Avnet Management Discusses Q3 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Avnet Inc (AVT)

Avnet (NYSE:AVT)

Q3 2014 Earnings Call

April 24, 2014 2:00 pm ET

Executives

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

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

Gerard W. Fay - Global President of Avnet Electronics Marketing and Member of Executive Board

Analysts

Shawn M. Harrison - Longbow Research LLC

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Ananda Baruah - Brean Capital LLC, Research Division

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Jim Suva - Citigroup Inc, Research Division

Steven Bryant Fox - Cross Research LLC

Louis R. Miscioscia - CLSA Limited, Research Division

Operator

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

Vincent Keenan

Good afternoon, and welcome to Avnet's Third 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 events.

As we provide the highlights for our third quarter fiscal year 2014, please note that in the accompanying presentation and slides, we have excluded certain items, including intangible assets amortization expense and restructuring, integration and other items for all periods presented in our non-GAAP results. When discussing organic sales or organic growth, prior periods have been adjusted to include acquisitions, divestitures and reflect 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 a 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 actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors are 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 third quarter fiscal year 2014 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights, our cash flow performance and provide fourth 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 third quarter fiscal 2014 business highlights.

Richard P. Hamada

Thank you, Vince, and hello, everyone. Thank you, all, for taking the time to be with us and for your continued interest in Avnet. Our Avnet team delivered a third consecutive quarter of year-over-year organic growth, driven by our Electronics Marketing Group, where organic revenue grew 7.2% in constant currency in its seasonally strong March quarter. This growth was somewhat offset by a softer-than-expected close in our Technology Solutions Group, despite coming off the strong performance in the December quarter.

As a result, our revenue grew 6.1% year-over-year in reported dollars to $6.7 billion, and organic revenue was up 3.5% in constant currency.

Revenue declined 10% sequentially as compared with normal seasonality of down 4% to down 7%, primarily due to the expected decline in high-volume supply chain engagements at EM Asia and the weaker close as noted at TS.

Gross profit increased 6.5% year-over-year to $804.9 million, and gross profit margin was roughly flat with the year-ago quarter, as an increase at EM was offset by a decline at TS. Gross profit margin increased 61 basis points sequentially, primarily due to the seasonal business mix shift as EM grew to represent 62% of enterprise revenues, as compared to 56% in our December quarter.

Adjusted operating income increased nearly 10% year-over-year to $223.8 million and adjusted operating income margin increased 12 basis points to 3.3%, primarily due to an improvement at EM. The impact of the seasonal operating income decline at TS, partially offset by the increase at EM, resulted in adjusted operating income declining 15% sequentially and adjusted operating income margin decreasing 20 basis points. As a result of these factors, adjusted EPS increased $0.08 or 8% year-over-year to $1.03.

Return-on-capital employed decreased 214 basis points sequentially to 10.7%, due to the seasonal business mix shift as noted earlier, and was down 34 basis points year-over-year. Cash flow from operations was a strong $358 million for the quarter, as working capital declined 6% sequentially in constant currency, highlighted by a decline of 13% in accounts receivable, in line with our expectations after the strong December close for TS. As a result, our trailing 12-month cash flow from operations increased to $471 million and our net debt declined $307 million sequentially.

While we have made steady progress during the first 3 quarters of our fiscal 2014, our year-over-year organic growth rate slowed as a result of the lower-than-expected revenue at TS this quarter. We will continue to evaluate our go-to-market strategies, and as always, maintain our discipline in allocating our valuable and limited resources to the most promising growth opportunities. With an outlook that incorporates seasonal growth at both operating groups in the June quarter, we are looking forward to accelerating progress towards our long-term targets across our portfolio.

Now let's turn to our operating groups. In the March quarter, Electronics Marketing built on their progress, as organic revenue increased 7.2% year-over-year in constant currency, and both margins and returns expanded year-over-year for the third consecutive quarter. Sequential revenue was roughly flat with the December quarter, as compared with normal seasonality of plus 4% to plus 7%, primarily due to the expected decline in high-volume supply chain engagements at EM Asia that had contributed to a December quarter that was above normal seasonal levels. At the regional level, EMEA delivered it's typically strong March quarter, growing sales 13% sequentially in constant currency, while the Americas region was down 1% and Asia declined 10% coming off its strong December quarter.

On a year-over-year basis, reported revenue increased 8.8%, primarily due to the strong growth in Asia and EMEA regions, which increased 11% and 9%, respectively, on an organic basis in constant currency.

EM's gross profit margin increased 58 basis points sequentially due to the seasonal geographic mix shift, as the higher margin Western regions increased from 58% of total revenue in the December quarter to 62% in the March quarter. On a year-over-year basis, EM's gross profit margin increased 12 basis points as an increase in the EMEA region, which was primarily related to the acquisition of MSC, was partially offset by a slightly higher-than-expected mix of high-volume supply chain engagements in the Asia region in the current quarter.

The year-over-year growth in revenue and gross margin expansion, along with expense reductions implemented during the past 6 quarters, combined to drive operating income up 17% year-over-year and operating income margin up 33 basis points to 4.7%. Operating income margin increased 55 basis points sequentially, driven by improvements in both the Americas and EMEA regions.

Return on working capital increased 116 basis points year-over-year and economic profit increased 63%, driven by the growth in operating income, while working capital velocity was essentially flat with the year-ago quarter.

On a sequential basis, EM's return on working capital increased 245 basis points, driven by the improved profitability in the Western regions. Our EM team has done a good job managing their balance sheet as working capital declined 3.5% from the December quarter, while sales were down 0.5%.

After adjusting for acquisitions and changes in foreign currency exchange rates, EM's working capital increased 7.1% year-over-year to support their organic growth. Working capital velocity and inventory turns have been relatively consistent through our first 3 quarters of fiscal 2014, which is also a reflection of the relatively short and stable lead times that continue to characterize the component's supply chain.

In addition to the strong financial performance this quarter, EM is also positioning for future growth, as the integration of MSC is proceeding as planned. While MSC's component distribution business is being integrated into EM EMEA's existing structure, we will also have a new business unit branded MSC Technologies that will leverage MSC's broad offering of embedded and display solutions across our combined customer base. With deep technical expertise supported by specialized development and manufacturing resources, we are confident this addition will expand our serve to markets, accelerating our growth in a region where customers are looking for advanced solutions and capabilities.

With our book-to-bill above parity in all 3 regions and an outlook indicating seasonal growth, we are positioned to leverage top line growth into another quarter of expanded margins and returns, as we approach our financial targets for this operating group.

Turning to TS. Despite a strong December quarter, particularly in our Americas region, our March quarter revenue at TS came in below expectations due to a weaker-than-expected close in our Americas region and somewhat softer demand in our computing components business in EMEA.

At the global level, reported revenue declined 22% sequentially to $2.55 billion, as compared with the normal seasonal range of down 16% to down 20%. At the regional level, the Americas declined 26% sequentially after growing 44% in the December quarter, while EMEA and Asia were more in line with normal seasonality with declines of 18% and 15%, respectively.

When compared with the year-ago quarter, reported revenue was up 2%, while organic revenue declined 2% in constant currency, with all 3 regions experiencing a modest decline. On a year-over-year basis, growth at networking and security as well as services was partially offset by a decline in servers.

TS gross profit margin declined 24 basis points year-over-year, as the decline in our Americas region was partially offset by an increase in EMEA. On a sequential basis, gross profit margin increased 19 basis points, driven by improvements in EMEA and Asia.

As a result of the lower-than-expected revenue in our higher-margin Americas region, operating income declined 11% year-over-year to $60.9 million and operating income margin was down 35 basis points. We are, however, encouraged by the performance of our EMEA region, where our core enterprise IT distribution business approached positive organic growth after adjusting for the portfolio decision to exit certain markets. These actions, when combined with expense reductions implemented during fiscal 2013, drove TS EMEA's operating income margin, up 65 basis points from the year-ago quarter.

Even though we were disappointed with the weaker-than-expected close at TS Americas this quarter, we continue to work with our partners to discern the status of the projects that were part of our active pipeline in the final weeks of the March quarter. With TS currently expecting seasonal growth in the June quarter, we anticipate companies will continue to invest in technology to maximize their investment in the data center, as they look to grow their businesses. In this environment, we will continue to focus our resources on providing solutions for high-growth opportunities to ensure we resume progress toward our long-term goals.

Now I would like to turn the commentary over to Kevin Moriarty, to provide more color on our financial position and outlook. Kevin?

Kevin Moriarty

Thank you, Rick. And hello, everyone. As is typical in the March quarter, the seasonal business mix shift to the higher-margin EM business influenced our sequential performance. And as Rick mentioned earlier, the strong year-over-year growth helped to mitigate the softness at TS Americas.

Despite TS experiencing 2 quarters of atypical linearity, especially at the end of our quarter, our team did an effective job of managing working capital, which resulted in strong cash flow from operations of $358 million for the March quarter. The cash generation was driven by a 6% sequential decline in working capital, as accounts receivable declined 13% and inventory was down 2% after coming off a December quarter where we consumed $28 million of cash for operations. These factors help drive cash flow from operations over the trailing 12 months to approximately $471 million.

During the quarter, we paid at maturity the $300 million of notes of the 5.875% notes, which helped to reduce our interest expense by 7.4% year-over-year. Overall, our balance sheet remains healthy and we ended the quarter with over $906 million of cash on hand and over $1 billion available on our credit borrowing facilities.

Consistent with our capital allocation priorities, we paid another quarterly dividend of $0.15 per share, which brings our total dividends paid to $62 million through the first 9 months of fiscal 2014. We also bought a small number of shares at an average price of $39.50 through our disciplined share repurchase strategy, and have approximately $223 million available in our share repurchase program.

Despite coming in below our expectations in the March quarter, we remain confident that our competitive position, strong balance sheet and ample liquidity will allow us to improve profitably -- that will create, drive and sustain long-term shareholder value creation.

Now let's turn to our outlook. Looking forward to Avnet's fourth quarter fiscal 2014 and our outlook, we expect EM sales to be in the range of $4.05 billion to $4.35 billion and sales for TS to be between $2.55 billion and $2.85 billion. Therefore, Avnet's consolidated sales are expected to be between $6.6 billion and $7.2 billion. Based upon that revenue forecast, we expect adjusted EPS to be in the range of $1.04 to $1.14 per share. This guidance does not include any potential restructuring, integration or acquisition charges or the amortization of intangibles.

The guidance assumes 140.6 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 U.S. dollar to euro currency exchange rate for the fourth quarter of fiscal 2014 is $1.38 to the euro. This compares with an average exchange rate of $1.31 to the euro in the prior year fourth quarter and $1.37 to the euro in the third quarter of fiscal 2014.

Stepping back from the quarterly results, if you were to assume the midpoint of guidance for our June quarter, our fiscal year 2014 revenue and adjusted EPS will be $27.35 billion and $4.19, respectively. This would represent annual growth in revenue and EPS of 7.4% and 15.4%, respectively, in fiscal 2014.

This performance demonstrates the leverage in our model, and we remain committed to continue to drive leverage that will expand margins and returns as we continue progress towards our long-term goals.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

I was hoping you could just really dumb it down for me with TS in terms of what happened in the Americas exiting the quarter. Was it that Avnet lost share in terms of programs that were supposed to close and it went to other partners? Was it partners fell short in making sales, was it something else? But really dig down in terms of whether this is something that could have been avoided, whether there's a market slowdown going on, or whether there's something else.

Richard P. Hamada

Yes, Shawn, it's Rick. Let me offer some commentary to start. As you would imagine, we anticipated that question right out of the shoot. Shawn, first of all, the TS Americas, our linearity for the quarter was absolutely on track to our guidance for 12 weeks. It was the 13th week that let us down, and it was a matter of not getting the bookings on specifically identified pipeline that was there and under normal closing rate circumstances, would have been consistent with our overall guidance. So as you can imagine, we're paying very close attention to what's going on with that's pipeline. Some of it moved into this quarter, some of it actually got booked early in the quarter. And we're continuing to monitor the -- all of our leading indicator activities with the partners. The quotes, the configurations, the proposals that are being developed. It was a matter of the identified pipeline did not get booked in the desired time frame. That's the quick answer.

Shawn M. Harrison - Longbow Research LLC

I guess, to that though, I mean, is that a market dynamic, where overall IT spending is slowing and so that says something for the rest of the calendar year? Or was this just a timing dynamic?

Richard P. Hamada

Yes. We -- at this point, given our indicators for the current quarter, we haven't seen a major change. Now first of all, it was very America-specific because Asia and EMEA had much more seasonal -- normal seasonality and we can't point to the weather or anything as earlier in the quarter. It was a late-quarter phenomena and the deals that were identified and in the pipeline have not disappeared. So that's what's going on.

Philip R. Gallagher

Rick, this is Phil -- or Shawn. You certainly anticipated the questions, as Rick pointed out. We're still tracking those. Those projects, if you will, by partner, are not gone. As Rick mentioned, many got -- did get booked in closed in the beginning of April. And to your point on share, we track our share by supplier and by brand extremely closely and we do not see any share loss in the Americas as best as we can track it today.

Richard P. Hamada

Right. And we speak to also, on a share basis, we're not aware of any major changes from a VAR customer perspective any transitions or share losses there. It was the identified pipeline. And under anything approaching normal close rate circumstances, we were highly confident heading into week 13.

Shawn M. Harrison - Longbow Research LLC

Okay. And I guess, moving on into the June quarter, there had been a goal to get kind of the core EBIT margin in EM, close to 5% exiting the year. Is that still possible?

Richard P. Hamada

Gerry, why don't you go ahead?

Gerard W. Fay

Sure. Shawn, this is Gerry. Yes, it is. It's just consistently been our goal. And this quarter, with that MSC, we were at 4.8%. So going into the June quarter, we continue to expect that goal to be met. So no change there.

Operator

Our next question comes from William Stein from SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

So the big push back that investors have expressed with regard to Avnet is that in this TS segment, that there are 2 things that can hurt you. One is the adoption of cloud computing architectures and the other is what IBM is doing in the channel. So I'm wondering if you can help us understand whether you have a clear enough view that what went wrong in the most recent quarter is or is not related to either of those issues.

Richard P. Hamada

Will, another good question. I'll start with the second one first and then back into the cloud issue, too. So IBM in the channel, I'm not sure I understand. Obviously, a lot of moving parts going on with that key partner today. But there was an announcement earlier this week that one of their significant new investments in soft layer we announced a channel support program for that new offering. So we continue to expand with our key partners as they continue to deploy their capital to take advantage of growth opportunities in the marketplace as well. So I'm not sure that there's any sort of negative connotations in IBM in the channel that I would directly point a line to. On the adoption of the cloud, it is a long term secular trend that we are absolutely looking at, as well as the overall patterns of IT consumption. When it comes to private cloud and hybrid clouds, we feel well positioned. It's the dislocation through the public clouds that would represent a challenge. But what I would tell you is that, that's not going to show up in the last week of the quarter. We really believe that's going to show up more and actually what's going on with the aggregate pipelines of the projects we're tracking with our partners. And if that starts to get impacted, and all of a sudden, we're expecting higher close rates to get to numbers, that's going to be more of how we respond to that part of the program. And oh, by the way, hopefully we're integrating more hybrid solutions into our total pipeline as part of the solution for those customers. So we can't point to any changes in IT consumption patterns that would show up in the last week of a quarter as a major factor that contributed to what happened this March.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Maybe just clarifying the kind of the first part, the IBM issue. The company added a couple of volume distributors. And also I think it's in the process of selling its x86 business. Any...

Richard P. Hamada

Right.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Do you think that, that contributed to the shortfall in the quarter?

Philip R. Gallagher

Yes -- Will, this is Phil. On the first part of that question, with the buyer and distributor we've seen 0 affect, negative effect on our current business. That's an Avnet statement at this point in time. And the second part was on the Lenovo divestiture. And we did note in the script, servers in general, okay, were down. So there's no question about that. Can't attribute that at this point to the Lenovo divestiture. We're actually very engaged with Lenovo executive management in all regions of the world. Now could there be some distractions in the market with that? Sure. And we're working with IBM and with our partners to assure them that it's going to be as seamless as it possibly can be. And then we'll make sure our partners have the solutions they need in their line card to be sure they can provide the solutions that they are giving their customers today.

Richard P. Hamada

And Will, having been through some of these transitions before. We're seeing the same priorities here along the lines of a high degree of focus on maintaining partner and revenue continuity during this transition. And so, as Phil said, we really can't use that as a downside rationale at this point.

Philip R. Gallagher

Other than servers overall.

Richard P. Hamada

The servers overall were weaker.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

And one brief clarification, if I can. How much of TS do you typically do in the last week?

Richard P. Hamada

Well, I don't know if we ever got that specific. What we have typically said, "Look, on a 4, 4 5 calendar, we're typically 25%, 25% and 50% of the last 5 weeks and over 50% of that in the last 2 weeks.

Operator

Our next question comes from Brian Alexander from Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Maybe a different approach on TS, Rick, is it possible, maybe you just miscalculated how sustainable the December strength that you saw would be in the March quarter? I ask because your December quarter was, I think about 1,200 basis points better than the midpoint of seasonal, while March was only 400 basis points worse than the midpoint of seasonal. So when you average the quarters together, it doesn't really look that bad, especially when one of your largest suppliers in the Storage business is carrying more backlog. So I'm just wondering if things really did weaken, or maybe the expectations were just a little too high.

Richard P. Hamada

No, Brian, it's an excellent point. We've done the same analysis internally here. Once again, if the evidence of the shortfall had have some more linearity, where we could appointed to it, the fact it was late in the quarter, despite the fact there was a strong December quarter. And again, when we laid out this guidance in late January as part of our call, not only that we were feeling a little bullish because there was a little bit more spillover than we had expected. So it's an excellent point. We have looked at the same smoothing it out to take the spikes out of it. But the fact of the matter is we put some guidance out there and did not achieve it, and it was not evident in those first 12 weeks. It really -- the linearity, really, really just took a turn last week.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay. So maybe just 2 clarifications/follow-ups. Are the deals that you think slipped out of the [indiscernible] that didn't close, are those factored into your June guidance, it looks like either not? And then the other question, follow-up on your margins, if you do get to the 5% in June, what's your confidence level in holding that margin beyond the June quarter given that, I think, seasonality and regional mix kind of go against you in September and December. So I'm wondering if you can get to 5% in June, but maybe it slips from there? Or you think you can hold it?

Richard P. Hamada

Yes, I'll just -- I'll add the continuity and TS. And Gerry you can talk about the 5%.

Gerard W. Fay

Sure.

Richard P. Hamada

So Brian, yes. If you look at our guidance for June, the midpoint of our guidance for TS for the June quarter is, you could argue, it is at the upper end of normal seasonality. I think we say plus 4% to plus 7%, and this is plus 6%. So at the same time, we're trying to respect the signal at March, make sure we understand it. And we haven't looked 100% of that spillover as we sit here on April 24. So we're just trying to be, again, as every quarter, we're trying to put the best information we have together and give the best story of what we see happening in the marketplace. And that's what you see represented for June. So Gerry, you want to talk about the 5%?

Gerard W. Fay

Sure. Brian, this is Gerry. If you look at the 5%, that's really a fiscal year goal for us. So as you know, coming into the first quarter of a fiscal year for us is usually weak, the first half is usually weak due to the mix shift. So the 5% goal, I would say, is the target for us for next fiscal year to achieve that across the fiscal year. But I would not expect that to achieve -- we would not expect to achieve that in the first quarter. So we're going to continue to look at our cost structure and if we get some market tailwinds on industrial growth and lead time expansion, we think the 5% for the year is doable.

Operator

Our next question comes from Amit Passi from UBS research.

Amitabh Passi - UBS Investment Bank, Research Division

Rick, I'm curious how you would characterize the demand environment if you normalize for the timing issue and sort of the pressure in servers, I'm curious as you have conversations with your partners and customers, what is the general sentiment with respect to IT spending, the IT spending environment. Do you feel like it's firming up? Is it about the same? Is it still choppy? Any incremental insight and color would be helpful.

Philip R. Gallagher

Yes, this is Phil. As we pointed out earlier, there was definitely the gap in the servers and we're working to plan around that, as always. But you just did a complete preparation for the call, obviously, weak[ph] channel -- with all of our brands in their top partners. And there's optimism around this quarter, there's optimism around their current pipelines. So again, we're confident with the guidance as we see it right now. So there's no -- the choppiness that we saw came, as Rick pointed out, very unexpectedly. But we're tracking that, trying to carry it over. Now with the balance of the brands, we did a complete check and there's no concern, or red lights flashing out there. To highlight, we are -- back to the cloud, we are seeing great opportunities in the hybrid area. Converged continues to be a real strong suit for the marketplace out there. And our brands, our line cards align very well with that. That's where we're seeing some really nice growth in opportunities. But as a general statement, the confidence level and our partners are pretty good.

Richard P. Hamada

Yes, Amitabh, it's Rick. I'll just say, it'd be great, we don't have such a metric, but if we had a thing called the partner sentiment index, I would tell you right now -- it's just -- this is unscientific. But I'd say it's stable.

Amitabh Passi - UBS Investment Bank, Research Division

Excellent. And then Kevin, maybe just one for you for the model, as we think about OpEx going in to the June quarter and beyond, maybe on an absolute dollar basis, how we should be thinking about OpEx trending over the next couple of quarters?

Kevin Moriarty

Yes, I'd say, Amitabh, for our coming fiscal fourth quarter, we're sequentially expecting a 3% increase on the top line. So we're estimating somewhere between the 5 80 to 5 90 range for the fourth quarter. obviously, it is our fiscal year end, so there's going to be a number of puts and takes as we close out our fiscal year. But that I think is the range we should be thinking about. And obviously, as we go forward with MSC and other activity, we are expecting -- and I'll give more color as we get ready for the June quarter. But we'll continue to update that from the timing of the MSC activity integrating that, that's how I would frame it.

Amitabh Passi - UBS Investment Bank, Research Division

Yes, but just as a reminder, are there any other restructuring savings you're anticipating beyond June?

Kevin Moriarty

There's -- Amit, things we carried out in the -- our December quarter this quarter and I would range it in the $5 million to $10 million run rate benefits as we get ready for the September quarter.

Operator

Our next question comes from Ananda Baruah from Brean Capital.

Ananda Baruah - Brean Capital LLC, Research Division

I missed it, but can you go over what the growth in storage was for the quarter? And then, I mean, you kind of called out networking and a couple of other technologies in the CFO review. But could you just kind of go ahead in servers? But could you just kind of go through and give us what the order of magnitudes were in the bigger buckets?

Philip R. Gallagher

Yes. Ananda, this is Phil. So storage, we didn't call it out. We saw slower growth than typical in storage. But when you take the top brands and you average it out, we still had roughly a what is called a low-single digit positive growth in the storage bucket. And we're seeing accelerated growth particularly around the flash arrays, in new flash storage and some of the new brands we've brought on there. They tend to be growing at a faster rate, which will bring the overall average up.

Ananda Baruah - Brean Capital LLC, Research Division

And was there -- I guess the business that you saw that didn't get revenued at the end of the quarter, was there -- what was the makeup of that business? Was it representative across your offerings? Or did it tend to lean one-way or another?

Philip R. Gallagher

It was pretty much across the offerings. It wasn't any one in particular. Again, led mostly in and around the top server suppliers.

Ananda Baruah - Brean Capital LLC, Research Division

Got it. Got it. What do you -- let me just ask a question and try it this way. I mean, what's your best guess? I mean, what are you guys thinking kind of offline what happened?

Philip R. Gallagher

That's a very open-ended question, Ananda. What I would tell you is, we're doing the same thing they would do. We're watching our dashboards very closely to discern cyclical versus secular, stay close to it and make sure that we're responding appropriately with all the levers that you would expect us to be managing. So we're giving you the best information we have as of April 24. But of course we're managing this business 7 by 24, 365 days a year and that's the way we'll continue to operate.

Ananda Baruah - Brean Capital LLC, Research Division

Got it. So we're sort of 3 weeks into the quarter now, and you guys haven't seen anything unusual, since we've entered April it sounds like.

Philip R. Gallagher

That's correct.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank.

Unknown Analyst

This is [indiscernible] calling on behalf of Sherri Scribner. So I just wanted to get an understanding of what your current assessment of channel inventories and supply chain conditions are. Are you seeing customers being cautious, restocking inventory?

Kevin Moriarty

Yes. I think given the fact that lead times have been very stable, we haven't seen any change in customer ordering habits at this point. With lead times at the low end, they feel like they can get inventory when they need it. So we haven't seen restocking going on, so I would tell you I think inventories in the supply chain today are very lean.

Unknown Analyst

Okay. That was helpful. And I know you did touch upon this previously, but if you can just shed some color on what your view on the cloud impact is on the business?

Richard P. Hamada

So as quick as I can summarize, my opinion would be so when it comes to private cloud, hybrid cloud, there's a lot going on with our current offerings. And in some cases, where our VARs are migrating to becoming service providers and we're growing some new customers in the areas of pure play service -- managed service providers as well. All of that, we believe, is having a beneficial effect on our business and it's part of the mainstream offering. The -- I think the big, if you want to call it the threat that is a concern is, so how much of the current solutions, hardware, software, and services flow is actually going to be displaced by -- particularly by the small medium business customer going around the VARs in the current channel to be able to sell provision in the public cloud. And as I said earlier, I think what we're going to watch for there is what happens to our total pipeline of activity and the total amount of projects that we're actually watching versus the projects that disappear from the pipeline because they found other ways to service it. And again, thus far, no material impact there and hopefully reinforced by our normal seasonality expectations here guidance for the June quarter that's causing us to alter our normally expected patterns.

Kevin Moriarty

And as we identified customers moving to the cloud, that's why we've expanded our portfolio and our services offerings around the cloud, with our partners and with our suppliers. So we're transforming the business at the same time.

Operator

Our next question comes from Mark Delaney from Goldman Sachs.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

I was hoping first, to ask the question on servers a little bit differently. And can you help us understand if any of the -- if there's any differences in the weakness that you're seeing in the server market between x86 and proprietary servers and if there's any differences between your different suppliers and where you're seeing the weakness?

Philip R. Gallagher

Well, we don't typically call out by supplier, Mark. This is Phil. But in this past quarter, if you'll get the year-on-year, they were both equally down, okay? So there wasn't really one more than the other, both industry standard as well as proprietary were down.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

Okay. And I think you guys -- can you remind us how much exposure you had to the IBM x86 server business, either in terms of revenue, profits or both?

Richard P. Hamada

I think we've made a comment last quarter on the overall percentage. I can't remember off the top of my head, Mark. We'll get that for you and follow-up, if that's okay.

Philip R. Gallagher

Mark, I want to say it's roughly of our 5% to 6% of TS revenue but obviously, much less in terms of GP dollars.

Richard P. Hamada

Now let me confirm that. That's correct. Between 5% and 7%.

Mark Trevor Delaney - Goldman Sachs Group Inc., Research Division

And if I could just ask one more, you also mentioned weakness in computing components business. And I'm wondering if there's any additional steps that you can take either in terms of revenue selection, your strategy there or cost controls that can help to improve the computing components business going forward.

Philip R. Gallagher

Yes, this is Phil. We are doing that. We've done quite a bit of revenue selection, particularly when you get in some of the volume drive business, and we're constantly moderating the expenses in that business to allow us to yield greater returns.

Richard P. Hamada

Keep in mind, March quarter in the PC components business was typically a pretty soft quarter coming out of the strong December quarter in that business.

Philip R. Gallagher

It's a high return business for us too, Mark.

Operator

Our next question comes from Matt Sheerin from Stifel.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

A couple of questions on Electronics Marketing. You had a very strong December quarter due in part to the volume supply chain agreement. As you look forward, do you expect similar agreements this year? In other words, the seasonality of your business change because of that?

Kevin Moriarty

No, I wouldn't say the seasonality has changed. So first of all, we don't see that business as strategic. We see it as opportunistic and it's accretive to our economic profit. So at the point at which it's not, we would exit the business. But it does have some cyclical effects, but this year, as you know, in Q2, it was very big. We don't expect to see that going forward and we'll continue to manage the business accordingly.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

You don't expect to see it. Okay. And the North America business in EM has seen no growth and it's still down significantly from where you were 3 years ago. What's your thoughts there? Is it just that the core industrial markets that you sell into are still somewhat lackluster, are you seeing shift to offshore? What do you think is going on there? What's going to jump start that market?

Gerard W. Fay

Matt, great question. I think you hit most of the issues. The first one is the industrial base is still very flat in the Americas. We're not seeing much growth. Most of the growth we see in the Americas market is around high-end automotive that we don't really plan. And we do continue to see offshoring, but we also see projects going to Mexico instead of going to China. So a lot of the projects that start are staying here. But a lot of project starts are slow at this point. So there's not much in the way of growth in our core industrial base and that's really what's driving the effectiveness[ph].

Richard P. Hamada

But our team in North America, Gerry, has responded, because they've got that margin expansion despite the limited growth. So they are getting -- hopefully an example of managing their business appropriately.

Gerard W. Fay

Yes, I think if you look at even this quarter, we did some margin deselect ion that helped our overall profitability. So we continue to look at our portfolio and weed out those items that don't make sense.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

And the book-to-bill is positive in North America, as well as the other regions, right?

Kevin Moriarty

Globally, we're positive book-to-bill and in every region, we're at seasonality for a book-to-bill perspective.

Philip R. Gallagher

And for the March quarter, it was above parity for all 3.

Kevin Moriarty

For all 3 regions in the March quarter.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, and what is it now?

Kevin Moriarty

Again, it's at -- globally, it's above parity. And in all regions, it's at seasonality.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And just lastly, if I can, for Phil, on the whole question of the IBM channel issue with Ingram and Tech Data now playing in the high-end server space in North America. My understanding is that both of those distributors have an opportunity to compete against your existing customer base beginning this summer, whereas the last year, they were going after their own customers. Do you expect any impact there and do you see any potential pricing or margin pressure, as you try to keep those customers? Or is that really not an issue because it's really about the services component of your business?

Philip R. Gallagher

I think the latter part, really critical the value that we bring to those partners, is still much appreciated by those partners and IBM, Matt. And we've seen to date 0 impact on revenue or margins. And we expect no change in the program beyond this summer, okay? So we're -- we believe that market is going to stay what we call a closed market at this point in time for those guys and we'll see how that plays out. We're not seeing any change.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

And have you had conversations with -- have you had any conversation with some of your larger reseller customers about the opportunity for them to expand to other suppliers and become a point of negotiation or anything like that?

Philip R. Gallagher

You mean with regards to -- clarify, with regards to...

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes, well, basically moving to your competitors.

Philip R. Gallagher

No. We've really not -- we've had no partner turnover at all.

Operator

Your next question comes from Jim Suva from Citigroup.

Jim Suva - Citigroup Inc, Research Division

When we think about your server segment and obviously, with IBM selling its x86 business to Lenovo, there's a lot of uncertainty there. Could you maybe help us, not in dollar amount, but maybe rank order your exposure to the server OEMs? And what I'm getting at is assuming something changes with one of them, is it just a zero sum game at best or is there an opportunity or a chance or a risk that if you sell less of a certain OEM server, that it goes to another one and Avnet has less or more of a economic positioning there?

Richard P. Hamada

Yes, Jim, this is Rick. Let me take a stab and see if I can hit the mark for you here. So I think we've shared in the past that actually, and we look at our commodity breakout, hardware, software, services, the trends that are going on there, and within hardware, we've talked about the trends and I think it was perhaps 1 year ago, maybe 6 quarters ago, we talked about storage became the single largest commodity within our hardware segment. So keep in mind that the server segment overall is only one part of the total solution. And as -- so as you talk about the server switch offs between proprietary to ISS and then ISS to a variety of players, that's one example of sort of the market share shift taking place. But at the same time, as Phil highlighted earlier, we are introducing some new players with some newer technologies, particularly in some of the storage solutions, particularly in some of the software, and in particularly, some of the services where we've actually invested in some service offerings ourselves. So it's really difficult just to say it's a zero-sum game at the server level. What we're watching is what's happening on 0 or 1 plus 1 equals 3 and what's going on with the solutions now that the server is becoming a less and less percentage, if you want to think of it that way, of these overall hybrid solutions that seem to be the predominant or preferred building blocks for today's data center or service provider centers. The converged solutions really are becoming the preferred solution, and the server component of converged solutions tends to be a smaller and smaller percentage. Makes sense, Jim?

Jim Suva - Citigroup Inc, Research Division

Right. Very well aware of that. My point is if one OEM struggles, are your stronger footprint with certain other OEMs and less strong footprint with some other OEMs? In case we see a shift in the marketplace.

Philip R. Gallagher

Yes, I think it's down by brand. We typically don't talk about suppliers specifically but in this case, Jim, we think we're well covered. I mean we're -- we have IBM and IBM is staying in the Server business. We're clear on that, at least in the high-end, so we're going to continue with that. And you've got to remember, the Lenovo deal is not a done deal yet, okay? So we're still stowing[ph] quite a bit of IBM. We're going to have Lenovo through to transition. We already have it in some regions. Small, but in some regions around the world. We've got HP, which are coming out with some great innovation and competing well in the server market. We've got Cisco, who's doing very well in the server market as well, and we have Oracle. So maybe this goes back to Matt's question a little bit. So do we have partners coming to us that maybe we're 100% with 1 partner and want to make sure that they've got coverage with others? Absolutely. Again, we're going to do everything we need to do to protect Avnet's revenue and protect our partner's revenue, okay? So we're going to be loyal -- we're only loyal to our brands but at a point where it's going to cost a partner or an end customer solution is going to cost Avnet revenue, we're going to go in and make sure we have the solution that partner needs, okay? So we think we've got the line card covered well. And to Rick's point, it's driving much more around the total solution of software, storage. So the server -- I think, Rick, you would have answered that differently 5, 10 years ago, right? There was much more exposure to server in our total revenue and profitability 10 years ago than certainly there is today. So we think we've got it pretty well mitigated.

Jim Suva - Citigroup Inc, Research Division

Okay. Then my follow-up, are you resetting or going back to try to get reset for your rebates on storage and servers since they're both underperforming where you'd like them to be?

Richard P. Hamada

So, Jim, our incentive programs with our suppliers are in constant communication, I would say. There are 2 quarterly. We look what makes sense. We try to find a win-win scenarios for but the supplier, the Avnet and for that matter, it's win-win-win with the partner sometimes. So nothing out of the ordinary there. It's very true that, that last $100 million of revenue in the quarter is good drop through overall. But no, there's no -- there's been no particular major issue or disruption there in those overall incentive stacks that are part of our plans and partnerships.

Jim Suva - Citigroup Inc, Research Division

Okay. If storage is growing much slower than historical and servers are now both proprietary -- and ISS negative growth, do you think that the rebate levels would need to be renegotiated at a lower level to keep the economics of Avnet pushing the products?

Richard P. Hamada

Yes, that certainly makes sense. And the growth we're experiencing in networking and security in those areas, including software, offer us incremental opportunity as well.

Operator

Our next question comes from Steven Fox from Cross Research.

Steven Bryant Fox - Cross Research LLC

Just a question on the guidance for the coming quarter and just to make sure I'm clear on the margin side. Are you saying that the EM business should hit 5% margins this quarter at the midpoint of the range? I thought I heard something along those lines. And then secondly, can you give a little help on the TS margins this quarter? It seems to me like, based on the revenues, to me you're talking about that you're either understating the margin potential for the quarter, or there's some other onetime items going on that maybe are driving some of the profits that I'm not aware of.

Richard P. Hamada

Yes, Steve, this is Rick. Let me take a start, then I'll let Kevin or Gerry still might chime in on. On EM, our consistently communicated goal was to get them back to 5% operating at the global level without MSC. Because we knew MSC was going to take some time to get our integrations done, get our synergies extracted. And I think we've set a very clear expectation again consistently that we believe the MSC business will be accretive to the EM global margin in the first quarter of our fiscal '15. So that 5% was always x MSC and I think Gerry reinforced earlier in an answer, we're still on track and that's the way we're thinking. For TS, our long communicated goal had been to drive and manage towards year-on-year up margin expansion. We disrupted that momentum this quarter, came in at 2.4, we were shooting for more like 2.7 to 2.8 and fourth quarter, 1 year ago at EM -- excuse me, at TS, if I remember correctly, was 3.0. We do not believe we're going to get all the way back from 2.4 to 3.0 in 1 quarter at TS. And, of course, we're monitoring very closely the trends based on that week 13 experienced. However, looking ahead to September quarter and getting back to that commitment to year-on-year margin expansion as we get to the long-term goals, that's the way we've been thinking about the business. So I hope that answered your question. But maybe the gap you're thinking about is are we really going to get back to 3% at TS in June quarter and that's not the way we're thinking based on the guidance we've provided.

Steven Bryant Fox - Cross Research LLC

Yes. That actually fills in the blanks for me. I appreciate it. And then just as a follow-up to what happened at the end of the quarter. Just to confirm, you guys weren't also seeing any kind of pricing issues or any kind of mix issues that would hurt your revenues. I just want to make sure we're clear on that.

Richard P. Hamada

No, that's absolutely right, Steve. Pricing issues and ASPs are a much more of an EM conversation and typically what we experience on the TS side.

Operator

Our next question comes from Lou Miscioscia from CLSA.

Louis R. Miscioscia - CLSA Limited, Research Division

I'm not trying to beat you up here, but let me see if I could look at this a little bit of a different way. So if you go back and we look at TS over the last 8 quarters, or could have gone back longer, starting in June of 2012, that quarter actually was below what the expectations was or below normal seasonality. September of '12 on a calendar year basis was materially below. December bounce back was materially above, then the next 3 quarters, while in-line with seasonality, and then the next one was actually above and now below. So I guess my question or point would be that we've been, I guess, consistently inconsistent with, I guess, in what being in line with normal seasonality. So 2 were above, 3 were in line and 3 were below, just wondering if there's any way that you all can -- maybe you can't do it in this call, can try to look back into it, because we're looking for, obviously, a pattern to try to help us understand the model that's better, that -- is something else going on here that maybe we can pull out or extract that would help us all.

Richard P. Hamada

Yes, Lou, it's a great point. And I can confirm for you that we are looking actually on both of our businesses, to make sure that the type of -- the overall goals that we set even when it comes to the patterns of seasonality, we're giving it our best efforts to make sure that we try to help determine and discern if we've had any fundamental changes, if the year ends, or typically going to be bigger and followed by a little weaker. We'll dig into it and let you know. Just to confirm for you though, we do look at that and scrutinize that and consider it an important part of our overall external communications.

Louis R. Miscioscia - CLSA Limited, Research Division

Great. Much easier question. What's the run rate of interest expense of the combined interest income and interest expense? Because it seemed like it came down a little bit. I wonder if we could now bottle that, flattish going forward, or -- what can you give us, from an absolute standpoint?

Kevin Moriarty

Yes, I would -- Lou, this is Kevin. I would suggest run rate right now would be a couple of million lower from what we experienced in the third quarter.

Louis R. Miscioscia - CLSA Limited, Research Division

Okay. And then flattish going forward?

Kevin Moriarty

Directionally, yes. And obviously, it all depends on working capital requirements or borrowings, et cetera, in terms of where we are from a net-debt position. But I would model that for the near term.

Richard P. Hamada

And, Kevin, that's primarily related to the tranche we paid off in March.

Kevin Moriarty

Yes.

Louis R. Miscioscia - CLSA Limited, Research Division

Okay. Great. And then the last question, it sort of goes back to TS anyway, so the large storage company, [indiscernible] and NetApp have actually said that their customers are sort of causing obviously, both of them brought down 2014 guidance. Evaluating and looking at cloud, flash, object storage, AWS whatever it might be, you said that you don't think that yours -- the customers that are buying your stuff through you all, are doing that. Is that because maybe they fall into more of the SMB category in comparison to large enterprise? Or why would -- I guess your answer would be a bit different than theirs?

Richard P. Hamada

Yes, Lou, this is Rick again. I think in the past, we've indicated that we do believe it's perhaps a difference in dynamics between large enterprise and SMB. But as we've said from an impact point of view, we'll be watching that total pipeline of activity that leads us to start to build models around the expected amount of close, the expected time frames, et cetera. And we'll let you know as we see any changes there overall. We don't typically provide annual guidance, as some of those suppliers do. But if we still, back to your point about quarterly patterns, if we see anything that indicates to us that we've got a secular trend in place, we'll be forthcoming about it, as well as the response and how it impacts our business, as part of the communications.

Operator

At this time, we have no further questions. I would like to turn the call back over to our speakers for closing comments.

Vincent Keenan

Thank you for participating in our earnings call today. As we conclude, we will scroll through the GAAP to non-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 GAAP financial reconciliations, can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you very much.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Avnet (AVT): FQ3 EPS of $1.03 misses by $0.04. Revenue of $6.68B (+6.0% Y/Y) misses by $250M.