due to some of your shifts in the supply chain strategy?

Gerry Fay (President, Electronics Marketing)

You know, we don't normally talk about, you know, future quarters, but what I would tell you is, you have to take into account there's, you know, there's ins and there's outs. So, you know, we've had some wins with some of our biggest suppliers that are coming in. So I think what we're gonna just have to look at is how those play out, and we will keep you updated on any changes to our seasonality going forward.

Matthew Sheerin (Managing Director)

Okay. And just, lastly, on the TS business, it sounds like you're putting the right pieces in place for growth to gain back market share. One thing you haven't talked about is any voids in terms of your vendor line card, particularly on the software and security side. Are there plans to add some vendors to the line card to beef up some of those initiatives?

Patrick Zammit (President, Technology Solutions)

Yeah. So the answer is yes, absolutely. So again, if you think about those four new specialties, BUs, I mean, their role is, they have several roles. The first one is to come up with a differentiated value proposition. Okay, because again, it's a software sale, so the skills required are going to be different, the solutions required will be different. And so with this specialization approach, again, that's going to accelerate us being able to define and deliver those solutions to the market. The second priority is going to be to recruit partners, so new partners who are specialized in those areas, but also enable our existing partners who are building practices in those areas.

And the third is going to complement our existing line card where needed, so that we come up with the best value proposition and, and line card, in the market. So these are the three objectives. So the answer is yes. And again, the SBU is the enabler to make it happen. And by the way-

Matthew Sheerin (Managing Director)

Okay, thanks.

Patrick Zammit (President, Technology Solutions)

The vendors are identified. We don't want to add too many vendors. We strongly believe in limited line card, but having the right vendors on the line card, so it's identified, and we started, by the way, working on it.

Matthew Sheerin (Managing Director)

Okay, thank you.

Operator (participant)

Our next questions come from the line of Sherri Scribner with Deutsche Bank. Please proceed with your questions.

Sherri Scribner (Senior Analyst)

Hi, thank you. I just wanted to ask, looking at the margins in the EM business, they're below 4% this quarter, I assume, related to the ERP transition. Should we assume that margins for EM are again below 4% in the September quarter, given you still have some transitions that are happening? Just trying to understand how that margin trends. Thanks.

Kevin Moriarty (CFO)

Sure. Hi, Sherri, it's Kevin. I would expect the EM margins to improve sequentially in the neighborhood of 30 basis point-40 basis points. And again, it's due to the sequential improvement in the Americas, to the point you highlighted earlier, coming off the weaker April and then the ERP, running more smoothly as we work through the September quarter.

Sherri Scribner (Senior Analyst)

Okay. And then thinking about the TS margins, that suggests they're down pretty significantly year-over-year. Is that primarily because we had the extra week last year, or how should we think about margins in TS? Thanks.

Kevin Moriarty (CFO)

That's, Sherri, that's the right way to be thinking about it. The extra week had a more of an impact on the TS business, so right way to think about it.

Patrick Zammit (President, Technology Solutions)

And so I'd just add one thing: if you normalize it, so if you normalize our quarter last year, so you remove the extra week and you remove the embedded business, which has been transferred to EM, in fact, we are forecasting to have flat operating margins year-over-year.

Sherri Scribner (Senior Analyst)

Thank you.

Operator (participant)

Thank you. Gentlemen, there are no further questions at this time.

William Amelio (Interim CEO)

Thank you for participating in our earnings call today. Our fourth quarter fiscal 2016 earnings press release and related CFO commentary 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, and thank you for your participation.