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Ingram Micro (NYSE:IM)

Q3 2011 Earnings Call

October 27, 2011 5:00 pm ET

Executives

William D. Humes - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Ria Marie Carlson - Senior Vice President of Communications and Brand Management

Gregory M. E. Spierkel - Chief Executive Officer, Director and Member of Executive Committee

Analysts

Benjamin A. Reitzes - Barclays Capital, Research Division

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

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

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Welcome to the Ingram Micro Third Quarter Earnings Report Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Ria Carlson, Senior Vice President.

Ria Marie Carlson

Thank you very much, Gabrielle. Good morning -- good afternoon, everyone, and thank you for joining us. Joining me today are Greg Spierkel, our Chief Executive Officer; and Bill Humes, our Chief Financial Officer. Greg will provide some opening comments, and then Bill will provide additional details around our financial results for the quarter. Greg will then come back and 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 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 January 1, 2011, 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'll now turn the call over to Greg Spierkel, our Chief Executive Officer. Greg?

Gregory M. E. Spierkel

Thank you, Ria, and good afternoon, everyone. Demand in our key customer segment, the SMB market, remained solid in most parts of the world during the third quarter. We experienced positive revenue growth, north of 5%, despite continued global macroeconomic pressures and reduced industry spending forecast. Our eighth consecutive quarter of year-over-year growth was driven by solid contributions from the Americas, as well as key countries in other regions such as China, India, Germany and France.

At the same time, we are facing challenges that impacted our profitability during the quarter. While these challenges are frustrating, we remain focused on our long-term objectives, making the right strategic decisions today that we believe will secure Ingram Micro's position as a significantly stronger, healthier and more profitable company in the future.

Arguably, our most strategic operational initiative is the change we are making with our global enterprise systems. We are approximately midway through a 6-year program and we are making meaningful progress. But that progress has not been consistent, impacting our worldwide performance. I will discuss in more detail later in my remarks where we are in that process.

Turning to some highlights from the quarter. North America continues to perform well, with company leading operating margins of 170 basis points on revenue growth of 3%, hitting a decade high for third quarter revenue. The region's results would have been even better had our fee-for-service Logistics business in the U.S. delivered at last year's level. Our DBL consumer accessories unit and Data Capture/Point-Of-Sale businesses were a particular stand out, with the U.S. classic business also driving growth above the region's average.

Avid, our home theater business, continues to make good progress, delivering year-on-year growth for the third consecutive quarter, and an encouraging sign given weak housing markets. We continue to gain traction in our cloud marketplace, adding security and remote management services from enabled technologies, Symantec and Trend Micro, as well as new tools to our Canadian cloud solution. Elsewhere in Canada, the Logistics business experienced solid growth and the classic distribution business continued to make modest market share gains and a seasonally slower quarter.

Rounding out the Americas, Latin America continued a strong performance with double-digit revenue growth. The region produced improved operating leverage with a year-over-year operating margin growth of 53 basis points. The overall demand environment remains solid despite broader negative news with Mexico and our Miami export business setting the pace. We are also beginning to see some encouraging signs in Brazil as we added more customers in Q3, building on our customer base by 15% over June levels. We are gaining traction in our Brazilian volume business, which experienced a return to growth from all 3 divisions in the quarter: hardware, software and servers and storage. Our value business has a new management team in place, actively engaging with vendors and customers to reestablish our position in the market.

Looking at Europe, there were several bright spots even as the region is challenged by the economic uncertainty surrounding sovereign debt issues. France and Germany, 2 of our cornerstone countries, delivered solid year-over-year growth in local currency and improved gross and operating margins. Our Data Capture/Point-Of-Sale business also continues to perform well, contributing double-digit revenue growth with strong margins.

Excluding Australia, which I will discuss in more detail later, the rest of the Asia-Pacific region had double-digit revenue growth in the quarter. Business in China was strong with revenue growth well above the regional average and solid operating margin growth. The India business also grew at a swift pace due to the strength of mobility products. In addition to solid country-specific operating performances, we took steps to further strengthen our already strong liquidity position with a new $750 million credit facility. We also repurchased 4.2 million shares of our stock during the quarter as announced on our Q2 call, and an additional 4.2 million shares this month. Against our $400 million authorization announced a year ago, we have repurchased 12.5 million shares for approximately $226 million. I'm also proud to inform you that Ingram Micro ranked #33 on Newsweek Magazine's 2011 Green Rankings on ratings of the 500 largest companies in the United States. We climbed more than 200 positions over last year and ranked the highest amongst technology distributors.

In other good news, I'm pleased to welcome Alain Monie back to Ingram Micro as President and COO, responsible for all operating regions and global logistics. Alas, 7.5 years of experience with the company will be valuable as he quickly gets up to speed. He will be rejoining us on November 1 and I'm looking forward to working together with him again.

I'm now going to turn the call over to Bill to cover some of our financial results in more detail, after which I will spend some time discussing the challenges we experienced during the quarter and the steps we're taking to address them. Bill?

William D. Humes

Thanks, Greg. I'll start with sales, which can be found on Slide 3. Worldwide sales increased more than 5% to $8.9 billion. Translation effect to foreign currencies had an approximate 4 percentage point positive impact on growth versus the prior year.

In our regions, North America sales were $3.77 billion, a 10-year high for third quarter and an increase of 3% versus the prior year. EMEA sales were up 7% to $2.65 billion. The translation of European currencies benefited the region's sales growth by approximately 9 percentage points. The local currency decline in sales is primarily a function of a difficult macroeconomic and competitive environment Greg noted earlier. Asia-Pacific sales grew 5% to $2.06 billion. Currency translation had a positive effect of approximately 6 percentage points. Including the impact of Australia, Asia-Pacific sales grew 15%. Latin America sales increased 13% to $420 million. This translation of regional currencies had a positive effect of approximately 3 percentage points.

Gross margin, on Slide 4, was 4.95% or 41 basis points below last year's levels. The decline is largely attributable to 4 factors. The Australian issues and the year-over-year decline of U.S. Logistics fees represent approximately about 9 basis points each, with the remainder somewhat evenly shared by the impact of the softer macroeconomic environments and a large proportion of our revenue mix coming from lower margin products and geographies. Greg will provide more insight on some of these factors later on the call.

As you can see on Slide 5, third quarter operating expenses were $355 million or 399 basis points of sales versus $347 million or 410 basis points of sales a year ago. We effectively managed our expense levels through the current environmental and operational factors with OpEx as a percentage of revenue hitting a 10-year low for a third quarter.

On Slide 6, you'll see that operating income was $85.4 million or 96 basis points of sales versus $106.9 million or 126 basis points of sales last year. The business disruptions in Australia had a 21 basis point negative impact on worldwide operating margin in the third quarter. On a regional basis, North America operating income was $64.2 million or 170 basis points, relatively flat with the $63.5 million or 174 basis points a year ago. EMEA operating income was $16.2 million or 61 basis points of sales versus $18.8 million or 76 basis points of sales in last year's third quarter. The decline from the prior year was due to the impact of weak demand and competitive pricing as discussed previously. Asia-Pacific operating income was $7.8 million or 38 basis points of sales compared with last year's $28.2 million or 144 basis points of sales. The year-over-year decline was due to Australia which had a 92 basis point negative impact in the current year, as well as a greater mix of lower margin products and markets. Latin America operating income grew significantly to $6.2 million or 148 basis points of sales compared with $3.5 million or 95 basis points of sales in the prior year.

Once again, strong performances from Mexico and Miami export were the largest contributors to increase compared to the prior year.

Interest and other expenses for the quarter were $18.3 million, flat with the prior year quarter. The current year includes the pretax charge of $5.6 million related to the termination of interest rate swap, partially offset by net foreign currency gains of $1.3 million, related to the translation impact on euro-based inventory purchases in our Pan-European purchasing entity as described in today's news release. In the prior year third quarter, interest and other expense included a $4.9 million in foreign currency loss due to similar dynamics in our Pan-European business.

Our effective tax rate for the third quarter was 65.2% versus 26.6% in the prior year. The quarter's elevated levels are driven by a noncash charge for valuation allowance of $24.8 million, recorded against the company's deferred tax assets in Brazil as described in our news release.

For the full year of 2011, we expect our effective tax rate to be approximately 29%, excluding the Brazilian tax valuation allowance in the third quarter.

On Slide 7, you'll see that net income was $23.3 million or $0.15 per diluted share, which includes the after-tax impact of $28.8 million or $0.18 per diluted share for the charges I just mentioned. Excluding the charges, adjusted net income was $52.1 million or $0.33 per diluted share. This compares with net income of $65 million or $0.41 per diluted share in the prior year.

Turning to some key balance sheet metrics highlighted on Slide 8. Our cash balance at quarter end was $1 billion versus $1.1 billion at the end of the year ago quarter. Our total debt balance at quarter end was $439 million, a decline of $270 million from the $709 million at the end of the 2010 third quarter, which primarily reflects the repayment of the $225 million outstanding principal on our term loan. Our debt to capitalization ratio was 12%, down from 19% a year ago, primarily as a result of the repayment of our term loan.

Moving to working capital on Slide 9, days of sales outstanding were 38, an improvement of one day from a year ago. Days of inventory were 33, a one day sequential improvement and flat versus last year. Days of payable were 48, improved by one day over last year. This brings working capital days to 23, down 2 days from the end of the year ago quarter and a day better sequentially from Q2. I'm pleased with the hard work our team has done to maintain working capital squarely within our targeted range of 22 to 26 days.

That completes my financial review. I'll now turn it back to Greg.

Gregory M. E. Spierkel

Thanks, Bill. As highlighted earlier, we made important progress across many areas of the business during the third quarter. Most of our business units have performed well aside from the challenges in Australia and Europe. At the same time, we experienced strong growth from emerging, yet lower margin markets and product,s, such as China, India and the mobility and tablet categories.

As I address the key factors that affected our third quarter profits, please keep in mind that there have been no fundamental changes to our business model or strategy. We continue to remain focused on driving excellence across our traditional business, growing revenue at or above IT spending levels and gradually increasing gross margins and profitability, driving returns on invested capital well above whack. At the same time, we're committed to strengthening and developing current and future adjacent business lines that generally have higher margin profiles and are expected to be highly accretive to both gross and operating margins.

First, let's turn to Australia. As we announced earlier this month, our efforts to regain share followed an unusually complicated enterprise system implementation that is progressing more slowly than anticipated. There are 2 main reasons for this. First, our competitors in Australia are fighting for share position and we adopted more active marketing and pricing strategies to win our customers back. While this has taken the bite out of our margins, we believe our customers recognize our value and will return over the longer term.

Second, while we have resolved the system connectivity issues we reported after the first quarter, we now understand that the customer experience with the new system is not as robust as what we were providing in our legacy system before. Our customers have historically given us good marks for ease-of-use and responsiveness and we have high standards in these areas. We are currently addressing the customer service functionality of the new system in order for it to better suit our customer needs and to expect customer service levels to -- and we expect customer service levels to improve within the coming quarters, in Australia and frankly as well in some other deployed countries. We are adjusting our implementation schedule to allow for the development of the disenhanced customer functionality. Additional country conversions will resume when we are fully comfortable with the service we are providing to our valued customers. As we build back share, it's important that we have the appropriate structure for the current environment. Our costs are not aligned with the current sales volumes so we're taking action to streamline the Australian operation, which should improve operating profits within the next couple of quarters. Beyond Australia, many of the upfront development cost of ERP conversion are behind us. So program-related capital expenditures should tail off over the next 3 years.

As tough as this experience has been, there is a silver lining. The lessons we are learning in Australia will be applied to future implementations. We do not expect similar challenges in the years ahead. Taking a longer view, we believe this system conversion is critical to our future. With it, we will have a consistent global platform that drives quick decision making and real-time data, further automation and greater automation and an optimized environment that will strengthen and extend our leadership position.

Now let me address the business climate in Europe. Given the daily headlines it should come as no surprise that Europe's widely reported macroeconomic issues continue to weaken consumer sentiment and spending in several geographies and market segments. While some countries and business units remain strong and the SMB-related customer segments were generally solid, European demand was weaker than expected throughout the quarter. The softer environment spurred competitive pricing behavior impacting gross margins and profitability. We continue to manage cost diligently though in this environment.

Finally, let me touch on gross margin decline we experienced across most operations emanating from our product mix. During the quarter, we took advantage of strong demand for tablet and mobility products, which generally carries similar gross margins due to their high-volume characteristics. Because of the rapid velocity, lower variable cost and favorable working capital dynamics of these products, we are able to maintain solid returns despite the lower gross margins. In a typical demand environment, this would be beneficial with additional operating leverage generated from the incremental volume as any additional expense to fuel this business is minimal. In the current softer environment, however, it is more difficult to drive the desired operating leverage. Looking ahead, I see significant upside as we resolve the ERP-related issues and seize the expansion opportunities that are in front of us. I believe we're doing a good job of managing the areas that we can control as evidenced by the improvement in our cost structure and growth in important emerging markets and product categories. We continue to focus on these efforts going forward.

We currently expect global technology demand to remain relatively stable with modest seasonal increases in demand across all geographies. In the fourth quarter, we believe Ingram Micro will continue to drive sequential growth in the high single digits. This is a slightly slower rate than we have seen historically due to the current state of the macroeconomic environment in Europe and our recovery efforts in Australia. Gross margin should experience a sequential increase in line with the historical seasonality as the holidays drive activity in our Logistics and consumer businesses, but they are not expected to reach last year's levels. Improving gross margins is a priority for the management team. We believe this quarter was an outlier and gross margins will improve measurably as we address the business mix dynamics and solidify the system rollout initiative. Market conditions may influence the slope and timing, but our core business foundation is solid.

We expect to exercise continued prudent expense control and drive significantly stronger operating results going into the fourth quarter.

I'll now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Matt Sheerin with Stifel, Nicolaus.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So question on the guidance for December, the high single digits, Greg. So below seasonal, is that pretty much across all your regions or you're seeing it more in Europe or other areas?

Gregory M. E. Spierkel

Matt, yes. I would say it's probably a broad-based comment although the biggest challenge, I think, is still Europe. I've been in Europe twice over the last 4 weeks and thankfully, there's been some decisions made overnight that will probably stabilize the environment there. But generally, the trade press, as well as the general press, has been monitoring and following the activity there and clearly, the lack of decisions and the overhang have influenced, I think, confidence of businesses in general. And also, the high unemployment rates of Europe, relatively speaking, are holding the consumer back. So that pattern that we've seen thus far in the last quarter or 2, I think, is going to continue in the current quarter that we're in right now. And I would say that we -- as we had touched on already, there's -- the ongoing softness of the trajectory of what we're doing in Australia is going to have some impact on our Asia-Pacific results. Elsewhere, I'd say the market conditions that we see are a little softer than they have been in the prior quarters this year. And I think that's a function, largely again, of the discomfort out there of all the press and the volatility in the marketplace and I think we've seen it to some extent from a number of our vendor partners as well saying, "Okay, growth but maybe a more moderated format or fashion in front of us." So those are all the factors that are influencing our comments with regard to the December quarter.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the gross margin, I want to talk a little bit about the Logistics business and I think in Bill's comments on margins, he talked about obviously the consumer in Europe and then also Australia being an issue but also talked about Logistics. So could you elaborate more on what's happening in the Logistics business? It sounds like a little bit disappointing in terms of results versus a year ago and how that does that trend looking into the fourth quarter?

Gregory M. E. Spierkel

Good question, and we'll try to highlight this. So our Logistics business is a good business for us. As we kind of touched on, we've seen some growth in Canada off of a small base. We've managed to capture new customers in Europe this year. All of a commitment to continue building out this business. But we did have a lower than anticipated revenues in North America. As some of our customers shift, I think, certain amounts of their portfolio direct to retailers instead of working as much through us. And so, what we're seeing is, at least from a couple of our larger customers, probably not a commitment to do things differently, but leveraging their infrastructure more than they had in the past. So from that point of view, having a sort of a top line impact or a revenue line impact for us with -- because, again, it's our larger customers. That said, we've had a good run of adding some smaller customers, and we have a decent pipeline of activity that's going forward into next year. But for the current quarter, we expect that the trends that we've seen from the last 2 quarters, 3 quarters of a slightly lighter load in North America to continue to roll through Q4.

Operator

And our next question comes from Brian Alexander with Raymond James.

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

Greg, it seems like you're losing more than $10 million at the operating line in Australia, which suggests the gross margins there are maybe as low as 3% and they've been cut in half year-over-year. Is that in the neighborhood of what we're talking about? And if so, how much of that is front-end versus back-end margin pressure?

Gregory M. E. Spierkel

All right. Well, I won't provide an exact number but we are definitely losing money in-country and it's clearly having an impact, as you know Brian, across the region and for the company. Margins are down significantly and probably, a little more than a -- a little better than half, so if margins were in a 6% range it would probably be closer to 4%. But we've got other one-time events that have been clean-up action and everything else that we've been working through the quarter. Generally, the team feels that the margins are moving in the right direction now. There's been a lot of good work just in the last few weeks, more stabilization and understanding of the full picture of the margin transparency at an operating level, or at the unit level. We were and have been trying to grab some additional share or bolster our position with active selling into our customer base. We are still the largest player in the country by a good distance and so the customer base that have worked with us for the last 4 or 5 years are still very committed to Ingram Micro, but clearly, they haven't been pleased with how we've been performing in servicing them. So our customer-facing capabilities haven't been up to the levels that we've had before and so we've had to obviously be a little bit more aggressive and clearly, we've lost some position. But again, I think the actions that we've got underway are going to put us in a much better position here, going forward.

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

So, I mean, just on the front end versus back end can you help me understand if the gross margins are close to 4%, how much of that erosion is front end versus back end because...

Gregory M. E. Spierkel

Well, the biggest piece would be -- that would have gone away is the back end for sure, in some ways, because we've got a fairly -- a lower set of numbers of revenue that we're achieving and the vendors, generally, are going to incent us significantly on hitting revenue goals and share or coverage goals in the marketplace. From that perspective, we've not been able to execute against the numbers that have been in front of us. So more often than not, the vendor partners are going to set goals and objectives with our organization based on prior year trends even though we might have had 1 quarter or 2 now of lower sales. They're slow to adjust, those, because they've been trying to stretch us to reach goals that they want to achieve in-country as well. So the back-end margins have been impacted probably more than the front-end margins here.

William D. Humes

But both, Brian, though. Both sides have been impacted, though.

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

I guess I'm wondering why would they try to help you regain the share that you lost if you've lost share and you're still the dominant player in the country. Wouldn't they want a more fragmented and competitive distribution landscape and maybe they won't reset the goals?

Gregory M. E. Spierkel

Yes, I wouldn't call us a dominant player. And I would say there's 3 other companies that are very good, capable players. $0.5 billion to $1 billion in revenue each and we're a little bit bigger than that. So from that perspective, there are good alternatives and they've been, obviously, taking advantage of our mis-execution in-country. So -- and as a result, I think the vendor community do have choices and they do know that -- what we are capable of. We've got, again, we've worked very hard to have the largest base of customers over the last 5 years. We've been a great partner. I think they all want us to be a great partner, going forward. So I think the convictions there on both sides of the street to work together and frankly, they've been supporting us, saying, "okay, we like what you did before. We want you back where you were. We're going to continue to support you." Just, again, we may be missing some of the clip rates that we would have seen and achieved in the past. As I said before, we're at the back end and it's not available to us at least in the short term.

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

Okay. Just final one on this topic. How much cost are you taking out there and how quickly do you think you can get Australia back to breakeven? Is that something you think will happen early next year or does it take back half of 2012?

Gregory M. E. Spierkel

Well we've had 2 initiatives around the cost. First and foremost, there's been a number of temp resources that we had that created extra cost through the conversion process. We've been phasing those out pretty aggressively here over the last quarter and there's additional cost that are coming out this quarter, so the team are taking some additional headcount out in the current quarter, probably some even going into a little bit into next year just to make sure it's being managed and transitioned well so that again, we don't impact service levels. So that's a priority for us. In terms of how quickly the business turns around, I think it's going to be a function of 2 or 3 things here, Brian: One, we're actively developing a set of new functionality and capability that we're going to be bringing into Australia over the next few weeks, starting at the back half of this quarter and at the beginning of the Q1. We firmly believe those enhancements to support our customer service objectives are going to serve us well. How quickly they allow us to get their total confidence back with all the customers is going to be the next element here, but we feel it's going to drive us in the right direction. So while I can't give you an exact timing on when we'll get back to profitability, we do expect to be moving in that direction with every passing quarter here as we go forward.

Operator

And our next question comes from Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Greg, can you follow up just on the competitive landscape in Europe, when you would expect that to kind of bottom out, perhaps from a pricing perspective, and what your tactics are in that region in terms of margin versus market share in the near-term basis?

Gregory M. E. Spierkel

Okay. So Europe is a very fragmented market. The market's been generally under lower GDP and growth rates than any of the other major economies that we're in this year. If you follow both the IDC and potentially context-type data, we've seen this year continuously, probably get into a slower growth than -- basically flat to no growth year-on-year right now, at least in Q3 and possibly in Q4 with the external data points that we're looking at. So that's made everybody be a little bit more hungry for the business across the region. And particularly we've seen real weakness consistently over the last 3 quarters in the consumer segment. The consumer segment there has been much softer and that's a slightly larger share of our business in Europe than it is, let's say, in North America. In terms of what sort of tactics are we taking forward here, pretty important for us that we're still very focused on 3 or 4 things that we think are going to be the areas of emphasis. One, the SMB market is still the best segment and sector and we feel that we, as a company, have probably the best coverage in that segment in Europe. So we've been putting most of our emphasis around driving SMB sales and supporting the vendor programs around that. We've been pretty active as well in trying to add more services capability and value-add vendor lines. So last year, we made 2 or 3 acquisitions in Enterprise computing. We're trying to build on top of that this year by adding specific vendor lines that support those. And we view that as pretty important for the medium to longer term in building out an Enterprise-computing practice in Europe. We've done some good work on that in Asia and in North America, but Europe is a little further behind because we started a little later there. So those would be the principal areas that we're focused on. And so, frankly, we're executing very well in some countries where we think we're growing a little better than market, in other countries we're probably growing a little bit slower. And I guess, the other sort of weak factor in Europe is Spain and Italy. The Southern Europe is still very slow moving, although maybe the conditions will change with government decisions that were made today, and then hopefully an improving consumer and business environment in the coming months. But we'll see how that translates itself into the marketplace.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. And then if I can follow up on the mobility side. You mentioned strong growth but there's an impact to margins. How are you approaching that business in terms of the growth opportunities, and any expectations of how margins will change that business over time?

Gregory M. E. Spierkel

All right. So the biggest positive here is that clearly, the tablet form factor has made its way into the business environment and I would say in a meaningful manner this year. In a number of countries, we're working with 2 or 3 of the major manufacturers that have been bringing some pretty exciting products out. Initially, they were mostly slated for the consumer market and typically going through either direct sales, structures -- Internet sale base structures. But over the last 2 or 3 quarters, we've really seen a very significant interest in the VAR community, as well as corporate community, to pick up tablet form factors and then bring those into the business environment. They're usually driving mobile applications. So we feel it's pretty important that we jump on this opportunity and capture those relationship opportunities early on. Initially, what we're seeing, it's mostly a hardware play so we didn't want to get the hardware play and the market share position get away from us. So we put a pretty big emphasis on making sure that we grab that opportunity as much as any other competitor might. And then, what we're anticipating and working hard towards, is there's a lot of accessories and software that we can build the business around as the hardware pull-through is happening. And so the VAR community, as well as some of the retailers, e-tailers we're selling to, are working pretty hard to start bundling other parts of the portfolio that will have a better margin profile to go out with those products.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. Last one if I could, for Bill. On the gross margin, you said in the press release, you expect a snapback but below last year. Any range that you can provide in terms of gross margin, what we should be thinking about for the December quarter?

William D. Humes

Yes, sure, Greg. Overall, I think we should have similar levels of sequential margin, gross margin improvement as we have largely driven off the backs of a higher seasonal Ingram Micro Logistics business, which the fee-based business drives much higher margins. That being said, it's coming off of, obviously, a lower quarter in Q3's gross margin. Plus, generally, with the higher consumer-related businesses, that tends to be a little bit higher in gross margins. So that should also impact it similarly. It's just coming off of a lower base, so therefore, the sequential impact will be about the same but we're starting from that base.

Operator

[Operator Instructions] And our next question does come from Ananda Baruah with Brean Murray.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

A couple of things, I guess, if I could. I apologize if this has already been asked or spoken to. But regarding the Asia-Pacific margins, Greg and Bill, is there any chance that when they come back, they can actually come back, maybe the snapback can bring them back to sort of higher than previous levels? And the reason I ask is, I guess, you're doing the cost take-out thing, the ERP just generally should drive greater efficiencies. And correct me if I'm wrong, but I believe I recall you guys saying last quarter that the mix of business actually coming back is a little more slated towards corporate that would seemingly carry higher margins. So it seems like if you can get the cost structure right, the mix might be better. So I just wanted to get the thoughts there on the expectations, ultimately, for this business.

Gregory M. E. Spierkel

Well, there's a couple of things happening in the Asia-Pacific region, overall. We're in a mix of countries and -- some of which have higher margin characteristics and some that are -- slightly a lower margin, but clearly a higher growth. So let me try to help you here a little bit. As we make the corrections in Australia, both from capabilities of what we need to do with our ERP systems and adjust the cost structure -- where our first step right now is to move the business back from a loss-making situation to getting it to be profitable, where our goal is to try to achieve that as we go through -- in the next few quarters in 2012. It will take us probably a little longer, maybe into 2013 before we would be able to get Australia back or returning to the levels that we had before. I think it's going to be a combination of growing the revenue and, obviously, we're addressing the cost. I think we're going to feel -- we feel good about what we'll be able to do with getting the return or back to the gross margins we had before. We have a very good blend of Enterprise, consumer and SMB business in Australia, and we have a very diverse portfolio and capability there. So I think we'll be able to get back where we need to be on that, but we do need to get better leverage with higher revenues and that will take multiple quarters for us to build back over the next year and going into the following year. Countering that a little bit, within the Asia-Pac region, I would say, is -- we're seeing real heavy growth or very positive growth that we're capturing out of China and India, 2 very important markets for the long term for our industry. And from that perspective, there's a little bit of gross margin pressure on those, although operating income -- operating margin on those, while the gross margin tends to be lower, our cost structures are proportionately significantly lower. So I would expect that we'll be able to come back over time to levels of 150 basis points or higher in that region as we get Australia right and still continue to execute well with the overall dynamics of the 2 other sort of growth engines.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

And I guess just a follow-up on the December quarter. I guess sort of nuance, margins expectations. I mean, look, I mean, macro feels softer and consumer feels a little softer, although it seemingly is -- continuing to be a little bit better than we all expect it to be. Logistics last year, the situation there was a bit of a surprise. Have you guys put, maybe measures into place to kind of guard against unexpected softening this year in consumer spending. And if you have, how confident do you feel about that? And if you have, can you kind of maybe give us some sense of what some of those things are?

William D. Humes

This is Bill. I'd say, overall, with the Logistics business in North America, yes, we put in a lot of programs and processes to be able to adjust and do appropriate forecasting, both on the revenue side, as well as on the cost side. So I think that is fairly well in hand. That being said, yes, there is lower transaction fees from some of the business partners there with IML. So I do believe it'll still have a little bit of a down impact on a quarter-for-quarter basis. But that being said, we have aligned our costs fairly appropriately to the extent, reasonably possible in -- for that business. So I don't think we'll have the same kind of efficiency issues we had in Q4, at least we're definitely not planned for that, we're -- it's just more of if the business is slightly down.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Got it. Great. And I guess, just last one for me. And just one last thing for me, Greg. You made a mention of new functionality and capability in Australia that you guys have put in or will continue to put in through the balance of the year. Can you just talk about what some of those might be and what they might allow you guys to kind of capture?

Gregory M. E. Spierkel

Yes, in essence, there are sort of 2 major pockets of work that we're putting in play into the Australia market, and some of which we'll definitely be portable into our other geographies, where there's been conversions. But their -- what we found here in a very large operation, which Australia is for us, that there's a significant number of what I call special customer needs, largely in the order process area that we had not seen, maybe because they were so integrated with our businesses or in part, also because some of our customers have routines that were very dependent on the feeds that our business would provide unbeknownst to us. And when you change systems the feeds are different. So things such as mass purchase orders or expert entry to speed up database or speed up orders into our systems for high velocity customers and the tools that they have internally integrated in their own businesses, we have to write some new interfaces and improve our capabilities to support customers that way. And that will only just enhance our stickiness with those relationships, which we had before and that we've lost a little bit through this transition. The other areas is really a number of system optimization steps that we're taking to improve our internal efficiency. Again, we've had probably large order latency challenges, our quote to an order process is a little bit slower in some areas with the new system than we had before. And we want to improve that customer-facing element, again it's a customer-facing element, so that we're back in a position that we're at before or frankly maybe even in a better position. So these types of -- and there's a few features in each of those areas that I'm trying to give you a high level at, that are going to really help us improve our visibility with the customers and clearly our controls.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Yes, that's helpful. I guess just -- last one for me. The first when you mentioned, the example with the mass purchase orders for high-velocity customers, is that something differentiated that you guys are going to be able to offer customers?

Gregory M. E. Spierkel

Generally, we did the best job with that before, that was one of the main reasons why we've had a very strong prior position in the marketplace, was just some of the tools and capabilities that we had with some of the larger customers in-country were very reliant on us. So they're still working with us, but they're giving a portion of the business to other parties and we're forcing them to do some work-arounds. Clearly, we've got to get that right so that they can come into us as easily as they did before, and so we can recapture some of that business.

Operator

And our next question comes from Ben Reitzes, Barclays Capital.

Benjamin A. Reitzes - Barclays Capital, Research Division

I apologize in advance, it's a busy night in earnings and announcement world. But with your guidance for high-single-digit sequential growth, you have a revenue decline and, I mean, you might've hashed that out already. It looks like a revenue decline in the low-single-digits. I guess my first question is, how long do you expect that to go on? Do you think you'll bounce right back in the first quarter with some of the initiatives on the ERP side in Australia, or maybe the European issue lingers. But how long are we declining year-over-year in revenue and did I read that right?

Gregory M. E. Spierkel

Well, again, I think high-single-digit growth gets us with a slight decline, it'll also depend a bit on what's going on with currencies. There are some currency movements, potentially -- they're fairly volatile, to say the least, right now. We do anticipate things to get better in Australia with every passing quarter so that will help us as we go into Q1 and beyond. The exact extent of that will be really a function of how good the new functionality is that we've talked, the enhanced functionality that we feel that we need to be bringing to the marketplace. I think the other variable here is -- that's at play is just the broader market conditions. The broad market conditions that have been somewhat creating a little bit of a muted stance in the environment, more so than maybe what's in place a few quarters ago. Does that change, does the consumer start getting a little bit more open with spending and technology after a few quarters of being a little quieter with spending in the technology space. That's probably the biggest determinant in whether there's a change going into Q1 or not. We, typically, don't have a backlog in our business. We tend to follow vendor trends, product technology trends, and a lot of analytics about how we're doing in the current quarter or trending that we've seen. But pointing out into next year is a little bit at this stage, a point that I would say we're not comfortable with saying, but we think it's going to be significantly better or is it just going to continue as is. My sense, at this point, given the external dynamics of the consumer and the SMB market that we see, it's going to remain a little bit more muted than it was, let's say, a few quarters ago, but it's too hard to tell at this stage to give you a clear or a definitive answer, Ben.

Benjamin A. Reitzes - Barclays Capital, Research Division

All right. Well, my other question was part of the reason I was late getting on the call was your friends at HP decided to keep their PC business and I was wondering how that impacts you. Did you -- is it a relief? Is it -- does it matter? And just -- is that something that can help you in your business and does it have any impact on you?

William D. Humes

I see that as a positive. We just were talking about it literally before coming on this call ourselves. It was somewhat anticipated, we've had, and I've personally have had discussions with a few senior people at HP in both Europe and North America over the last few weeks and all the body language was that it was likely to stay. I think most of the people that I did discuss this with were of the view that, that was going to be a good thing for them as well, internally. There's just so many intertwined systems, programs and initiatives that we work with, with HP particularly on all things, hardware from print to servers to PSG division. So by pulling that out, clearly, there were going to be some issues and a transition of some sort. So I think from a go-forward perspective, that it's business as usual there subject to any changes that a new CEO might bring, we're pleased. Generally, we were working very closely with HP because we didn't want to miss a beat, anyways. But as you know, anytime a big potential change like that's afoot, it does sometimes create more internal focused dialogue than external and -- but they recognized that they needed to watch for that and they were working pretty heavily with us to make sure that, that wasn't happening in our relationship.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. And it didn't hurt your business at all yet but it was something you were concerned about?

Gregory M. E. Spierkel

I would say it was something we knew would probably be a challenge a few quarters out when the changes did take place. If and how the spinout happened but clearly at this stage, it's all water under the bridge, by the looks of it.

It doesn't look like we have any more questions so I'll close the call here. Well, thank you for participating in today's call. Also we look forward to seeing many of you in a couple of week's time at our investor and analyst day in New York. Hopefully, we'll catch most of you there. We plan at that point to provide additional visibility in how we view our business, including more details around revenue, gross margins, growth trajectories for each of our lines of business, as well as additional insights into our global IS initiatives, which is important to us. I'm confident you'll leave that investor day with a clear understanding of how we're running the business and why we're so confident that the difficult decisions we're making today will provide us significant future benefits for our customers, vendors and shareholders as we go forward. So, again, thank you for joining on the call today.

Operator

And this concludes today's call. You may disconnect at this time.

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