Ingram Micro Inc. Q2 2010 Earnings Call Transcript

| About: Ingram Micro (IM)

Ingram Micro Inc. (NYSE:IM)

Q2 2010 Earnings Call

July 28, 201005:02 AM ET


Ria Carlson – Chief Strategy and Communications Officer

Gregory Spierkel – Chief Executive Officer

William Humes – Chief Financial Officer

Alain Monie – President and Chief Operating Officer


Richard Gardner – Citigroup

Ben Reitzes – Barclays

Ananda Baruah from Brean Murray

William Fearnley – Janney Montgomery Scott

Rich Kugele - Needham & Company

Craig Hettenbach – Goldman Sachs

Brian Alexander – Raymond James

Matt Sheerin – Stifel Nicholas


Welcome to the Ingram Micro Second Quarter Earnings Report Conference Call. At this time, all participants are in a listen-only mode. (Operator instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Ms. Ria Carlson, Chief Strategy and Communications Officer.

Ria Carlson

Thank you, Angie. Good afternoon, everyone. Joining me today are Greg Spierkel, our Chief Executive Officer, Bill Humes, our Chief Financial Officer, and Alain Monie, our President and Chief Operating Officer.

Greg will give an overview of the second quarter Alain will say a few words and then Bill will provide the financial review. We will then turn it back to Greg to discuss business highlights and plans for the future. Greg, Bill and Alain will be available for questions at the end of the call.

The financial portion of this call is accompanied by presentation slides which can be found with today’s news release at the Investor Relations section of our website at or by calling 714-382-2015.

Before we get started, I have a Safe Harbor announcement. During today’s discussion, we will make statements that are forward-looking. These forward-looking statements and all other statements made on the call that are not historical facts are subject to a number of risks and uncertainties. Please prefer to today’s news release and documents filed with the Securities and Exchange Commission. Specifically, the risk factors listed in item 1-A of our Form 10-K for the fiscal year ended January 2, 2010 for more information on the risks that could cause actual results to differ materially.

In addition, this conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of this call will be available for one week on the company’s website at or by calling 800-678-3180.

I'll now turn the call over to Greg Spierkel, our Chief Executive Officer. Greg?

Gregory Spierkel

Thank you, Ria and good afternoon everyone. Building on our strong start in 2010, the second quarter was outstanding by virtually all accounts. Sales grew 24%, the best growth rate for any quarter in 11 years. Profit growth was even better, with both operating and net income more than doubling. In fact, net income and earnings per share hit the highest second quarter levels in our history.

All regions contributed to the quarter's performance. Sales in North America and EMEA grew at double-digit pace with operating income tripling and doubling respectively while the other regions also generated strong sales growth and solid profits. Driving much of the quarter's operating leverage is our sound management of expenses which declined versus a year ago, despite the robust sales growth.

We continue to reap the benefits of our cost reduction initiatives of the last two years while holding the line on day-to-day expenses. Our solid balance sheet also provides avenues for growth as we use working capital to drive demand and meet the needs of our customers.

Return on invested capital at 12% exceeded our weighted average cost of capital for the fourth consecutive quarter. Growth and profitability were also driven by greater flexibility in other targeted areas such as gross margin. We believe this was a worthwhile tradeoff given the record-breaking performance. While we plan to improve gross margins overtime, profitable growth, higher levels of income and optimal ROIC will continue to be the priorities in the near term.

Before we turn to the financials, I'd like to take a moment to recognize Alain as he moves to his next opportunity. This will be his last earnings call here at Ingram Micro but the positive impact of his leadership will be felt for many years to come. He played a critical role in transforming our Asia-Pacific region from a breakeven operation to one of our company's most profitable. As worldwide President, he instituted operational improvements that set us on a path of even greater achievement. Alain, the company is better off today than when you joined seven years ago and much of that is due to you. Thank you for your foresight, your leadership and counsel. We will miss you. We wish you success in your new role.

Alain Monie

Thank you, Greg. My seven years at Ingram Micro have been some of the most rewarding and productive of my career. If I may have contributed to the company's performance I can tell you that I had learned a lot about how to manage in such a highly transactional business, and beyond the quality of its processes, without a doubt the people make the difference.

I am impressed with the dedication, mutual support and strong values of the associates around the world. These are unique qualities that set Ingram Micro apart as the leader in this industry. Deciding to leave was one of the more difficult decisions I've had to make but I was presented with a CEO opportunity that I simply could not pass up.

I leave knowing the company is in good hands, with a first class management team. Ingram Micro will continue to lead this industry globally for many years to come. To those of you on the call, it has been an honor and a pleasure getting to know you over the years. Thank you for your support and continued interest in the company.

Now I'll turn the call over to Bill who will provide more detail on our financial performance.

William Humes

Thanks, Alain. I'll begin with sales which are on slide three. Worldwide sales grew 24% to 8.16 billion. The translation impact of foreign currency was immaterial, as the negative impact of currencies in EMEA essentially offset the positive impact in Asia-Pacific and Latin America.

Sequential sales grew 1%, a bit better than historical seasonality. On a regional basis, North America sales were 3.56 billion, an increase of 30% compared with prior year. EMEA sales were 2.37 billion, an increase of 18%, with a translation of weaker currencies having a negative impact on revenue growth of approximately seven percentage points. Asia-Pacific sales grew 24% to 1.87 billion with translation of stronger currencies having a seven percentage point positive impact on revenue growth. Latin America sales were 360 million, up 12% versus last year, with six percentage points of the growth attributable to currency translation.

Gross margin on slide four was 5.36%, compared with 5.87% in the prior year. As Greg explained, we strategically used gross margin to drive growth and higher profits. Also affecting year-over-year comparisons was last year's exceptionally strong gross margin which hit a second quarter 10 year high as well as a greater mix of lower margin products in this year.

On slide five, you can see that operating expenses decreased from last year despite the strong sales growth as we realized the benefits of our operational improvements over the last two years. Operating expenses were 332.9 million or 4.08% of sales, compared with 345.1 million or 5.25% of sales a year ago. Last year's expenses included 7.4 million or 11 basis points and costs associated with the company's expense reduction programs and 2.5 million or 4 basis points in goodwill impairment associated with our prior year acquisitions in Asia-Pacific.

Operating income more than doubled to 104.6 million or 128 basis points of sales as seen on slide six. In the prior year period, operating income was 41 million or 42 basis points, which included a combined charge of 9.9 million or 15 basis points in expense reduction program costs, and the goodwill impairment I just mentioned.

In North America, operating income more than tripled, reaching 54.7 million or 154 basis points. Last year North America operating income was 9.1 million or 33 basis points, which included 5.3 million or 19 basis points in expense reduction program costs. EMEA operating income more than doubled to 22.3 million, or 94 basis points, representing the region's highest second quarter operating margins since 2005.

Last year EMEA operating income was 10.2 million or 51 basis points, which included 1.5 million or 7 basis points in expense reduction program costs. In Asia-Pacific, operating income grew to 29.8 million or 160 basis points of sales. In the year-ago quarter, operating income was 22.8 million or 152 basis points which included 3 million or 20 basis points of combined costs relating to our expense reduction program and goodwill impairment.

Latin America operating income was 4.8 million or 134 basis points compared with 5.2 million or 160 basis points in the year-ago quarter. Other expenses for the quarter were 9.9 million, up from last year's 6.7 million primarily reflecting higher interest costs from lower net cash levels. Our effective tax rate was 28.5%, compared with 26% for the second quarter of 2009. The increase in the effective tax rate was largely a result of mix of profit in higher tax jurisdictions.

On slide seven, you'll see that net income and EPS more than doubled to 67.7 million, or $0.41 per diluted share, hitting a second quarter record. In the prior year period, net income was 25.3 million or $0.15 per diluted share, which included $0.05 per share related to an expense reduction program cost and the goodwill impairment in Asia-Pacific.

Now let's look at slide eight for a discussion of the balance sheet. Our cash balance at quarter end was 762 million, and debt was 351 million, compared with 1.3 billion and 335 million respectively at the end of last year's second quarter. The lower net cash levels are due primarily to the investment in working capital as a result of the revenue growth as well as the use of cash to repurchase shares. Our debt to capitalization ratio was 11%, also flat with last year's second quarter and year-end.

As shown on slide nine, we repurchased 9 million shares of common stock during the quarter for a total of $152 million. This completed both our $300 million share buy back program announced in November 2007, and the $100 million program authorized in May of this year. Through which we purchased more than 24 million shares within three years.

Now turn to slide 10 for an overview of working capital. Days sales outstanding were 39, flat with a year ago and improved by two days from the end of 2009. Days of inventory were 31, higher than last year's 27, but flat sequentially. We have strategically added to our inventory position this year in response to improved overall demand and our sales initiatives. Days of payable outstanding were 47 flat with last year. This brings working capital days to 23, up from a year ago, but a one day sequential improvement and within our normal range of 22 to 26 days.

That finishes my financial review. Now I'll turn it back to Greg for a discussion of the regional highlights and closing comments. Greg?

Gregory Spierkel

Thanks, Bill. As we begin the regional review it's important to emphasize that the quarter's strength was broad-based with every region delivering solid results. One of the quarter's best performances came from North America where sales reached the highest second quarter levels in nine years. Operating income more than tripled, after more than doubling in the first quarter. I'm pleased that the improvement is relatively widespread with nearly all operations performing well. In our classic distribution business, growth in the VAR and government segments exceeded the regional average while the components segment was weaker.

Our Data Capture Point-Of-Sale and Canadian businesses were particularly strong, while the volume in consumer electronics and fee for service logistics businesses declined versus the prior year. We recently announced enhancements in both consumer electronics and logistics to position these units for greater success. We appointed two new leaders in the logistics face, Robert Gifford in a global role and Bill Saunders in North America who will be actively working to build the business through a combination of new accounts and alternative sources of revenues while also seeking additional efficiency opportunities.

IM Logistics continues to be one of our key global growth strategies and we're enthusiastic about the new opportunities too capable executives will uncover. With the consumer electronics business, we are merging the operation Avid operations into a larger divisional umbrella with EBL distributing which allows greater sharing of best practices, back office infrastructure and cross-sell opportunities.

As part of this transition we are closing five Avid branches with customers served from the remaining 23. In other adjacency areas, we hosted our first Cloud Summit last month, introducing a host of new offerings. We unveiled the Cloud conduit program which allows our partners to access multiple Cloud vendors such as Amazon web services and Rockspace on a fee basis from a single easy to use source.

We also announced an exclusive payors you go servers offering from VMware. Our services business is building nicely with approximately 1600 customers and more than 50 being added each month. A similar conference was also presented by our data capture point of sale division with more than 300 resellers participating to discuss sales opportunities in key market segments including integration into the data center.

Data center point of sale has been one of the region's best performing units. Historically yielding higher returns and growth rates than the core and the expertise gleaned from the North American market is shared with our developing unit in other countries. And in the Enterprise computing space, the region was chosen as one of two distributors allowed to configure Cisco's Unified Computing System, C series servers. A vote of confidence in our ability to serve the complex data center market, congratulations for the team.

The team also well welcomed back a talented Executive during the quarter. Paul played. For 11 years before leaving in 2006 to become a CEO of a software Company. He has rejoined the region as Executive Vice President, responsible for all partner facing activities in the US and Canada. He will be a key leader in our efforts to embrace growth and customer engagement in the quarters ahead.

We'll now move to EMEA where the revenue growth was the strongest in six years and operating margin reached the second highest – sorry, the highest second quarter levels since 2005. This was achieved against a difficult macroeconomic backdrop in several European countries with volatile currencies and spotty GDP growth.

Every country saw double-digit revenue growth with the exception of Sweden. The UK was the growth leader with Italy, Germany, and Spain as additional stand-outs. The SMB e-tail and retail segments were strong with the UK also benefiting from our Computer Center acquisition last year.

Our data capture point of sale division showed progress with the renewed focus on sales opportunities. The UK operation was recognized by two large data capture point of sale vendors as the fastest growing distributors of their products in Europe. We recently expanded our IM logistics global footprint with the launch of a dedicated logistics business in EMEA, helping both technology and non-technology customers optimize their supply chain. The new region-wide accounts include a medical goods supplier and mobility accessories manufacturer. We look forward to continued progress as we diversify our business with new accounts and services.

Our Enterprise business was enhanced through a late second quarter acquisition of Albora Soluciones, a value added distributor headquartered in Barcelona with offices in Madrid and Lisbon. This transaction builds on our acquisition of Computacenter in the UK and our recent appointment as HP’s value distributor for business critical systems in Sweden. The enterprise technology market is a key growth area for us and we plan to use a combination of acquisitions and organic expansion to build capabilities in this space.

Our progress in EMEA has been encouraging and we have many irons in the fire to further solidify our position. We continue to closely monitor the macroeconomic environment but so far we have not seen a negative impact on our business in the region.

Moving to Asia-Pacific, our results continue to impress with sales growth of 24% and a solid operating margin. Every country except Thailand which is still feeling the effects of political unrest increased sales in local currencies. China, India and Singapore were all strong with IT spending continuing to grow throughout these countries. Australia, New Zealand and Malaysia grew at rates below the region's average. Australia had a tough comparison with last year's sales which were stimulated by tax incentives. While New Zealand strengthened as the quarter progressed.

Our higher margin value business continues to develop in the region. Earlier this month we completed the acquisition of Asiasoft, one of Hong Kong's leading value-added software distributors. Asiasoft serves a wide array of end users from large enterprise to small to medium businesses with additional capabilities in enterprise computing. To more fully leverage our enterprise capabilities we recently opened in Singapore Asia's first Cisco center for Unified Computing, an innovative testing center that allows partners to try out new solutions and simulate real life situations.

Through these investments, we are building far reaching enterprise capabilities from hardware and software to consultative and monitoring services.

We'll finish the regional review with Latin America where strong sales in the country operations were slightly offset by weakness in our export business in Miami. Argentina delivered the strongest growth rate, followed by Brazil, Mexico and Chile. The export business was impacted by weak sales in the components market which also had an effect on the large white box market in Brazil.

We see Brazil as an opportunity as well as an investment where we can build on our capabilities in an emerging and vibrant market. Argentina is growing and improving profitably while Mexico and Chile continue to be strong, consistent performers. While small in terms of revenue, Latin America is big on opportunity. Our adjacent areas are nearly untapped in the region and we see longer term avenues for expansion in logistics, Enterprise and data capture point of sale.

As we close the call, I think it's worthwhile to do a mid year performance check, comparing our progress against some of the plans we do communicated to you several months ago and providing an update on our views for the second half.

First, we said we were going to be more externally focused, concentrating on profitable growth after making operational improvements during the recessionary quarters. By nearly all indications, this continues to be a successful strategy. After growing 20% in the first quarter, we delivered the best growth rate in more than a decade in the second quarter.

Profitability was even more impressive with net income and EPS breaking second quarter records. We have deepened our engagement with vendors and resellers, energized our sales force and developed new solutions for our customers. Driving profitable growth will continue to be a critical focus area in the second half.

Next, we said we would build expertise in key adjacency areas. We’ve made good progress with acquisitions in the enterprise computing space, good traction in our Data Capture Point-Of-Sale operations and the hiring of highly capable logistics executives and the launch of a logistics business in Europe. We still have more work to do in diversifying and expanding the IM Logistics account base as well as improving the consumer electronics business and these efforts are underway. Acquisitions are likely to help us drive growth in adjacencies as they have in the past.

And finally, we said we would develop new capabilities that strengthen our future leadership position. Our efforts in Cloud Computing are a perfect example. We are consistently recognized as being ahead of the competition in this area and we continue to develop programs that differentiate us and provide unique solutions for our customers. We plan to drive growth in this area through additional investments and partnership opportunities. The back half of this year looks promising and we expect year-over-year sales and profit growth to continue in the third quarter.

Sales comparisons are expected to be more modest than in the prior two quarters as we began to see results of our energized sales efforts in the third quarter of last year. Sequentially, sales are expected to be generally flat, in line with historical seasonality. Gross margins should remain relatively stable as we continue to strategically and surgically drive sales when and where it makes sense. We will continue to hold the line on costs, which should drive operating leverage. I'm expecting great things from this team in the quarters ahead. We have a clear path for growth, a winning attitude, strong partner engagement and the financial strength to make things happen. This continues to be our year.

I will now open the call to questions. Thank you.

Question-and-Answer Session

Operator: (Operator Instruction). Our first question comes from Richard Gartner of Citigroup. Your line is open.

Richard Gartner – Citigroup

Okay. Thank you. Congrats on the quarter. I wanted to ask you about gross margin. I’d hopefully – we don't mean to focus on it too much because you did produce really good operating leverage in the quarter. But I think you said in the past that you wanted to keep gross margin above the 5.4% level. So I just wanted to get your views on what the right way to think about the gross margin going forward would be? And then I had a quick follow-up on the expense side if I could?

Gregory Spierkel

Okay, Rich, thank you. It's Greg here. Well, generally we expect relative stability in the gross margin in the range of where we are, the 5, 4 has been a number that's important to us. And clearly we feel that we will do better than that on a full year basis. We think as a management team we've made really worthy trade-offs in this quarter on revenue and operating profit overall, and clearly we've driven the ROIC at a nice healthy level overall and that becomes our focus as a management team.

So we knew there would maybe be some trade-offs in this but generally we're trying to hold our own here. Slight movement quarter-to-quarter on the margin but we are really being very targeted in what types of accounts and vendors were going to. And more importantly, in some instances we may need to protect share in some of the more mature markets, that's kind of a little bit what happened in, let's say, Asia and certain territories. So from that perspective, we feel pretty good about where we are. Don't see any market dynamic changing things. It's really a mix of our business and the type of clients that we're going after that are holding the margin close to where we are right now.

Richard Gartner – Citigroup

Okay, great. On the OpEx side, Bill, you're tracking way, way better than your target of growing OpEx at half the rate of revenue this year and it sounds like OpEx is going to be flat in Q3, so we're pretty much -- we know where we stand for the rest of this year, would you be willing to talk about what rate of growth you're expecting for OpEx versus revenue going into 2011 at this point? Thanks.

William Humes

Hi, Rich, it's Bill. Yeah, I mean, I'd say overall, recognize we had great, exceptional results on OpEx in this quarter and we'll continue to be very tight and manage our OpEx growth very diligently on go-forward revenue, go-forward growth. As we had talked last couple of quarters, we did expect in the near term over the next several quarters to be able to manage on the low side of what we had talked about as a range on growth of OpEx versus revenue growth. So I would expect a few more quarters of very, very tight OpEx and then probably recover a little bit back to the normal state of half the growth rate of sales, which is generally what we'll manage our business units in a normal environment situation.

Richard Gartner – Citigroup

Okay. Thank you.

William Humes

You’re welcome

Operator: Thank you. Ben Reitzes of Barclays, your line is open.

Ben Reitzes – Barclays

Yeah, thank you very much. Bill, could you comment a little more on inventory, up I guess 6% sequentially, if I have that right and what is it and why are you comfortable with it? And I have a few follow-ups?

Gregory Spierkel

Ben, it's Greg, although Bill can talk.

Ben Reitzes – Barclays

Hey, Greg.

Gregory Spierkel

No problem. So inventory is up a little bit on last year in days, definitely, but sequentially we're still sitting at the same sort of levels quarter to quarter. I think we've been pretty transparent that we were planning to use the balance sheet to improve our market situation, you know and our top line trajectory.

So we've consciously worked with the vendors and through a few product categories to increase our inventory, to improve our sales opportunities. And you saw that in the last quarter and it's translated very handsomely into the quarter that we just finished. We feel that we're going into Q3 with a solid outlook on sales. We believe we moved through that inventory through most of this month anyhow, the month of July that we're into right now.

And we're managing the overall working capital days in total to our customary range, and the range that we think is optimal for the return on invested capital that we're trying to achieve for the company and what the market will allow us to. So at 23 days and inventory being a key piece of that, we felt like we ended up right in the middle of the sweet spot. We're down in the middle of the fairway and we're very comfortable with where we are in the inventory at this stage.

Ben Reitzes – Barclays

Greg, is it things that you thought were in shortage maybe before, is it networking gear, PCs, what do you feel like you need to invest in right now to make sure you can deliver it?

Gregory Spierkel

Yeah, was very little way of shortage impacts in the prior quarters. I think you might have heard us say that we probably looked at tens of millions of dollars per quarter over the last two, three quarters that we might have been able to capture additional revenue had we had a little bit more in printing and networking and some display areas. There's much less of that at this stage than there has been in the prior quarters. Very little that's being talked about right now so I think the supply chain globally has caught up with the market dynamics. So our inventory holdings are either targeted around specific programs that we've strategically decided to take with certain vendors, or otherwise I would call it as fairly broad-based, but we're probably placing bets a little bit more on some vendors where there's better growth characteristics right now. And we want to make sure we're staying ahead of the curve where we see those trends with certain product categories that are doing well.

Ben Reitzes – Barclays

Okay. And then, two final things, if you could comment on linearity of the quarter and what particular product categories did better than expected and what particular product categories did worse? Thanks.

Gregory Spierkel

Okay. So during the quarter, I would say all three months kind of grew close to the overall rate that we achieved for the quarter, surprising strength through the quarter. We typically have a little bit quieter months in months one and two because we have a four, four, five quarter structure in weeks or how we make – and so the third month is usually a little bit stronger because it's a five week month and it's usually the end of the quarter with a lot of vendors and some of them end their year. So from a linearity perspective it was fairly in line with the top line through the quarter. So not a boost or burst at some point, you know particularly at the end of the quarter that you might normally see.

In terms of product categories, we're shifting the product categories just a little bit. We've tended to stay between 40 to 45% is in peripherals and then systems are 25 to 30, that's been a balance for us for quite a while. We've seen over the last, I'd say four or five quarters in a row where systems have generally been sort of in the one or two highest areas.

Now with – again, that continuing, we're changing the mix you now. Peripherals are 35 to 40, systems are 30 to 35 and that was again in essence what we've seen in this quarter is that, systems and networking were the better performing broad categories for us, both growing faster than our overall corporate rates, not hugely faster but faster. And then software and peripherals, strong double-digit, but not quite at the corporate average, so hopefully that gives a bit of characterization on where the revenues were coming from.

Ben Reitzes – Barclays

That's great. Thank you very much.

Operator: Thank you. Ananda Baruah from Brean Murray. Your line is open.

Ananda Baruah – Brean Murray

Hey, thanks, guys. And Alain, congratulations been good working with you, certainly will miss our conversations. Hey, Greg, was wondering if you could comment a little bit on I guess which regions more specifically you guys used gross margin strategically? And maybe some of the product categories or I guess deal types if you're willing to do that? Thanks.

Gregory Spierkel

Well regions I don’t know, again, I alluded to it just with my answer a little bit before. Definitely in Asia, again, we grew fairly solid in that but that was close to company average and a couple of our more mature markets, Australia and New Zealand in particular, we saw the margins being a little bit lower than we have had in the past. So good operations they're solid operations. But again, that's an instance where I'd say some low local competitors were probably being -- trying to come into our territory where we have very strong market positions. And frankly we felt that we wanted to protect our position so that would have probably -- I would call that out as a little bit of a strategic move there. Within the context of Europe, I would probably highlight a little bit as well, some countries, again, where we were trying to get back into clients that we held pretty solid positions with maybe two years ago, we might have lost a little ground. We felt we'd go back on some of those clients and again, a bit of a mix of which types of customers but we were getting handsome returns overall and return on invested capital with that. So we were comfortable again with making that trade-off. Those are probably from a region perspective kind of where that might have happened. The rest was more normal. And the only other mix in terms of impacting that maybe Latin America where singled out component, although a tough margin process usually in Brazil, it's usually a very healthy business for us, selling down into Latin America out of our Miami export. We had a lot less of that business and usually decent back ends in managing that and again didn't have that come through again because of the changing dynamics potentially of more laptops than desktop PCs as a longer term phenomenon in the components space. So that's probably why that market is sort of weakening a little bit from a go-to-market perspective for us.

From a product point of view, really it's harder for me to characterize it. We had good movement across all product categories as I just shared. The mix maybe in systems tends to be a little bit lower on margins for the overall company, again its fairly competitive area as well as typically in the commodities space, terminals are - flat screens. In that area we had very healthy growth in systems. So that has a little bit of pressure from an overall perspective on the company on that line.

But again, we get good working capital management. We get good turns and velocity there. So while it may touch one line, the overall return on the invested capital felt pretty good in making those types of decisions on that mix this quarter.

Ananda Baruah – Brean Murray

Thanks. That's helpful. And then I guess just on the competitive environment in Europe, would like to get your thoughts. Is there any – is it your sense that yourselves and sort of your largest competitor are maybe taking share from some of the smaller players over there. And I guess outgrowing the market that way? And if so, how would you see that sort of selling in as the demand environment maybe kind of stabilizes over the next two to four quarters?

Gregory Spierkel

You know, Europe has been I think a pleasant surprise for virtually everybody. And I'm talking vendors, resellers. I was there for two weeks, two full weeks just last month and meeting with a good cross section of customers and vendors in that period of time. And everybody was pleasantly surprised. Given all the, I would say public rhetoric and dynamic of GDP rates in Europe, which are both not positive clearly for business, let's say in a planning context and comfort for the future. But I think, again, there's a bigger phenomenon at play here Ananda that's got everything to do with refresh and that's still playing itself through the marketplace and that's why clearly IT is growing faster than gross domestic product is across a lot of geographies. And so from a competitive point of view, I believe we grew a little faster than the overall market. We followed the context data which is giving us a pretty good pulse on what the channel is doing overall. I'm sure you probably hear the data on that or see the data on that as well. So I think we grew a little faster than market, not substantially so. So I think to your point it's coming probably at the expense of some of the smaller players, I believe we're just executing really well at this stage. And the vendors can’t over emphasize it. The vendors and the customers are feeling that we're back in the game, particularly in Europe, where we were less so a year or year and-a-half ago, Alain Maquet and the whole team there are doing a very good job of getting us back in the game and now we're getting some traction and momentum.

Ananda Baruah – Brean Murray

Cool. Great, thanks a lot.

Gregory Spierkel

All right. You're welcome.

Operator: Bill Fearnley from Janney Montgomery Scott, your line is open.

William Fearnley – Janney Montgomery Scott

Hi, good afternoon. Greg, I had a couple questions for you on programs specifically. You had mentioned in the logistics business, I thought you said was down year-over-year. And what will you be looking at first to improve this and will we see the benefits of whatever restructurings you might do there here, will we see the benefit in the third or fourth quarter, because those quarters tend to be the most important for IML?

Gregory Spierkel

Okay. Well, you're right. We did say that revenue is down and the business is down slightly in IML in the first half of this year. So that had a bit of a factor in the margin profile for the company because it's a very healthy margin business for us.

Not a loss of customers, it's just one or two significant customers that have built out extra capacity themselves and in that transition, they've absorbed some of the business that we had into their facilities, but as they continue to grow, we anticipate incremental business to start coming back on those customers. So nothing lost, just a change of relationship a little bit through a transition for two, three, maybe up to four quarters there.

In terms of what our outlook is for the logistics business, we're very encouraged. Again, we just talked about two new wins in Europe in the quarter. They're small, but they're exactly the types of things that we need to be adding to build expertise and some degree of confidence in the community out there about our capabilities.

We've added two seasoned executives which signal that's we're very committed to continuing to invest in this area through the next couple of quarters. Q3 is generally not as active as Q4. Q4 is clearly, Bill, as you know, an area where it has a significant impact on overall operating performance for North America and Q1 is the second strongest quarter in that regard.

So still a little quiet in Q3 although there's starting to be some build-out in planning for the very heavy end of year Christmas type season activity that’s – IML plays a key role in.

So we're not making any structural changes or cost reductions here. It's strictly all about finding new business accounts, building out the capability in both Asia and Europe, just to share a little bit more color here, last year we put in advanced systems that we use here in North America into Australia to kind of start the business down under. We've just put some investment in place in the first half of this year in the -- in France, complete that in Q2. We're making similar investments now in the UK. In this current quarter, so when we talk about capital spend and where we're putting our money it's in these types of things that are going to help us from a systems point of view to start landing these types of contracts. And so there's investment going on right now with a view that this business is going to be more important piece of our overall portfolio as we move forward, not within the next quarter or two but clearly over the next several quarters.

William Fearnley – Janney Montgomery Scott

Okay, thanks. And then if I could ask another program follow-up. On the business intelligence center, how's the launch gone, how's the initial reaction from the vendor and the customer community been, and when do you think the results from that might be material?

Gregory Spierkel

I think it will a while before they're material but they have helped us a lot. So our business intelligence efforts as you are aware somewhat, Bill, is we help analyze sales trending information, so that we can generate leads, go after product affinities, target specific vertical markets and clearly it's giving us I think a real interesting capability that we're quite excited about. We launched the offering into our reseller base in Q3 -- excuse me -- in Q2. We talked about it in Q1, but we actually did the physical launch. So it's early days but right now I'd say the excitement for us is that we're going to be able to drive incremental sales and capture I think more share of wallet with our existing customers as we help them understand, what's in their base of customers. A lot of them do not have these types of tools. And the customers that we are signing up, and we are signing this up on a fee-for-service basis. Again, so an annuity, buy also with our capability to some of us to do the analysis for them, we're quite excited about it. But it's too early to say that it's going to be anything meaningful. Probably two, three quarters out, I think we’ll a little bit more about some types of business that we would be winning that we might not otherwise see. But so far, we're encouraged by the uptake of a number of resellers that are taking the product or the service capability on.

William Fearnley – Janney Montgomery Scott

Excellent. Appreciate the detail. Thank you.

Operator: Thank you. Rich Kugele with Needham & Company. Your line is open.

Richard Kugele – Needham & Company

Thank you. Just one question from me, following up on your positive comments really on Europe, I was just wondering if the OEMs were in any way changing some of their incentive and rebate structures with you, to spur sales in any other regions or if there were any changes versus previous years or even previous seasons and – their interactions with you in the channel?

Gregory Spierkel

I'm glad to say that it's relatively benign right now. We have at points in time kind of signaled that there's concern’s with certain significant partners, in particular making major changes. That is not happening right now. That we are having more constructive discussions about programs and putting some resources associated with those programs to drive certain sales or initiatives in support of what the OEMs are trying to do in Europe is garnering us I think some healthy program money.

And, again, share of -- call it share of mind in terms of traction with the vendors. And I think, again, back to my earlier comments before, I believe that's helping us get some good traction. Again, the market as a whole is pretty solid. So it remains a competitive environment as it always is, but the OEMs have been supportive of what we're doing. And I think because the traction is good and better than anticipated across Europe, I think they're continuing to invest as we go into the back half of this year. There's just this overhang question at some point, do the governments across Europe start pushing austerity programs that will change confidence levels in small to medium business. But again, when I was just there a few weeks ago the confidence level of our reseller base and the pipeline that they were seeing was quite encouraging and their pipeline is usually a three month to nine month sort of window that they're telling us about and they're dealing with, so much better than it was a year ago.

Richard Kugele – Needham & Company

Great. Well done. Thank you.

Gregory Spierkel

You're welcome.

Operator: Craig Hettenbach of Goldman Sachs, your line is open.

Craig HettenbachGoldman Sachs

Yes, thank you. Just a follow-up on gross margin and the logistic business in Q4, anything else in the traditional business that would prevent you to see that more positive gross margin mix because of logistics in calendar Q4?

William Humes

This is Bill, Craig. Yeah, we would generally expect the same level of kind of sequential tick-up relating to the large volume of IML business that we normally expect and we would expect that as a sequential relationship from Q3 to Q4. So we should enjoy that tick-up in margin from Q4. So we should enjoy that tick-up in margin from IML.

Ria Carlson

Craig? Angie?

Operator: Craig, your line is open.

Craig HettenbachGoldman Sachs

Okay. Just a follow-up on the topic of capital allocation, very encouraged to see the large buyback activity. Can you just give us your thoughts on where you stand today in terms of cash and the balance sheet, M&A opportunities versus potential future buyback?

William Humes

Sure, Craig. It's Bill again. Yeah, overall we're very pleased with, one, our cash and total capital, access to capital balance. It provides us great flexibility and avenues for pursuing growth as well as potential return of shareholder capital. So there's a lot of potential growth opportunities out there and investments that we also -- we evaluate.

So we continue to look at what the related capital allocation requirements are for these growth opportunities, as well as evaluate potentials for other programs like share repurchase programs. But we were very pleased with the amount and the aggressive way we bought back shares in Q2 for roughly 9 million shares for 152 million. And we'll continue to evaluate our balance of allocation there.

Craig HettenbachGoldman Sachs

Okay. On the investments in M&A, is it still likely to be on the smaller size in terms of tuck-in or how would you describe the environment out there for investments?

Gregory Spierkel

Again, it's Greg here. Investments, M&A type of activity, again, we've done nine acquisitions in the last two and-a-half years. The smallest player in there might have been closer to $10 million, the largest closer to $200 million run rates and clearly price points commensurate in that context around our business model. So I'd call those predominantly tuck-ins. All of them have been geared towards enterprise computing, the data center environment where we're trying to build out that capability over time and/or Data Capture Point-Of-Sale. There are other areas where we're thinking strategic investments but those have been the mainstay of those nine acquisitions over the last two years. I'd say that's probably more where our emphasis continues to be going forward but that said, you know, it's a case-by-case situation. You know what we see is valuable and priced effective for us to get a reasonable turn may be viewed differently by a seller. So we're not averse to taking a bigger step if we saw the right thing coming across the bow, if you may. And that's why it's healthy to have a reasonable balance sheet here to continue looking at M&A activity to kind of support our strategy. And in particular we're happy with the recent investments that we've made that have really been helping us nicely.

Craig HettenbachGoldman Sachs

Okay. Thank you.

Operator: Thank you. Brian Alexander of Raymond James, your line is open.

Brian Alexander – Raymond James

Thanks. Is it fair to say that after four straight quarters of above market growth in North America and Europe that you're at a point right now where you're going to ease your foot off the pedal in terms of going after market share and that's why you expect gross margins to be stable while growing in line with seasonal patterns?

Gregory Spierkel

Yeah, it's a good question, Brian. Generally, we feel that we've been growing just slightly above market each quarter, not hugely so. Again, depends on what measures you look at. We gauge things through a combination of all the earnings results like you do and clearly that gives us some degree of a perspective on the community that we're working with. And of course there's – no matter what they may say or what numbers look like on the top line, there's always a mix going on between direct one tier and two tier and we also cross-tabulate that, if you may, against NPD context type data points as well.

We are of the view that we've got some nice momentum now and we want to try to hold on to that. Once it gets away from you it can be fleeting to kind of bring things back so we want to try to stay, again, at/or slightly above markets. That will be sort of the battle cry as we've had for the last three quarters. So I don't think we've runway ahead of the markets.

And we want to make sure that we get the right balance, to your point. Again, return on invested capital is healthy. It's running 200, 300 bips now above our cost of capital. We want to try to keep it solid and above, and that's been something I think you and others have said would help the stock over time and I think the shareholders are looking for that as well.

So all that features in the mix of us making our decisions of where we're going. But again, I think momentum, some of the small acquisitions and the general body language of the company is more positive. That all works with our customer base and vendor base, and I think it's giving us some momentum that might carry a little further than what the market does.

Brian Alexander – Raymond James

Okay. And as you analyze the composition of gross margins, Bill, in terms of front end versus back end, has that changed at all over the last few quarters, as you guys have been regaining market share? Are you seeing it skew more towards back end dollars, again, given the sales upside? And if so, what's going to happen to gross margins when the vendors reset your goals to higher levels and perhaps you get a little bit less aggressive? Is that going to create some gross margin headwind that we should consider?

Gregory Spierkel

Yeah, I mean, Brian, overall gross margins made up of many different areas and categories, front end pricing, rebates, back end program money, other costs to serve the inventory. I would say overall there's probably been some fairly good results on the program and backend moneys with our deeper engagement with our vendors and consistent approach to things and developing very targeted marketing programs and other things. So that has been fairly positive. I would say -- but that's not the end result. I mean, when we do pricing, when we do analysis, we really do look at a minimum thresholds of return on capital and growth in profit dollars. So if one goes -- if margin or front end margin goes up then you have a little bit more room, if front end margin goes down, you try other avenues or you try different pricing mechanisms. So I think we've managed in this industry for many, many, many years and we know how to work through that balance and that pricing dynamic. So I think we'll be able to control that fairly well.

Brian Alexander – Raymond James

Okay. And then just I guess finally on Europe, it sounds like you guys are pretty happy with the performance you've seen, your revenue performance was obviously good it doesn't sound like you're seeing much weakness in the region, even quarter to-date. I just wanted to make sure I understood that correctly and if there are any pockets of weakness within Europe whether it be on the consumer side or certain countries that have you concerned because obviously there's a lot of folks out there that are concerned about Europe going forward? Thanks.

Alain Monie

Yeah, again, on Europe, there's no uniquely worrying pockets. Clearly, we're not exposed to the Greek market as you know, no operations or sales there. We do have a significant presence, though, in Spain. But even in that market or Italy, which have been viewed as probably the slowest GDP markets, we've had pretty good progress this year in both of those geographies.

So again, it's back to more of a story of refresh and technology outpacing the overall markets which I believe, Brian, at some point is going to diminish a little bit. I think this refresh rate of if it's at 10% of probably natural growth, if you want to call it that in the first two quarters, will start to taper down in the following quarters. I can't be sustained at this level. I think we all realize that.

But I think it's still going to be a positive on top of GDP and typically tech is running sort of 2X GDP over the last 10 years. So although -- again, within a European context that would be 2% instead of 1% of - GDP is 1%. So we're clearly riding at something higher than that right now.

No one part of Europe worries us at this stage. Again, a little bit to the point earlier, I believe there's some smaller players that are not as competitive and I think the vendors are making some choices around where they place their bets that way and I think we're in a good position to continue seeing some positive dynamics in that region. And, again, nothing is concerning us in this current quarter as we give a little bit of the guidance there.

Brian Alexander – Raymond James

Okay. Thanks. And I also wanted to wish best of luck to Alain.

Alain Monie

Thank you.

Operator: Thank you. Matt Sheerin from Stifel Nicholas, your line is open.

Matt Sheerin – Stifel Nicholas

Yes, thanks. Just a couple, just one, back to the guidance, Greg. I know you're calling for sort of flattish sales and this may be splitting hairs a little bit but if you go back and you throw out the last couple of years which I know were really not seasonal either in '08 or '09 but you're typically up 1 to 3% or so, so you have a little bit of sequential growth, like Europe is down in the summer then picks up a little bit in September. US up a little bit with the government. So I mean, when you say flattish, are you looking at like down 1 to up 1 type of thing or you're not seeing any growth at all potential for the quarter?

Gregory Spierkel

Yeah, I think you're right in sort of a little range on either side of that, down 1, up 1. It's hard to tell. Our best perspective is sort of in kind of a range that's fairly tight to that. But again, it's so dependent on what's going to happen in September, a five week month and what comes on with Europe. And hopefully Europe comes back in the same sort of momentum that we saw the first half of the year looking and if it does, then that helps us for sure. But that's our best kind of view of the world at this stage that we can provide you.

Matt Sheerin – Stifel Nicholas

Okay. And then your comments on weakness in the component business, I know you talked about Latin America but broadly speaking, could you remind us exactly where your exposure is in terms of products, I know there's some disc drive exposure and there's reports of that being weak, so exactly what's your exposure and any liability issues with ASP erosion or inventory or anything else in that area?

Gregory Spierkel

Well, this is an area I think we feel pretty good about. We've seen our business in Asia, and I was just in Asia last week, in both the CPU area, and less so hard drive, but our exposure has been going down pretty consistently. And I say exposure to some extent particularly in Asia because it's tended to be lower margin business for us in that region.

Not the case in Latin America, definitely not the case in Europe. So in Europe, yeah, the business may be a little quieter than it was, but we have a very good inventory profile so there's no liability there. We have a very, very broad base of customers. So we perform quite nicely in getting to the small DIY market, Do It Yourself builders. And so, between CPUs and hard drives that's the majority of that business. There's clearly other things that we're doing, particularly in Europe and Latin America. We're seeing a little less business, but it's generally that's got more to do with a longer secular trend of, again, laptops displacing desktops. And you would expect over time that that's going to be a trend that's going to squeeze out that side of the components play. Although within components we sell a lot of drives that are external drives now and they're doing very well for us back into the retail network.

Matt Sheerin – Stifel Nicholas

That's helpful. And just last question for Bill, just on the tax rate, was a little bit higher than we expected this quarter. What should we be modeling going forward on the tax rate?

William Humes

Yeah, it's say for 2010, 20 is probably as good a rate as I can estimate at this point in time. Obviously we did very well in North America in the U.S. It has higher tax rates, so that has an impact on the overall mix and dynamics. So I would expect that for the full year 28 makes sense.

Matt Sheerin – Stifel Nicholas

Okay. All right. Thanks very much.

William Humes

You're welcome.

Operator: Thank you. I'd now like to turn the call over to Ria Carlson for closing remarks.

Ria M. Carlson

Thank you everyone for joining us today. Our call is concluded. As a reminder, the replay number is 800-678-3180, and that will be good for one week. Thank you very much for your questions. Bye-bye.

Operator: Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.

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