Vincent Keenan - Vice President of Investor Relations Richard P. Hamada - Chairman of Executive Board, Chief Executive Officer, Chairman of Global Executive Council and Director Kevin Moriarty - Chief Financial Officer, Senior Vice President, Controller, Assistant Secretary and Member of Executive Board Gerard W.

Fay - Global President of Avnet Electronics Marketing and Member of Executive Board Philip R. Gallagher - Senior Vice President, Member of Executive Board and Global President of Avnet Technology Solutions.

Louis R. Miscioscia - CLSA Limited, Research Division Jim Suva - Citigroup Inc, Research Division Shawn M. Harrison - Longbow Research LLC Brian G.

Alexander - Raymond James & Associates, Inc., Research Division Steven Bryant Fox - Cross Research LLC Sherri Scribner - Deutsche Bank AG, Research Division Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division Amitabh Passi - UBS Investment Bank, Research Division Mark Delaney - Goldman Sachs Group Inc., Research Division William Stein - SunTrust Robinson Humphrey, Inc., Research Division.

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

Good afternoon, and welcome to Avnet's Second Quarter Fiscal Year 2014 Business and Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event.

As we provide the highlights for our second quarter fiscal year 2014, please note that in the accompanying presentation and slides, we've excluded certain items from our non-GAAP results, including intangible assets amortization expense and restructuring, integration and other items for all periods presented.

When discussing organic sales or organic growth, prior periods have been adjusted to include acquisitions, divestitures and the transfer of certain operations from EM to TS. In addition, when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S.

dollar-based financial statements into U.S. dollars. And finally, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our presentation. Before we get started with the presentation from Avnet management, I would like to review Avnet's Safe Harbor Statement.

This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause the actual results to differ materially from those described in the forward-looking statements.

More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's second quarter fiscal year 2014 highlights.

Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights, our return on capital performance and provide third quarter fiscal 2014 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also here today to take any questions you may have related to Avnet's business operations are Phil Gallagher, President of Technology Solutions; and Gerry Fay, President of Electronics Marketing. With that, let me introduce Mr. Rick Hamada to discuss Avnet's second quarter fiscal 2014 business highlights..

Thank you, Vince, and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. Fiscal 2014 continues to gain momentum as both operating groups exceeded our revenue expectations and normal seasonality, while year-over-year organic growth improved for a third consecutive quarter.

Strong demand for IT infrastructure in our Technology Solutions Americas region and continued strength in our Asia components business combined to drive revenue up 17% sequentially and organic revenue increased 14% in constant currency.

As a result, enterprise revenue grew 11% year-over-year into a record $7.4 billion and organic revenue was up 8% in constant currency as compared with up 3.5% in the September quarter. Gross profit increased $113.5 million or 15% sequentially due to the strong double-digit percentage growth of TS and the acquisition of MSC and EM EMEA.

Our sequential gross profit margin decline of 16 basis points included the impact of the enterprise business mix shift as our lower gross profit margin TS business grew to represent 44% of enterprise sales as compared with 38% of enterprise sales in the September quarter.

The combination of strong growth in revenue and continued expense discipline drove adjusted operating income up 32% sequentially and adjusted operating income margin increased 41 basis points sequentially to 3.6%.

Adjusted operating income increased 15.2% year-over-year and adjusted operating margin was up 14 basis points due primarily to an increase at Electronics Marketing. As a result of these factors, adjusted earnings per share of $1.17 increased 30% sequentially and 11% year-over-year.

Return on capital employed increased 243 basis points sequentially to 12.8% due to the increase in profitability and an improvement in working capital velocity. On a year-over-year basis, ROCE increased 53 basis points due to the growth in income, as working capital velocity was relatively consistent with the year-ago quarter.

While we are encouraged by the resumption of positive year-over-year growth in more of our end markets and relatively stable gross margins, we continue to deal with an uneven recovery that impacts our leverage relative past recoveries.

In this environment, we have leveraged organic growth to expand operating margins and returns year-over-year in the first 2 quarters of fiscal 2014, and we remain focused on continuing that trend across our portfolio as we enter the second half of the fiscal year. Now let's turn to our operating groups.

For the second quarter in a row, Electronics Marketing's revenue came in above expectations, driven by our high-volume fulfillment business in the Asia region.

While we are primarily focused on design win business in all 3 regions, we do selectively participate in specific high-volume engagements, where our cost and working capital model allow us to support customers' requirements and achieve our return targets.

Over the past few quarters, these engagements have grown more robustly than our core business in Asia, which, while having a negative impact on margins, are supportive of our return targets in the region. In the December quarter, EM revenue grew 5.5% sequentially to $4.15 billion, driven by a 5.7% organic increase in our Asia region.

When combined with the normal seasonal decline in the Western regions, EM organic sequential growth of 1.6% in constant currency was above our normal seasonal range of flat to down 3%.

On a year-over-year basis, reported revenue increased 13%, and organic, in constant currency, accelerated to 11.4%, the first double-digit year-over-year organic growth in over 2.5 years. At a regional level, organic sales were up 13% in constant currency in EMEA, while Asia and the Americas were up 14.4% and 3.2%, respectively.

EM's gross profit margin was essentially flat with the year-ago quarter and increased 26 basis points sequentially due to the acquisition of MSC, which has higher gross profit margins, partially offset by a higher mix of high-volume fulfillment business in our Asia region.

The revenue growth and cost reductions implemented last year combined to drive operating income up 20% year-over-year to $171.7 million, and operating income margin improved 24 basis points to 4.1%.

On a sequential basis, operating income margin declined 33 basis points due primarily to a decline in the EMEA region where we have yet to realize synergies from the recently acquired MSC business.

Looking at our balance sheet, EM grew working capital 5.2% sequentially due to the acquisition of MSC and a decline in accounts payable related to a reduction in inventory.

After adjusting for acquisitions and changes in foreign currency exchange rates, EM's inventory decreased 4.9% sequentially and our cash conversion cycle declined both sequentially and year-over-year.

This effective working capital management, combined with the increase in operating income, drove return on working capital up 236 basis points from the year-ago quarter, and economic profit has increased significantly year-over-year through the first 6 months of fiscal 2014.

With the year-over-year growth rates improving, book-to-bill near parity and 2 consecutive quarters of year-over-year expanding margins and returns, we feel confident we can leverage expected growth in our higher-margin Western regions to accelerate progress toward our longer-term goals in the seasonally stronger quarters of March and June.

Now moving on to Technology Solutions. TS delivered a strong quarter on both the top and bottom line as stronger-than-expected calendar year-end spending on IT infrastructure in the Americas region drove sequential revenue growth above our expectations for normal seasonality.

Reported revenue grew 36% sequentially to $3.3 billion, and organic revenue grew 35% in constant dollars as compared with the normal seasonal range of plus 20% to 26%.

Our Americas region, which grew revenue 44% sequentially, achieved well above seasonal growth, as the last 2 weeks of December closed very strong driven by demand for software and storage.

In our EMEA region, which has been dealing with weak demand for multiple quarters, revenue grew 31% sequentially in constant dollars while Asia increased 11% sequentially. Reported revenue increased 8% from the year-ago quarter while organic revenue increased 4.1% in constant currency, the first positive organic growth in 8 quarters.

On a sequential basis, software, storage and services grew over 30% while software and storage drove our year-over-year growth. Gross profit margin declined 18 basis points year-over-year and 34 basis points sequentially with a sequential decline driven by the Americas and Asia regions.

The significant growth in revenue drove a 92% sequential increase in operating income to $120.2 million. Operating income margin increased 108 basis points sequentially to 3.7%, driven by material improvements in the Western regions.

As a result of this sequential increase in profitability, return on working capital increased over 1,500 basis points over fiscal Q1.

However, return on working capital was down 432 basis points year-over-year, primarily due to a decline in the EMEA region and the impact of the computing components business transferred from EM at the beginning of the fiscal year.

While some end markets are just returning to year-over-year growth, we remain focused on the future and continue to invest in higher growth markets, including converged solutions, software and professional services.

With end-users remaining highly focused on optimizing their data center investments, including the growing interest in hybrid cloud solutions, the breadth and tools -- breadth of tools and services that TS has developed will help navigate this dynamic landscape to accelerate progress to results.

These investments will allow us to develop and deliver incremental value to our partners that will enable them to address new opportunities and accelerate their growth going forward. Overall, while we delivered another quarter of solid progress at the enterprise level toward our financial goals, we still have work to do in parts of our portfolio.

After a difficult fiscal year 2013, where we had to adjust to market realities including reducing our expenses, we are now starting to realize the benefit of those actions as organic growth has returned.

Through the first 6 months of fiscal 2014, our revenue was up 9.5% year-over-year and adjusted operating income grew almost 3x faster, driving adjusted operating income margin up 39 basis points to 3.4%.

Even as we grew working capital to support this growth, working capital velocity has improved year-over-year and return on working capital is up 278 basis points when compared with the first half of fiscal 2013.

In addition, we have maintained our disciplined approach to capital allocation as we incorporated a dividend into our priorities while continuing to seek opportunities to invest in value-creating M&A.

With both operating margins and returns at their highest level in 6 quarters, we remain committed to our value-based management approach to running the business as we drive further improvements across our portfolio. Now I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial position and outlook.

Kevin?.

Thank you, Rick, and hello, everyone. Turning to Slide 8. With sales growth exceeding expectations and normal seasonality, the team did an efficient job of translating this momentum into strong profitability and returns. We improved working capital velocity by approximately half a turn sequentially and drove returns to the highest level in 6 quarters.

As a result of this strong top line growth at both the operating groups, our working capital increased 9.8% or approximately $406 million sequentially and 7.8% when adjusted for acquisitions and currency.

After adjusting for acquisitions and the impact of foreign currency, the primary driver of working capital growth was an $888 million increase in accounts receivable related to the stronger-than-anticipated December close at TS. Despite the significant increase in receivables, our overall net days declined by approximately 4 days sequentially.

In addition, a sequential decrease in payables at EM, primarily driven by effective inventory management throughout the quarter, also contributed to the increase in working capital. After adjusting for acquisitions and the impact of currency, inventory declined 4.9% sequentially at EM, with all 3 regions contributing to the reduction.

As a result, we used $28 million of cash for operations during the quarter to support this resultant increase in working capital.

Even with this investment in our working capital, cash flow from operations over the trailing 12 months was approximately $135 million, and we ended the quarter with roughly $779 million of cash on our balance sheet and over $1 billion of available credit from our short-term borrowing facility.

In addition, we remain focused on returning cash to shareholders, during the first 6 months of the fiscal year, we have returned $41.3 million to shareholders through our previously announced dividend and have approximately $225 million remaining in our share repurchase program. Now let's turn to our outlook.

Looking forward to Avnet's third quarter of fiscal 2014 and our outlook, we expect EM sales to be in the range of $4 billion to $4.3 billion, and sales for TS to be between $2.6 billion and $2.9 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.6 billion and $7.2 billion.

When adjusted for the impact of foreign currency, the midpoint of guidance for EM represents flat revenue as compared to normal seasonality of plus 4% to plus 7%.

The EM guidance reflects normal seasonality in the Western regions and below normal seasonality in the Asia region due to an expected decline in the high-volume fulfillment business that drove much of the regions growth over the past 2 quarters.

The midpoint of TS guidance would represent a sequential decline of 16% as compared to normal seasonality of down 20% to down 16%. Based upon that revenue forecast, we expect third quarter fiscal year 2014 adjusted EPS to be in the range of $1.02 to $1.12 per share.

This guidance does not include any potential restructuring charges or any charges related to acquisitions and post-closing integrations and the amortization of intangibles. The guidance assumes 140.1 million average diluted shares outstanding and an effective tax rate in the range of 27% to 31%.

In addition, the above guidance assumes that the average euro to U.S. dollar currency exchange rate for the third quarter of fiscal 2014 is $1.36 to the euro. This compares with an average exchange rate of $1.32 to the euro in the prior year third quarter and $1.36 to the euro in the second quarter of fiscal 2014.

Before we turn to Q&A, I would like to proactively provide some brief commentary on this morning's announcement from IBM regarding the sale of their x86 Server business to Lenovo. Given that this is a very recent public announcement, we do not have a large amount of definitive information to share at this time.

However, we would expect this transaction to be of interest to our shareholder base and, therefore, we'd like to provide some limited perspective at this time. As a point of reference, our IBM x86 Server business represents approximately 5% to 6% of Technology Solutions' global revenue.

As has been our experience with other transactions, continuity of customer relationships and business activities are generally of paramount importance to all stakeholders. We look forward to being an important partner to support all parties involved to ensure minimal disruption for the channel we serve.

Given our long and significant partnership with IBM in this technology area, we believe the breadth and depth of our existing relationships will continue to be of strategic interest from a channel strategy perspective. With that, let's open up the lines to Q&A.

Operator?.

[Operator Instructions] Our first question comes from Lou Miscioscia from CLSA..

I got 2 questions.

I guess when you look at the Technology Solutions business and you look at the demand level that we just saw here in the December quarter, do you think on a year-over-year basis, that same level of demand will roll over into 2014, and if you're getting any visibilities on budgets that are coming in, and then I'll hold to my second question in a second..

Lou, it's Rick. Let me start with that. So far be it from us, I think we always resist the temptation to try to be forecasters in this particular area. Our commentary reinforces the perspective that it was a very strong year end close, we're very good to see that.

And our guidance for the March quarter, as you see it, down 16%, which is arguably at the higher end of down 16% to down 20% in normal range.

Remember, we factor in all known information at this time into that equation, including what we've seen and already happened in January, what our normal leading activity indicators are in working with our channel, number of quotes, proposals, configuration, what their pipelines are looking like, et cetera.

So we can give you some outlook for the March quarter here overall, but far be it from us to try to call the demand, call on what's going on for 2014..

Okay, great. And my follow-up question, it looks like that cash flow has been negative for a couple of quarters now. I realized certain things are growing like working capital.

How quickly -- can you give us any kind of magnitude of when it might reverse?.

Kevin?.

I think, honestly, a number of factors moved within a short time. As you pointed out, because of working capital requirements. But I think based on the trends I see today, I would expect positive cash flow from operations in our fiscal third quarter, and I would say in the range of roughly $150 million to $200 million..

Our next question comes from Jim Suva with Citigroup..

The first question is regarding your cash and cash flow situation of not being overly robust because you need to use it for working capital. Does that mean in the next quarter or 2, you guys need to wait to build some cash for future M&A, as I know you made some acquisitions last year and with the growing of the business.

Just kind of sort through things because the MSC acquisition was pretty big and it looks like it's going to be quite successful so far.

But given your cash balance of where it's at and the consumption of cash, cash flow, just wondering if M&A takes a little bit of a pause here, and if so, how long?.

Yes, Jim. By the way, thank you for the thanks, and I'll make some comments, maybe ask Kevin to follow-up. Yes, there's no pulling back on M&A from a strategic perspective or capital allocation priority perspective for us overall.

We certainly have ebbs and flows in the cash flow, and we tend to pay attention to what's going on, particularly the trailing 12 months. But we very much enjoy investing in organic growth when we have it, and that's the situation that we have right now.

Kevin, anything else you want to add?.

I think the key point I would highlight is the major contributing factor was the linearity of the quarter for us on the TS side, the strong December revenue really led to up 10 [ph] on accounts receivable. And just alluded to that will liquidate and, as I've commented earlier, I'm expecting positive cash flow from operations in our third quarter..

Okay, great. And then as my follow-up, when we start thinking about -- you mentioned on the TS side that you're guiding a little bit below normal seasonality because of such a robust December quarter, which is a great situation to be in.

Am I correct by saying so far in January, you've already seen the orders slow down a little bit? Because I believe it's a pretty back-end a quarter. And then we're talking about the Asia impact of it, the Asia impact that's stronger than expected.

Or is it you've already seen the orders, are you just going to be conservative because you believe as the quarter closes, that things will likely, off such a great strong quarter, it will be a little bit softer?.

Yes, Jim, I'm glad you raised the question, so that any confusion here will be very clear. When the normal range is down 16% to 20%, down 16% is at the higher end of that range.

Do you follow what I'm saying now?.

Yes..

So actually, we're not trying to indicate anything to slow down, if anything, I imagine we'll get a question later about why you're feeling the way you are.

And again, our answer is based on what we've seen in January and, by the way, we had a little fiscal calendar spillover that gives us a couple of days that were technically calendar -- December 30 and 31 are part of our third quarter, we have that data. We have 3 weeks of the business activity.

Again, we've got our leading indicators in our conversations with our borrowers and our channel. All of that is factored in to actually encourage us to provide the guidance, which is at the upper end of down 16% to 20%, it's not at the lower end..

Our next question comes from Mr. Shawn Harrison with Longbow Research..

So I want to get back to a point where you alluded to initially, but the 5% EBIT margin target for EM pre-MSC, as you look now into the March quarter and into the June quarter, is that still something you believe is achievable particularly given the strong bookings you have in the West?.

We do..

All right.

And MSC is still supposed to be something like a 10 basis point EBIT margin drag going into the June quarter, give or take?.

Think of it as 10 to 20 drag today, Shawn, and it's going to mitigate as we actually start extracting synergies. And we'll keep you updated on the time, in each quarter, on what that looks like as we go through.

But if you do the math, look at our overall guidance and you do the math here, we're obviously expecting some nice up margin expansion for Gerry and team at EM in the March quarter..

Got you.

And just to follow-up on that, where are book-to-bill ratios either globally or regionally for EM here in January and maybe where were they at this point in time last year?.

Yes, let me ask Gerry to fill in on that..

Sure. Shawn, thanks for the question. If you look at where we finished in December, we ended at 0.99. Three weeks through January right now, we're at 1.05, which is actually a little better than last year, so we feel pretty good about how January is starting off at this point. And when we look at our regions, it's pretty much what we would expect.

So there's no region that we are concerned about at this point. And based on how we ended December and how we're going into January, we're feeling good about the book-to-bill..

Our next question comes from Mr. Brian Alexander with Raymond James..

Kevin, thanks for the information on IBM. I think you said x86 is about 5% to 6% of your TS revenue. I think, overall, IBM is about 25% of the TS revenue. So I know it's early on in the transaction being announced today, but I think the rumors have been out there for sometime. So you guys have probably thought about the longer-term implications.

So my question would be is there potentially a spillover effect to the other lines that you sell for IBM like pSeries, like storage, like software, if you see other distributors compete for the x86 business? In other words, have you benefited in the past from bundling x86 with other elements of the IBM portfolio, and therefore, we should be looking at it as more of the holistic IBM relationship than just the x86 business?.

I really think -- Brian, I would say, again, it's very new news from a public perspective.

And as you indicated, it wasn't a complete surprise in some respects and, obviously, we've had contingency plans available and lots of activity taking place behind the scenes to make sure we understand what kind of opportunity it creates, I believe, actually, Lenovo was holding a con call at 12:15 Hong Kong time with their CEO to talk about the transaction, et cetera.

So lots in play.

But at this point, we view it as a very specific set of the technology portfolio at IBM, and they've been very specific in the announcement we've seen regarding which products are going with the transaction but also which ones are staying, including POWER, zSeries, some of their appliances as well, and their storage portfolio, majority of their storage portfolio.

So lots of moving parts. We'll keep you posted on any impacts or implications at this point, but we added Kevin's proactive comments upfront just to try to head off the eventual questions and make a commitment that as we learn about implications or impacts, we'll be forthcoming with more details about that..

Yes, I think -- Brian, thanks, this is Phil. This is -- the rumblings were out there 6, 9 months ago, so we've certainly not been sitting on our heels on this. So we've had multiple different contingency plans and talked to them, other partners about potential alliances.

When you really bundle this in, you look at these solutions, this still plays very much right in the heart of where we're finding our growth. And with our access to the data center, and our understanding, we don't know them well, Lenovo is a channel-centric type model, frankly, we see this as an opportunity moving forward.

We deal with this since the day we started distribution years ago, add to that adaptability and agility. So we're -- we'll absolutely work with IBM on this and we think there's going to be further opportunity for us. Time will tell.

But I think the other thing I want to note is when we look at the IBM portfolio, the fastest part of the growth we've seen with IBM has been in the software, okay? So as we continue to drive solutions in the software, again, we see this as minimal effect, but we are going to do everything we can to make it a greater opportunity..

Okay. And then if I could just follow-up on the EM business and going back to the operating leverage, I think December quarter contribution margins in EM was about 6% year-on-year. I think March guidance implies something similar.

And, Rick, you talked about an uneven recovery impacting the operating leverage, so maybe if you could expand on that comment.

But what I'm really trying to understand is do you think there's anything secular or structural that's impacting your operating leverage during this recovery versus prior recoveries? Perhaps there's a new normal in terms of lead time stability that may be impacting pricing power for all distributors or something else that's impacting EM margins and the industry margins relative to prior recoveries?.

All right. Good question, Brian. Let me offer a high level, and I'll ask Gerry to speak specifically to what's going on in EM as well. Our commentary around uneven recovery, I think, there are many examples I could point to. I'll even grab some headlines from this morning. I believe, if I saw my headlines correctly, European PMI was up, U.S.

was slightly down, but they were both over 50, and China crossed under 50 for the first time in a while. So that's what I'm talking about, those broader signals for us from an uneven perspective. And yes, it's great to return to organic growth here. But some previous recoveries, as you'll remember, have had steeper slopes on the return to that growth.

This one seems to be a little more moderate. But the way, not necessarily a bad thing because as we learn fast growth up leads -- sometimes leads to reciprocal opportunities on the downside.

So when I make those comments on even recovery, just putting a little bit of a crimp in our style to extract the leverage, those are the kinds of indicators that I'm referring to.

And, Gerry, do you want to speak specifically to EM and what's going on?.

Sure. Brian, it's Gerry. I think you know without lead time extension, we don't get much in the way of ASP expansion. And customer inventory days now are roughly constant with where they were a year ago. So inventories have grown essentially in sync with quarterly revenue growth, so the absolute levels still remain low.

Supplier inventories, which have been elevated kind of an overhang to customer inventory growth have finally started to come back to normal levels. So we're hoping this will start leading to restocking, which will then drive the lead time extensions, which we haven't seen yet.

We've seen some moderate lead time in memory, both NAND and DRAM, but nothing particularly exciting at this point to change pricing. And then as Rick mentioned, industrial is moderately better but still flattish, which is a big play for us.

And he mentioned, he looked at some of the news today, PMI is constant in the Americas, it was up today in EMEA, down in China. So that recovery is still pretty rocky at this point. And so when we look at the environment, things haven't changed all that much quarter-over-quarter..

Brian, I would just add more specifically. The couple of drags on leverage specifically for EM have been the MSC, that's known and expected, we talked about that for Q2. It boosted the top line. It actually was accretive to the gross margin profile for EM, but it's not on the bottom. We've got to get to work on the synergies.

And then secondly that -- also that the high-volume -- the fulfillment business in Asia, also a little bit of a drag on the leverage.

And keep in mind that what's really happening here, since we've got that guidance that looks like flat for EM, that causes people to say what's going on, well, remember, we're not going to have quite the opportunistic growth there in Asia with that fulfillment business.

So that's -- that revenue is actually essentially being replaced by more margin-rich and higher leverage business in the West in the March quarter, and that's leading to that expectation for some nice margin expansion for Gerry and team in March..

Our next question comes from Mr. Steven Fox with Cross Research..

First question, you mentioned that the quarter on TS closed much better than you expected. It sounds like that's what drove the upside the last couple of weeks of the quarter, which I don't think we've seen in a couple of years.

I understand you don't want to forecast out through the whole calendar year, but can you be a little more specific on why the confidence in spending, or was it product-specific or certain type of customers? A little bit of color around that would be helpful..

Steve, let me -- it's a really good question. We've spent some time on it here, as you would imagine. And let me offer you a thought or 2. Maybe Phil can add something to it. What I would tell you is you're right. Even for calendar year-end, it was pretty exceptional and fairly strong.

Now remember, in our commentary, in our script, we did highlight the Americas region as leading the charge. And I would offer you there that it's actually North America region in particular.

And can I point to specific confidence factors? Was there some concern towards the September, October time frame with all the government potential shutdown, threats and issues? Now I can't point to any negative in September.

But did that actually cause a pause and defer some stuff into the December quarter which came pouring in at the calendar year-end, that would be part of our thesis along those lines.

And, Phil, I don't know if you can offer any other drill down on specific commodity sets or segments?.

Yes, I think there's a general sense of more confidence in the market, Rick, as you noted. And then we just saw extremely good growth in storage and software.

Our services strategy, although still relatively small compared to the Avnet branded services, relatively small to the total enterprise, it's really changing the conversation in our new opportunities with our partners. I think the other thing, Steve, is you look at us compared to a supplier. I mean, our customer base is really diverse.

So yes, we are absolutely still dealing in the enterprise, but the mid-market, it's much broader, and they're really utilizing the leverage -- continue to leverage the channels of our sales and, frankly, our product offerings. So we have the multiple brands with the push towards private cloud, hybrid cloud, which leads into Converged Infrastructure.

That's really a market segment that's fitting right into our sweet spot. So hard to pinpoint any one piece of data. But as we aggregate that together, there is a cause for optimism, I think, and I'll leave it at that..

That's helpful.

And then secondly, just going back to sort of the volume business you did on the EM side, is it fair to say that, that would -- I know you're not giving specific scale, but is the difference between what you're guiding to versus normal seasonality all that volume business if we wanted to try to scale it? And could you just remind us of the difference in sort of the operating and gross margin structure between that and your traditional business in Asia?.

So it -- yes, in rough numbers, the difference between normal seasonality and flat, you're right, it's kind of in that scope, Steve.

The business -- the only specificity we've offered on the fulfillment business in particular has been that, look, it's not accretive to gross margins or for that matter, operating for Asia, but it is consistent with and supports our return goals for the region. Please take to the bank. Everybody listening to Avnet and knowing them.

If it does not meet our return goals, we are not interested, all right?.

That's helpful, but that also feeds into the idea that it's helping your margin. I think you said your margins in EM should improve nicely this quarter..

Well, I think -- this is Gerry. And if you look at it, so -- first of all, that business is going to be down quarter-over-quarter. And now, when you think about the mix shift moving from Asia back to the West, we're going to have a much bigger concentration in the West, where the margins are better. That's going to skew our margins to the higher side.

And so those 2 in combination are going to improve our overall operating margins for the quarter..

Our next question comes from Ms. Sherri Scribner with Deutsche Bank..

I wanted to dig a little bit into the EM business, particularly the Americas side of the business. I mean, if I look on a year-over-year basis, it looks like the Americas piece of EM has been declining on a year-over-year basis for about 6 quarters.

Can you give us a little bit of detail on what's happening there, is business transitioning? What are you seeing, and when do we see that sort of year-over-year decline turn in the Americas?.

Sherri, it's Gerry. Let me jump on that one. If you look at it, some of that was the transfer of business from the Americas EM to Americas TS. So if you look on an organic basis, actually year-over-year, the Americas has had positive growth.

And so -- and we continue to see -- are looking to continue to see that growth and we're projecting it will this quarter sequentially over the last quarter in the Americas..

Okay.

And can you just remind me what the growth was without the transfer?.

About [ph] 3%..

3%..

Okay. So still underperforming but not as much as would be implied by the year-over-year. And then just looking at the TS business, obviously, you called out storage and software where you've been doing a good job. Services was up. But you haven't mentioned anything about servers.

Obviously, IBM's results were pretty disappointing on the server side this week. Can you give us some detail on what's going on in the server market? It seems like that market is just perpetually depressed..

Yes, Sherri, this is Phil Gallagher, thanks. One other area we don't talk about much is NetSec. It's a growing part of our portfolio as well, and we saw a nice growth year-on-year, quarter-on-quarter in the NetSec area as well. But specific to your question on server, actually, we didn't call it out.

But actually, we're pleasantly pleased with the results. The servers were moderately up year-on-year, okay, and quarter-on-quarter, were up pretty significantly, which you would expect. And actually, we saw growth in both inventory standard, as well as in proprietary.

Didn't make the headlines because it's just overshadowed with the accelerated growth in storage, software -- storage and the software. But actually, we were pleased with our server performance overall..

Okay. That's helpful. And so can I just follow-up with you on the margins in TS? We're now sort of in this past quarter, in the December quarter, within your targeted range, obviously, the fourth quarter, the fourth calendar quarter is a good quarter for TS, generally.

But I know you have done a lot of work improving the margins in TS, improving the business in EM.

Do you think that the margins now have turned the corner? Do you think that business has turned the corner in profitability?.

Yes, Sherri, I do. We've done a lot, and I'd like to say foundationally, internally, and operationalizing business and getting a lot of the integrations completed, acquisitions I'm referring to. We've modeled the services this year and take another one. So I'm pleased with the quarter. We can always do better, and that's the marching orders to the team.

But as we go into Q3 with our guidance, we are expecting each region to expand the margins in Q3 versus a year ago, so the trend will continue..

Our next question comes from Mr. Matt Sheerin with Stifel Nicolaus..

I just wanted to go back to the issue of that strength that you saw from the component fulfillment business in Asia. I'm not sure if it's a coincidence or not, but last quarter, Arrow talked about selectively walking away from the low-margin supply chain engagements and you're talking about big volume increases.

Wondering if there is a connection there.

And the strength that you're seeing there, is that a handful of customers, a single customer? And then can you remind us your returns targets for that kind of business?.

So, Matt, this is Rick. Let me jump in. Maybe Gerry, if you'd give additional. So as we're hopefully reinforcing throughout the call here, the return targets are consistent with the overall returns we want out of that region, all comporting with our enterprise level ROCE commitments and goals, okay, which are very limited.

I won't even say it's limited by customer. In many cases, we're accommodating a supplier who needs our supply chain services to actually service that customer in the region.

And the final point I would make is that one of the reasons that these are so spiky and seasonal had to do with the fact that they're very often related to consumer products as opposed to more industrial, which, as you know, is the bread and butter for us overall..

Yes, the other thing I would add, Matt, as you know, we constantly review our portfolio to ensure these engagements continue to make sense for us, and when we don't -- when they don't, we exit them.

So I can't comment on your first part of your question, but I would say we constantly look at the portfolio and when they don't make sense anymore, we exit them..

Okay. Fair enough. And then on the TS business, Phil, you have nice growth in the quarter, obviously. I did notice that gross margin was down 34 basis points or so. You would think that on higher volumes, you'd get some pretty good vendor rebates, which would help gross margin. But it could be a function of mix, perhaps your component business.

So could you talk about that?.

Yes, Matt, thanks. Your outline [ph] was really -- is a big part of that. Partial mix, okay, for sure, based on different commodity growths and the PC components business and the disk drives in the business, that's shifted in last year. So if you net those out in the enterprise space, our margins held up very well.

And I wanted to just add, we're also continuing to invest in the business. So as we drive growth, we've been very vocal and forthright about making investments further in our Converged Infrastructure space, driving software and, most recently, the bigger investments in the area of Avnet branded services, okay, which are getting good traction.

But we're making those investments upfront, and then not all yielding the operating margin returns that we would expect at this point or that we would want at this point. But they're in line to where we need them to be as we closed out the balance of our fiscal year..

Okay. And if I could just throw in just a quick third question regarding your EBIT, 5% EBIT margin target for EM. It doesn't look like you're going to get there this quarter because of the acquisition.

Is there a timetable, Rick, that you're willing to put your neck out for in terms of whether it'd be June or another quarter?.

Matt, hopefully, I am consistently on record with Gerry and team that we are committed to returning to that 5% goal for the EM business, excluding MSC, in our fourth quarter..

Excluding, okay. I'm talking about for the whole business then..

Well, again, there'll be a little bit of a drag. I think we talked about that with Shawn earlier on the call. But we don't provide multi-quarter guidance, but we have provided some insight into what we're solving for as we're continuing to improve our financial performance.

And I really believe since the beginning of the fiscal year, we've tried to consistently convey an expectation. We will get the EM business before the MSC acquisition even became a reality starting in our first quarter, we're going to get that EM business on a global basis back to 5% in the fourth quarter of fiscal '14.

And we're still committed to that goal..

Our next question comes from Mr. Amitabh Passi with UBS Research..

Rick, sorry, not to beat a dead horse here, but I'm just trying to figure out for the December quarter, was MSC actually loss-making on the operating profit line? I'm just trying to figure out why the operating profit dollars declined on a pretty robust sequential increase in sales..

Yes, Amitabh, think of MSC much more as a breakeven, a very minor plus or minus kind of impact on the December quarter..

And so why were operating profit dollars down?.

On a -- just to make sure I got the right framework. You're talking about sequential or year-over-year, Amitabh, to make sure I got the right....

Sequential..

Yes, I think, Amitabh, this is Gerry. If you look at that, if you have the MSC business, which is not providing any drop through and then you look at our Asia business, that fulfillment business we talked about being on much lower end of our margins, there's not a lot of drop through there either.

So quarter-over-quarter, that was the big contributor to the difference. Now again, also on top of that, it was our highest quarter where we had the biggest mix from Asia overall, which are lower margins overall than our Western business.

So if you then look at the quarter coming up, our Asia business fulfillment business goes down, we get a swing to the West. So if you look at what we're projecting for our profit next quarter, we are starting to move up toward that 5% range..

Okay, perfect.

And then I was just curious, on the book-to-bill in January that you talked about at 1.05, I mean, is there any possibility of some impact from Chinese New Year? I'm just wanting to make sure, I mean, is that pretty much normal? Or do you think some of that is being skewed by the Chinese New Year?.

Some of it is being skewed by -- Chinese New Year, as you know, is earlier in the year this year, so some of it is skewed. That's actually, I think, a benefit at this point because we have the back half of the quarter to continue to ship.

So I think part of it is customers pulling in before Chinese New Year, but it's not out of what we've seen on a normal basis, so it's pretty standard..

Yes, Amitabh, I'd say it's a typical sort of intra-quarter seasonal -- seasonality that we've seen. No matter where it drops, there'll be a little bit of buildup before things go very quiet for about a week, and then it comes roaring back..

And then finally, I just wanted to confirm, what's implied for OpEx in your March quarter guidance? And then, how do we think about any other savings from restructuring actions? Anything else we need to be thinking about for the next couple of quarters?.

Amitabh, it's Kevin. I think when you walk the expenses for the next sequential, it'll be up roughly $5 million to $10 million, and that's composed of a few different items. But one item pulling it up is the American freeze which went into effect January 1. As you look forward, there's going to be a lot of impact potentially from currency and M&A.

But the overall, a little bit sales activity. I would say if you look out to our fiscal fourth quarter, the run rate we would expect the impact of our integration and restructuring efforts to lower operating expense, in the $8 million to $10 million range for the quarter..

Our next question comes from Mr. Mark Delaney with Goldman Sachs..

I was hoping we could talk about the margins a little bit further within the EM business. I understand there's some integration impact that's going on right now with MSC that's impacting the operating margin. So I was hoping maybe we could just talk on the gross margins.

If you strip out MSC and you think about your gross margins in the March quarter, do you think that those are going to be up on a year-over-year basis versus last year on a like-for-like basis for the divestiture of computing components?.

Go ahead, Gerry..

Yes. So if you look at quarter-over-quarter, our gross margins, taking MSC out of the mix, will be slightly up year-over-year..

Yes, Mark, I think we've made a lot of commentary regarding a stabilized gross margin environment.

And what I would say, anticipating perhaps the next question or the question that may be on somebody's mind out there, are we counting on any continued gross margin expansion, and think of it as the core business as part of our get back to 5, and at that point, we're not.

We are anticipating we would maintain a stabilized environment at this point, but an acceleration in the pace of recovery leading to some gross margin recovery would be additional upside..

Great. That's helpful.

And then for my follow-up, can you just talk about what your plans are in terms of executing upon the remaining buyback?.

So I've given all the -- we've got a standing schedule in place, Mark, as we do every quarter. We will take the latest internal financial projections, do our calculation of intrinsic value. I think I've shared we use multiple lenses to take a look at that.

And then heading into the next window, we will put a new schedule in place and have it standing in place with a currently open authorization in the neighborhood of $225 million still open..

William Stein..

Can you describe in a little bit more detail this Asia business, this transaction fulfillment business that you cited.

It sounded like you said it was customer-driven, and should we assume this might repeat every Q4 kind of on in calendar Q4 and off in calendar Q1 changing the seasonality? Or is this kind of a one and done situation?.

What I would say is it's a seasonal selective paying consumer that's not mainstream for us, but in the history that we've had the business, this quarter is usually the largest quarter for that business, it hasn't been this extreme before. So it's all based on customer demand. So that's how it works.

It seems these customers -- consumer customers, it's a big quarter, but this was a particularly large quarter for those fulfillments..

Will, if you'll remember, I believe that on our October call, we -- I think we mentioned at that time, we had some fulfillment business in the backlog and in the pipeline. And in fact, some of that contributed to a little bit of the inventory build, we were getting ready to support some of this business.

But as Gerry said, it actually came in even stronger than we were anticipating at that time..

Yes. And if you look at what happened to the inventory, the inventory came down in line with that business..

I appreciate that. One follow-up, if I can. I think the last call, you were asked about cloud. And, Rick, I think your comment was bring it on, bring on the complexity.

Is this part of the result that we're seeing in terms of both better revenue in TS in the quarter driven by the Americas and also the better-than-seasonal outlook as well? Is that part of what's contributing? Or is it not clear, or is it just kind of a more general expansion in demand that -- as you're kind of in line with a better, questionably better global macro?.

Yes, Will, so first of all, I would say we maintained our bring-it-on attitude. What I would tell you is that we're still learning and tracking, trying to be more specific about identifying specifically which portion and segments of our revenue we could specifically tie to either private or hybrid cloud environments.

What we are seeing is that these converged solutions, which we believe are becoming the preferred building blocks of many of these clouds, whether they be private or hybrid, that's where we're seeing some exciting growth. So we think there's a connection there.

I just can't tell you that 50%, 80%, x percent of that net growth is coming because, specifically because of cloud investments or environments. So we know that there's a loose connection there. We're trying to tighten it up a bit to be able to report more specifically going forward.

But right now, we just got to speak to the big trends of growth in software, services and converged solutions, all of which we think are consistent with this growing interest in cloud solutions..

If I could just squeeze one more quick one. And I think you were asked about the negative growth in EM Americas, which I guess, excluding a backout, is really positive. But in TS EMEA, I think you're still showing negative growth.

Any comment as to when you think that will turn?.

Yes. This is Phil, Will. I'll jump on that. We did show the aggregate level, negative growth in EMEA, albeit improved, okay, and improving. We are looking for organic growth this quarter, being the March quarter, in all regions, by the way, and expect that to turn around in March..

Our next question comes from Lou Miscioscia with CLSA..

Just to clarify, did you say that SG&A, after it being up $8 million to $10 million this quarter, is going to be down thereafter? And if so, could you actually give the absolute dollars suggestion for down for the next couple of quarters due to the restructuring?.

Lou, it's Kevin. What I indicated, in the sequential quarter, so on our third quarter, I'm expecting it to be up $5 million to $10 million from Q2. Given the restructuring and integration efforts underway, thereafter, I'm expecting it to be down $8 million to $10 million on a per quarter basis..

For 2 to 3 quarters? Or how long before it stabilizes?.

It goes down in our Q4 and then thereafter. And again, that results based on volumes and things of that nature that go into play..

Okay. Last question, I guess, is for Rick. I appreciate the fourth quarter EM guidance. Just wondering about the big picture of 5 to 5.5, is that still the long-term -- I'm sorry, the 4 to 4.5 long-term company goal.

When do you think you'd hit that even if it's a quarter, let's say, fourth quarter of next year? Any chance we can get you to give us a prediction on that?.

Yes, we do a lot of modeling here, Lou. It's -- for us, first, I think the path to EM back to 5 to 5.5 is fairly clear. We're asking TS to improve on year-on-year margin on the path back to get into their 3.4 to 3.9. And I'm telling you what Avnet's going to be comfortably in their range is when both groups are operating in their ranges.

So that means do your modeling and pick your scenarios and keeping in mind we're trying to share what we're solving for, we'll keep you posted when we see that crossover point..

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

Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation, along with a further description of certain charges that are excluded from our non-GAAP results.

This entire slide presentation, including the non-GAAP financial information and reconciliation, can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you..

Thanks, everybody..

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