Ingram Micro CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.29.10 | About: Ingram Micro (IM)

Ingram Micro Inc. (NYSE:IM)

Q3 2010 Earnings Call

October 28, 2010 05:00 pm ET

Executives

Ria Carlson - SVP, Communications and Brand Management

Greg Spierkel - CEO

Bill Humes - SEVP & CFO

Analysts

Ben Reitzes - Barclays Capital

Craig Hettenbach - Goldman Sachs

Brian Alexander - Raymond James

Matt Sheerin - Stifel Nicolaus

Bill Fearnley - Janney Capital Markets

Ananda Baruah - Brean, Murray

Shaw Wu - Kaufman Brothers

Operator

Welcome to the Ingram Micro Third 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 Ria Carlson, Senior Vice President. Thank you. You may begin.

Ria Carlson

Thank you very much, Ashley, and good afternoon everyone. Joining me today are Greg Spierkel, our Chief Executive Officer, and Bill Humes, our Chief Financial Officer.

Greg will present an overview of the third quarter and then Bill will provide the financial review. Greg will come back to discuss business highlights and plans for the future, followed by a question-and-answer session.

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 ingrammicro.com 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 this 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 1A 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 the call will be available for one week on the company’s website at ingrammicro.com or by calling 800-678-3180.

I’d now like to turn the call over to Greg Spierkel, our Chief Executive Officer. Greg?

Greg Spierkel

Thank you, Ria, and good afternoon, everyone. Our third quarter performance continued to demonstrate the strength of our business model. It was the third consecutive period of sales and income growth at double-digit rates or greater, as well as the fifth consecutive quarter of ROIC exceeding the cost of capital. I am pleased with our progress and optimistic about the path ahead.

Our regions delivered solid results. The three largest regions generated outstanding top-line growth with Asia-Pacific sales reaching a historic high and North America hitting the highest third quarter sales level in 10 years. This helped drive excellent operating leverage, with worldwide operating income growing more than three times the rate of sales and operating margin returning to pre-recession levels.

North American operating margin was at the highest third quarter level in over a decade. Gross margin was relatively stable at 5.36%. We continue to manage gross margins within a targeted range, while leveraging them to drive sales, profitability, and returns. We review transactions holistically with a bias towards operating income and returns on working capital. At the same time we continue to hold the line on operating expenses.

The results speak for themselves. Year-to-date, sales were up 19%, while operating income grew at multiples of that rate. Return on invested capital reached a healthy 12.1% in the third quarter and is 12% year-to-date.

There are still plenty of opportunities to improve our performance. Demand for technology remains solid and we continue to create more efficient and powerful infrastructure to successfully support our growth. Our higher margin specialty businesses, fee-for-service logistics, data capture/point-of-sale, value-added enterprise solutions, and services are expanding globally and are expected to become a greater portion of our business mix in the years ahead.

We’re upbeat about our business and dedicated to converting this optimism into a greater value that our shareholders deserve. We believe in Ingram Micro so much so that we’ve repurchased 24 million shares in the past three years. Today, we announced another repurchase authorization of $400 million over the next three years, demonstrating our confidence in our company and its future.

Now I’ll turn the call over to Bill for a financial review.

Bill Humes

Thanks, Greg. I’ll start my discussion with sales, which can be found on slide 3. In the third quarter, worldwide sales rose 14% to 8.45 billion. Foreign currency exchange negatively impacted sales by 2 percentage points. Regionally, North American sales totaled 3.65 billion, increasing 13% from the prior year. EMEA sales were 2.48 billion, increasing 15%. The translation of weaker European currencies had an 11 percentage point negative impact on our revenue growth. Asia-Pacific sales were 1.95 billion, an increase of 19%. The translation of stronger local currencies had a 5 percentage point positive impact on revenue growth. Latin America sales were 372 million, roughly equal with last year. The translation of stronger local currencies had a 3 percentage point positive impact on year-over-year comparisons.

Gross margin on slide 4 was 5.36% compared with 5.44% in the prior year. The 8-basis-point decline was attributable to the mix of business in the quarter, more competitive environments in specific markets and, as Greg mentioned, the selective use of gross margin to drive sales.

On slide 5, you’ll see that operating expenses grew far less than half the rate of sales, reaching 346.6 million versus last year’s 338.7 million. As a percentage of sales, operating expenses were down significantly to 4.1% versus 4.59%.

Last year’s expenses included $8.4 million or 11 basis points in costs associated with the company’s expense reduction programs. This year’s operating expenses included approximately 2 million in costs associated with Silvi consolidations in our Avid consumer electronics subsidiary as well as head count reductions in our Brazilian operations.

Operating income grew 69% to 106.9 million or 126 basis points of sales as seen on slide 6. In last year’s third quarter, operating income was 63.2 million or 86 basis points, which included $8.4 million or 11 basis points in expense reduction program costs. On a regional basis, North America operating income more than doubled to 63.5 million or 174 basis points, the region’s highest third quarter operating margin in 12 years. Last year, the region’s operating income was 30.4 million or 94 basis points, which included 7.1 million or 22 basis points of expense-reduction program costs.

EMEA operating income increased 39% to 18.8 million. Operating margin increased 13 points to 76 basis points. Last year, EMEA operating income was 13.6 million or 63 basis points, which included 600,000 or 3 basis points in expense-reduction program costs.

Asia-Pacific operating income rose 32% to 28.2 million or 144 basis points of sales. Last year, operating income was 21.4 million or 131 basis points, which included 700,000 or 4 basis points of expense-reduction program costs. Latin America operating income 3.5 million or 95 basis points, lower than the 4.7 million or 127 basis points in the year-ago quarter, as the region invested in improvement programs in the Brazilian operation.

Interest and other expenses for the quarter were 18.3 million, versus [16.8] million last year. As is described in today’s release, this includes an accounting charge of 4.4 million, or approximately $0.02 per share, related to the foreign currency translation impact on the value of euro-based inventory purchased in our Pan-European entity, which designates the U.S. dollar as its functional currency.

Although the euro was weaker than a year ago, it strengthened 8% versus the U.S. dollar in the final three weeks of the quarter. This late quarter volatility had a negative effect on the value of our euro-based payables for inventory, which was recognized as a foreign exchange loss at quarter end. This had an offsetting increase in the value of inventory in Europe, but under the accounting rules this increase will not be recognized until the inventory is sold. The impact of this timing difference is expected to be recovered in the fourth quarter.

Also contributing to the year-over-year increase was higher interest expense relating to the 300 million in public debt issued in August. In addition, net interest expense increased compared to last year, due to lower net cash levels, which was the result of investments in working capital to support business growth and the repurchase of 152 million of the company’s stock completed in the second quarter.

Our effective tax rate for the third quarter was 27%, compared to 25% for last year’s third quarter.

The increase in the effective tax rate was largely the result of the mix of profits in higher tax jurisdictions.

On slide 7, you’ll see that net income grew to 65 million or $0.41 per diluted share, making our highest third quarter income since 2007. Last year, net income for the quarter was 42.3 million or $0.25 per share, which included 6.3 million or $0.04 in expense-reduction program costs.

On slide 8, you can see our balance sheet. Our cash balance at quarter end was 1.1 billion versus 1.2 billion a year ago and 911 million at the end of last year. Quarter-end debt was 709 million, compared with 436 million and 379 million at the end of the year-ago period and last year, respectively.

As I mentioned previously, the lower net cash levels compared to a year ago were primarily due to greater working capital investment and the funding of our share repurchase activity in the second quarter this year.

Our debt to capitalization ratio was 19% compared to 13% at the end of last year’s third quarter and 11% at year-end.

Please turn to slide 9 for an overview of working capital. Days of sales outstanding were 39, flat sequentially and with the end of a year-ago period. Days of inventory were 33 versus 29 days last year and 31 sequentially. Third quarter inventory days are typically seasonally higher as we stock for stronger fourth quarter demand.

Days of payable outstanding were 47, flat sequentially and a day less than a year ago. This brings working capital days to 25, within our normal range of 22 to 26 days, and compared with 20 at the end of a year-ago period and 23 at the end of last quarter.

That completes the financial review. So I’ll turn the things back to Greg for a discussion of regional highlights and closing comments. Greg?

Greg Spierkel

Thanks again, Bill. I’ll start my regional review with North America, which was the star performer this quarter. The region’s sales were better than any third quarter in a decade, aided by solid post-recessionary demand and our proactive sales philosophy with operating margin hitting the third, the highest third quarter level since 1998.

Nearly every operating unit in the region contributed to this success. U.S. core distribution, data capture/point-of-sale, fee-for-services logistics and Canadian businesses were the strongest growers.

Earlier this month, our data capture/point-of-sale business enhanced its line card with the addition of Intermec, a leading vendor in this space which should help them fuel future growth. Ingram Micro Logistics gained strength during the quarter as clients benefit from back-to-school demand and began to gear up for the holidays.

Among our customer groups, bar, retail, and direct marketers exceeded the regional average. While corporate and system builder segments were slightly weaker. Many of those customers joined us earlier this month in our VentureTech Network Invitational in San Francisco. Attendance was the highest in history, attesting to the strength of our customer network and the value of our services and programs.

Another notable event was the addition of Renee Bergeron, a global IT executive with 25 years of experience as Vice President of General, sorry, Vice President of Managed Services and Cloud Computing.

Renee joins us from Fujitsu America, where she led a $300 million IT services business and oversaw the development of datacenter virtualization and cloud computing solutions. She will lead our sales growth and business expansion efforts in Managed Services and have a leading role in the development of our cloud solutions worldwide.

Recent research indicates that the majority of resellers want to work within the cloud environment, but don’t have the resources or expertise to do so. This presents a significant opportunity for us to educate our customers and establish an advantageous position early in the adoption cycle. This week, we were honored by Rackspace as Cloud Visionary Partner of the Year, so I’m proud that we’re being recognized for our leadership in this area.

The EMEA region also had an outstanding quarter with every country growing at double-digit rate. The region’s growth in local currencies outpaced many of our emerging markets, a noteworthy achievement given the uncertain economies in many European countries.

Germany, the U.K., Italy, Sweden, Hungary, and our data capture/point-of-sale business all grew stronger than the regional average. Retail and e-tail was robust throughout the region, while Germany, the U.K., and Italy experienced specific strength in corporate, enterprise, and SMB, respectively.

Our fee-for-service logistics business, which launched earlier this year in EMEA, is progressing nicely, while still in the early stages of development. This month, we announced the addition of another new client. Freecom, a leading provider of desktop and mobile storage solutions, headquartered in the Netherlands, selected Ingram Micro Logistics to provide fulfillment services throughout Europe.

The region also continued to expand its data center capabilities with the acquisition of Belgium-based, interAct, a value-added distributor of specialized IT solutions including hardware, software, and services that help resellers move their infrastructure into a virtual or cloud environment. This is our third acquisition in this value space over the last 12 months, joining CCD in the U.K. and Albora Soluciones in Spain and Portugal.

We’re also taking a greenfield approach with the launch of a specialized value division in France and moving international talent into the region. Jason Beal, a key executive who helped build the services business in North America, will be moving to the EMEA region at the start of the new year to develop a service-based portfolio on a Pan-European basis.

EMEA has emerged from the recession with one of the strongest years in its history and now is venturing into exciting new adjacencies to cultivate incremental growth and profitability. I feel good about the region and its future.

Asia-Pacific, not to be outdone by its brethren, delivered the highest quarterly revenues in the region’s history. The standouts were China and India, but sales in nearly every country grew. In China, India, and Singapore, substantially all vendors and product groups were strong while Australia and New Zealand found particular strength in the commercial segments. Australia also made progress in its services businesses, winning new accounts and developing greater presence.

The region continues to win industry accolades, including IT Channel Choice Distributor of the Year, Hardware Distributor of the Year, and Software Distributor of the Year from Australian Reseller News. These honors reflect our commitment to customer service and market leadership in the region.

The macro trends in Asia-Pacific continue to be in our favor, with many industry experts expecting double-digit industry growth to continue. This has attracted new competitors in some of our markets, however, which dampened margins somewhat compared to last year.

In addition to the predicted IT growth, Asia-Pacific continues to develop innovative ideas in its individual markets. For example, we are one of the largest mobile handset distributors in India and our datacenter solutions businesses in Australia and Singapore are more established than some of our more mature markets.

With the region embracing new technology and advanced solutions, often in advance of mature Western markets, our emphasis on expanding capabilities and technologies is on target for this geography.

In Latin America, the region delivered solid results with a combination of strong performances and some operations in transition. Mexico and Argentina were the top growers, while Brazil is rebuilding.

Mexico is buoyed by a new gaming software release, while Argentina grew at above-market rates with the addition of new vendors and customers as the country ramps up to a full-fledged operation. The export business has been a consistent profit contributor but experienced some revenue softness due to lower sales in components, a key category in their product portfolio.

Chile was also a bit soft but gained strength as the quarter progressed. Brazil continues to be an improvement, in an improvement phase but is making visible progress. We strengthened our local management team with the appointment of Dominique Deklerck as Managing Director (Inaudible) operations.

Dominique most recently was the lead turnaround of our Italian operations and ran the country, and ran other countries within Europe over the last several years. He has proven himself as a capable leader and we look forward to seeing his imprint in Brazil.

As a key emerging market on the global landscape, Brazil offers significant potential.

Many of the economies in Latin America are developing, so we expect some level of inconsistency in the region’s results as markets mature. This is more than offset by the opportunities within the region as better than average growth is predicted for both the local economies and technology spending through 2013.

As we round the final lap of 2010, a solid finish is expected ahead. We are tracking to a highly successful year of above-industry growth and profitability. This winning performance comes from a solid demand environment, coupled with our reenergized sales philosophy and more efficient infrastructure, and supported by sound management of costs, working capital, and gross margins.

In the fourth quarter, we expect sales and gross margins to increase sequentially, consistent with our normal end of the year seasonality. We will continue a disciplined approach to operating expenses, but interest expense will increase modestly due to the sale of public notes this past August.

Our business continues to evolve with a greater mix of emerging technologies and adjacencies that operate on a global scale. To accommodate this evolution, we recently made adjustments and additions to our executive team. Ria has taken a greater role in Marketing and Branding, with an emphasis on establishing a global identity for our growing adjacencies; and Sam Kamel joined the company on Monday as the new Head of Strategy, establishing a greater focus on emerging technologies. Sam, an electrical engineer with an impressive background in business development, will marry strategic planning with front-line execution to help us accelerate growth in youth market segments such as cloud solutions.

I’m confident in our ability to capture these new opportunities, while building on the success of this year. As we look at 2011, our plans call for growth equal to or greater than the overall IT market and return on invested capital maintaining a healthy spread over our cost of capital. We will continue to enhance our position in data sensor solutions, logistics, data-capture/point-of-sale, and services through organic expansion and some acquisitions.

I’m excited about what lies ahead. We emerge from the recession stronger, more flexible and ready to win. We have the right team with the right mindset, a solid track record, and a sound strategy and an exciting industry. We feel the progress that we have made will continue, which will serve our principal stakeholders, customers, vendors, associates, and shareholders really well.

I would now like to open the call to your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ben Reitzes from Barclays Capital. Your line is open.

Ben Reitzes - Barclays Capital

Yes, thanks a lot. Just two questions, if you don’t mind. Could you talk about the EMEA operating margin, I guess, why was it at the level again that it was and how quickly can it kind of rebound closer to, maybe, 1%, get closer and closer.

And then also, if you can just comment a little more on the inventory; I know it goes up sequentially to get ready for the fourth quarter, but it did seem like it grew a lot faster than revenue and was up a bit in Q-to-Q, so if you could just discuss why it maybe went up that much, or if that’s normal to you. Thanks.

Greg Spierkel

Okay, Ben, it’s Greg here. And I’ll take the first question and I think I’ll pass to Bill on the second. So EMEA, actually we’re pretty pleased. We’ve moved up about 10 basis points on operating income from where we were last year. Our revenues are up very substantially year-on-year. We did see a little bit of margin pressure but, generally, very strong performance overall.

Keep in mind that Q3 is always our softest quarter from a revenue perspective and rebate and margin opportunity. At a regional level, the months of July and August are our two quietest months, you know, probably running at about 60% of typical revenues, what we see for the rest of the year as so many Europeans are on vacation. And businesses, you know, close down in light of that.

But we had a very solid rebound in September with business coming back. And over a full year basis, you always have to look at Europe, really, on a full-year basis, you’ll see a significant swing back if you may in Q4 as additional revenues and programs are kicking in for the end of the year, which is a typical seasonal pattern that we do see in Europe.

So all-in-all, we feel good about Europe coming up on last year, revenues are up substantially and good operating performance. So I don’t think there was anything out of the ordinary here and if you look at it on a full-year basis, we’ll be well above the 1% for the full year. That’s for sure. Bill, on the inventory?

Bill Humes

Yes. Sure, hi, Ben, it’s Bill.

Ben Reitzes - Barclays Capital

Hey, Bill.

Bill Humes

Answering the inventory, yes, we closed the quarter at 33 DIO or days of inventory, which, if you look at Q2, that’s up slightly higher than Q2’s level of 31 DIO. As you know, we measure the working capital efficiency through the days of inventory invested or any DSO or DPO, for that matter.

Overall, it’s typically increased from Q2 to Q3 time period as we plan for a much seasonally higher fourth quarter growth level, so part of that is advanced stocking in considering the fourth quarter growth rate that we would expect, normal seasonal up-ticks.

Another point is, it has been an area where we have been investing in the levers of growth in market share and making sure that we are engaging with our vendors. So overall, net-net, if you look at the working capital days at 25, that’s right in the middle of our normal range of 22 to 26, which has been a range that we’ve held to for a while and will continue to hold to. So we’re comfortable with the overall inventory levels, but we will continue to monitor them.

Another factor to consider is by the time, generally, roughly 30 days to 33 days of inventory, by the time we’re having these discussions with the market, most of that inventory has been sold through anyhow.

Ben Reitzes - Barclays Capital

Was there anything in particular in the inventory that you needed to stock up on that was in shortage?

Greg Spierkel

Shortage, no. I wouldn’t say there was any shortage dynamics in the quarter. I think it’s a case of: the strong sales that we start seeing coming out of September really manifest itself particularly on a consistent basis through all regions because that’s the prime time for us to be moving more consumer products and that becomes even more prevalent outside of North America, where we see a lot of retail sales happening through distribution making its way to whether to retailers or e-tailers.

The other phenomena that is also a bit of a factor here that’s been playing into, I think, all distribution companies over the last, over the last year, is that we’re seeing a greater propensity of the ODMs and OEMs to be producing all of the systems and PCs in Asia and now the propensity of those major OEM players that we’re dealing with are shipping those products by sea.

There used to be a time until about a year or two back where there were still a number of last stage assembly operations and stocking points by the vendors in Europe or parts of Asia and now that’s all is coming directly oversea and then typically we are taking ownership of that inventory and holding it for maybe a couple of more days here and there than we might have in the past, as that mix is changing from where it’s originating.

Now, we’re getting some offset for that, as Bill commented, in overall working capital days, we’re staying within our normal range. So we’re seeing a little bit of a slight mix change there, which is a pattern of what’s being going on where the products are produced.

Ben Reitzes - Barclays Capital

Okay, thanks a lot.

Operator

Next question comes from Craig Hettenbach from Goldman Sachs. Your line is open.

Craig Hettenbach - Goldman Sachs

Great, thank you. Greg, any update on your thoughts on the pace of the PC refresh cycle and how much room is left going forward?

Greg Spierkel

Yes, I’d say PC versus rest of market are two different stories here. It’s a pretty interesting question. I think the pace of PC sales within the consumer domain has, the growth rates have slowed. They were strong double-digit in the first half of this year and the back half of last year. What I’m reading and seeing is that they’re probably slowing down into single digits but they are still growing. But the pace is slowing down. Again, that’s a consumer PC comment.

Now, part of the reason behind that is, I think what is everybody would see, is that hand-held smartphones that are becoming smart PCs in the palm right through to tablet technology are starting to display some of that lower-end market and are playing a role, I think, in what we’re seeing with the growth rates in the PC space for the consumer.

Now, in the business environment, I think the growth rates are still double-digit on a global level, maybe tempering a little bit as we go forward because they’ve just come out of a very strong three or four quarters here. And I would say that investment in the business context continues, if anything, to go up or remain fairly robust because of the underspend through 2008 and 2009.

So there’s still refresh going on beyond the PC around enterprise servers, storage, networking, enterprise software upgrades. That’s all still holding, I’d say, fairly firm and at this point, feels good going into the current new year, although we’ll see if any broader macroeconomic things change that a few months out. But right now it still seems to be having some reasonable positive pace on it.

Craig Hettenbach - Goldman Sachs

Got it. And then, Bill, on the gross margin, the comment increased sequentially. Can you just talk about the impact of mix and IML and then also just what you’re seeing in the pricing environment?

Bill Humes

Yes, Craig, are you saying the increase sequentially for the seasonal fourth quarter or are you talking about Q3?

Craig Hettenbach - Goldman Sachs

I’m sorry, for seasonal Q4.

Bill Humes

Yes. I mean generally our seasonal uptick is largely driven from our Ingram Micro Logistics fee-based business, which has its strongest quarter in the fourth quarter and the second strongest in the first quarter. So if you look historically, Q3 to Q4, you can see a natural bump up in gross margins and we would expect that bump up of gross margins to be normal, within normal seasonal trends. And that’s the driver.

Craig Hettenbach - Goldman Sachs

Okay. And then any comments, I know a quarter or two ago you talked about some activity in pipeline for that business. Any update there for customer activity in IML?

Greg Spierkel

Well, we did announce one new win in Europe. We are working on, again, the company there was Freecom. We are constantly working additional opportunities here in North America. There are some small sign-ons and sometimes some of these relationships don’t want to be expressly highlighted. But from a quarter perspective, I think we added three additional clients in North America and one in Europe, but there are others in the pipeline. And we’re working hard with the existing relationships to try to grow the business that we have with them.

I think what we identified to your question a little bit, Craig, earlier in the year is that one of our larger clients started pulling some of their inventory in-house. Although, they were growing very well they moved some of that in-house and we started having to find an opportunity to replace some of that and clearly we’re interested in doing that. That’s, we’ve been actively doing that with addition of some staff here in North America and Europe. So there’s is an area we’re building out with a view that these long-term sales cycle of two quarters to five quarters, we will start to continue to deliver some additional clients into this new business opportunity, particularly as we try to grow it in Europe.

Craig Hettenbach - Goldman Sachs

Okay, thank you.

Greg Spierkel

You’re welcome.

Operator

The next question comes from Brian Alexander from Raymond James. Your line is open.

Brian Alexander - Raymond James

Thanks. So all regions grew sequentially, but you had operating margins down sequentially in three out of the four regions; and I know you talked about pricing a little bit in Europe and Asia, but maybe just expand on that. I’m just wondering is the pricing environment getting more competitive here globally and, specifically within Europe, if you could drill down by geography or customer segment with respect to the pricing environment, I’m just wondering is the pending merger of (Inaudible) also having an impact on pricing in places like Germany?

Greg Spierkel

All right, let me try to touch on that as much as I can. So let’s deal with Asia first. So Asia, I think is, we tried to highlight, it’s a bit of a mix. Although it’s up year-on-year, it’s not as high as it may have been in prior years a little bit. So Asia, we’re seeing, is more of, additional sales over time. The mix in the region going towards China and a little bit of India will have somewhat of a downward pressure overall on operating margins in some instances, particularly with the China piece.

Again, we had a little less growth in the other more mature markets, so that was a bit of an influence in the mix a little. I’ll tell you another element of the mix here was some competition that’s tended to be in one or two countries are now moving into additional countries in the region, as an expected phenomenon, really, because there is good growth characteristics in a number of countries there. And with the entry of some of these players, there’s usually a little bit of a land grab, if you may, on trying to capture some share. In some instances, that has happened; in another instances, we just have to match prices a little bit to make sure that we retain our share position. So those are the sort of the influencing factors in Asia, Brian.

Within the context of Europe, I would say, you know, to your point (Inaudible) not seeing anything at all in the dynamics there that would be influencing things. Obviously, they haven’t gone ahead necessarily and started that process; they haven’t had approval to conclude the deal yet anyhow from external authority. So from what we see, though, is that we’ve, again, we’ve grown better than market, very substantially, I think, better than market. We feel maybe 50% better than the overall IT market is growing for hardware and software in Europe. And some of that, Brian, is coming with some relationships, volume-based relationships that might have slightly lower margin characteristics.

Again, operating income for Europe is better than last year off of the revenue growth. So we’re not disappointed with the results there. We feel very good that we’re getting great leverage out of the overall performance and that the return on invested capital continues to move up substantially from where we were a year ago. I think we’re trying to make that point that we’re making a mixed change, balanced mix change to drive the company’s ROIC at 12-plus percent, which is not something we’ve been able to say in the past, and at the same time grow better or at market rates everywhere. So the right mix, we feel, is the decisions that we’re making the world.

Latin America, smaller region, different set of conditions there. I think we’ve highlighted, finally, on this one that we’ve got a one operation in Brazil where we’re not executing as well as we would have liked over the last year. So we’ve been making some changes, restructuring, moving some people out, bringing in a new executive. Part of the catalyst behind all of that was there were a lot of tax changes and office moves that had to take place last year so that we could take advantage of being as competitive as some of the local players. So out of 35 countries, this is the only one, maybe, where we were struggling a little bit. So that’s not too bad within the total portfolio, and we feel we’ll get that right over the next quarter or two. But I think we’re trying to be very transparent that that’s the one country we’re sort of somewhat challenged with in Latin America. Sort of a long answer, but I’m hoping to provide some clarity for you.

Brian Alexander - Raymond James

Yes, very helpful. Just two follow-ups on the volume relationships you talked about in Europe, is that primarily retail, and then also, Bill, when you recover these foreign currency losses, I think you said over $4 million, will that be recorded below the line, as well, or will that actually get captured in gross margins?

Greg Spierkel

Let met touch on the first one, and I’ll let Bill do the second here, Brian. So on the volume side, it’s actually coming, there is two broad initiatives. We’ve worked very hard in the SMB space and an initiative that we took on board very much in the second and third quarter of last year to have a stronger presence there. So we’ve, generally, that’s better margins, but as we’ve been making some significant inroads across a number of customers, there’s been a little bit of pressure on that margin in that space. But we’ve had very, very healthy growth so the overall return for us, again, is still positive.

And yes, there’s been some good success in certain large retailer clients in two or three countries, which will have a slightly different margin profile, but the return on invested capital is still pretty healthy and we’re balancing those two dynamics at the same time.

And I’ll let Bill touch on the euro currency question.

Bill Humes

Hey, Brian. Yes, on the foreign exchange recovery, that historically we reported that in the foreign exchange loss/gain area so that’s most likely where it will be recorded when we recover in Q4.

Brian Alexander - Raymond James

Okay. So that’s not playing into your comments about a bump-up in gross margin?

Bill Humes

Nope.

Brian Alexander - Raymond James

Okay, good. Thank you.

Bill Humes

You’re welcome.

Operator

Your next question comes from Matt Sheerin from Stifel Nicolaus. Your line is open.

Matt Sheerin - Stifel Nicolaus

Yes, thanks. So I wanted to talk a little bit more about your guidance both on the revenue and the gross margin side. I know you don’t give specific revenue or EPS guidance anymore, but typically you have been up sort of mid- to high single-digits in North America sequentially, 30% plus in Europe. Is that sort of what we should be thinking in terms of sequential revenue growth and on a year-over-year basis, that translates to basically the low teens, 11% or so, which is lower than the growth rate you have been at. But you said in the press release that you expect that to slow, so is that what we should think about or is it different than that?

Greg Spierkel

Yes, I won’t get into too much specifics on North America or Europe; but you are right, North America tends to be a little less sequentially but it is usually positive, again, in part because some additional retail business and IM-Logistics type business. So again, single digit is probably in the right digit zone at least. And EMEA definitely tends to be a much stronger pop again, back to the comment I made before, two soft months and in this quarter, we have three strong months, so we’re going to have, again, a very substantial increase in revenues quarter to quarter sequentially in Europe.

Worldwide last year, we moved up quite a bit from Q3 to Q4. That was an abnormal year because, again, markets were very soft and still in a downdraft, very much so in the first three quarters. That changed in Q4 and we also put a lot, let’s say, put our foot to the floor a little bit more from a sales point of view in Q4. So there was a bigger step function. But if you look over the last 8 to 10 years, Matt, it has been low to mid-single-digits, excuse me, double-digits, my apology. And, I think, on a worldwide basis that’s not an unreasonable assumption in terms of our qualitative guidance.

Matt Sheerin - Stifel Nicolaus

Got it. That’s helpful. And then on the gross margin I know on Craig’s questions before, regarding your logistics business. Typically you’re up in the 18% to 25%, 26% basis points in gross margin. I know last year you had a hiccup with a big customer, so should we be expecting that kind of range or maybe less so because of that one customer?

Bill Humes

Let me answer that a little bit and, Greg, chime in if you want. But on the IML business and the strength of those customers, we’ve actually, the softness that we had talked about in Q4 into Q1 or so, of 1 and 2 customers has generally come back in growth within the existing customer base, it has been pretty strong towards the back half of this year and we expect it to be fairly strong into Q4. So I would say last year may not have been as good as a judge of seasonal uptick from the fee-based logistics business as maybe historically before last year.

Matt Sheerin - Stifel Nicolaus

Okay. And then just one quick last question, if I may, just regarding expenses. You did grow expenses a little bit faster last quarter, SG&A percentage went up. I know you’ve done a great job of cost-cutting and those restructuring programs are over, but were there some expenses or any FX headwinds that led to the higher number, and are you looking, you’re sort of back in the investment mode, right now, in terms of expenses?

Bill Humes

Just a clarification, you’re speaking Q2 to Q3?

Matt Sheerin - Stifel Nicolaus

That’s right, sequentially.

Bill Humes

Yes. Overall, in general we’re very pleased with our operating expense management and the results. If you look at the Q2 to Q3 increase in both total dollars and as a percent, I did mention, one of the items in my prepared remarks was a little bit of cost that we took in reorganizing, realigning some of the Avid facilities that, we’d actually released that information in a release earlier in the quarter. So that was a little bit of costs and then Brazil staff-reduction costs, as part of our improvement actions. So overall, roughly, that was a couple of million dollars or so.

Also as we had a little bit stronger IML business from Q2 to Q3, as we started to recover and grow some of the existing customer bases as well as some of the add-ons, that revenue and, it comes with a lot higher OpEx as well. So net-net, it’s good business on an operating margin basis, but it does have a higher OpEx configuration. And then, obviously, with the higher sales growth, there is a little bit more volume along with the currency growth, which is a couple of million.

Matt Sheerin - Stifel Nicolaus

Got it. Okay. Thanks a lot.

Bill Humes

Yes.

Operator

Your next question comes from Bill Fearnley from Janney Capital Markets. Your line is open.

Bill Fearnley - Janney Capital Markets

Yes, good afternoon. If I could follow up with a couple of questions on the enterprise, how are you guys performing versus your management expectation and any additional color on server storage and the networking business there? Just the macro environment and your performance in the enterprise sector?

Greg Spierkel

All right, this is an area of continuing focus for us, Bill. And it’s a combination of, we are already doing a fair bit of enterprise business in many countries and we’re continuing to invest; so I will deal maybe just the macro level, let’s say, with each region briefly on this.

So within the context of Europe, we completed another acquisition in the quarter, interAct, a Belgium-based play, not big revenues, in the tens of millions, but it’s, again an incremental commitment to that country; and that team will start taking over our overall initiatives in enterprise and value-based solutions selling. We have done the same late last year with computer center distribution in the UK and the quarter back, we had announced the investment of similar approach in Spain with Albora.

So within the Europe context plus what we are trying to do in France and what we already have today in Germany, we’re starting to build this out. I would say Europe is least advanced, if you may, in that regard within the company in terms of an organization structure but it’s, I would say, this year is our first full year of, call it commitment to start moving forward in a more meaningful manner.

We do have a number of vendors and products already within the portfolio, but it’s not consistent around the region and it’s not been managed as a separate division, necessarily, thus far, but that we will be moving down that path over the next year or two.

And we’re pleased with the progress there, by the way, and we’re going to continue to invest if we can find good opportunities there, whether greenfield or acquisition.

We go forward to North America. We just recently announced in the quarter that we’ve set up a more divisionalized structure around this, two divisions, if you may, in the value space, enterprise space, one completely centric around computing and related software, and another fairly centric around networking and some related security services that are nicely combined.

So two leaders to drive that. Sales force starting to separate, customers starting to separate so we’re taking steps of getting a greater critical mass and focus on that as well, although again, much like Europe but much further along, we’ve been in this area, let’s say, for the last three years with very good performance on some vendor relationships but the portfolio isn’t as broad as we would like it to be and, nor are the technical skills quite where we need to be from where we want to go over the next two to three years.

So, again, this is a multiple quarter voyage in North America over two years, three years as we’re building it out. In North America, it’s truly greenfield or buildout. There isn’t much in terms of an acquisition opportunity there. And Asia has been a similar story. Asia soft and acquisition that we made happen in Q2 in Hong Kong. Again, high-end software play, very technically oriented group and they will take the lead for Hong Kong.

But I think there’s an opportunity next year in that group to play an even greater role with greater China as well, so they’ll start with one location that we’re going to build that out a little bit into China and we’re looking at building out a similar capability and have been building out a similar capability in China. We have a separate division to some extent in India. We have very good capabilities in Singapore, Australia, and New Zealand already, and we’ve made some either greenfield or acquisition type of investments there.

So this whole space is getting more attention. It’s already more than a few billion dollars of business for us, but it hasn’t been managed, on a global level, it hasn’t been managed as a separate division, necessarily, and with all the technical and corresponding solution-based orientation that we feel it should have, if we’re going to be a stronger player as we go forward, so that’s the de-orientation and the direction we’re taking this; and it is performing at this stage for us pretty well, but we’re continuing to invest in it.

Bill Fearnley - Janney Capital Markets

And if I could shift gears, just quickly on the business intelligence center, any update there on what’s happening with the resellers or with the OEMs regarding some of the predictive analytics you’ve been doing?

Greg Spierkel

Well, we continue to see success with the vendor community. There has been some part of our success for the profitability that we’ve seen improvement in North America can be directly linked to the BI center, or the business intelligence center, without question, we’re getting a deeper dive opportunity into certain client base with end users on behalf of vendors and programs that they want to go tackle with us. That BI center is driving it. The reseller uptake has been a little quieter than I would say we would like, but the vendor side of the equation has been very good; they’re seeing really good value in the programs that we’re putting behind the, data analytics that we’re providing.

Bill Fearnley - Janney Capital Markets

And then one last one, did you guys break out what percentage of revenues HP was in the quarter?

Bill Humes

No, we haven’t. We will in the queue.

Greg Spierkel

Yes, we’ve tended to be running between 22, 23% for the last two, three quarters. I haven’t, to be honest, looked at it, but I would be surprised if it would be much off of that.

Bill Humes

Yes, within a couple of percent of that.

Greg Spierkel

Yes, I wouldn’t, I don’t have the number off the top of my head but it’s around that. That’s what it has been the last few quarters.

Bill Fearnley - Janney Capital Markets

Excellent. Thanks, guys.

Greg Spierkel

You’re welcome.

Operator

Next question comes from Ananda Baruah from Brean, Murray. Your line is open.

Ananda Baruah - Brean, Murray

Hey, guys, thanks for taking the question. Just a follow-up on the gross margins, if I could, was the implication that we should expect overall company gross margins to resemble what your typical December quarter seasonal patterns have been?

Greg Spierkel

Yes, I mean gross margins will go up quarter to quarter, a combination, as Bill highlighted very clearly, of year-end IML impact, which is largely driven from North America, but I would say there is also a factor typically at the year end with a number of programs and vendor initiatives that are pretty active in Q4, more so than Q3, so that also pulls the gross margins up, so you should see typical seasonality as you have seen in prior years from us.

Ananda Baruah - Brean, Murray

Okay. Great. Thanks. I appreciate that. Then I guess just circling back to OpEx dollars, maybe Bill this is one is good for you, now that we’re seeing sequential growth, on a year-over-year basis, should we begin to see, sequential growth in line with revenue growth, on a year-over-year basis, should we begin to see sort of a, I guess, a divergence from the growth pattern of less than half revenue growth, or should we expect that to continue for a period of time here?

Bill Humes

Hi, Ananda. Yes, overall, I think we have talked about it through most of this year and the back half of last year as we started to, you know, reenergize our sales efforts and our focus and engagement with vendors and drive for market-share recovery. We said also as we swing back with the economy, we’re going to be very, very tight on OpEx.

And hopefully the high end was going to be half the rate of sales growth on OpEx growth, which I think we’ve done for the last several quarters. So I’m very, fairly successfully on a year-over-year basis. As we’ve recovered a lot of that share and as we’ve had some substantial operating leverage and recovered a lot of that loss of leverage that we had early 2009, I would say we’re coming back to about where I think in the go-forward thought process where our goal and our targets are going to be more in the half, 50% rate of growth of sales in the near term and we may continue to try and drive, obviously, below that but that would be, it’s settling down a little bit is that your point, so I agree with you.

Ananda Baruah - Brean, Murray

Okay. Great. Thanks. And just a quick housekeeping. Should we expect, what should we expect of the share count for the December quarter?

Bill Humes

You’re going to have to model that in. We came out of the quarter, I think, with this quarter with 159 million shares on a fully diluted basis, 159 and change. Obviously dependent upon the stock price that impact the equivalent shares, any stock repurchase activity that may or may not occur. So that’s all going to be a factor but it doesn’t, unless we’re buying a lot of shares, it hasn’t fluctuated significantly from one quarter to the next.

Ananda Baruah - Brean, Murray

Okay. Great, guys. Thanks a lot.

Bill Humes

Sure.

Operator

Your next question comes from Shaw Wu from Kaufman Brothers. Your line is open.

Shaw Wu - Kaufman Brothers

Yes. I’m going to revisit the expenses again; it’s probably a question more for Bill. The expenses this quarter, they grew, normally you see a bump-up more in Q4. I know the last two years were a little unusual. Your expenses actually declined on an absolute basis sequentially and I understand there’s some one-time items involved in there. So the question is, should we expect a bump-up, because maybe this quarter the expenses were a little higher, will the bump-up in Q4, perhaps, would that be, how would that be? Could it be less pronounced? Or, any further color there? Thanks.

Bill Humes

Sure. Let me try and answer that. In the end, a lot of the bump-up in gross margin, as Greg mentioned and I mentioned earlier, is driven by the fee-based business, and that’s a 100% gross margin business as fee, and then it’s also a much higher operating expense model as well, because the fee base is, or rather the revenue base is low. But net-net it’s a much better operating margin than our base business. That dynamic will still exist in Q4.

The Q2 to Q3 expense increase as a dollar amount and slightly because of, on the, as a percentage of revenue, does have to do with items I discussed earlier, one of them being the amount of business reorganization in Avid and in Brazil, that’s a few basis points, a little over 2 million. But IML had strength from a Q2 to Q3 basis, too, which impacted it. And also, you have to factor in part of the sequential revenue growth from Q2 to Q3 was strengthening currency, which probably represents roughly 20ish percent of the sequential growth and that OpEx on a translated U.S. dollar grows, obviously, at a lot higher rate because it’s just an accounting translation.

Going into Q4, I mean, we are obviously going to continue to manage operating expenses as tight as possible. It will naturally go up sequentially because of the logistics business and the rest should be somewhat variable relating to just normal business growth on variable costs running through the warehouse and commissions and that kind of stuff. So nothing else extraordinary, at this time, at least.

Shaw Wu - Kaufman Brothers

Okay. I mean, I guess we should still expect to see leverage, meaning like a drop in, like, this quarter, the OpEx was, I guess, around 4.1%. I guess, should we expect to continue to see leverage there typically seen in Q4 as a percentage of ...?

Bill Humes

Yes. I mean, as you go into much higher operating, I mean much higher revenue levels in Q4, we generally do realize some OpEx leverage, understanding if you pull out, if we were to pull out the Ingram Micro Logistics business, which is an entirely different model, the OpEx leverage on the core business is very, very good, from Q3 to Q4 and Ingram Micro Logistics business is a completely different model and it would be a little easier if we disclose that, but for competitive reasons we don’t disclose the IML business.

Shaw Wu - Kaufman Brothers

Okay, thank you.

Bill Humes

You’re welcome.

Operator

Your next question comes from Ben Reitzes from Barclays Capital. Your line is open.

Ben Reitzes - Barclays Capital

Sorry, just had a quick follow-up. I just wanted to reconcile, and I’m sorry if you said this but I didn’t pick it up, the interest in other, recover the loss but then you have the lower interest income and higher interest expense. I mean, so what does that line do sequentially. It’s just down a little bit and that’s how we should model it going forward? Or is it more significant drop-off? If you could just, because it is such a big swing, I think it’s worth hashing out.

Bill Humes

Yes. You have a couple of factors. One, we’ve invested a lot more in the business by, in the sense of the net-net cash levels being lower than last year’s same quarter and that’s been reflected in the last couple of quarters. So there is a baseline that you can judge that, and then you have the increment of the $300 million public debt that we issued in mid-August at roughly a 5.25 coupon rate. It’s a little bit higher given cost of issuance. So let’s say 5.4ish with cost of issuances and so there’s a full quarter of that you can experience in Q4 as well as the relative capital needs you’ll need from the larger amount of business we’re doing. And then offsetting that will be some degree of, or all of the recoveries from this foreign exchange, pan-Euro inventory issue into the fourth quarter, which should offset it. You’ll be able to see that, obviously, when we issue the Q and Ks on the differential. And the Q comes out in early November; you’ll be able to see the individual line items as well.

Ben Reitzes - Barclays Capital

But I directionally have it right, like it just goes down a little bit, I just want to make sure, not surprised again.

Bill Humes

Yes. Yes. It should go down a little further or fully. It’s going to go down for the foreign exchange, but it’s going to go up for full quarter’s impact from the bond.

Ben Reitzes - Barclays Capital

All right. I don’t think it’s out of line bad. It was 9 million more than expected in the quarter so.

Bill Humes

Yes.

Ben Reitzes - Barclays Capital

The tax rate, by the way, what’s the model going forward given that you mentioned mix? Did I miss that? Is it 26 or 27 from now on? You said model 28 before, I was wondering if it’s down moving towards a lower rate?

Bill Humes

Yes. For the full year and for the fourth quarter, somewhere between 27 and 28 would be reasonable modeling.

Ben Reitzes - Barclays Capital

Okay, but for next year given the different mix, it’s too early to tell?

Bill Humes

A little too early to tell. I’m going to probably continue to think about 28 for the near term and it depends on relative mixes of income going forward.

Ben Reitzes - Barclays Capital

Got it. Just wanted to check on that. Thanks.

Bill Humes

No problem, Ben.

Ben Reitzes - Barclays Capital

Yep.

Ria Carlson

Ashley, we’re ready to close out.

Operator

I would now like to turn the call over to Ria Carlson for closing remarks.

Ria Carlson

Thank you, Ashley, and thanks, everyone, for your questions. That concludes our call. A replay of the call will be available at 800-678-3180 for one week. Thank you very much for joining us. Good bye.

Operator

Thank you for participating in today’s conference call. You may now disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!