Ingram Micro's (IM) CEO Alain Monié on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: Ingram Micro (IM)

Ingram Micro (NYSE:IM)

Q2 2014 Earnings Call

July 24, 2014 5:00 pm ET

Executives

Damon S. Wright - Senior Director of Investor Relations

William D. Humes - Chief Financial Officer and Principal Accounting Officer

Alain Monié - Chief Executive Officer, Director and Member of Executive Committee

Paul Read - President and Chief Operating Officer

Analysts

Benjamin A. Reitzes - Barclays Capital, Research Division

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

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

Ananda Baruah - Brean Capital LLC, Research Division

Keith M. Housum - Northcoast Research

Osten Bernardez - Cross Research LLC

Joe Yoo - Citigroup Inc, Research Division

Operator

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

Damon S. Wright

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

During today's 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 refer to today's news release and documents filed with the Securities and Exchange Commission, specifically the Risk Factors listed in Item 1A of our Form 10-K for the fiscal year ended December 28, 2013, for more information on the risks that could cause actual results to differ materially.

Throughout this call, we'll refer to non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the 2 for the periods reported in the release.

Please also see the Investor section of our website for our slide deck that includes additional information disclosed under SEC Regulation G. This conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company.

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

William D. Humes

Thank you, Damon, and good afternoon, everyone. We had a strong second quarter, as continued execution by our teams and further stabilization in demand across most countries led to record Q2 revenues.

Total revenues grew over last year by $600 million or 6%, with the majority of our largest countries contributing strong single-digit or low-double digit local currency revenue growth. Gross profit grew by more than 6%, and non-GAAP operating income was up over 7%.

As anticipated, we delivered excellent leverage over the 2014 first quarter, with a 5% revenue increase driving a $0.19 sequential increase in non-GAAP operating income. We are benefiting from some of the investments we discussed in Q1, including initial fee-based revenue in Asia Pacific, to support 2 new global supply chain customers.

Prior to getting into more details, I want to point out we are now reporting 4 segments: North America, Europe, Asia Pacific and Latin America. The prior period also reflects this change.

As we continue to integrate our acquired mobility business, we have been combining formerly discrete operations into shared warehouses, systems and back-office functions, making it increasingly difficult to separate the businesses. We will continue to provide additional details and drivers by region for our technology and other solutions business, which includes technology solutions, supply chain and Cloud. And we will do the same for our mobility business.

Q2 revenue was $10.9 billion, benefiting from strong growth in North America, Europe and Latin America. Technology and other solutions revenue was up 5% to $9.2 billion. Q2 Mobility revenue was $1.7 billion, up 13%, despite $180 million in lower handset sales in Indonesia versus last year related to a market share loss by a large OEM.

Second quarter gross margin was 5.81%, up 3 basis points year-over-year. We continue to benefit from a better mix of higher value business. This more than offset an increase in high volume, but lower gross margin revenue in consumer markets in Europe and New World building [ph] distribution wins in North America. Non-GAAP operating expense was 4.47%, flat versus last year and down significantly by 23 basis points from the 2014 first quarter.

Non-GAAP operating income was up 7%, and non-GAAP operating margin increased year-over-year for the fifth quarter in a row to 1.34%. Interest and other expense was $21 million, in line with our expectations. Non-GAAP EPS of $0.54 was relatively flat to last year. However, last year benefited from approximately $0.03 from a discrete tax benefit.

The effective tax rate was 34%, which includes the negative impact of approximately 4 percentage points, related to a portion of restructuring charges recorded in jurisdictions where there was no tax benefit realized.

Looking at some regional highlights. North America revenue of $4.6 billion grew 8% year-over-year. The region drove solid leverage, with operating income increasing 17%. Non-GAAP operating margin was 2.14%, up 15 basis points.

North America technology and other solutions revenues grew in the low-single digits. Towards the end of the quarter, the competitive selling environment began to stabilize for the first time in more than a year. Networking and ProAV sales were strong, and we had relative strength in PCs, driven by the overall refresh cycle, as well as the expiration of Microsoft XP, both of which we expect to continue through Q3 and a bit into Q4.

Mobility revenue in North America grew high double digits, benefiting from the initial ramp-up of recent wins in the U.S. to support the Verizon Wireless channel. North America mobility also benefited from adding customers in the fast-growing wearables market, and resumption of services for Cricket Wireless, business that had been lost just before we acquired BrightPoint.

Europe revenue up $3.4 billion, was up 13% year-over-year in U.S. dollars and up 7% in local currency. Non-GAAP operating income increased 10%. Non-GAAP operating margin was flat at 53 basis points due to mix, as solid revenue growth in most countries was driven by lower margin retail and consumer markets.

As highlighted at June Investor Day, we expect to see strong improvement in Europe's operating margin over the next 2 years. We are making good progress on executing on our organizational effectiveness programs in the region, although the realization of cost savings takes time in the European environment, with most of the savings not materializing in the region until Q4.

Led by growth in all countries except Sweden, Europe technology and other solutions revenue grew mid-single digits in local currency. Germany delivered 7% growth, benefiting from a rebound in consumer spending, with systems performing well based upon relatively robust sales of PCs and tablets. France was up 5%, driven by strong sales in Data Capture/Point-Of-Sale.

In the U.K., the SMB end market continue to be a standout. Europe Mobility revenue grew mid-single digits in local currency, led by strong smartphone sales in Germany, Sweden, Spain and France. Growth was somewhat limited by the absence of large deals related to new handset model launches that benefited last year.

In Asia Pacific, second quarter revenue of $2.4 billion was down 7% in U.S. dollars and down 5% in local currency. Double-digit local currency growth in India and Australia was more than offset by the $180 million decline in handset sales in Indonesia and reduced sales in China.

Non-GAAP operating margin for Asia Pacific was 1.12%, down 3 basis points from last year, due primarily to weakness in our Middle East and African mobility business. The region's non-GAAP operating margin increased sequentially by 21 basis points over the 2014 first quarter, as we are benefiting from prior investments, including driving service fee revenues from recent supply chain solution wins.

Asia Pacific technology and other solutions revenue was flat in local currency. Strong sales of advanced solutions drove double-digit growth in Australia and Singapore. PC sales were strong in India, Australia, Singapore and New Zealand, leading to modest regionalized growth for this product category for the first time in 4 quarters.

Growth in these countries, however, was offset by declines in China, which continues to be affected by soft PC, tablet and accessories demand for the vendors we carry. Asia Pacific mobility revenue was down a bit more than 20% in local currency, related to lower sales of handsets from single OEM into Indonesia. Some of the decline was offset by strong growth in India and recently entered markets. We are gaining share with leading OEMs in the region, and benefiting from strength in emerging handset suppliers. Q3 marks the final quarter of difficult revenue comparisons in Indonesia, and we expect to see Asia Pacific's mobility sales resume solid growth rates thereafter.

Latin America revenue increased 13% in U.S dollars and 19% in local currency. Non-GAAP operating margin of 1.59% was down 53 basis points from last year. Last year benefited by 23 basis points from the sale of a building in Argentina. Additionally, this quarter we had a greater mix of higher volume, lower margin hardware sales and investments to build out the region's rapidly growing mobility business.

Latin America technology and other solutions revenue was up low double digits in local currency. We continue to perform well in Brazil, where strong sales in advanced solutions helped drive a 23% growth, despite added holidays due to the World Cup.

Mexico also delivered an 11% growth, with the strongest increases coming from tablets. Mining the export continues to experience slower retail sales versus last year, due primarily to a lack of new product launches.

Latin America's recently established mobility business contributed strong revenue growth, but from a small base. We are rapidly gaining a foothold in this market, and expect to continue to experience accelerated growth rates.

Turning to other financial highlights in the quarter. HP and Apple represented 16% and 7% of total sales, respectively. At quarter end, our cash balance was $470 million, with total debt at $1.2 billion. Working capital days were 27, flat sequentially and up 3 days from the 2013 second quarter, due primarily to retail growth in Europe and additional mobility distribution business.

CapEx for the quarter was $19 million. Depreciation was $23 million, and amortization expense was $14 million. Non-GAAP return on invested capital for the trailing 12 months was 10.2%, which is above our weighted average cost of capital by about 200 basis points.

I'll now turn the call over to Alain. Alain?

Alain Monié

Thank you, Bill. At our Investor Day last month, we laid out our roadmap for continued improvement in our operating model over the next 2 years, and committed to delivering non-GAAP operating margin of 175 to 200 basis points in 2016, 35 to 60 basis points improvement over 2013.

We also outlined our strategic position and the benefits we will deliver from accelerating higher margin service businesses, leveraging global mega trends in mobility, supply chain, data center enterprise, computing and cloud.

Given a revenue base in excess of $40 billion, as we grow in many of these strategic areas, the top line impact will be relatively small. However, the benefit to our profitability is expected to be meaningful. Over the next 2 years, the operating income contribution from our services businesses will grow to 20% to 25%, up from only 14% today.

Our second quarter results demonstrated a solid continuation to delivering on these commitments. Our growth trajectory, along each of our business lines during the quarter, was consistent with the longer-term compound annual growth rates we expect. We have maintained an overall disciplined approach to sales, but have also been strategic in taking share selectively. The result is improvements in profitability across the company, with operating margins expanding year-over-year for the fifth quarter in a row.

As you heard from Bill, the demand environment continues to improve globally. This is a trend we expect to continue throughout the year. In addition to strength in technology solutions, such as networking and systems, our core SMB market remains healthy and a good driver of company-wide growth. Consumer and retail markets are stabilizing throughout the world, and we are benefiting from strong growth in Europe, Latin America and in many of our larger countries in Asia Pacific, as our differentiation is enabling us to continue to make share gains.

We're well-positioned within the mobility life cycle ecosystem and are being selected as the partner of choice for the world's leading carriers and OEMs, which is producing growth rates above market. We're also benefiting from early investments in supply chain solutions, which grew well above the 20% to 25% compound annual growth rate we expect to deliver through 2016.

We're executing on the contracts we recently won in Asia Pacific, and we expect these supply chain solution services revenues to continue to ramp up throughout the year. In our CloudBlue IT active disposal business, we have nearly doubled our operating facilities since our acquisition of the business last year, and are expanding into India and China.

CloudBlue was recently awarded an important piece of recurring business from a major e-tailer, which we believe has the potential to greatly increase our North America volume over the next year. We're also opening a new state-of-the-art repair facility in Indianapolis that will produce certified, preowned, retail ready electronics for sale via e-commerce and the Ingram Micro channel.

We're having similar success with Shipwire. Since acquiring the company in December of last year, Shipwire has continued to grow in all regions where they offer services. As mentioned on our last call, we are rapidly expanding these capabilities internationally. We're currently integrating our Australian and Canadian facilities to better enable emerging companies to easily leverage global world-class logistics. This expansion also allows us to rapidly and at low-cost onboard larger logistics services customers in these important regions of growth.

In cloud, we have launched our marketplace, based on an automated aggregation platform that will allow much easier vendor solutions onboarding, as well as a single unified place to provision numerous disparate solutions from the customer's perspective.

This automated platform will really allow us to scale our Cloud business. And at this stage, we're delivering growth rates above our longer-term objectives. We have also begun to launch Ingram branded cloud solutions, such as Ingram Micro Hosted Exchange, Ingram Micro Virtual Private Servers and Ingram Micro web hosting.

In addition to strong execution on revenues and delivering margin improvements, we remain on track to achieve the full $80 million to $100 million run rate of annualized savings in 2016 from our worldwide organization-wide effectiveness program. We are making significant headcount reductions, as we delay [ph] globally and are about to close and consolidate some European facilities. We realize market savings from these programs in Q2 and expect additional savings in Q3.

As we look ahead for the 2014 third quarter, we currently expect worldwide revenue to increase year-over-year in the high-single digits. Gross margin is expected to improve solidly over the 2014 second quarter, and be relatively flat with the prior year. Operating expense, as a percent of revenue, is expected to continue to benefit sequentially, over the second quarter from incremental cost savings and year-over-year, from revenue leverage.

I'm pleased with our second quarter results, which not only continued to show growth and increase profitability, but are also well aligned with our longer-term goals I've shared with you in June in New York City. I'll now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Ben Reitzes with Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

A couple of questions, with regard -- first, with regard to APAC. Bill, you mentioned in your comments what you thought the revenue trajectory could improve at there. Could you just recap that, and what gives you confidence that you can reaccelerate there? And then I have another question around PCs.

William D. Humes

Yes. Hi, Ben, it's Bill. I'm not sure I recall doing what we expected the revenue growth could be overall. But demand-wise, it was kind of a tale of different cities and stuff. We had very strong growth overall in most of the Technology solutions area, with strength in India, really strong Australia growth, Singapore and so on. But China, as we've talked about in previous quarters similarly, in the vendors and lines that we sell, that has been challenged. And then the other half piece of that is the mobility side of things, where we actually did have $180 million of decrease year-over-year in Mobility revenue to one OEM that's lost share. Now that is -- that's generally, and maybe that's where your comment comes from, Ben, is that generally anniversaries after the third quarter. So it gets probably lesser in Q3, and then it's pretty much on a stable run rate after that in Q4.

Benjamin A. Reitzes - Barclays Capital, Research Division

All right. So we, in terms of our modeling, we can take out the 1 80 hit and then kind of get to, what the real trajectory is? Do you [indiscernible] that, going forward?

William D. Humes

Yes, for that, for the mobility side of things, yes.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. And then, with regard to PCs. You mentioned you expected to continue in the third quarter. And you obviously have very nice revenue guidance with the high-single digits, year-over-year growth. Is that it? Or do you think that PCs are driving your business even further than that, maybe due to the better employment statistics or what you're seeing in the economy? And if you don't mind, commenting on servers as well. If we have a server cycle, what can that do for your business?

Alain Monié

Hi Ben, this is Alain. I'll start and pass it onto Paul, to give some color here. But the growth that we're seeing coming is indeed the PC's continuation that we have seen in Q2, and that we see going -- continuing, maybe to a lesser extent in Q3, but still being there, solidly. But overall also, as you know now, we include our mobility business there. And as we onboard the Verizon-associated retail channels, that gives us also a very strong growth element. So it's really the combination of both that gives us that. But Paul, I don't know if you have something to add to that?

Paul Read

Yes, overall, in the main regions around the world, we've seen, around about 7%, 8% growth in PCs on a year-over-year basis, mostly on the desktop side, benefiting, of course, from this refresh cycle that we're going through. We see some of that continuing through into Q3 and maybe a little into Q4. Heavy amount of it has been in Europe. That's been double-digit growth there. And we've got a lot of exposure to the retail consumer channels there. And so that's what we would expect. And in North America, we didn't have much growth last quarter Q1, but Q2 has been strong for us, even when we take away, kind of some of the programs that we didn't participate in, the year-over-year growth is still high-single digits for us. So I think that's been good. And that's not been done at the expense of profitability, either. We've still been pretty disciplined about it, and we've been able to bring in some pretty good business for us. We have seen strength as well with Chromebooks in the education front. And working with a number of our vendors, we've had some growth there. So I think Q2 is probably a bit of a peak, and then it should tail off a little in Q3 and Q4.

Benjamin A. Reitzes - Barclays Capital, Research Division

That answer [ph] my question on the -- well good, yes, that's it, on servers yes, sorry.

Alain Monié

Yes, now on servers, I think it's a bit difficult to comment at this stage. As you know, it's more down the road. But one could expect a similar effect of tailwinds, maybe not to the same level of how it affected the PCs, but there is a possibility that it will also affect positively, when that happens.

Operator

We'll take our next question from Brian Alexander with Raymond James.

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

So just to follow-on, on Ben's question on PC. So it sounds like it grew 7% to 8% in Q2, which was better than the overall company growth of 6%. But Paul, you'd mentioned that you think it might have peaked in the second quarter. So I'm just curious, like what the trajectory is from here in terms of that deceleration, relative to your overall revenue guidance of high-single digit growth? In other words, how much below that high-single digit growth do you think you'll see the PC business in the third quarter?

Paul Read

We think -- it's difficult to tell, but we think there'll be some tail-off, I'd still expect it to be around the mid-single digit kind of number. But we did have a good quarter in Q2 in particular. And so I would expect to have some tail off, and then some resulting in Q4 as well. But it's been pretty strong for us.

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

And that's a market comment. That's not Ingram getting any less aggressive in pursuing that business, correct?

Paul Read

Correct. Yes, that's just -- we see the market tailing off that way. We've had a good start in July. The month of July has been strong. But I think we'll see some tail off here through the summer months.

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

Okay. And then Bill, just on cash flow. I think this is the second quarter of negative cash flow this year. And I understand the impact that growth has on working capital. But if I look at the DSOs, they were up a couple of days. Inventory was up a couple of days, year-over-year, so. Just talk a little bit more about what's going on with working capital, how we should think about cash flow for the year, given how we've started the first half. And then, when you talk about inventory, can you just be a little bit more specific on where you might have seen that increase in inventory, either by region or product category?

William D. Humes

Yes, sure, Brian. Overall, as you notice, our working capital days are at 27 working capital days. It's really a, on a year-over-year basis, up in DSO, up in inventory, slightly down or better in DPO. And I'd say, overall, a large driver of that, Brian, is building up business, like the Verizon business. We also had very solid, consumer-related business in Europe. So I would say that's the 2 places where we're having kind of inventory buildup, as well as the DSO buildup. The Verizon business in the U.S. that we're winning started in Q2, but continue to ramp up more so, and will in Q3 and onwards. So we're kind of having to invest upfront in the capital. So it's like the inventory. And then, as we realize the sales, it should stable out a little bit. Overall, that working capital day fluctuation from year-end, which was out, say, probably a fairly low and extremely good year-end close, a little under 22, and now at 27 working capital days, at the end of June, has been the driver in the differential and cash flows. So except for the investments in the business, we are driving the right cash flow, it's just we're investing these upfront. Hard to tell what it will be at the end of year. It's obviously a working -- working capital days are always a focus point that we manage every day, in every way. But some of this business is driving a little bit higher days. I won't expect it to get down to the 22 level we had at year-end, so I would kind of anticipate a little bit higher. But other than that, I can't really tell you exactly when that will come in. And that's the driver of cash.

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

Do you think you'll be cash flow positive for the year?

William D. Humes

That really depends on the working capital days, Brian. So I would say, probably, with the investments that we're making, maybe we end up being flat, roughly.

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

Okay. And then just a quick one, on the accelerating growth in Q3, from 6% up to high-single digit year-over-year growth. Is all of that the Verizon wins that you've talked about? Or are you actually seeing acceleration besides that? I know you said PCs might slow, but anything else in the rest of the business that you think is actually improving still?

Alain Monié

Yes, Brian, this is Alain. I can give you a little bit of color on how we're looking at Q3. If you cut it by business, the 2 major business, technology solutions and mobility, technology solutions, the core of our business, we see growing mid-single digits year-over-year, with a good OI leverage there. And mobility, we're seeing that growing double digit. And that's based mostly on the ramping up of the new business we've won, and in spite of the Indonesia downturn, as we mentioned before. If you take a look by region, I'd say North America would probably be, again, growing in Q3 in the high-single digit, driven by Mobility and the continued PC refresh, even if it's not at the same level of Q2. In Europe, we continue to see very healthy growth in local currency, similar to Q2, I would say. And again, driven by consumer PCs and Mobility. In Asia, very strong growth in India and Australia, double-digit. But offset by China and the final negative comparisons in Indonesia. And finally, in Latin America, that still remains the region that grows the most out of the 4. So solid growth we see there a continuation. So it's really more than just the Mobility wins.

Operator

We'll hear next from Matt Sheerin with Stifel, Nicolaus & Company.

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

So just back, I know a lot of questions on Mobility. So you sound some of the most confident with some of these ramps. But on Verizon, that networking business, is -- you had given us the range, it's fairly wide range, I think $300 million to $700 million. As that is ramping now, do you have better visibility into that where you can give us a better range or maybe more narrow range of the revenue [ph] there?

William D. Humes

Hi Matt, this is Bill. Overall, that $300 million to $700 million range was actually for the Wireless 360 group that we talked about, and part of the Q1 earnings release. Since then, we've won 3 other major businesses. So that -- not all of them started in Q2, but some of them did. And they'll continue to ramp up through the -- through this year. And then start having normal, kind of year-over-year growth. But right now, it's all in ramp up mode.

Alain Monié

And, during the session in New York, we mentioned that it was north of $1 billion a year, and as we look at the ramp-up, we're very confident that we'll at least reach that level, and probably more.

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

So at what corner do you expect to be at that -- at that run rate then? By the end of December? Or would it be early next year?

Alain Monié

I would say that we probably are building up that run rate, between now and December, exactly. I think at the end of the year, we'll probably be close to the -- having all of the run rate, yes.

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

In terms of profitability, because obviously, with ramps, you're seeing incremental cost there. But at what point do you think you're going to be able to get to profitability, the goals that you are looking at internally, is that sort of another quarter away?

William D. Humes

You mean, the profitably on this Verizon business?

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

On that business, yes.

William D. Humes

Yes, it actually is profitable. Actually, it's accretive to operating margin overall. It just has a little bit different profile right now. It has lower gross margins than the herd average, but also lower OpEx and ultimately, it does have some OpEx with it, but it definitely is accretive. And as we continue to add, after a period of time, be able to win services elements of that, that hopefully will increase operating margin even more so. So we're making great progress in all the things that we are talking about and that's achieving our long-range expectations. And we're pleased in that direction.

Alain Monié

So basically, the business is already profitable. The investment is reeling in the cash that you need to put the business, to build it up.

William D. Humes

Yes, right.

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

Yes, I got you. Okay. Great. And then just on the restructuring going on in Europe. And I know they go on with the heavy lifting is in the next couple of quarters, particularly going into the December quarter, where it's seasonally strong in Europe. Are you concerned at all about any big disruptions in terms of customer facing relationships, or anything to the headcount reduction that may jeopardize or create some hiccups for your organization?

Paul Read

Hey, Matt, it's Paul. So we're on track with all of the actions that we're taking in Europe and around the world. It's going very well. No disruption. We're conscious of the Q4 period. But a lot of the decisions and actions have been taken. This is just a matter of time, of unwinding some of the cost structure that will be fully out by the early part of next year. So we're very conscious of any disruption, but it's working very well so far, and we don't expect to have any. In fact, it's really focused our organization on the go-to-market side. And that's why we've seen this double-digit growth that we had last year, last quarter, this quarter and continuing the rest of the next quarter. So I think it's had a very positive impact on our go-to-market and therefore, our results in Europe.

Operator

[Operator Instructions] We'll hear next from Ananda Baruah with Brean Capital.

Ananda Baruah - Brean Capital LLC, Research Division

Really good leverage this quarter sequentially, op income grew 3 to 4x that of revenue. And I think gross margin was down sequentially as well. So can you give us a sense of, given these new investments in all things Verizon, second half of the year, how we should think about OpEx? And then I have a follow-up about leverage as well, after that.

William D. Humes

Right, Ananda. I think, ultimately, at the Investor Day, we talked a little bit about what we expect to be kind of attenuate OpEx ratio, relative to the revenue growth. I'd say it's probably around 2/3, 75% OpEx growth, relative to volume. And now obviously, we're also doing the OE. There are organizational effectiveness programs and structural things that will also help. On the other end, reduce that at least for -- going forward. But that's kind of the way to look at it, generally. And it's consistent with what we talked about at Investor Day.

Ananda Baruah - Brean Capital LLC, Research Division

Okay, that's great, Bill. And then, just with regards to the gross margin. I know there's some more PC business in there than usual. The June quarter, there'll be a little bit more in the September quarter. So where are the forces on the gross margin? I think you guided gross margin flat Q-over-Q for September. But just sort of, as you look out further than that, given the ramp of, not just the Verizon business, but the ongoing ramp of the acquired businesses as well. How should we think about gross margin kind of past this quarter?

Alain Monié

Yes, getting into Q3, this is Alain. There are 2 forces. On the positive side, when you look at the sequential improvement, on the positive side, you have a lower percent of low-margin refresh deals. Although there will be some, but there will be less as a percent. We have a ramp-up on to the fee for service business in Q3, to culminate in Q4. So that also comes with a better profile on gross margins. And the new acquisitions that, although they're still small, but they do give us good support on improving gross margins. Now with that being said, as you already noted, the new mobility wins come with a lower gross margin. So that improvement is kind of muted a bit by the gross margin's profile. Although, for that business, we have very good leverage and accretive operating margins from the Verizon business.

Ananda Baruah - Brean Capital LLC, Research Division

Right. So what do you guys think the net of it will be as we look, kind of 4 quarters out? Of those forces? Will gross margin be higher than -- I mean, I know this is sort of the model then is gross margin's higher.

William D. Humes

Right. I mean, overall, it's hard to project that. But it is dependent upon mix, and what's going on in 4 quarters or 2 quarters from now. And we kind of gave you that overall operating margin targets for 2015 and 2016. So that's what we plan to grow. But we are driving higher gross margin business. And that's our key. But when you have good margins at our entryways into potential services or whatever else, you're also going to take them specially when they are positive and good returns, like the Verizon business. But as we continue to focus on services on top of them, and services in the supply chain services area, the Cloud, so on and so forth, all those should help us drive margins up.

Operator

We'll take our next question from Keith Housum with Northcoast Research.

Keith M. Housum - Northcoast Research

Hey Bill, as I look at your investments in new businesses, how would you compare the investments you made in this quarter, versus the investments you made last year, same quarter?

William D. Humes

You mean -- and you're talking about investments in the sense of acquisitions, or the organic side of things?

Keith M. Housum - Northcoast Research

Actually, probably both.

William D. Humes

Okay. Overall, on the year-over-year, we still have the same investments that we made in Q1 of this year, that there's carrying forward into Q2. But as you can say, you can see from the Q1 to Q2 performance, we generate a significant amount of leverage by the increased revenue. So that, that level of investment really hasn't substantially increased from a kind of, I'd say, more of a run rate basis using this year as a baseline. So those -- the -- overall, we made some new acquisitions in Q2 with GMP, which is a reverse logistics and repair company out of Canada, which complements significantly the business that we have in North -- or U.S. We also acquired a similar company called datrepair in Europe, and a couple of smaller ones that are of -- that kind of fit into the pie a little bit in some of our services elements, but aren't necessarily going to drive any type of numbers as well. But those are investments. They carry on and kind of, on top of what we've done in Q1 and ever since last year's timeframe similar.

Keith M. Housum - Northcoast Research

So would you say that the investments weigh down gross margins, or I'm sorry, operating margins at all quarter-over-quarter?

William D. Humes

So I mean, I think that's part of it. Obviously the driving of the leverage. But we're -- we are investing a little bit, than we have been, but you can really see, again, the leverage from Q1 to Q2, and that's kind of where we have a steady state of investments and now we're driving the leverage into the business.

Keith M. Housum - Northcoast Research

Okay. And then, just change gears on you there. As we look at your business over in China, and I think you guys touched on this a little bit at the Investor Day. But what are you guys doing different in China, in order to get some of those, I guess more local vendors that maybe you'll attract that local business that perhaps you don't have now?

Paul Read

Hi, it's Paul. Yes, we're doing that. We're attracting local vendors and balancing out the portfolio that way. We're also investing in the advanced solutions business, and so diversifying the portfolio that way. That's going to have a, more of a longer-term investment cycle, probably paying off next year. And we're bringing in mobility, cloud, supply chain solutions. There's lots of opportunities we've identified. So we're bringing in all the other business units to participate in what is an exciting opportunity for us in that region. And we talked -- I think John Soumbasakis talked about this a little bit, with emerging markets. We really can't fulfill the demands, the technology in the Tier 2, Tier 3 cities, we think, very well, in not just China, but other emerging markets as well. So that's kind of our holistic approach to this.

Operator

We'll hear next from Osten Bernardez with Cross Research.

Osten Bernardez - Cross Research LLC

I just wanted to get back to your reasons for PC sales during the quarter. If I am correct, you noted that it was particularly strong in North America. And my question is, is there a reason why your PC sales are stronger this particular quarter in North America versus say, earlier in the year? And what color could you add on the relative strength compared to say, in Europe?

Paul Read

Yes, this is Paul. So we've said in Q1 that there were a number of deals that we walked away from because the profitability simply wasn't at the levels where we think it would be acceptable. And I had said earlier that I think there's some stabilization coming back, with the improving demand environment in North America, that the pricing has stabilized to some extent. And so we participated more in Q2, as well as the increasing demand. And so that's where we got a lot more business with good operating leverage for us. In Europe, it's actually much stronger. Europe was double-digit growth on the PC side, with more exposure to consumer and commercial channels there for PC product -- PCs and PC products. And we saw the uplift there, which is a broad increase across the geographies in Europe, resulting for more stabilization. So that's how we started in Q2. We've had a good start to Q3. July is particularly strong for us. But with the holidays and everything else, it goes on. So I'd expect probably, sequentially, there's a slight decline into Q3.

Osten Bernardez - Cross Research LLC

Got it. And then, separately, you noted in the press release that networking was particularly strong for you during 2Q. Would you be able to identify or provide some color as to why that was the case? And tied into that, could you just give us sort of an update, in terms of how should we be thinking about advanced computing as a whole bucket for Ingram Micro for 2014, perhaps looking into longer-term into 2015?

Paul Read

This is an area where we've invested heavily, particularly in North America, over a number of years. And in Q2, we've had particular strength working data center products on the infrastructure side and even on the software side. So it's very pleasing for us to see these investments pay off. We have some great partnerships out there, particularly strong for us was the SMB sector, which is really the heartbeat of the business here. And I think that has been very strong for us. We've seen some of that in Europe, in some cases, in some countries like U.K. In particular, we've seen very strong SMB and networking product growth. Now whilst we're strong in North America, we said in our Investor Day, that we're kind of patchy around the world, I've just alluded to China as an example, where, we have to invest in the advanced computer -- that advanced solution business organically, and really grow that service level. So we have a number of plans in place to make those investments here over these next 12 months. I would expect revenues and profitability coming from the back end of next year and then into, of course, 2016, which we have some pretty ambitious targets out there, for that side of the business.

Osten Bernardez - Cross Research LLC

And were there any additional line cards in North America in particular?

Paul Read

Nothing that stands out. We continue to win business across North America with vendors. But we pretty much have the full line card of these types of products. Of course, there's some that we continue to chase, particularly on the software side. But on the hardware side, we tend to have most of what we need. In Europe, we're building that. And there's plenty of opportunity to win more business there with our vendors. And in Asia in particular, we're pretty light on it. So that's where the opportunity is and in Latin America as well. So I think there's a tremendous opportunity. We are seeing this overall business event solutions growing 2x, what the consumer business is, in terms of growth rate, which is encouraging. And the profitably is much higher as well. So this is definitely where we're putting our investment on the core business, and it's paying off. And I think there's even greater rewards ahead for us.

Operator

We'll take our final question from Jim Suva with Citi.

Joe Yoo - Citigroup Inc, Research Division

This is Joe Yoo, on behalf of Jim. A few questions, if I could. First, I hate to ask another PC question. But I think this is the first time that we've heard of any type of pickup in PCs within emerging markets. And you've mentioned about weakness in China, but talked about improvement in India, as well as Singapore. And I was wondering, what is driving that? Is it commercial markets, consumer? And do you have any visibility on when China could begin to improve?

Paul Read

It is -- and particularly in Asia, it's the first time for over a year, we've seen PCs increase. So there's no doubt that the driver with the XP refresh cycle that's going on that's helping this. And we're pretty encouraged by that, because we cover all the major countries there in Asia. In China, to a lesser extent, it's not something that's featuring well for us. And we don't see that turning around in the short term. But I think that Australia, New Zealand, Singapore, India, they're all up kind of double digits for us. And that's very strong, with China being off, of course, like we talked about.

Joe Yoo - Citigroup Inc, Research Division

And from a product perspective, you talked about networking in PCs, and to a certain extent, x86 servers. But any comments on storage and printing?

Paul Read

Yes, storage wasn't particularly strong for us this quarter. We didn't see the growth. We cover a wide range of storage products and vendors and access, of course, in particularly North America, to a wide breadth of channels. So it wasn't strong for us. We are not predicting that there's much change in that this coming quarter. But it hasn't featured very well, and I think that's showing up in some of our numbers here.

Joe Yoo - Citigroup Inc, Research Division

And last question, and this is more -- specific to Mobility. When -- based on the historical data that you provided, it does seem to suggest that Europe is maybe a little less than half of that business. And the surprising thing for me was that it appears that margins, the Mobility business in Europe, is meaningfully lower than the Mobility average. I was wondering if that is a structural issue, or maybe business mix. And if not, what should be the more normalized profitability?

Alain Monié

I think, Joe, your observation, this is Alain, is right. The profitability profile is different in Europe and North America. And that's due to, what I would call the maturity level of our own organization to address services on the market. In the U.S., we have much, much more prevalent percentage of services that come, obviously, with good profitability. But in this business, if you start looking at how you get into the carriers, you need to carry both distribution and services. In other words, you get to the services if you also start with services now with the distribution. In Europe, we are not at the maturity level that we want, and we're making investments on that front, so we have more distribution business there with lower profitability than we have in the U.S. That's a matter of us putting in place all the resources needed in order to reach the same levels of profitability that we have here in the U.S. And that's work that we're doing, and we're investing very seriously in.

Operator

At this time, there are no additional questions in the queue. I will like to turn the conference back over to Mr. Damon Wright.

Damon S. Wright

Great. Thank you, Roxie. And thank you, all, for participating on today's call, and we look forward to the opportunity to sit down with many of you at upcoming conferences over the summer and into the fall.

Operator

That does conclude today's conference. Thank you for your participation.

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