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Ingram Micro, Inc. (NYSE:IM)

Q1 2014 Earnings Conference Call

April 23, 2014 05:00 p.m. ET

Executives

Damon Wright – Head of IR

Alain Monié – Chief Executive Officer

Paul Read – President and COO

Bill Humes – Chief Financial Officer

Analysts

Matt Sheerin – Stifel

Brian Alexander – Raymond James

Brian Ries - Barclays Capital, Research Division

Jim Suva – Citi

Ananda Baruah - Brean Capital

Keith Housum - Northcoast Research

Osten Bernardez - Cross Research

Brian Alexander - Raymond James

Operator

Good day, and welcome to the Ingram Micro First Quarter Fiscal Year 2014 Conference Call. Today's conference is being recorded. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Damon Wright, Head of Investor Relations. Please go ahead, sir.

Damon Wright

Thank you and good afternoon. Joining me today are Alain Monié, our CEO; Paul Read, our President and COO; and Bill Humes, our CFO. Bill and Alain will make initial remarks. After which, the call will be opened for a question-and-answer session. We have also prepared presentation slides to highlight key aspects of our financial performance, which can be found with today's news release at the Investor Relations section of Ingram Micro's website.

During today's discussions, we will make statements that are forward looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today's news release and documents filed with the Securities and Exchange Commission, specifically the Risk Factors listed in Item 1A of our Form 10-K for the fiscal year ended December 28, 2013, for more information on the risks that could cause actual results to differ materially.

Additionally, throughout this call, we will be referring to non-GAAP financial measures. Today’s earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release.

Please also see the Investor section of our website for our slide deck that includes additional information disclosed in accordance with SEC Regulation G.

This conference call is a property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. Additionally, I want to remind you that we are hosting an Investor and Analyst Day in New York on June 25th. Invitations were emailed last week and registration is required. Please contact me with any questions.

I'd now like to turn the call over to Bill. Bill?

Bill Humes

Thanks, Damon, and good afternoon, everyone. We delivered a solid first quarter with worldwide revenue increasing $120 million year-over-year in line with our expectations and consistent with sequential historical seasonality.

We maintain our trajectory, a strong year-over-year gross margin improvement in the face of a continued competitive and solid environment, especially in North America. North America, Europe, Latin America in our BrightPoint business all delivered year-over-year, non-GAAP operating margin improvements. And we increased non-GAAP net income by 8%. However, we also accelerated our investments globally in supply chain services, Cloud, advance solutions and mobility which impact in earnings per share growth. Higher interest and other expenses in a higher share count versus last year also had an impact.

Turning to some specifics of our first quarter results, Q1 worldwide revenue was up 1%, which is $10.4 billion. Good growth in Europe and Latin America offset the expected impact in BrightPoint revenues, primarily related to significantly lower handset sales in Indonesia.

First quarter consolidated gross margin was 5.88% up 18 basis points year-over-year benefiting from a better mix of higher value business including from recent acquisitions.

Non-GAAP operating expenses 4.70% up 13 basis points which includes the realization of additional BrightPoint cost synergies versus last year. The increase is primarily related to more than $20 million in additional investment acquisitions and ramp up costs in higher value services businesses.

Non-GAAP operating income increased 6% year-over-year with non-GAAP operating margin of a 1.18% up 5 basis points. Non-GAAP interest and other expenses increased $7 million over last year. Due to onetime interest charge of $2 million as well as higher debt in some countries where we are experiencing strong growth and interest rates are significantly higher and higher costs are factoring in draft discounting programs.

Non-GAAP net income grew 8% resulting in non-GAAP EPS of $0.43. In fact trajectory was 43.4% which includes the net of impact of approximately 13 percentage points related to $18 million of restructuring charges recorded in jurisdictions where there is no tax benefit realized.

Looking at some regional highlights for our IT distribution business, North America revenue was $3.9 billion grew 1.5% year-over-year.

The selling environment remained very competitive, however, margins grew again at the region continued increase of its mix of higher value business. Non-GAAP operating income grew 6% and non-GAAP operating margin was 1.61% up 6 basis points.

Advance solutions continue to perform well lead by strong networking security and virtualization software sales. We are also getting excellent traction in our cloud business adding six new vendor partners to our industry leading platform during the quarter which helped drive revenue growth in excess of 50% they are still from a small base.

We see good opportunities in North America and continue to expect full year growth in low to mid single digits. Europe revenue was $3 billion was up 12% year-over-year in U.S. dollars and 7% local currency.

Non-GAAP operating margin increased by 11 basis points to 75 basis points. We started to execute on our organizational effect in these programs in Europe including providing notice for meaningful headcount reductions and facility closures.

Cost savings are expected to begin in the second half of 2014. As a procedural requirements to fully implement these actions take some time.

Our businesses in the United Kingdom, France, Netherlands, Spain and Italy all delivered solid double digit growth in local currency. SMB end market continues to be relatively robust and retail showed strength probably in the region. Our new program with Apple to distribute iPhone is proceeding well.

In Asia Pacific, first quarter revenue was $2.1 billion was down 2% year-over-year in U.S. dollars but up 2% in local currency. Non-GAAP operating margins for Asia Pacific was 74 basis points down 5 basis points due in part to investments to build out higher value business in the region.

India continue to deliver double digit local currency growth and Australia grew revenues in local currency while maintaining its year-over-year gross margin improvement momentum.

Our Middle East and Africa business contributed high single digit revenue growth with gross margin expansion benefiting from its focus on high value offerings in advanced solutions. These strong performances were partially offset by China where revenue is declined by 14% in local currency due to software demand in some products and vendors we carry.

Pan America revenue was $493 million, up 7% U.S. dollars and up 14% local currency. A region benefit from an increasing mix of advanced solutions resulting in a healthy gross margin expansion and a strong non-GAAP operating margin at 1.96% up 71 basis points.

Brazil is executing well and taking share in a relatively flat demand environment. Mexico had a high single digit revenue growth resulting from a more stable demand environment and restart of government spending. Miami export revenue is declined but gross profit and non-GAAP operating income dollars were each up due to a better mix of higher value products.

Our BrightPoint business as reported contributed revenue of $830 million, down versus last year due to lower handset sales in Indonesia as previously indicated and the transfer of approximately $100 million of mobility distribution revenue into our IT distribution business.

Gross margin expanded due to higher mix of mobility lifecycles services revenue and additional vendor support on certain products. Non-GAAP operating margin were also benefit from this mix, improving 18 basis points, 2.35% however our operating income dollars were down on lower revenues in a more labor intensive reverse logistics services contribution.

North America BrightPoint services and distribution revenue both grew benefiting from new service and engagement wins which Alain will cover shortly and strong sales in accessories. BrightPoint Europe continues to be a solid contributor although handset volumes were impacted in Germany and Austria due primarily delays in new product model introductions. These launches took place in April and the regions had a good start in Q2.

The mobility services business in Europe is also performing well and is expected to benefit further from our pending acquisition of (inaudible) the provider repair, refurbishment and after sales services in Germany. This small, strategic acquisition is expected to close in Q2.

In Asia Pacific, we have quickly and successfully skilled back cost in our BrightPoint business to line up with our revenue levels and are focused on building new revenue strings with OEMs and carriers and entering developing markets.

We are also working to partner with emerging brands from well known technology firms that are relatively new at the mobility space and want to leverage our industry expertise and broad infrastructure.

Turning to another financial highlight in the quarter, HP and Apple represented 16% and 11% of total sales respectively. At quarter end, our cash balance was $425 million with total debt at $1 billion.

Working capital days were 27 up five days sequentially as historically expected and down one day from the 2013 first quarter.

CapEx for the quarter was $22 million, depreciation of $20 million and amortization expense was $14 million.

Non-GAAP return on invested capital for the trailing 12 months was 10.4% which continues to exceed our weighted average cost to capital. I will now turn the call over to Alain. Alain?

Alain Monié

Thank you, Bill. As Bill said, we had a good start to the year and remain confident in our expectations for full year revenue growth in the low to mid single digits with continued improvement in operating profitability.

During the quarter, we had healthy demand in the majority if our large countries. SMB remains relatively solid globally and the consumer's segment is showing signs of improvement broadly.

The PC refresh cycle picked up but we selected not to participate in some of the business as it was not up to our profitability standards. The demand environment is slowly improving and we had ample growth opportunities, particularly in higher margin areas where we are investing to improve our mix.

Continuous investment is an important driver in evolving our model. Our focus is leveraging 30 years of supply chain expertise, partnerships with the world's best companies in an unmatched global infrastructure.

Early returns are clear and expanding margins and EPS growth. Q1 reflects the addition of more than $20 million in investments versus last year. Let me give you some examples. Our logistic business in North America already serves some of the world's largest technology OEMs, big box retailers and E-commerce leaders. We are enhancing processes to better meet our customers’ requirements. We are also making it easier and more cost effective to on board smaller customs.

We are expanding the IML model globally with the current focus in Asia Pacific as we ramp up capabilities to support large new customer partnerships including with one of the world's leading technology OEMs.

We also added CloudBlue and Shipwire which expand our offerings into IT asset disposal and e-commerce fulfillment. Where country small, each of these businesses presents large and fast growing market opportunity where we expect to capture meaningful share.

During the quarter, we opened CloudBlue facilities in the U.K. and in Canada and began to integrate Shipwire into our existing U.K. logistics operation.

In Cloud, we are also gaining momentum with our industry leading Cloud marketplace, offering more than 200 Cloud-based solutions from over 70 of the world's leading technology vendors.

We recently held our annual cloud summit in Florida with nearly 1,000 partners in attendance. Buzz around this dynamic and exciting market opportunity is increasing exponentially and we are investing to build on our leadership position.

We are adding go-to-market resources and investing further into our acquisition of SoftCom which in conjunction with the strategic relationship with Parallels in enabling us to rapidly reach a high level of automation and take our platform globally.

We are also adding R&D resources to develop proprietary Ingram Cloud offerings, now launching a new series of cloud managed services.

On a global basis, we are adding expertise and programs to move further of the values stack and improve our mix of advance solutions. We continue receiving high value authorizations in data centre virtualization, security, enterprise networking and unified communications. Improving mix has been reflected in operating margins in North America and in many other countries globally.

In Q1 we expanded our value portfolio further adding high end storage and data management solutions from NetApp in Europe and Asia Pacific. We partnered with VMware to take their full portfolio with the U.S. Federal government market and we enhanced our data capture point of sale offerings in Asia Pacific adding solutions from Honeywell across the region. Additionally, we were just selected as an authorized IBM global training provider to provide the complete portfolio of software and systems training.

Mobility is an excellent example of the improved profitability and earnings power we expect to deliver from all of our investments as we leverage our global presence. For instance, Ingram Micro's global brand of reputation has strengthened our position with notable carriers and OEMs in North America and abroad. The combination of device life cycle expertise and the stability and financial strength of Ingram Micro was instrumental in winning the Verizon Wireless Channel Business with the 360 Group which is expected to add a meaningful new revenue streams starting in Q2 this year.

We continue to invest in mobility capabilities globally and are leveraging our infrastructure to expand it to the high growth Canadian market. Our entry into Latin America mobility market is gaining very strong momentum and we hire the leader for the business in Q1.

We also just hired the leader for our Middle East and Africa mobility business and we are adding mobility talent in developing countries in the region where we expect strong demand for our offerings. In all of these areas, the services nature of the new business we are investing in is driving the margin expansion we are showing.

We are also off to good start executing on our organizational effectiveness program which as a reminder are expected to result in $80 million to $100 million in annual cost savings in full year 2015.

In addition to headcount reduction in all regions, initial actions include consolidating our German mobility and distribution warehouse operations into one, shutting our Belgium warehouse and consolidating it with the Netherlands, closing our current regional headquarters in Brussels and moving some of these activities to lower cost locations in Europe and transferring back-office functions through our shared service center in Bulgaria.

These actions will result in sizable annual cost savings. However, due to the time associated with procedural requirements in Europe, we do not expect to begin to realize any significant benefit until the second half of 2014.

As we look ahead for the 2014 second quarter, we currently expect worldwide revenue to increase year-over-year in the low to mid-single digits. With gross margin improvements all of the second quarter of 2013 by mid-single digit basis points.

Our investments and the cost saving initiatives we are implementing are focused around one primary goal; driving greater profitability across all businesses and delivering sustainable long-term shareholder value. Our financial results show that our strategies are working. I will now open the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go ahead and take our first question from Matt Sheerin with Stifel.

Matt Sheerin – Stifel

Yes, thanks and good afternoon. This first question regarding of the restructuring activities in Europe and as that plays out through the year, are you concerned at all about distractions to operations and perhaps on some loss market share opportunities in your term and what efforts are you doing to basically try to proceed with as fairly smooth transition?

Paul Read

Hey Matt, This is Paul. So, we have been very pleased with the execution of the initiatives that we have underway. As you can see we have taken quite a large charge this quarter reflects the decisions that have been taken and if you think about Europe in particular the region has grown 12% year-over-year. So we are not seeing a distraction, disruption. Of course there are issues that come up which we are dealing with but I think it's been very well planned and executed so far and we continue to be diligent through the rest of the activities through the rest of the year but no we are really not seeing a distraction or loss of business.

Matt Sheerin – Stifel

Okay. Great and in terms of the $80 million to $100 million in cost cutting program that you announced last quarter, it sounds like you talked about a lot of investments that you are making in other parts of the business so on a net-net basis in terms of savings, is it the same as it was when you reported last quarter or there are more expenses and more investments that may lessen the improvements that you may see next year?

Bill Humes

Hi, Matt. This is Bill. Overall we are still holding steady on the fact what we had said on the fourth quarter earnings and we do expect $80 million to $100 million in overall savings annual run rate to be an improvement overall in the operating expenses and profitability.

Matt Sheerin – Stifel

Okay. Thanks very much.

Bill Humes

Yes.

Operator

And we will take our next question from Brian Alexander with Raymond James.

Brian Alexander – Raymond James

Alright. Thanks. Good afternoon. Maybe just to start with BrightPoint. Revenue was down over 20%, profitability was down I think about 16%. You talked about a few different factors. Some seem transient, some seem a little bit more lasting. So maybe if you can help us understand the pieces of that, how much of the decline would you call temporary delays with product launches in Germany? How much would you say the actual just underlined demand, I think you called that Indonesia and that can linger from multiple quarters and then ultimately what's your confidence in delivering on the $0.51 from BrightPoint for the year.

Alain Monié

Yes Brian. This is Alain. On the BrightPoint revenue, indeed 22% down and I will get into the elements of that. As far as the profitability though on the operating margin, 235% we increase to 18 basis points. So we have been pretty successful at managing the business in the right way but let me talk about the revenue. Two larger pieces, I would call out of these 22%, one is – one that we have already mentioned a couple of times in the past, were sales of handheld devices, particularly in Indonesia were related to one OEM, who is now not producing almost any of these devices and so we – that revenue stream went away. The comparisons versus last year will continue to be in negative until Q2 but starting in the second half of this year, we should not have any of that comparison negative there although the business has gone away there.

The other part of the revenue is transfer into the IM distribution side as we combine the two businesses and our back-offices in particular and go-to-market in certain countries has a common platform, it is more and more difficult to separate those businesses and it makes more sense today to have some of that revenue streams sit in a different bucket and so that's the other large piece around the $100 million that was appeared in the distribution side of the house.

As far as the full year, we are still confident that we are going to reach out targets. If you look at the overall mobility business segment which includes, what's reported within BrightPoint, it also was reported within IMB distribution side. We see total revenue still growing in the low to mid-single digits so the overall mobility market is not down and the profitability as I mentioned continues to be solid as the mix of services increases versus the portion that is fewer distributions. So we remain very confident in this mobility business in spite of some of the reported numbers are there which are a mix of a punctual lack of business in Indonesia but also transverse internally.

Bill Humes

Brian this is Bill. Overall, I think on the accretion piece of $0.51 we continue to feel comfortable when delivering that. As Alain mentioned there is additional synergies and additional of savings in both side of the business so in the BrightPoint as disclosed, in the legacy BrightPoint we cut cost and reduce there but we have also cut costs and consolidated activities into ERPs and systems and business units within the IMB sides. So some of the savings and other things are buried there. So it's getting harder to obviously to separate and just make those more distinct but we feel comfortable under that built in their targets, built in our targets of $0.51 so we are comfortable that we are going to be driving towards and achieving.

Alain Monié

And they are going back to the revenue, sorry, Brian, I want also to mention that one of the announcements we made with the win on 360 group for the Verizon carrier. Also, it will be a meaningful addition to revenues and profits starting in Q2 but more meaningfully in the second half of this year. So that will be also a very positive element for our mobility business.

Brian Alexander - Raymond James

But there is still my follow-up question Alain. So let me just expand on what you just said. So with this win, how significant is it on an annual basis and what's the scope of the relationship, the margin profile, I know you have got very different margin profiles whether it's logistic or classic distribution. So just help us size it number one and number two, is there more potential opportunity behind this with Verizon given that their current distributor is expected to lose that business or is this basically all that you expect to win?

Alain Monié

Fair question. So although we don't give precise numbers I can say that the 360 Group which is regrouping of the four major national dealers for Verizon. They have a reach into 1,750 individual retail sales points so it's a huge network there. It's going to be in the full year several hundred million dollars worth of business with a very nice contribution margin that would be accretive to our business. In addition to that, we are still working on a number of other opportunities that are similar to it given that it includes forward logistics, demand planning, distribution of handsets, but also accessories. So it's a full suite of services to that retail network and channel and the fact that we have penetrated this which is the result of our capabilities and aggressive positioning, I think this should do well for increasing further wins in that area.

Brian Alexander - Raymond James

Thank you.

Operator

And next we are going to Brian Ries with Barclays. Please go ahead.

Brian Ries - Barclays Capital, Research Division

Hi, thank you. Can you talk about the PC refresh cycle at this point, it was obviously it was past the day for expediently (ph) upgraded and what's your view on sustainability of that trend of going forward?

Paul Read

Hey Brian, it's Paul. In the quarter particularly North America and Europe, where we participate, we did see an uptake in the refresh activity and cycle. Some of which we participated in and some of it we decided not to just because the returns really weren’t adequate for us. We see that continuing throughout the next quarter or two and we are still participating in some of that new business and I think but we can't really see beyond the next 60 days but I think that’s a – we will benefit from some of this here in the next 60 days or 120 days probably.

Brian Ries - Barclays Capital, Research Division

Alright. Thanks. And then on Euro business, you grew very nicely there this quarter and you still have some very – you still have relatively easy comparisons over the next couple of quarters. What's your outlook there over the near term?

Paul Read

Yes, we think that Europe has had a few good quarters, its strong together albeit the comparisons against last year it was pretty weak but the SMP strength is very encouraging and on the retail side, it's up, it has helped, of course by the Apple business that we have which is proceeding very well. In general, there is a lot of stabilization in the region within the countries and there is an uptake I think in the consumer demand side, so that really helps from the retail side as well. So we should continue the growth throughout the year and we are planning for that as well as of course have been very busy on the organization effectiveness program and rationalizing the cost space. So I think we are in the big turnaround in the Europe business that we have both growing it and reducing cost and therefore improving the profit but at the same time we are investing and value business for us is doing very well in other parts of the world and we are certainly got a good start but we are adding headcount there to service the advance solutions business and other businesses that we grow that we are pretty successful with and so that we can get a better mix of high margin business going forward.

Brian Ries - Barclays Capital, Research Division

Alright. Thanks.

Operator

And we will next move to Jim Suva with Citi.

Jim Suva – Citi

Great. Thanks very much. On your restructuring of cost savings about $80 million to $100 million, you laid out several different facilities, workforce reduction, consolidation plans at the beginning of the call in your prepared remarks, are those remarks, does that incorporate the full $80 million to $100 million of items or they are still more items left that you still have to announce?

Bill Humes

Hi Jim, this is Bill. Overall no, there are – I mean that’s just the sample of some of the items that we have, kind of notified both the Works Council as well as the employees in different areas. But we have done and continue to do actions globally in all regions, across the board and some of them have been notified and some other actions will continue all the way through 2014. But we have a great start on doing some of the heavy lifting and we are making great progress and we recorded some $42 million of charges which relates to some of the notifications we have done around to the different regions but specifically around Europe and North America and Alain gave some of the, individual specifics of the examples but basically every country is getting affected in some manner to shape form.

Jim Suva – Citi

Okay and if that's the case realizing how certainly the rule is different in different countries around the world and obviously we want to have longer notification period before you can actually let the facility or person go, have you pretty much laid out everything on track where even those longer notifications ones are on track to making sure they don't slip out or have some type of major delay.

Bill Humes

Yes and in general we are making great progress. I said there is always going to be some puts and takes but in general we are making good progress in the announcement and you are right there are some, that's why there is a lot of – most of the savings won’t be realized specifically in areas like Europe where you have long notice periods plus some of the things we are doing are structurally significant. So it takes a while to in the planning and developing and executing the plans overall but those are going along plans for the most part and we do expect take it to our full run rate by the time we enter 2015 on the $80 million to $100 million in savings.

Alain Monié

Yes, all the time, means we have integrating in the days that we are providing this.

Jim Suva – Citi

Okay, and then just to confirm, benefit start kicking in the second half of ’14 and slow run rate at the beginning of ’15, is that right?

Bill Humes

Yes ultimately, it's full run rate in 2015 savings-wise. It ramps up with -- not a significant amount of realized in Q2 but ramping up Q3 but with the (inaudible) share more kicking in towards Q4 and then ultimately Q1 of 2015.

Jim Suva – Citi

Great. Thank you very much.

Bill Humes

You are welcome.

Operator

(Operator Instruction). And we next move to Ananda Baruah with Brean Capital

Ananda Baruah - Brean Capital

Hi, guys. Thanks for taking my question. I have a few, if I could. Bill, just with regards to OpEx levels and sort of how you can contextualized in the press release; acceleration of investments, are you accelerating the same level of expense sort of you that originally planned for or she expense actually going to be greater for the new initiative and I guess just in context around, what we should expect as normalized OpEx levels for the next couple of quarters so the savings actually kick in?

Bill Humes

Right, I would say overall, I mean, our investments and OpEx overall is the sum of many moving parts. If you talk about zeroing on the investment that we highlighted out about $20 million, roughly a third of that, a little bit over third of that relates to basically the three acquisitions in the high margin space of Shipwire, CloudBlue and SoftCom. Now as those are necessary to track those on earnings per share because they have good and solid impact on gross profits. So they maybe a little bit of a headwind I mean since we are talking little bit less probably a million or so of kind of earnings headwind. So the remaining really $12 million is kind of the true investments in organic growth type value investments. A big portion of that comes in supply chain areas where we are investing and ramping up some key supply chain wins in Asia Pacific with some – with the carrier and very large OEM. So we are ramping up that business. So it's one business, it's just ramping up in advance and the other is investments in cloud, in advanced solutions and some mobility. As Alain mentioned, we are hiring ultimately some very seasoned executives in areas like Middle East and Africa in mobility, Canada, in Latin America for our regional area in different emerging markets. So with their knowledge and seasoned relationships of the industry, we believe that helped us to drive much more business in the mobility area and hopefully even more so in the services side in the mobility. So overall, I think the investments are about what we planned and are expect those that level on the -- what I would say the P&L investments for $12 million is probably what’s going forward for the near term and we will evaluate what we need to invest in growing future business later on in the year.

Ananda Baruah - Brean Capital

Got it. So sort of take, let's call it the base business. I know there is a lot of new great businesses in what we have got – what we consider base business now but what we should do to take sort of the base business OpEx and assume, whatever you assume for that and kind of put $12 million on top of that with current reach of the coming quarters?

Bill Humes

Yes, I mean for more or less for right now I mean I think. In the end, I mean, I think as we continue to drive the business drive revenues drive, (inaudible) from these investments. So these ultimate investments are going to pay off with increased business, increased margins, increased value. So ultimately they start paying for themselves but you always have to when you are doing organically you have to invest upfront before the revenues and profit enhancement to come. So over time, these necessarily won’t be investment, they will be payoff returns.

Ananda Baruah - Brean Capital

Got it. I got it and I guess I am trying to do this, I m just trying to get a sense of how to balance near term investments with the leverage kind of getting the benefits from those investments so the leverage on those balance with (inaudible) cost saving that they are going to kick in the second half of the year and I guess that's what I can think of it kind of offset is like how should we think about next dollar levels.

Bill Humes

Right, right. No, I understand. I mean overall, let’s say, we continue to drive. Our results are comfortable with our full year trajectory and these are investments that we made and we planned to make, they weren’t surprise investments. So definitely they are intentional investments to drive future value and we are right in line with where we expect to ultimately grow for the whole year and drive for the whole year.

Ananda Baruah - Brean Capital

Awesome, and then you are circling back to horizon, more of the clarification, Alain, will you saying that its several hundred million dollar opportunity of Verizon for Ingram Micro?

Alain Monié

Yeah that’s in the full year. That's how we – the best we can characterize it's at this stage. I mean without giving any more details around it.

Ananda Baruah - Brean Capital

That's really – that’s pretty nice equation.

Alain Monié

That's for full year and we are starting in Q2 and ramping up through second half of the year, we should be bringing that business in, yes.

Ananda Baruah - Brean Capital

That's awesome. Congrats on that. Now just one last housekeeping for me. The interest in other of $24 million, how much of that is one time in nature because it’s actually materials to EPS, so just I just wanted some context around that.

Bill Humes

Alright. Sure Ananda, this is Bill again. Overall, if you look at year-over-year basis with a non-GAAP consideration, our interest in another went up from roughly 19 to little around 26. So it's not $6.5ish million increase. About two of that related to an interest charge associated with a settlement with the Indian Tax Authorities on some commercial taxes. So that's the one off item that shouldn't go forward into the future quarters. The other kind of increase is probably two more parts, one: as we have talked about with everyone last quarter. Q1 ends up being our highest interest quarter because we are financing the growth and volume of Q4 in Q1. So that ends up being the impact or increase on interest but specifically Q1 part of the increase has came from higher interest cost in areas like India and Brazil where we have very nice growth. Hard to get kind of intercompany capital and debt into there so we borrow locally and locally adds higher interest rates then I would say, you would say as the herd average. So that had an impact on our overall interest expense, probably another one and halfish to $ 2 million impact and then lastly was given the high volume of retail business combined with increased (inaudible) Apple business in Europe. We did have higher draft discount costs from fourth quarter volume and factoring cost for selling receivables related to the retail business in Europe specifically that we are basically in Q4 and in Q1 that probably was the remaining piece of that significant increase. So, overall, I think the volume of that business is not as high going forward because Q4 and Q1 were larger size businesses in the sense of retail and so that will naturally subside. And also, normally our Q1 as you said is higher in interest than other costs, all things remaining the same and then Q2 starts to normalize a little bit. That being said it will probably be higher than on a year-over-year basis than it was last year.

Ananda Baruah - Brean Capital

Got it. And then just one last follow up on that. I mean given the new makeup of the business, should we expect similar dynamic sort of next March quarter as well?

Bill Humes

Yeah I would assume at least, I mean you can take out the – firstly you can pick up $2 million on the interest charge on the settlement of the commercial tax item. Here you can assume that it's probably going to be at this year's adjusted level or somewhere in that ballpark, I mean in the end you are talking a couple of million of dollar so it's – it doesn’t really turn the needle that much. It's just turns the needle based upon some expectations in year-over-year but I would say next year normalize the $2 million out and it's probably going to have a slight amount of growth from there.

Ananda Baruah - Brean Capital

Great. Thank guys.

Bill Humes

Sure.

Operator

And next we move to Keith Housum with Northcoast Research.

Keith Housum - Northcoast Research

Thanks for taking my first question guys. On the first part of the quarter in May, there has been lot of discussions about Australia, I guess if you guys just provide little bit color about your satisfaction about Australia progressed from fourth quarter last year and your first quarter this year, I mean I recall you guys saying those may have had some loss expected that last quarter but didn’t form as expected and they passed through the rest of the year?

Paul Read

Yes, this is Paul. It's made great progress year-over-year in particular but sequentially as well. We have seen the revenues grow, we have seen the gross margin grow, and we have seen us wining business back on the value side of the business which is the high margin kind of business. So we are putting the investments in and we are winning the business. There is lot more stabilization. We are really encouraged by the team and their efforts down there to do this but we have a long way to go. We are not really going to talk about profitability of the business going forward because I think we have reached the milestone we wanted to achieve in terms of getting back in the black. But we are making investments in other parts and some new businesses that we have particularly in the supply chain services and the mobility and cloud as well in the future. So we will continue to invest in that regions. It's – so it is our growing demand down there essentially it’s pretty flat if not negative overall in that region but it seems to be growing nicely and we put the investments to make sure it continues.

Keith Housum - Northcoast Research

Alright, okay. I appreciate that. And then a follow up in terms of all different acquisitions, I guess what I assume that rather from acquisitions over the past year has done fairly immaterial for the quarter?

Paul Read

Yes, I would say it was for the quarter in fact pretty, pretty small and insignificant overall in the revenue sense. They were all higher gross margin than our average. So they did have an impact on gross margin. These are, our gross margin on the year-over-year basis point, our basis increased by 18 basis points so we are very, very pleased with how we are progressing on that and I’d say roughly a third of that was from the impact from acquisitions.

Keith Housum - Northcoast Research

Got it. Alright, I appreciate it. Thank you.

Paul Read

Thank you.

Keith Housum - Northcoast Research

Sure.

Operator

We will go ahead and take our next question from Osten Bernardez with Cross Research.

Osten Bernardez - Cross Research

Hi, good afternoon, thanks for taking my questions. Would you be able to add some color to the extent which you can on your current mix of services including in your higher logistics some of the, the recent additions with Shipwire and in the asset disposal business and sort of how should we be, what should we expect from the seasonality standpoint for services going forward and sort of what’s the anticipated growth that you see for that buckle of revenue over the next couple of years.

Alain Monié

So let me start mini comments and then Paul and Bill you can chip-in here. Taking the question around seasonality, I think that now our services really represent a very different series, services they are pretty different and they go from forward logistic services all the way to repairs and also are based on very different types of customers, our legacy IML, IM logistics business was quite Q4 and Q1 loaded so very seasonal and we continue to see that but as we grow the services businesses into what’s I keen to Shipwire our asset disposal or even the cloud business which could be considered as services all of those have much, much less of the seasonality profile. And so as we grow these businesses overall we see less seasonal impact rather than more. As far as the growth of those businesses obviously we’ve made those investments although small because of the growth patterns that were much, much healthier than the rest of our business. So we can't give you, at this stage, the selling point but I would characterize the growth of the services business as a multiple of the rest of our business.

Osten Bernardez - Cross Research

Got it. And then with respect to China, could you just add some color in terms of what you are seeing from the demand environment standpoint because you noted that the demand for some of the products you have does not that great but what do you seeing with respect to the overall demand environment there and what is – what can you do to turnaround your performance there?

Alain Monié

China is really much a long terms play for us. We have a good established business, good presence, good team but really the markets are changing quite dramatically, different new vendors there and I think some of the businesses that we have, some of the legacy businesses that we have is declining and on the retail side as well you know it's shrinking a little bit as well but that's not all about. I think that our focus is on building the value businesses and building the – making the investments so that we can have a high margin mix of business. We have a good presence and good footprint and so we are really thinking with this small longer turnaround now for China to turn that into a better mix of value versus the volume business that we have traditionally in the past and signing up new vendors, which we have been pretty successful with and launching our new businesses. The supply chain services, the cloud, the mobility in a big hopes and plans for that to penetrate into China.

But again that’s not going to happen overnight. You will notice this is the transition that we are going to go through over the next couple of years but it's a market that we are going to stay focused on and participated in and invest in.

Osten Bernardez - Cross Research

Thank you and then finally would you be able to comment on sort of the puts and takes with respect to cash flow for the quarter and your expectations for full year cash flow generation?

Alain Monié

Yes, I mean overall we have a given our cash, although we did previously our cash for earnings but the first quarter operating cash flows I would say has impacted largely from the fluctuation of working capital days from 22 to working capital days to 27 working capital days that’s 27 capital days. At the close of Q1 we also had timing of payments of commercial taxes like VAT and other things because we had a very strong December in areas of Europe and Asia Pacific where you have high VAT payment or your requirements that ultimately come due in the first part of the 2014 year. So I would say overall I mean we are not modeling our cash flows for you but in the end assuming we had 22 to 23 working capital day that get close of this year, if you assume the same or similar working capital days that year end or give or take, I mean we talk about our range of 22 to 26 usually at year end we are at a pretty good level and within that range from year to year it moves around during the quarters but at the yearend it's pretty good. Then you basically have to look at what we produce as operating cash flow or operating profit from the expectations you model your business and then in the essence of profits and then some of that get reinvested into the business for growth. So, essentially every billion dollars of incremental growth for the year represents only $60 million, $70 million of incremental capital require. So you can do that modeling yourself. So you build that into the cash flow. So overall we manage cash flow and cash quite closely. We manage working capital days which is the biggest element of working capital for us. As we believe it’s required and then we drive it the cash flow comes through.

Osten Bernardez - Cross Research

Thank you very much.

Operator

And we will take our final question from Brian Alexander with Raymond James.

Brian Alexander - Raymond James

Alright, maybe just a couple of follow-ups. On the PC comments, earlier, you mentioned you are not participating fully on the refresh activity because it didn't meet your profitability profile. Your competitors are certainly benefiting from the PC refresh. Both of them had pretty strong growth rates. So what is it about your cost structure or maybe the way you look at that business that would prevent you from capitalizing on that opportunity while your competitors are clearly benefiting.

Paul Read

Hi, Brian. It's Paul. So we are participating to some extent like I said not fully. I think we did leave on some on the table for sure and probably we will do the same again this quarter but you know we are focused on margin accretion and we have demonstrated that even though we have had low single-digit growth, we will still increase the margins and I met some of the competitors as focused on that as we are and that's why you have seen some of their margins fall off a bit but we need to balance and we recognize that and we are going to make sure we continue to have that balance of growth in both revenue dollars percent and margin percent and operating dollar increase. So we will make sure we have the balance. It will go from quarter to quarter but there is some pretty large opportunities out there and we are actively pursuing them.

Brian Alexander - Raymond James

And then just maybe to go back to the investments one more time Bill, there is $20 million increase year on year, I assume that that was a quarterly number or was that an annualized figure?

Paul Read

No I mean overall that was a – that was the quarter impact. I mean if we look at our operating expenses increase, roughly around $20 million year-over-year but that had a lot of puts and takes. So we realize synergies from our break point integrations as well as some other restructuring savings that have started to take place basically offset normal things like volume mix and merit increases, you can compute on the impact of merits of people globally. So those normally got offset by some of the savings overall. So in the end you have $20 million of incremental areas about little bit over a third of that related to acquired businesses which had almost equal to acquired gross margin and then the remaining was true investments organically to ramp up or drive new high value, high margin businesses so about $12 million of it was incremental investments from last year's quarter and specifically supply chain which has sales probably about half of it and the rest half was since split between cloud, event solutions and mobility.

Brian Alexander - Raymond James

So I guess if we are talking about $80 million of annualized investments that basically offsets all of the cost savings that you are targeting or most of it and I realized you just said again a third of this is acquisition related. So I guess what I am really trying to understand is if the revenue growth environment continues at a low to mid-single digit pace going forward, how should we be thinking about aggregate OpEx growth, this year before most of the savings kick in as I realized it's more back-end loaded and then next year when they do kick in, what’s the right way to think about OpEx growth relative to that kind of revenue growth environment?

Paul Read

Well I mean overall we did talk about revenue growth being low to mid-single digits for the whole year. So I will tell you, one, if it is lower than that then we are going to adjust our spend levels that’s one factor but second factor is we are investing in a lot of these areas. I have talked about the supply chain services investments. Those are really in advance of true business that’s coming in so they are soon to be not investments anywhere, that would still be OpEx increase but they will have offsetting and more than offsetting gross margin impacts that are favorable. So you got to build all those dynamics into a acquisition piece of it so $6 million, $7 million, $8 million of that $20 million relates to Shipwire, CloudBlue and SoftCom which is delivering nice gross margins that are growing even very-very fast and although we’ll continue to invest, they are not really dragging the overall P&L. They are not adding to the P&L yet and on the bottom-line but they are – they will continue to have net growth and then they will soon be investments that are paying off with nice returns with higher margins. So then the mobility advance solutions areas will – those will start paying themselves overtime as well. So I wouldn't take the four times 20 or I would say four times 10 or 12. I would say that eats into the overall, all these savings. These are things that we have planned all along and impacting overall results and we feel comfortable for full year and we feel comfortable that our 2015 targets that we have laid out there. So I think things are going just along the same route that we had anticipated.

Brian Alexander - Raymond James

So the bottom-line is that you would still expect the operating leverage and operating margin expansion as we move forward even if you don't see much gross margin improvement.

Paul Read

I mean ultimately we do expect gross margin improvements and that's where we are investing and growing into higher margin business but in the end yes we do expect operating margin enhancements based upon all the different factors that were driving.

Alain Monié

And with the growth, for the full year, yes we also expect operating leverage.

Brian Alexander - Raymond James

Great. I just wanted to clarify that. Thanks guys.

Alain Monié

Yes. Thanks Brian.

Operator

And it appears there are no further questions in queue at this time. I would like to turn the conference back over to Mr. Damon Wright for any closing or additional remarks.

Damon Wright

Thank you, Shannon and we appreciate you all participating in today's call and look forward to the opportunity to sit down with many of you at your Investor event in New York in June. Thank you.

Operator

And that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.

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