Ingram Micro Inc. - Analyst/Investor Day

| About: Ingram Micro (IM)

Ingram Micro Inc. (NYSE:IM)

November 15, 2011 1:25 pm ET


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

Keith Bradley - Senior Executive Vice President and President of Ingram Micro North America

Mario F. Leone - Chief Information Officer and Executive Vice President

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

Unknown Executive -

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


Benjamin A. Reitzes - Barclays Capital, Research Division

Unknown Analyst

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

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

Osten Bernardez - Cross Research LLC

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

Ria Marie Carlson

Good afternoon, everyone. I'm Ria Carlson. Thank you so much for being with us today. It's great to see all these faces.

Before we get started with Greg's presentation, I do want to let you know that we do have forward-looking statements today. With those statements, some risks and uncertainties as you know, and if you want to get more detail on those risk factors, you should take a look at our 10-K. Also, we are going to discuss non-GAAP information today. There are reconciliations on your thumb drive and also on our website. So if you need those reconciliations non-GAAP to GAAP, take a look at those.

Our agenda today is here. Greg's going to start off with an overview of our strategy. Mario is going to follow him with an overview of our information system strategy and some of the plans we have in place going out for about 5 years. We'll then take a break and then Keith will come up and really show our strategy in action. North America is a little farther ahead than some of our regions in implementing our strategy, and Keith's going to show some hard results on how that strategy has been successful for us. And then Bill will follow Keith with a bridge, a financial bridge, to some of the targets that we disclosed earlier this morning and then Greg will wrap it up. And then after that, we'll have cocktails, so it should be a fun day.

That said, I'm going to call Greg Spierkel, our Chief Executive Officer, to the podium. Thanks a lot.

Gregory M. E. Spierkel

Hi. Good afternoon, everyone, and thank you for joining us, as Ria just said. So this afternoon, you'll hear a few things from us, and maybe I can just sort of provide a little bit of an overview here first and foremost.

First of all, we're going to try to focus on a 3- to 4-year perspective of where the company is going. So you'll hear these thematically through some of my comments: what's driving our thinking, our investments, our directional initiatives as an organization. So you'll see that come through in my comments as well as all the other presenters here.

And we're going to be pretty clear, I think, about where we're trying to place some of our bets. Some of it will be consistent with what you've heard before but we're going to try to show you a little bit more data than we have in the past about makeup of the revenue and the buildup of our business outlook. And finally, we're going to consistently come back to some targets that we're establishing for ourselves over this 3- to 4-year window that we really do believe we're going to deliver against and have a very good chance of delivering against.

So I'm going to move through my presentation here quickly. Today or actually this month, 15 years ago, on November 1, 1996, is when the company took -- the company went public and we were celebrating that today. We were at the Exchange today, which was excellent opening the opening bell. And I thought it was going to be of value to get a feedback on 15 facts or information points that we're going to leave you with here at the front end of my presentation. I'd point to a number of things that are pretty important for the company that you may not be aware of.

First, we believe we're strong and have a great presence as we've talked about from an investment point of view in emerging markets. These 4 markets: Brazil, China, Mexico and India represent about 15% of Ingram Micro's revenue today, these 4 countries, a little bit more than 15% or a little over $5.5 billion of revenue in 2010 coming from these key emerging markets.

When you look at the growth rates that we've experienced in the last 5 years, and frankly, we believe very much the same growth rates are in play as we go forward as a company, we think we've got great exposure to these 4 countries where I'll share with you our exact market position in each of these countries in a few minutes' time.

We have a very large commitment to supporting our VAR community. Our VARs and incredibly relying on Ingram Micro. We have, just in North America alone, as an example, 300 technicians that are on phones with over 100 certifications around different vendor, product certifications and expertise to help them in the whole presale process. So on a global level, we're taking on board 18,000 calls a day to support sales by our VAR community. And these calls, the predominance of these calls are strictly in the technical domain, clearly, there's sales calls from a revenue point of view, but this is supporting solutions selling, and again, very large force around the world doing these same sort of general support.

Data that you have not seen before either here that we're sharing with you is we're doing -- and last year, we had over $10 billion of revenue from Ingram Micro as derived from selling Enterprise-related products and services. So again, we've not split this out before but we're structuring our business around this area or back of focus for us on a strategic point of view, and Keith will touch on this more explicitly a little later, but you can see how large Servers & Storage are as a piece of that business, looks like in the range of 25% to 30%. Clearly, very strong in Networking & Power. Those are 2 major broad areas that combine for us multiple billions of business on a global basis.

Value Software is another big stack there that you can see a big percentage. So pretty important pieces of our business. Thus far, we've garnered most of this revenue from the vendors in this area out of North America. You can see a disproportionate North America percentage. That's, in part, providing a floor or support mechanism for what Keith will talk about where he's driving his operating income in North America. So you can see the splits in the other regions but I'll come back to this a little bit further as we go through the talk here.

On a global level, we've made a big emphasis around being a green supporter to the industry partners that we work with, the vendors in particular, over the last 3 or 4 years. 3 years ago, we were ranked around 450th on the Fortune 500. Last year, around 250th. This year in the most recent report that came out, ranked 33rd on a North America basis. This is very important to our vendors, as more and more of the vendors are looking for what type of capability and the ability to support ISO 1400, 1401, green initiative, being efficient in that respect, what kind of outsourced partners that we work with anywhere in our organization. So there's big effort around this and we are very explicit about it. Significant position above any of our competition. The next, of course, our competitor is, I think, 150th position or thereabout, so we feel like we've done a great job here.

Next factoid is almost half of our products that go through our operations, believe it or not in North America, go through a logistics context. So last year, shipped 21 million orders in North America within our fulfillment of pure fee-for-service structure with our 40-plus customers that we have in North America. So in the order of 80,000 units being shipped through those facilities on a daily basis here in North America alone.

We've got a very strong track record as an organization too with recognition. There's a number of accolades that we've get on an annual basis. We thought we'd share just 4 up here with you. Last year, CIO Magazine recognized the effort that we were putting in place as an organization to build on a cloud portal, first of its kind for distribution. Mario and the IS organization was recognized for that. 2 major vendors here, Microsoft and VMware recognizing us as best-in-class on a global level for them over the last few months. So again, very good recognition of the company efforts that we're putting in both volume and value-related areas of the market stack as, particularly, VMware's very value-oriented relationship. And we've been recognized in 6 countries out of the top 100 kind of companies in those countries as a place to work. So Ingram, again, a lot of value in terms of what we're trying to do with our associate base on a worldwide basis.

We feel like we're almost everywhere, maybe not in Antarctica, as you can see on this picture, but we are in 30-plus countries with direct subsidiaries today. Those 30 countries represent 80% to 85% of the worldwide available market for IT expenditures on a global level. So yes, we're not in a number of midsized or smaller countries but as far as worldwide TAM or operating opportunity, we're capturing with the 30-plus countries we're in, 80%-plus of the market opportunities. We're shipping into over 150 countries on behalf of our customers on an annual basis, so we are shipping into a larger number of countries than clearly the ones we have direct subsidiaries in.

We believe we're a strong player in the Consumer Electronics space. In certain markets, we have exclusive relationships for Xbox and gaming opportunities with Microsoft, just an example here in Mexico. We have a very strong business in Mexico, both in the firmware, as you may, the box activity is going through the market but very strong titles in the software space as well. So this is a very strong business for us in places like Mexico, in Canada, in the U.S. and a number of markets in Asia.

Pretty excited about what's going on in mobile. For Ingram Micro, we were not in this space 3 years ago. Effectually, we've gone from 0 to 60 but in this case 0 to 600 in a matter of 3 years of new incremental business for Ingram. And there's sort of 3 areas that we're focused on here within this context in getting all of our attention. First, it started with a lot of software emphasis around security and software enablement around mobile products, selling instruments and capabilities that will work behind Research in Motion as an example, that's where we've had a very extensive exclusive arrangement for a number of years. And now, we've been building other software suites for tablet form factors, which is now fitting into this business unit, which is now taking off as commercialization of the consumer products are going into the marketplace. And in some countries, we're signing up smart handhelds, which is not a business that we've been into before but we've got some very significant business here in about 4 or 5 countries that we've just started to see this year. So this is an area that we're expecting to more than double in size over the next 3 years. We've got at least 30% to 40% rates, and this year is actually 100% growth rate for the company in this space.

We captured data as a big emphasis. As you know, we've talked about this pretty extensively over the last 2, 3 years. We are and believe we're the #2 player in distribution with this value-add service offering, a different set of vendors and a different set of customers, very happy about the vendor relationships. There's about 6 to 10 major vendors here, companies like Epson and Intermec and Motorola, Zebra, IBM that have got very, very explicit products for barcoding, scanning and point-of-sale devices.

There's less competition here. Mostly, these vendors have had solution-oriented direct sales forces that as they've shifted very aggressively over the last 2, 3 years towards go-to-market opportunities through distribution, seeing the value we can bring and -- so these small acquisitions that we've made and Keith will show a pretty interesting chart on this, bringing it into life into action that show some numbers around this, that the small acquisitions we've done, a number of them, we've more than trebled in size over the last 3 or 4 years by expanding the base of those vendors are selling to a broader base that Ingram Micro has, and we've built a number of practices through our VAR community through this data capture sale business.

We've got a very diverse management team, a very globally-based management team. Individuals that, I believe, as you can see here in a number of countries so not just a question of visiting here but spent a number of years, myself included, who lived in 6 different countries with work. And so has Alain Monie, our COO. But it does influence the way we think, the way we work with the vendor community, which is clearly a global relationship base that we have. And there are a number of customers that want to see us become more and more global in our nature. So this is a huge asset for the organization, and you're going to get to meet Mario who's lived in 3 different countries and Keith in 4 here as we talk to you today.

We've done a good job, I think, in terms of factoids here, generating cash over the last few years. Again, there are some down years as you know in this period of time, 2002, 2003 were very significant down years for the industry yet the company was managing to throw off a significant amount of cash, and I guess one year out of the 10 here, which was 2003, we went down a little bit but there were some investments and acquisitions going on then. But every other year, we've seen some very good movement towards positive cash flow on a compounded basis.

We've also done a great job, I think, of improving our net tangible book value. Compounded growth rate here over the 9-year period of 12% a year, growing from a little over $8 in 2002 to finishing in Q3 at close to $21. The only thing that we're not happy with and there's still more work for us to do here clearly is over the last 2.5 to 3 years, since the back end of 2008, we've seen ourselves at or below tangible book. We've had a premium to that for the prior decade but again, market conditions, everybody's multiples compressing somewhat over the last few years, and we're seeing ourselves close to the tangible book which were clearly, was an opportunity for us, I think, as we go forward, we think there's significant upside in light of that. And all the actions we're taking and what we're talking to you hopefully will drive stock value well above that and again Bill will touch on this in a few minutes' time.

Last -- second to last factoid. We've been very acquisitive on our own front. We're the single largest shareholder or purchaser of our own stock over the last 3, 4 years. We've actually acquired or picked up $625 million in that 4-year period so we've been active as a shareholder in that regard, and we do believe that our future's bright in that respect.

Finally, I wanted to share with you in terms of the last factoid sheet of 15 pieces of data here. Here's our trailing 12-month view of some of the key metrics that you all pay attention to, so do we, as a company. Clearly, you can see our growth margins are below what have been our norm as a company. If you look and again, Bill will share some data points on this, we've tended to gravitate anywhere between 5.4% and 5.55% over the last 7 or 8 years, so we've drifted down here with some of the challenges. So we're not pleased with some of the execution challenges we've had, so we believe we're going to make a lot of progress as we go forward. So there's upside here, although if you look at the full year of 2011, these numbers will probably be a little weaker given Q4 last year was going to be, based on the forecast, everything was a bit stronger than Q4 of this year.

So generally, that's where we finished and where we are in the most recent 12 months. What's more important, and which we had in the press release this morning, is where are we taking the company over the next 3 to 4 years? Very strong commitment across the organization here. These are the goals that we have. We really do believe '12 through '14 and '15, we'll be sitting in these ranges across-the-board. A lot of work to be done in getting through some of the investments that we're making right now but we see a very clear path that Bill will walk you through and a wonderful chart here a little later on and kind of pulls the good bridge together on these key metrics for us.

So with that said, let me move to some of the major elements that we look at as a management team that have been sort of driving where our investments are going. What are the macro trends, so the next 4 or 5 charts kind of touch some of these macro trends that are influencing where we're placing some of our bets.

First, maybe I'll just start with a graphical depiction of where the company is at today. And from that perspective, you can see 42% in North America. Then essentially, the strongest part of the company, more consistently over the last decade, generating pretty healthy operating margins. As we look forward, I would expect that North America percentage over the next 3 years, 4 years, will probably hold in the 40% to 42% range. I don't think this one will probably come down. I think we'll hold out with market conditions and growth rates close to these broad averages that we anticipate for where the IT market's going.

Europe might decline a little bit in size, largely off of the back of what's happening in both Asia and Latin America for us, where there's clearly more opportunity and more growth, and that's again, in terms of where we're situated with some of the key countries here as I mentioned before, very important to us.

Of the $1.7 trillion industry, $600 trillion (sic) [billion] of that, $700 trillion (sic) [billion] of that is services. So we really do participate in about a $1 trillion market of hardware and software at Ingram Micro, and I'll put that out in a couple of charts here in a moment. We've touched on the management team, really do feel that we're covering the right countries. We do get questions, are there other countries you will expand to in terms of acquisitions or investments? And the bias has been for the management team really over the last 3 or 4 years more within the countries that we're in. We might have a #1 position in India, which we do, but I would rather get even stronger there because again, I think the characteristics of that country and the market opportunity are still greater for us there than necessarily saying we have to be in Vietnam or Cambodia or Poland to say that we need to get into another country. It's a country we already understand well, so the bias for Ingram at this stage will be in the blue and the green, if there's a bias at all in terms of where we'll make maybe more bets will be in terms of acquisitions or investments will be into these areas where there's higher growth rate opportunity.

And the last other factoid here, I think, is really important to us. All of our country operations typically run with anywhere from 100 to 200 vendor relationships. Exceptions to that are North America where we typically run 600, 700 vendor partners, so we have a very good breadth of portfolio, and the other exception extreme is actually China. China, we are today only around 35 or 40 vendors, and yet we have a book of bill business that's closing in on $2.5 billion of business this year, and we've only got, as I said, 35 to 40 vendors, so there's still significant upside from what is a norm for Ingram Micro, which is 100 to 200 vendor partners, so we're aggressively adding vendors in that country as we speak usually half a dozen to a dozen each year, and we're being careful about it so that we can bring them in and support them more adequately. And we've got that same challenge or opportunity to some extent in some of the other emerging or developing markets like Brazil or India.

And then when it comes to resellers, a real big strength that I'll touch on a couple of times and Keith will bring home as well is we think we have the biggest and broadest base of customers around the world. Again, I think the point of sale data capture example that I mentioned before, made an acquisition 5 years ago with Nimax, a small-ish $60 million business with about 2,000 customers. In the subsequent 5 years, we've doubled and trebled the customer base with that business, really training and bringing on board a broad new set of VARs that these vendors could not see before, and that's part of our value-add, developing business practices in the value-add reseller community, making sure that they take and follow us in terms of our one-stop shop opportunity working with them.

From a broad context, we're following external data points. We do believe that, overall, global markets will grow probably in the range of 3% to 4%. Clearly, there's some markets that are doing much better, most again, the developing markets where we have very good exposure on the big developing markets. There is risk in these numbers as we all know given everything we're involved with every day on a global basis. But this fits, I think, the footing for what the IT market will grow at, and as most of you know, IT tends to grow at 1x -- 1.5x, generally, 1.5x to 2x GDP growth rate. That's been the pattern for the last decade, with 1 or 2 exceptions where there's huge volatility of a downdraft, where if there's a significant downdraft, IT will go further down, capital expenditures around IT will go down faster. But that usually is short-lived as it was in 2009, and then there's a very significant bounce back in 2010 as there was where the market was growing 12% on a global basis for IT whereas this year, it's come back down to sort of 6% or 7%.

And then the IT splits as you can see here from IDC but basically, we work in a world today of about $1.6 trillion of expenditures, $1.6 trillion, $1.7 trillion, as I mentioned before. We, as a company, are operating within that software, hardware space. Software is showing good characteristics, a little bit stronger than hardware. We have a great presence in both. 15% of our revenue on a global basis today is in software. So we are the largest player in the software domain and in our industry.

Both an opportunity and potentially a bit of a threat. A lot of people talk about cloud direction and the implications of that but we'll touch on everything we're doing there, I think, to position ourselves as a company as we go forward.

Now growth rates in the regions, again, just to take this home, in the top box, you can see that Europe's outlook on a compounded basis for the next 3 to 4 years is a very low single-digit 3% to 4%, and there's a mix by country in there, but it is a slow-growth region, and included in there, of course, there's some high growth opportunities of central Europe, potentially, Middle East but incredibly volatile. They can go up and down pretty quickly. North America, much more moderate in line with global numbers of around 5% to 6%, but it's Asia and Latin America that present us ample opportunity as a company as we go forward.

Now I want to move to some of the broader trends that again are influencing where we're spending our money in terms of either acquisitions or development of business units in our own organization. And clearly, everything that's happening in the cloud and mobility space is being driven by the device form factor, in essence. So smart handhelds and tablet form factors are growing at an incredible pace. Today, the estimates that we see and hear back from the vendor community is, in essence, about anywhere from 2% to 3% of total IT expenditures are cloud-oriented. By 2015, just 4 years out, probably upwards of 8% to 9% of total IT spend is within a cloud-related context. So clearly way outpacing the market. The money in terms of marketing funds and investment here is very robust. We're seeing it in unit sales as well here, you can see the media tablet numbers for this year in the $65 million range. For the current year, last year, that was sort of a $19 million to $20 million range so trebling in the current year. That rate will continue as we go forward. Just this year, near 4 years out from now, the numbers look more around 325 million units. And you say, "How can I be growing that fast?" Well, that doubling and trebling phenomena is still very much in play. Included in here are all the major manufacturers that are really going to continue to put a lot of investment here from everything we're seeing and hearing from them. It's the likes of Amazon coming in with more and more form factors. As we all know, they are in this space, but it's, of course, Dell, HP, Acer and, clearly, Apple is the leader today. So we're excited about this space. And the vendor communities are saying, "We need to go well beyond where things are today with the consumer." We're going to bring this very much in the business environment.

Next major set of trends are focused all around what has been -- a key driver for most of 2010 and I would say the first half of this year, which has been corporate refresh. I'd say that has played most of its way through but it is fairly cyclic and so depending which country you're in, there's still a fair bit of money going into clearly in data centers that support the cloud-based environment that we're in but more and more companies including ourselves, which Mario will talk to you about, will say, what's being done within an Ingram Micro context to support that environment as well?

And so from an Ingram perspective, we support this. We're of the view that the market opportunity around data centers and what we're doing with all the pieces that we've got today in Enterprise computing as again we were showing you that we were selling over $10 billion today, that $10 billion is completely geared to this marketplace. A portion of that sale activity at Ingram Micro is very much cadence and I would call it in a velocity context. But what's really exciting is that each operating unit within the company is either building out on a greenfield practice or we're looking at acquisitions to build out specializations and solutions that are going to be focused around the data center. So there's a big theme for us thematically around the world.

Social media, you've seen the numbers probably on Facebook last year. It was probably 550 million. This year, it's approaching 800 million. These are the big drivers around content, around video and users. The numbers go up to 1 billion next year. Here again, huge play for us in 3 or 4 areas. Networking infrastructure, we're the largest player in networking today and distribution, very strong piece of our business at the back of an excellent relationship with companies like Cisco, Juniper, all the major players here, we have a very strong position with. Usually, a #1 position with in most countries around the world. So this is a great area for us from network infrastructure point of view but also again form factors of what the end users are going to use, is going to be drivers here supporting that drive and movement.

And then finally, again, you can see the data points here I think you've seen before, but it's again, the sheer numbers are creating great data center opportunities for us as an organization.

The last area of trends which I've kind of touched on already is what's driving things for us in a positive way is the emerging markets. So Ingram Micro, I think, a disproportionate exposure, if you may, the emerging markets in Latin America and Asia today 27%, 28% of our business. I see those 2 regions easily being in the 35% range over the next 3 or 4 years. And it's being driven by these data points, just the sheer number of people starting to onboard onto the Internet. India, as an example, bringing on the equivalent of 2 Swedens a month in IT infrastructure with people buying mobile devices. We're participating actively in that. We have a strong practice in handset activity in India because it's an open market as opposed to a carrier-driven market so very active in that opportunity.

The next little section here, I'd like to walk you through, is the area of focus that we're putting into around each of the 4 regions. And what's our position in those key markets? And where is the area of emphasis by the individual operating units? Here, you can see in North America, we have a pretty good infrastructure, and I wanted to share with you some important data points just from the graph. We have 7 major warehouses spread around the country, and these warehouses typically are 0.5 million to up to 1 million square feet each, fully automated, all of them being able to handle, as you know, what we talk about our Logistics business as we shared with you before upwards of 50% of the traffic, of the volume coming through is logistics-related, and 50% is what we'd call the normal sales push that we have with the vendor community to our VARs.

We're, on average, shipping 90% of those products to the end user, very important data point for us. 2-day shipment via ground, low-cost service solutions for both the vendors and the customers but that 90% shipment to the end user is extremely important. It represents upwards of 4 million commercial end user businesses that we ship product to. And over the last 6 years, we've collected records on all those end users. Exactly what products they've taken on behalf of the VARs that are working with them, and we've been using that extensively in terms of database and business intelligence to sort of co-market with the vendors whether products are getting old, whether there's certain vertical markets that there's huge opportunities to or significant upgrades to go into. So a rich, rich vein, if you may, of data from which to go target specific programs and initiatives. And we've built out a very good practice on this again which Keith will touch on a little bit in his talk.

We have a very strong base of small to medium business in North America. North America has probably got the most diverse base of customers, maybe not the largest number of customers but the diversity of the mix of the customers is very good here. We also have built out the first Consumer Electronics businesses. We still do have 2 strong divisions in CE that are -- have separate brand names, one that's focused on high end home theater, the company that we bought 4.5 years ago called Avid. That market did very well for us in the first 2 years we were in it. But in the last 2 years, it's been a slight drag in our business and operating results in North America. The good news here is we're finally seeing for the first time growth in Avid, and in the last 4, 5 months, we've seen us probably go through a trough, and finally, there's activity buying high end home entertainment systems, which we have through this map, all the smaller dots, depots for that business.

But we also have another business called DBL, another acquisition of about 3 years ago, where this is focused on consumer accessories, also growing extremely well this year, much, much better than the Avid piece. Here, we're seeing a lot of uptake on accessories around tablet form factors, smartphones and everything else. So we're strong in this area selling to retail shops across the continent. And again, a very strong book of business here, slightly better margin opportunity than the overall core business, so we're very happy with how that's moving as separate business units and within the North American operations.

We have a cloud business that I'll come back to in a few minutes' time, as well as Keith giving some -- spend more time on that. I did touch on the Data Capture/Point-Of-Sale business, which from a small base, is now 4x, 5x what we acquired 5 years ago, a very healthy operating margins. And we have a very strong Logistics business that we've touched on. You can see here the split on Data Capture and Mobility and Logistics. Small in revenues but the contributions from these are very rich, and we'll share a couple more data points on that later.

Enterprise & Data Center is where today, as I said, there's cadence in both volume and value. Keith and his organization are making some very significant investments in structure to go attack this big piece of the pie where we have very significant revenues with a stronger margin focus. So he'll come back and walk you through that but it's a pretty big opportunity.

Looking at Europe. Again, you can see a footprint here. We're in most of the major countries in Western Europe, again representing probably 90% of what EMEA has to offer in revenues, with a pretty good warehouse footprint. We've established the Logistics business by bringing in IM First, our automated warehouse systems into Europe over the last 18 months, so we're finally starting to land some logistics customers. But the real strength for our business in Europe, where I think we've garnered close to 70% to 75% of our revenues outside of the consumer market is in SMB, much bigger focus on SMB here in this market than anywhere. And frankly, our largest base of resellers anywhere in the world is actually in Europe. So it just goes to prove how fragmented this market is, much broader base of customers than we have in any other GEO even though the population is not anywhere as large as Asia or Latin America but we've got a very strong book of business with the VAR community, and we focus most of our efforts on that. As I was saying over lunch discussion today, our consumer business is probably about 30% of our revenue in Europe. It's been very soft this year. The consumer -- unemployment rates, everything else has been relatively soft. It's been year-on-year a drop in revenues. That trend has continued through this quarter.

But the good side, alternate [ph] side of that, is the SMB market we're continuing to grow in most of the geographies we're in. And we've held strong there by focusing a lot of special programs mostly around a lot like we've done in North America, leveraging the data that we've been collecting for the last few years on what sits in that end user community or what the VAR has actually sold over a number of years and we've kept the stronger capability of understanding that and using that for marketing programs.

I'll move on to -- just to give you a sense of where we are from a market position. So in Germany, we're #1 in terms of revenue and market share position. And in most other countries, we're in position 2 or 3. What's a little unique here compared to what you just saw with North America, there's 4 or 5 the same key players for the whole continent. Here, apart from Tech Data and Ingram Micro, where we're present in all the same key markets, everywhere else, it tends to be local European players. And these local European players will typically hold anywhere from 25% to 75% of the market share opportunity. And the typical country in Europe, I would say, is on average around 20 competitors. It's much more fragmented in Europe but those same competitors don't necessarily operate in multiple countries, most of our competitors are in 1 or 2, there are some that might be in 6 or 7 like in [indiscernible] but generally, they're in one country or 2 countries.

The last point I would like to highlight here too is you can see that our Enterprise business is relatively small, 20% in Europe compared to North America but we'll be growing quite fast. We've got a lot of focus on here. The good news is we're signing up a lot of vendors, a lot of what Keith has been doing for the last 3 or 4 years, those vendors are now coming to us and working with us around networking -- high-end networking or high-end Enterprise computing and software storage to sort of build out a practice across Europe.

Asia, very different picture, much broader coverage of warehouses and offices. And that's necessarily in both China and in India. Particularly in India, the road infrastructure and the ability to ship across the country is very difficult compared to, let's say, China or compared to mature markets in Western Europe or North America. And there's value-added tax and the tax structures in India vary by municipality or by state, which forces anybody that's going to play across that country, a requirement to have a number of offices. So in our situation, a better part of 40 or 50 warehouse locations and around 20 sales offices managing optimally, if you may, the sales activity and the distribution footprint requirements of that marketplace.

China, we're getting better with the road infrastructure and the train infrastructure, so not as many warehouse locations but like everywhere in these 2 key markets, most of the vendors are working pretty aggressively with us, saying, "Look, we've tackled the Tier 1 or Tier 2 level cities that are 5 million population or up. Let's go attack country -- sorry, the cities of 35,000 to 0.5 million and there are hundreds of those." And so from that perspective, that's where the emphasis is and that's where we're starting to put dots on the map here and reaching that market, going up market, as they would call it, in each of these 2 key countries. We see a little bit of that, too, with the footprint that we have in Thailand and Malaysia.

Much like Europe, a lot of focus on and emphasis in putting in a Data Capture/Point-Of-Sale practice. We've bought 2 companies, 2 years ago and 3 years ago, and we've built out a very healthy business here, approaching $200 million off of some small acquisitions so a very strong business there and the largest player in that and growing in a very healthy clip, strong double-digit growth this year.

We've got, as I mentioned before, a very strong handset business. Major partners there for us include Sony Ericsson, HTC, Apple, Samsung and so those vendors are working with us like we know some competitors do here in North America and Europe, we're the major player in the handset business and this open device market that India represents. And we're trying to break that code, if you may, in China so there's discussions and we're looking at doing the same there.

We're in early stages of doing some work on cloud-based computing already in 2 markets. As an example, we are selling where you have an exclusive partnership with them in India, which is pretty interesting so we're the first distribution company that they've been working with in this regard, so we're taking their product solution, which is a cloud solution into India on their behalf.

And we do have a very strong network of SMB, like Europe, not as large a number but clearly a key commitment from us developing that market.

Here, you can see we have the stronger position as #1 in most countries we're in. Exception there are really the key market that we're not, in my opinion, is in China. Digital China and Synnex International are larger than us, but we have a stronger business here. We've been very vigilant in China as we are in other developing markets. Quality comes first of results, so we may not grow sometimes as fast as the overall market will, but it's very important for us that we have good results as a good multinational New York Stock Exchange-based company, critical that we do a good job here from an FCPA and a go-to-market compliance perspective. So very happy with where we are but clearly, there's great opportunity, as I mentioned to you before, in India and China, in particular, as we add more vendors to the portfolio. And as you can see, a big commitment to the Enterprise & Data Center as an area of growth for us.

Finally, Latin America. Strong position here. #1 position in Mexico and I will come to this with a number of offices here. And in the other countries, as you can see, one office, one warehouse typically around the major commercial centers. And in each case, I think we've got a good position. We've struggled a little in Brazil over the last year, 1.5 years but we've made a number of changes, so there may be a question or 2 on that later but we're very committed to this market as we go forward.

You can see our market position here in these countries. Argentina is the only one we're relatively small but there's no one player that's over $150 million, so most the players are small in Argentina. It's not that big a market. Really, it's Latin America's mostly about really Brazil #1, Mexico #2. They dwarf the rest of the other markets, and then we do extremely well ourselves out of selling to the rest of the region on an export basis, which many of our competitors do out of Miami.

Now let's close with the last 3 or 4 charts, just reiterating, some of what you've already heard thematically from me, about what is the emphasis from Ingram Micro from a strategic point of view, and this sort of essentially 3 pillars that we've been talking about for the last 2 years that are driving a lot of the investments and the focus of the organization team. First pillar is excelling around corporate and worldwide operational excellence. Second pillar is about developing these businesses I've already been touching on, and the third one is where do we invest for new growth that's quite different than what we've seen before.

Let me touch on all 3 briefly. First area that I'm going to make a comment on is the biggest area of single investment for us really over the last 2.5 years and will be for the next 3 is our investment in our IT systems. As a management team, we knew when we made this decision 3 years ago that we were dealing with a platform, Ingram Micro's core ERP systems are COBOL-based. 30 to 35 years ago, we wrote most of the platforms in terms of this ERP system, access to those resources and ability to work with our VAR community or the vendors who are dealing with generally SAP or Oracle environment, we're going to impede our growth opportunities in the future. So we said, at some point, this organization needs to make that leap of faith. We made that decision as a management team. I made it expressly and said we're going to commit our way and work through this.

We're actually, as I said, halfway through that voyage, and Mario will share with you in a few minutes' time where we are in the span of that and the implications of what it means for us as we go forward. But we feel like we're in a very good stage. We've run into 1 or 2 bumps that have been very significant so we're not happy about those results particularly in Australia but we know what's not worked and we're making the corrections as we speak, and we're very, very focused on making this right as we go forward before we move into additional country rollouts. So again, Mario will touch on this in a few minutes' time.

From another area of investment for us, again very significant in terms of capital spend, is we've been upgrading all our websites, all the data mining and database management, were a very big area of management for us from an IT perspective. We've also been taking out costs and restructuring the business. As you saw most recently, we hit sub-4% operating costs. First time we've done that in Q3 in a long, long time so we're really driving operating leverage in the organization even while we're investing very substantially, because we're running dual systems today in ERP as we bring in on SAP and as we keep Impulse in until we discharge Impulse over the next 3, 4 years. So we've been very focused on costs and margin management, and even though you might not see it from some of the margin situation because some of the challenges we've had but we will move forward there positively.

We're driving with the SAP and consistent process systems in the company to the leverage shared services, and I'll let Keith walk you through that, but we're off-shoring certain number of roles and functions so that we can improve our costs and improve our processes as we standardize with one operating system over the next 2 to 3 years. So this is going to be great leverage for the company as well, and I've already touched on our business intelligence impact.

In the adjacencies area, I think I've hit on most of this, so I'll keep it brief, but there are some data points on here. So $600-plus million in the current year, growing double-digit in Data Capture/Point-Of-Sale, vendors really enjoying working with Ingram Micro particularly as we build out their practices as a number of other VARs that they might not have otherwise seen, and they're expanding their own portfolios and going more into distribution. So this is, trend-wise, this is a healthy double-digit business for us. We expect over the next 3 or 4 years, this grows by at least 50%, we think the opportunity is even larger than that but we're pretty certain that this directionally is where we're going.

In the Logistics space, also a double-digit, very healthy double-digit margin business for us. We're looking at a very significant book of business right now. There's been good work this year in our organization. Robert Gifford, who's come in, the direct report of mine has taken over worldwide logistics, and that's what he's done all his life, and he's focused on what can we do as a marketing engine and developing more logistics contracts and opportunities. We are very focused on the 40-or-so customers we have today but there's 2 or 3 that are very large for us that represent over 50% of our revenue. We want to diversify that revenue, and we've got some interesting things that we're working on right now that I know over the coming months, we will be announcing about some new relationships.

In the mobility space, as I mentioned earlier, high and strong double-digit growth this year, triple-digit growth for us on a global basis. This could very well be very high double-digits, possibly triple-digits next year but on a compounded basis, we're looking at, at least 30% to 40% growth rates here for the next 3 to 4 years with all the products and the opportunity that's presenting itself in front of us. It's generally more velocity-related than the others but I have up here where there's more margin opportunity but what we're working pretty aggressively on is let's just capture the key vendors here that are the major pull in the industry, vendors like Apple where we've got a very strong relationship and then make sure that you have the accessories, the software and the solutions around those as those markets really start to take off in the commercial space.

So we see very strong revenue growth here. You can see up to $1.5 billion to $2 billion really over the next 3 to 4 years, an additional business here for us.

And in the technology enterprise space, we're looking again at very substantial growth for the company. Most of this focus is going to be on how we train the mix and change the mix to be solutions-oriented and again, Keith will give you a very good example of what he's doing around that.

So the last thing I want just to come back to, is an exciting area for us which is where there's been more development dollars. Last year, we took our first real step forward with this by dedicating an executive with a team of 40 people and a greenfield investment as an organization, so no acquisition here. A lady called René Bergeron came into the organization and we said, "We're going to go after this cloud space very aggressively." We built out the first education and informational portal, which again, we got the CIO Award on and what we were doing in distribution.

And then this year, we've been building out on top of that a very significant capability to authorize and enable an annuity revenue stream for our VAR community and our VARs can use those tools to manage the end users. That toolset, very exciting toolset that we're bringing out in pilot mode right now and it goes into production mode, if you may, in Q1. In the meantime, through this year, we signed up and now we're upwards of as you can see up here, closing in on 30 vendors. 50 different types of solutions. So we are far and along away in terms of putting a very strong aggregator capability, as we've done in the hardware world. And we're doing this on an annuity structure so we're very excited about what this represents for us from a start essentially of last year in the cloud arena.

So I'm going to close and allow for, in a moment here, to allow for some questions from the floor as I've given you a good overview of where the company's going. I want to leave you just with a couple of thoughts. The biggest day of emphasis for us is, let's get through the very significant investment where I've mentioned, we've got duplication of investment going on in ERP. So we're still carrying our current ERP system. So there's additional costs for us. We got 2 ERP systems working, one ramping up, one that will start feathering [ph] Out over the next year or 2 and then stop very significantly years 3 and 4. So very important piece of work for us. We're very committed to getting through that so that's a big piece of work but it's very fundamental to the future of the company. It's going to be the basis of everything we do in terms of processes, features, functionality and connectivity to our vast partner world that we play into on both sides of the organization, both in customers and the vendor community. And we feel good about where we are on that even though we've not executed as well as we would have liked with the Australia situation, and we've learned that there's other opportunities for improvement. So Mario will touch on that here on the agenda in a few moments.

Second big area of focus, we're very committed to some very substantive financial targets, and we believe, if we can execute through the changes that we're making as well as the market opportunity that we see a combination of just broad organic growth rates that we believe we'll be anywhere between 5% to 7% for the overall IT markets, in some markets clearly more than that, others less. Where our bias is going be to focus on those geographies with investments that have gotten longer-term potential at much higher growth rates. So that's a huge commitment from us in terms of acquisitions or greenfield investments.

And then the final point I want to leave you with is that we've got and here -- I haven't touched on this but Bill will speak to it, we still got a lot of flexibility with a

strong balance sheet, strong financial position that we're in that we've got ability to lever and push ourselves in certain directions that the opportunities present themselves and that's what we're going to be focused on as an organization going forward, a little bit more on the acquisition front in terms of driving around these 4 or 5 pillars that I shared with you at the back end of this presentation. So with that thank you for your attention and we'll go back to the back of the room here with the first question or a couple of them on the microphone.

Question-and-Answer Session

Benjamin A. Reitzes - Barclays Capital, Research Division

Thanks a lot. Ben Reitzes, Barclays Capital. Greg, I wanted to thank ask about your long-term target. On the EPS line, it's about 13% to 18% EPS growth and what it would take to be at the higher end of that? And I just had a clarification as well. You mentioned that ERP system moving off of 2 to 1, does that mean that the growth rate's actually faster towards the end of the period because once you flip the switch on that, does that hockey stick up the earnings some? So those are kind of -- how do you get to the higher end and then just clarify the ERP comment and what does that mean for the timeline.

Gregory M. E. Spierkel

So the higher end I think will be a function of probably 3 or 4 things. What's the overall IT market growing at? At this stage, we've taken a conservative view of the outlook for the market. As I said so before, IT growth rates have generally been 1.5x GDP, so GDP outlook here is globally and we've got the same sort of exposure to those numbers generally, would mean 5.5% to 7% growth opportunity. But we do know there's a lot of noise in the system short-term economically particularly coming out of Europe and to a lesser extent here out of North America that there may be broader headwinds or question marks that could influence things over the next 3 to 4 years. So that would be the biggest thing that could drive things. So will be the top line, because we think we've got good controls around the rest. The next thing, I think, that will help that is the ability to get through the ERP system changes. We do feel good about where we are. The cost will step out much more aggressively at the back end then, to your question. Mario will show that. Next year, as we've alluded to and said already, we've reached the peak of capital spend this year and P&L spend this year. So next year steps down a little bit. The year after, steps down a bit more. '14, steps down very significantly, same thing again in '15. We will be out of the duplicate ERP systems for sure '14 going into '15. And so you say, why are you holding onto some of that as it is? At this stage, we've got through 7 or 8 countries out of 30. We have a requirement also to hold on to the mainframe data for 2, 3 years for record-keeping, financials and information that we do need and want to make sure that we have some ability to go back. That's very normal for a large organization to go through that process even though we are moving a lot of data over. Mario will touch on what we've done from an infrastructure point of view to give us more flexibly going forward. The last variable on my mind is the initiatives that we talked about here how quickly we can ramp these initiatives up. So there's a lot of emphasis on that. And acquisitions while we've got factored in here, they will be an element that we think to your point is more upside on this, closer to the higher end of these numbers if we're smart about what those are, because we got flexibility to go after some things that we're looking at. And we think they'll do more than we have done in the last 2 years. And again, Bill will share with you a little bit of that capital allocation thinking that we're planning on as an organization between now and '14, '15.

Benjamin A. Reitzes - Barclays Capital, Research Division

And the, let's call it, 16% average growth over the years faster at the end, a little slower in the beginning because the ERP situation. Then with regard to share repo, are you willing to say how many points that is of the growth of the EPS or is it too hard to say?

Gregory M. E. Spierkel

I'd say it is too hard to say. We're putting general numbers together. We've done some of that share repurchase this year on a chart that we're going to share with you. But we'll feature some as we go forward depending on where we are, on price versus tangible, net tangible book. That will be a function of how aggressive we are. And whatever else we're looking at in terms of investment opportunities whether internal or acquisition in nature. So we've got another question in the back. And I'm sensitive to hear that I've got another 5 minutes or so before we keep the agenda on schedule.

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

Greg, Ananda Baruah of Brean Murray. I guess just 2 things, just to keep it brief. First is a clarification. Your opening comments about Europe being soft there. Are those incremental to what you guys said on the call a couple of weeks ago? Or is that sort of just...

Gregory M. E. Spierkel

That's just a general statement on that first question I wouldn't call Europe softer in our perspective. It's interesting trend here. As I was saying over lunch, Southern Europe, in particular, has been just generally negative with the press and clearly Italy in a particular, which is an important market for us and important within European context is weighed, I think, on the psychology of the neighboring countries. So where in the first half of this year. Germany and Austria and France were all showing consistent growth GDP wise. We have seen data in the last few weeks that tell us that Q3, Germany, as an example, is flat. It's not positive GDP. So for the full year, they may end up still at 1.5% to 2%. But the quarter they just finished, things have slowed down a little bit. That's translating into some degree of consumer spend, not so much on the business side yet for us that we're seeing. But on the consumer side it's translating in a little softer consumer spend in some of the countries in Europe that we saw in the first half of the year but I wouldn't be calling it any softer than what we saw from our call a couple of weeks ago.

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

Got it. And also on the revenue outlook, so I understand that you're being -- there's some conservatism baked in. Your IT spending forecast, I guess, in sort of in the [indiscernible]. Is there also conservatism to your overall Ingram Micro revenue forecast typically -- distribution might grow at a premium to IT spending overall and you guys have pointed to some of these, I guess, incremental growth initiatives. You have some good dollars to add to them as well.

Gregory M. E. Spierkel

I think, again, not having a crystal ball on that, I would say market -- we're making a point that we want to grow at or above market. We're picking our battles, where we need to, to hold on to margin and operating income. So there's a balancing act that we need to make there. We can grow the top line a little more aggressively but we don't necessarily want to disturb the market dynamics. And that said, I think where we're placing our bets is where there's huge or better opportunity right now. And we've got some good momentum. Hopefully we're showing that and talking to it with some of the break up. You can see the growth rate or the momentum that we've had. So that's again where we're going to put more emphasis as a management team, which could give us some upside. But again, it's hard for me to call it. So we're saying, here's a band that's governing a little bit of the band of the operating performance. But we're going to get leverage on OpEx plus carrying less of the duplicate IT expenditure so that's leverage coming out. Again, without taking too much away from Bill really giving you a really defined waterfall chart, so you have more explicit numbers to work with here. I think it will help. Matt you want to go next?

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

Matt Sheerin with Stifel, Nicolaus. So looking at that 5.4% to 5.6% gross margin target, given these growth initiatives are in the higher value-added and higher-margin area like Logistics, like Point-of- Sale, Enterprise, it seems like that target is a little low. You were there '08 through 2010. So is that factoring in the core business that consumer SMB business where there's sort of blocking and tackling and there's some give-and-take on the margins, sort of factoring that in or there are other things? Or could that be a conservative number? And then as a follow-up to that, the logistics number looks fairly ambitious given that you've had some issues with some bigger customers. So tell us how you get from 120 to 190, maybe acquisitions are part of that? And could you give us a comparison of the last couple of years what the revenue run rate in that business was or has been so we can get an idea...

Gregory M. E. Spierkel

Alright, quite a few comments and questions in there. So on the first one, it is a mix of what's going on here to your question, Matt. Clearly, these new pieces of business where we're seeing healthy growth rates do have better margin characteristics and that's the whole emphasis behind it. But there is also a function that you can pick on one of those growth rates of that we've highlighted in most recent call, the Mobility space. We said we've got to jump on the key leaders here with those devices. And initially, those devices are going out at lower margins than the corporate average. So yes, call it hyper-growth, which is available there. We need to do it. Otherwise, we'll lose a -- let's say the Trojan horse going through the door. It's the ability to build on the solution practice around that Mobility space that we're working aggressively on. And so for the first year to 2, we may in fact run at slightly lower than corporate averages on that business. And we're seeing it for sure right now. So that's actually pulling it the other way in the short-term but it's the right decision to be on the front end of that. So pick on again the fruit company in California, that relationship is critical to us. They're working with us as 1 or 2 or 3 partners in most countries. They want us to be their commercial route to market. If we didn't jump on it even if it had a lower margin profile, we would miss out being able to get back in there later and build a broader practice around it. So that's an influencing factor that puts a little bit of dampening influence on that 5-4 to 5-6 range. So it's going to be a condition of the acquisitions and the mix of business. I would say the commodity business remains aggressive as it always is within a range. So there's parts of the portfolio that run at Ingram Micro big blocks anywhere from, let's say 4% to 5% that are always going to be there, have been in there. You want to hold onto that because it generally pulls again with the customer relationship. The biggest objective that we have as a management team is making sure we do a better job with that other piece of the pie. I was trying to show you that we'll keep pushing that envelope. And it'll be a function swing that I talked about to Dan's question earlier. What the upside is on an earnings per share growth rate, if you may, over the 3- to 4-year window? We'll vary a little bit on how much we can push that combination of our own organic initiatives as well as the Acquisition side. Now there's a logistics piece. This year, logistics revenue is down slightly. We have not shared those numbers before. Upfront sales 2010, it had continuously been growing from a start in 2002 with probably a compounded 10%, 15% a year, a healthy book of business. Moved up off the back of initially 2 very large relationships. But we've built it out to over 40 relationships now. And what gives us some comfort here, as I was saying in my comments before is, as we speak, we've got 2 or 3 very interesting clients that we're already in, what I'll say, early stages of development work together, where we know we've essentially won the business if we don't make any -- find any problems with what we're doing together. Because this is very substantial decisions when companies work with us to decide to move their logistics function over to Ingram Micro. We've won some business from what I'd call net new product area, where people are really trying to get into -- and a big part of our business is e-commerce fulfillment. So we're best-in-class, I think, in e-commerce fulfillment. But some relationships are saying, "No, I want to un-couple what I already have and I want to close warehouses. And so we're in discussions literally in a supply chain context with 2 or 3 very substantial clients that were well along but I believe we're good with. We've landed 3 or 4 small ones in the last quarter. But there's really some substantial ones that are right in front of us, and others that are in longer-term discussions. The gestation period for a sale there compared to our regular business, which is ours, is many months. Sometimes many quarters depending on how long the courtship has to be and depending where they in their supply chain discussion internally. So acquisition might be a future here in the logistics space. We have looked but we've never really pulled anything in specifically. All of this growth has been organic for us so far. And I'm over my time limit so I think I'll take one more and then we'll get the floor over here to Mario and then we'll go into our break.

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

Brian Alexander, Raymond James. Just on the European landscape, Greg, what benefit do vendors see from having multiple distributors in the country. You said some countries have 20 distributors and what do you think will ultimately be the catalyst to drive consolidation? Because we've been talking about this for a number of...

Gregory M. E. Spierkel

I know, I know. In Europe, and I've worked there, Brian. As you know, I lived there for 6 years with Ingram Micro and have been away for now for 6 years. Ingram came into Europe in mid-90s onwards. And a lot of our competitors have been there, let's say, from the late 80s onwards. So they had a 5- to 10-year advance relationship situation with a number of vendors, whether it's networking storage, computing software. As big as we are and as important as we are to the vendor, let's pick a big vendor on the software side or big vendor in the hardware side. Well, you know who the biggest ones are. They typically have, at a country level, anywhere from 5 to 9 partner relationships. Very, very normal for Europe. Quite different in North America, interestingly enough. In many cases it's only 4 or 5 because there's better transparency, they've rationalized things, so a lot of our competitors might have only portions of the portfolio but not all of it. Europe, different that way. The decision-making still for the vendors rests quite often at the country level and getting that change to happen is not easy. So I'll pick on 2 to give you an example of where it's really worked in our favor over the last few years. Cisco, when I first went to Europe 10, 12 years ago, had on average across Western Europe around 80 to 90 distribution partners. One individual came in, had to come in from the U.S., not a European, had to be an outsider who is going to rip apart this normal fabric and over a period of 4 years, that individual managed to get Cisco down to 4 partners per country, of which Ingram and a couple of our major competitors, and this is Wescon and Tech Data, have got rights to all products in all countries and on average of using maybe 1 other player per country that's a local. And in that instance, they moved from 90 relationships in Western Europe down to, in essence, around 15, of which 3 are consistently all over the place and there's one local per country. That's not unusual but it has worked in our favor where we've ramped up our relationship with that company. Same story within Apple and even more dogmatic on it, had, when I first got here, many more relationships made a decision to get down 2, in some cases 3, per country. Now in some countries, we were not one of the 2. And so getting back in there is either through acquisition or maybe another form factor coming along at some point in the future like the tablet. And so we work pretty hard. In some countries, there's 3 or 4 countries we don't have Apple. And yet as big as we are, you think we'd have them on a global level but decision-making still happens on country level for a lot of vendors. So I picked those as 2 good examples. We're going the right direction for distribution, but there are a number of other vendors that have just said we got to keep adding and adding and then they realize there's too much conflict and price issues and everything else to manage that they get religion, if you may, and then start backing off but it's a multiyear program to move that way. Or it comes down to one of 3 or 4 Arrow, Avnet, Ingram or Tech Data buying certain companies out of the country level. And again, we'll do that if it makes sense financially, but you're not going to do it to help a vendor necessarily. You're going to do it usually if it has the right kind of return for the business. The question here for the cloud, it's the global target assume 115 basis points for Europe. We haven't split it up by region but we do believe Europe will be getting close to that. But it's going to be close. It has to be, because it's 30% of the business but we could do it without it, Brian with the other regions. But it's going to be in spitting distance if it's not there. A number of things can influence that at that point in time. But we're definitely going to work pretty hard on that.

Gregory M. E. Spierkel

I'm going to close the questions at this point. Thank you. Good questions and ask that Mario Leone come up, who is our Chief Information Officer. Mario has been with the company for 3 years and it will be 3 years in January. He was a CIO at Fiat and Federal-Mogul before that. So automotive industry background and he's come into the wild, wild world of technology and distribution and technology. Mario? Thank you.

Mario F. Leone

Thank you, Greg. Thank you very much and very much appreciate the opportunity to speak to you all today. And actually, prior to the automotive industry and now distribution I spent 20 years with Union Carbide and Dow Chemicals. So a lot of different industries and a lot of transformational-type programs.

So what I'd like to do today, if I could, I'll basically take you through what we are doing as far as our transformational program within Ingram Micro. And actually, as you begin to think about the journey we're on and I'd like to get you familiar with our particular path because it is more than just the ERP system. And I think if you really stop and reflect on most of the transformations companies go through sort of in an epic [ph] way in large companies at different points in time, they really do take in a lot of other different pieces, if you will, of their system architecture than just the application area. And hopefully you'll see some of that here.

So ultimately, I think the goal for us has to be really putting in place the platform and architecture that's going to carry us not just for years but probably for decades going forward as did our classic, our legacy environment, which really was early in its time, was really best-in-class and held up through about 30 years of the company's history. I'll also talk a little bit about the cost structure of our new environment, how I see the environment that we're putting in place. I think we delivered sort of value that this company needs.

And finally, I will speak specifically about SAP and the web. It's 2 of the key ingredients and components of what eventually both our customers and our partners seek. On this chart here, as you can see, this business blueprint, I think many of the things that Greg has spoken to you about and that you'll hear from Keith as well under the technology trends are things that are not just happening outside of Ingram Micro but they're actually things that we're building into the strategy that we have and we're putting in place internally. And it's not because it's just a nice thing to have but it's the reality of the platform that you have to have, if over time you're going to go ahead and be really in a situation to go ahead and take advantage of the cost-competitiveness out there and the refresh of technology that's going on.

Probably the thing that I would call out to you in sort of the key corporate initiatives, which is different from on -- for those of you who follow manufacturing and industrial environments is, in many cases, for those type environments, an IS strategy is important, but it's not critical. Unlike our business, where once you get beyond the warehouses and the supply chain, our IS architecture is absolutely fundamental and critical and we have to get right because this is the part that really drives our business. And in many cases even R&D and engineering in manufacturing and industrial markets.

In our business in fact, we in the IT group are the R&D and engineering of the company. So we do 2 things. And I think you can see that under the corporate initiative. We're doing the operational effectiveness piece, which every CIO has to go ahead and take on, and then the other part is the innovation piece. And I think you can see it captured here, sort of the operational effectiveness pieces that come from dealing with the blocking and tackling of the core [ph] ERP system, partner connectivity in the web and then clearly moving into those spaces as you can see here, like Micro-Logistics [ph] Business, cloud computing and Mobility services, where we've enjoyed some success.

So in coming to Ingram Micro and really taking the early portions of my time here, really there's a good opportunity to get to know the business on a global scale and I think the worldwide executive team that we have, 4 region presidents and Bill Humes, our CFO, to really help me understand the dynamics of the business and it was critical. And I think it's really an asset as we're moving through this journey that we have. It also became apparent there are a lot of really good things we were doing, but there are places that we fundamentally had to go ahead and take a detour and make sure that we put in place the right, if you will, architecture that we'd go ahead and deal with some of the components that really have to be there so we may be successful going forward.

If you look at these, it starts with computing environments, which I'll speak to in a few minutes, and that's sort of classic data-centering networks. A global network is really an extension of that going from the local inter-networks to wide area networks in telephony and a lot of the things that you hear about cloud computing and the like. The modern ERP system and the ERP system for us is SAP. And we can go through and the decisions are even made as to, [indiscernible] pick SAP. But ultimately, when you look at the type of company you have, multiple countries, multiple business units that we're driving towards, a lot of different partners from one side really became pretty apparent that's at the core portion of our transactional system, this is the right choice.

Does that mean we are going to use SAP for every aspect of our architecture? The answer is no. I don't think that's the right solution there an all or nothing. It's like you'd think in the core fundamental areas, around order cash, where we talk to the customer how to whether CPI, XML transactions, web transactions or just sort of taking an order over the phone all the way to the payables and receivables and all of that. Doesn't have orders cap [ph] but sure to pay some of the supply chain areas. Really, it's a good choice, in particular to deal with a lot of changes that are constantly going on in multiple countries. And many companies like us have made the same type of choice.

If you get to [indiscernible] edge application, there's a lot more room to go ahead and think about different solutions that have, if you will, more of the best of breed sort of approach. I use the term e-solutions. I chose to use of term e-solutions is really a make of 2 different pieces. The web and EBI [ph] and XML transaction or partner connectivity.

When we look at our type of business, and this is probably again another fundamental shift from many of the industrial companies, is we do a lot of our business across the web or through some type of partner integration and that's a good thing and we want to continue to push that it's a fast-growing piece of our business, both for partners and customers. It allows you to get things right. It allows you to go ahead and provide a lot more self-service, so you can keep your cost down. And you can go ahead and make sure once you get -- once you get those pieces established, you get the precision that you need in terms of your data flows.

Finally, when you look at lower operating cost, I think it was from day 1 really with the executive team, The focus had to be how do we really think about getting our cost structure down, because we are a remnant on duplicate set of solutions and we will be for a couple of years. But that doesn't exclude the fact that we can get cost out. So where we are today is I think you can see here. I feel very comfortable in telling you we have the foundation right. It's modular, we'll talk about it in a few minutes but it's behind us. And it was a necessary detour we had to take. So I think that as you look ahead, you can see that a lot of our focus now is really around the web and SAP. Not that it hasn't been up to this point, it has been but I think now we can accelerate those pieces even more. And we'll do the fine-tuning that's necessary to go ahead and make sure that's exactly right in the implementations we do going forward.

This is what we looked like coming in a couple of years ago. We had about 3,000 service across the world. They were not very well networked, if you will, [indiscernible] On solutions across the world. Highly physical and really did not have the capabilities to really go ahead and dial up or down the bandwidth we needed going forward. If there's 2 things that are certain, going forward and all this experience you get in your daily life, is that basically you want to get more network that you would need more storage. So you better figure out a way to go ahead and do those things in a pretty consistent way across the board without going ahead and just depleting your cost structure.

So we looked at this. And by the way, this diagram, I could probably draw it for most of the companies I've been with and for tens of companies that I know. This is where a lot of folks started, it's not unusual. You take businesses that have grown rapidly on -- essentially they've done a lot of small IT shops, if you will. But eventually go ahead and they're consolidated up. So we were looking at a situation -- we were heavily reliant on physical servers and actual physical hardware pieces that was out in a lot of different locations. We connect to over 180 different sites beyond the countries we're in. But if you think about the map that Greg showed, if we can just India [ph] those warehouses, all of those were [indiscernible] not connected into a single backbone [ph] .

Today, they are [indiscernible]. We didn't hear our storage. Why is that important? Because if you think about the dramatic increase in storage attractions [ph], great for our business as well. What happens is you wind up using high-cost storage for everything when in fact, if you compare it, you can go ahead and use that high-cost storage only in those areas that you really have to, and that's a good cost move to make. And it's one actually even from a business standpoint. Is really exciting for us to go into.

We had essentially a full outsourcing model of the company. And although that model may have had its benefits back in the 90s and early 2000 period, really more and more companies have moved away from that and they needed to. Because having a lot of on your computing in either 1 center with 1 major application, 1 major platform, we've got a lot of diversity. Really doesn't provide you the redundancy that we all know is necessary. That's just for the traditional, if you will, IT architecture. But even if you think about some of the recent issues with Amazon and the cloud space, not that that was a bad thing. But the fact that even in those cloud environments you need to think about how will you have your information distributed across multiple data centers so that you can get that resiliency and high reliability that most of the companies need.

If you look at this diagram for a moment, this is our new architecture and you can actually go ahead and you can see we're in Chicago. We're in Frankfurt, and we are in Sydney -- excuse me, Singapore. And we've essentially gone ahead, and we've used the co-location strategy and what I mean by that is, compared to full outsourcing models of the past, people took their infrastructure, their applications, their middleware and they moved it out. The model today -- I personally am very much in favor and I think it's really great, we store a lot of intellectual property back to the company.

But it builds on the fact, almost like a set of LEGO. That used a co-location strategy, in this case not using telcos but essentially using, our partner happens to be Equinix [ph], which has multiple cross-connects into those particular sites. So if I find, as an example here, BT and Sprint. Again, notice the redundancy? It's not being competitive. I can go ahead and do it on RFP to go ahead and make sure that I point another partner on a global scale who can go ahead and get me the right technology. But at, more importantly, also see a very competitive price.

So we built redundancy and today, we're running actually our almost 6,000 users on SAP in Chicago out of our production environment. And then we use Frankfurt as what we call our development and quality environment, so that we build a mirror image. So essentially, if you take a very sensitive business like ours where, clearly, we cannot experience gaps in our processing, it allow us to go ahead and build out redundancy in a way so that we can go ahead and ensure we can run our business in sometime in a degraded way, but you have the capability to keep that business running across the board.

So a couple of things to take away here. Low latency, we've got to make sure that it's sort of the responsiveness, and this is another key point that we probably took out on the Australia implementation in particular, is we cannot afford a situation where we put everything into one site particularly around the, if you will, the pricing and the SKU given the complexity and the numbers, the sheer volumes that we have and expect to get the type of processing and response rates that our customers would need on the web.

So we went for [indiscernible] call regional price engines in both Frankfurt and on Singapore. So if you go ahead and get the low latency integrity that we wanted. So here we are today. It's been a journey as part of actually the first phase of journey here but I think you can see the results are coming and they're coming in the right way.

We dropped [indiscernible] the service, I'll point to that one first on pretty significantly from the investments we've made. So it's been costly to go ahead and integrate those into our costs pressures of corporation into the SG&A, but it's there and those will pay dividends across the time. Our physical virtual ratio is really important because we're largely in a very hardware-centric, non-virtual-type environment. We can now scale up and down depending upon the business requirement and that's huge. We need to be able to dial up storage and computing power and precision and effectively. If it's something you can take away, we'll build the private cloud.

So that's really 17 RFPs last year to get through this, a lot of work in terms of putting the architecture together. But effectively we built a private cloud that not only can serve us at Ingram Micro looking internally but we can now begin to look at some of our particular partners and our VARs to go ahead and do some interesting things from a business standpoint inside our architecture [ph] we've set up. And as you can see, built the redundancy in the ERP centers and the wide area network, 2 partners, 2 world-class partners have built on 1 what we call on MPLS network, which is a very expensive wide area network that allows us to scale up or down, including, and I'll point the down, when you're not getting that traffic.

Think of our business we have high volumes on towards the fourth quarter so we want to make sure we can scale up during those periods but then where periods come in where you have less intensity, you want to be able to dial that down as well. So as we look at the investments we made in this particular area, I think we have put together a solid modular operation. Faster to build delivery clearly in terms of getting our computing out there. We've added new partners including, and most importantly, in the SAP environment that has already gone live. One of the real benefits is that we can bring on standard interfaces for our connections to our partners and to our VARs.

So we built both on the cross-connects here for that particular area. So reliability is unquestionable. We've gone from an older environment with all its disparate pieces that had to be plugged and played. And anytime you add this together, clearly you can see that you have opportunity for breakage. and just like a good engineering solution, the fewer variables that you have in place, go ahead and move that up reliability and move that uptime reliability. And for us, that's huge. Moving uptime reliability, I need to have fewer people on -- in the group because they get deeper in terms of their skill and knowledge in certain places, and that all is positive.

And last of all is the IT operating cost. Although the greatest benefits will come in the outpost years, you can already see, if you subtract out the capital pieces we were making on this last couple of years in terms of the web and SAP and the data centers, you can look at the operating cost. And because of using the RFP process that we used pretty aggressively last year, and we negotiated our mainframe contracts into more of a variable model, we were able to go ahead and free up cash that we've been able to go and self-fund on new investments that we've wanted to make.

So now let me spend a couple of minutes on SAP. Because at the end of the day, we can put in all the computing infrastructure you want but there's something that has to run your business and touch your customers and your partners. And for us the, the core application is SAP and it's basically untangling and winding down a legacy environment that has been our core for the last 30 years and now bringing up those core processes in an SAP environment. And it's not a simple process as you can imagine, but it is one that you have to go ahead and systematically move your way through. And you have to be committed to getting to the other side. And I think you've heard from Greg, but I'll probably say the same for our entire worldwide executive team.

This is not one of those things that you sort of get a little way through and then you decide to pull back, you have to get to the other side. So one of the models I use with my team is, the worst place to be is the middle of the river for too long because all you can do is drown. So we are absolutely committed as a business team first and an IS team to support to go ahead and get up to the other side and I know we have capabilities and competencies to do it.

We now have active deployments in 4 regions and that's critical because we talk about a global template within the company which basically tries to build a blueprint to build some standardization into our business processes. This is, I think, can be a powerful piece for us going forward, because we deal with our partners. They can use us to go ahead and push new promotions, new products, new SKUs into different markets and basically through the single instance on that we put in place allow them to go ahead and get into these markets.

The term single instance is actually for us, an important, if you will, principle that we've tried to hold to hold to. A lot of companies have sort of compromised that one. And for us, I think we've done a really good job of holding to it. It hasn't been easy but it's required us to go ahead and really rethink some different pieces. But in the end, allowing us to get to that single instance of SAP will give us really the ability to do a lot more business reporting, real-time reporting, that really allows us to look clearly even better with our partners that we represent on a global scale.

As you can see, the number of users on is 6,000. We have gone ahead, and we broke up the implementation you'll hear about the country implementation. What We probably haven't talked a lot about is, we took the entire North American group and brought them over to SAP about a year ago. And we took North America, both Canada and U.S., which were on separate systems and essentially brought them both over on to SAP.

And in fact, the whole process of decommissioning is not something that we're waiting to 2014. It's occurring everyday. Every implementation we do in a country or, in this case, a systematic one where we cut over 2 different financial systems to 1. We've already said it's shutting down that environment. And in addition, that was one of the reasons why we wanted to renegotiate the mainframe contract, which was our largest IS expense so that we could go ahead and start getting some of the benefits of CPU utilization that would be dropping.

We talked about some of the partner connectivity, but again I think it's really important to mention that as you look at the implementation we're going through, it's not about just SAP. It's SAP, it's all the work we do in the point of connectivity space and our supply chain management. That's really a critical component of what we're doing. And there, we've had sort of 2 different pieces and experiences. One is for our smaller warehouses, we've used the SAP warehouse management model, which is -- a native [ph] Embedded module within SAP, which works well for us in some of our smaller sites where we have very little automation. And doesn't bring along very much cost with it.

On the other side, we have had through the years developed a very powerful Ingram Micro proprietary system for our automated warehouse. And if we're going to put money into investments in our areas of expertise and where we get the biggest return, that really is in the Warehouse Management System. No different for a company that's in the manufacturing industry that wants to put more money into sort of the footprint for them that happens to be in the plant itself.

So I think you can see from some of these numbers that the warehouse management piece, which we've now implemented across a number of sites, is really something that's fundamental to our architecture so think about it as the SAP; the [indiscernible], so integration for partner connectivity; the web, which I'll talk about in a second or 2; and the supply chain, those are really the building blocks for us to make up that application in the middleware area. And as you can see, the 5 million-plus orders that we've already processed is a good testament to the fact that we've reached a good stabilization point and a place for us to go from.

But I'd be remiss if I didn't give more color and depth to the issues and problems that we've had because they're real. They're ones that we've confronted as a business team and IS team. They've impacted the financials of the corporation. We understand them. We're well on our way to go ahead and get them remediated. And I can assure you that the pieces that we put in place get embedded into the template we have so that we can go ahead and accelerate implementations of other countries going forward.

When you look at it there are 3 fundamental problems that I think we ran into in Australia and some of the other countries that are clearly not quite as large as Australia, but began to show sort of a trend that I think we needed to address. If you look into the degree of localization, this idea that can we use a standard template across all your business processes in all your country implementations? And I think what you'd find is that on SAP works really well for us in the security page, the supply chain area, the financials as you would expect. As you got closer to the customer I think there's clearly some nuances to our business. And really the movement back and forth even with some of our partners in order to catch base where we had to allow more localization and customization, which is right and it is our business.

And so I think that's what we had to go back and do a little bit more on redrawing the line and really rethinking how to go ahead and look at these in a more systematic around the customer interface. We spent a lot of time of the points of integration. Any time you leave one environment, one system, you go to another and you can sort of skip all the trendy things around middleware and in a way go ahead and connect, you're opening yourself to potential issues that you have to go ahead and manage.

And in fact, for us, we knew that at some point, we were going to have to go ahead and get through this piece of an SAP integrated to our Ingram Micro proprietary supply chain system. And if it wasn't Australia, it would have been somewhere else. But we had to go ahead and really get that locked down. And took us a quarter or 2. We have it down. It's solid and the proof is that over the last 60 days, we've actually brought up a number of customers here in North America, some significant customers in Ingram Micro Logistics business and it has been very successful. So we've taken the lessons learned, we put them in, we've institutionalized it. And the word that I want to stress is "institutionalize" because in our type of business, you have to really institutionalize some of these things. So they're not people-dependent, but to get them into good solid technology that we can go ahead and plug and play them into different markets as we go forward.

And probably the last learning on what's the toughest. And it's the toughest that any type of system change, not just SAP, and that is the whole change management aspect. We probably had looking back could have spent a lot more time and energy in the training. And actually, we've since, on Australia, we built out a completely different training environment for our country users so they can go ahead independently look and see their data and field [ph] their data and work with it well in advance in implementation.

In addition, we scaled up our infrastructure from what you see in the investments we've made to go ahead and actually have a situation where we can scale up now to really replicate what happens in on the actual environment that's going to go into overtime. So these are learning outcomes. Ideally you'd hope that you don't have to go ahead and take these learnings. But at the end of the day, probably worse is if you don't take them to heart integrate them into your methodology. And it is our methodology. I think one of the things I'm very pleased to say is that in the last couple of years, we've implemented our methodology not someone else's, it's not an external. We built the SAP skills and built the web and partner connectivity skills so that we know our business clearly. So we can go ahead and put all those pieces together there and really deliver in a more quality way.

If I spend a couple of minutes on the web, I think starting out when I came to Ingram, there wasn't a holistic strategy around the web. I think folks recognize that it's important but we thought we thought we could do in probably at a later date. But it became pretty apparent when you looked across a number of countries we operated in, we were at 6 different code bases, that we were going to have additional issues if we didn't go ahead and work our way through standardization of our code base, getting the single brand image on Ingram Micro partners smart [ph] in place.

The third piece was with the advent of the cloud, we wanted to have a platform that we knew we could go ahead and port over to the cloud area. And then finally, we wanted a website that would allow us to go ahead and give a lot more real estate to kind of partners that work with us so they could go ahead and put out their product, their different SKUs. We put a pretty powerful search engine out there to go ahead and allow for cross-selling opportunities for them and most of all the analytics. We wanted a capability of analytics behind it so that we could go ahead whether it was in one region, multiple regions, across regions of the countries, we could go ahead and go back to the partners that we have, our important partners and give them the sort of data analytics, that I know Keith is going to report in a few minutes, that really is the heart and soul of our business.

So one other point along this particular journey with the web standardization that further along in terms the number of countries, we actually expect to finish this well before the SAP implementation is finished. Because we also recognized that we did not want to go ahead and link this so tightly to the SAP rollout, that we would have a situation where we would be waiting or partners who during the experience would go ahead and have to wait. So we've essentially taken this one. We've gone ahead and linked it to both our legacy environment and our new country environments that have gone on SAP. So we brought those together.

Let me talk a little bit about the economics of what we're doing and how we see the modeling going forward. Several of these terms are probably familiar to you. If you take the industry research group Gartner, I'll refer to [indiscernible] and to transform, grow and run. And most companies will spend the majority of their time in the run growth sort of area. And run being clearly operating a steady sort of processing your run -- excuse me, growth tends to be things like enhancements due to your trend system and you do a lot of that. And then transformationally, you'll tend to do some but those things tend to be somewhat epic when you do them on certain moments in your company's history.

We're in one of those moments where the majority of our spend is in the transform space if you look -- if you combine the transforming growth. And pretty much the balance holds. In most industries, it's about 1/3 in that growth transform space and you're doing about 2/3 in some type of operation. And if you're doing it really well, you try to push down that on that run piece and grow when you're going to transform to it like we are, and you're pushing those money into the transform.

And I think what the business team, the executive team we've done a good job of sort of starving the enhancements on our old environment to make sure that all of our focus is to get through the key goals that we have on the higher priorities that we have here around SAP and the web. So you can see for us, transform is a huge portion of what we're dealing with right now, as it should be. Going out to 2015, then that will continually drop in the transform area. And what you should see is, and we've factored it in here, is we'll do a lot more enhancement of the current environment. We'll do enhancements of the new architectures that's put in place, and that's just the constant thing that you do. We've left a little buffer there for the fact that as you're closing down the mainframe, it's going to take on -- it's not just a hard stop. It does take, Greg alluded to this, for a lot of fiscal reasons, statutory reasons. You do need to maintain your data. That doesn't necessarily mean that you have to keep it all online. So we have different strategies for going ahead and working that through. But there is some of that, that will definitely fall into the 2015 target area.

On this particular chart, this is drawn with the P&L sort of look. And on, as was mentioned already, you can see where we happen to be in 2011. And the other point that probably should be brought out here is if you would do this with just the total IS spend, capital included, a lot of the capital investments are behind us. You can imagine having put a lot of on monies and investment into buying SAP licenses, getting the web retooled doing a lot of the global template design, the consolation piece which comprise the data center and networking pieces. Those are behind us, but clearly what you have here on the P&L basis is you have certainly the depreciation that rises for a few years going forward.

So thus, I can tell you that from a Global IS spend, we feel pretty comfortable we passed the peak. And now it's really more about getting things deployed, getting them implemented and then going ahead and making sure that we keep the focus on getting costs down.

The other point that's really -- hopefully, it's a take away for you, is what we've put in place has terrific leverage. You don't need to go add more data centers if our sales over the next 3 to 5 -- or [indiscernible] sales over the next 3 to 5 years continue to increase. It's not a linear one-for-one. We put it in an environment that at this point will go ahead and scale very nicely based upon the business goals that we have through the strategic planning period.

So I've taken you through this period, which I think has had its highs and lows. Any CIO has to always balance 2 things: operational effectiveness and innovation. We're doing both. We've had our highs and lows in each of the areas. I'm not bashful about telling you that there are a lot of areas that I wish we didn't have to go ahead and retool but in fact, we did. But we've got a team back on home front. Terrific global IS team supported by I think an excellent relationship with on the worldwide executive team.

Our investments are, as you can see, they're going to taper off more slowly in the next year or 2 but more rapidly in the years that go forward. But the big capital investments are pretty much behind us at this point. We've learned a lot from the SAP challenges and I can also tell you that probably one of the big success here is that we have an executive steering committee together with Greg and our COO, or Chief Operating Officer, who's the other co-sponsor of this of this entire initiative [indiscernible] and the worldwide executives then sit on it. And they're on it religiously and take part and not just only take part but they're making and guiding the decision-making process for the type of business rules that we've put in place and hope we are enabling the business going forward.

And I think that's what you want, it shouldn't be an IS-driven initiative that we can walk out and say, "Boy, we have some nice data centers and networks to put in place." But actually, if it doesn't lead to some of the opportunities that we'd hear in a minute or 2 from Keith on shared services, then we really haven't done our job well as far as taking advantage of this seep hole change.

And largely I would tell you when I look at the modernization of our IS environment, you think of the key things that are happening in our environment today in terms of fast pervasive networking, mobility that's coming on, storage, quite frankly, is going to explode in the next couple of years as we look at not just data or voice, and we transition most of our -- a lot of our voice into a voice over IP mode. But we have video that's staring us in the face, and it's going to be a prevalent mode of communication and also transactional that our networking has to deal with.

So I think that we have both pieces as well. So I think we've put in place on the platform, if you will, that will go ahead and service well for decades to go. So with that, hopefully I've addressed and given you some better visibility to some of the things that are clearly important to us as an IS group but as an IS group supporting Greg and the executives in their business.

So with that, I would probably go ahead and thank you all and to turn to questions I might be able to address.

Osten Bernardez - Cross Research LLC

Osten Bernardez with Cross Research. One question I have is with respect to the lessons that you've already learned in Australia and in other regions, how comfortable -- or could you express or explain your confidence of the future rollouts you have planned out in Europe and in other regions? And in addition to that -- and perhaps Keith will get into this next. But how do you see this -- how do you see your systems -- what role do you see your systems playing in the expected growth in some of the segments that were highlighted by Greg earlier?

Mario F. Leone

Great. So let me go ahead and take the Australia situation as sort of just the starting point. I think that we learned quite a bit during that implementation. If we hadn't, boy, we should be shot, right? But I think stepping back, we were dealing with an environment there that actually the system came to us through an acquisition that we had made some time before. So as a result, if you will, the rest of the company was on legacy mainframe applications. So already, you had a different, if you will, from what our global template was. And whatever you're going in that situation, I think it makes it a little bit more difficult. So that put apart, I think now we're dealing with the sort of the core, moving from what we call impulses, to our Ingram Micro legacy environment to SAP. So that will be repeated over and over again, so I feel reasonably confident we understand that piece as well. I think the training and change management issues, quite honestly, were -- we underestimated some of the change that's needed. And I guess, the word I would use is change in context, okay? I mean, you can go through a lot of SAP training and education. But unless it's really in context, and that's why I don't think we did enough, is on that piece, I think, really had to come up. And I think you'll see it in some of Keith's comments in a few minutes. As we look to North America and to some of the other major countries in Europe, we feel good that we're building, if you will, some extra resourcing and some additional training pieces that, I think, are going to help in that area. And that's huge. So I feel pretty good that we covered that piece. And remember, when you go through technology changes, folks don't like to admit it, but the reality is that technology or a system is a culture of a company. And when you go ahead and change it, really sometimes, you lose sight of the fact that you might have had 3 accounts receivable people sitting at a particular location that no longer have a job, I mean, because you've changed even the way you started thinking about the way you want to run a process. And that's happened. And those pieces, I think, have to be taken together with the whole change management piece. And I think we've done a lot of work in that particular area. We've done a couple of other things that I think de-risk the future implementation. You heard my talk about the SAP financials integration here in the U.S., and that was huge because for -- we did not want to see clearly a repeat what occurred in Australia, in the U.S. or anywhere else. And so what we've done is by putting several thousand users on SAP financials, we've already started to go ahead and change their mindset and their look and feel, so they're already working with these environments today. And then the second piece of it was the IM Logistics business. We've taken this into one of the key areas that, quite frankly, is an important growth business for us, with clearly very important partners, who by the way, are also SAP-shot [ph] . And so the good thing is we're starting to show some success from that as well. So can you eliminate risk completely? The answer is no. And I think if I were up here telling you that, then I'd wonder about my credibility, something like that. I think that you try to de-risk stuff. You try to change things in a way that go ahead and reduce the exposure that you have. So I think by dealing with the integration to the warehouse, by getting the training and changed management piece better-situated, by putting more users onto the SAP environment earlier, so they get comfortable for that new [ph] thing, I think that all those things together are helping us to de-risk the opportunity. Was that okay or...

Unknown Analyst

[indiscernible], over at Collins Stewart [ph]. You mentioned outsource. I just wasn't -- or was curious whether IT systems were outsourced to one of the big vendors, and then did you pull that back in-house. And maybe just go into that in a little bit more detail.

Mario F. Leone

I'd be happy to. I think it's a transition in the transformation that's occurring not just with Ingram Micro. It's a part of several [indiscernible]. Late [ph] Back in the '90s, there was a model that full outsourcing would solve everyone's problems. And I think that the issue with that was that people began to pick up not just on infrastructure but its infrastructure applications, all of it. They threw it over the fence as soon as they have [indiscernible]. And they get cost reductions, and all would be wonderful. Problem with that model is over time, I think, you began to see a situation where in many cases, you weren't getting the financial return that you expected. You also began to miss technology jumps. And you weren't able to refresh your technology as you needed to stay competitive. And probably the worst thing of all was you internally began to lose your intellectual property and what that architecture was. I refer to a co-locate -- to the co-location model that there we're taking. I think very strongly and I feel very strongly about this and I'm passionate about it. I think it's a model of the future. I think it -- returning IT back into the company in terms of the IT and the knowledge and the architecture piece. And now I think what you do is just like a bunch of LEGOs. If I don't like my co-location partner, no problem. All that really is it happens to be aware of some really good warehouse with dual power. It has dual air-conditioning, but I can pull it really quickly and move my stuff around. If I don't like my telecom provider because I don't think I'm being very competitive or I'm getting the type of technology that I want, I can plug and play in it as well because I haven't put myself into major telecom hub locations. If I don't like the storage, I can pull that storage and I can give it to someone else, who I think could just come up with a better storage approach and strategy. But to do that, it means you have to return that intellectual property back into the company. It's been a tough road, but I can tell you that we've rebuilt a lot of skills. And to a degree, yes, we've moved several pieces back in-house. And I think that's where it belongs. And then you can go ahead and use the external pieces to go ahead and plug and play them as you need them to keep those 2 pieces together, both technology and that cost competitiveness, which if you lose in our type of business clearly more than manufacturing areas, you can really run into problems. Okay, so we have time for one more question, if there's one. One back there?

Unknown Analyst

Would you consider moving off of your proprietary warehouse management system onto a packaged solution? And what would be the deciding factor there?

Mario F. Leone

Yes, it's a terrific question to close on. When I came into Ingram Micro a couple of years back, there had been a lot of discussion as to do we keep our proprietary warehouse management system or do we move off of it? And as we did the analysis and looked at it, we really came down to the fact that even though it was an expensive solution compared to something that might be off-the-shelf, when you looked at sort of the automated environments that we were running, it became pretty critical that when you look at that environment and the proprietary system with enhancement was probably the right place if you're going to invest money, this is the core of our business. And we also made the decision, though, that: Was it necessary everywhere? And the answer was no. Because with our core proprietary system, what we do is we actually put the storage and servers into the warehouse itself. So what that allows us to do is when you have a high-processing warehouse fully automated, if for whatever reason, you get a break with your ERP environment, which can occur, you can keep running that environment, and then later bring them back together again to do all your reconciliation of financials. So I would tell you that from my standpoint to many years and a lot of different industries, I think to go do a lot of customization in financial systems and all that probably doesn't make sense. To go ahead and customize these types of environments, which are very particular and they are at the end of the day, whether you're a manufacturing or you're in our distribution business, I think it's a good investment because that whole tic-tac strategy for us, the release strategy that we have in the warehouse is particular -- it's our competitive advantage. And we want to make sure that we invest in that piece so that's why when we look at our Ingram Micro proprietary system for those large warehouses, we look at it as, if you will, part of our transformed piece and one that we want to continually go ahead and add and automate and modernize constantly. I think that -- okay, so thank you all very much. Appreciate the opportunity to spend some time with you. And there is a break for 10 minutes, and we'll be back at 3:40. Thank you.


Keith Bradley

Okay. Welcome back, everybody. If everybody can just retake their seats, I'll get started. So again, appreciate everybody's time today to learn more about our strategies and what we're doing and how we're going to go about executing them. So again, appreciate it.

From Greg's perspective, just a quick refresh, we've got a lot of consistency in our strategies. They haven't changed. How we're executing them on a go-forward basis is what is changing. So again, we got to excel inside the core business. We've got strength in certain capabilities and build very robust businesses around those capabilities and then develop new businesses that are a little bit more nascent first, including the cloud and mobility. So again excel, strengthen, develop, consistent strategies, really good for our partners, vendors and customers. They know we're going to be predictable in our execution.

Before I go onto the North America presentation, I did want to thank Mario again for his leadership on the IS side of the house, and really draw attention to the work we did just recently complete in our Logistics division. So in the last 6 weeks, we launched 22 customers on IML without any flaws in the cutover. And again, Mario and I probably talk at least on a weekly basis, sometimes more often than once a week, but we really looked at the 3 risk categories as we convert anything over to SAP. What do we do in partner connectivity? So we've got to get that right. What do we do in robust functionality? We've got a lot of functionality in our mainframe system today. That has to be recreated and leveraged inside SAP, so again robust testing, and then training and change management as well.

And to give you a feel for the extent that we did this on IML, we had the 22 partners we've cut across. We only tested this standard logistics process, but for each one of those 22 customers, we went back over the last 12 months and looked at exceptions to the standard process. And for each customer, they averaged 60 exceptions for the normal processing path. And we tested those as well as we get ready to cut over, which is why it went so smooth in the last 6 weeks. In addition to that, we've already onboarded 2 brand-new logistics customers onto SAP, so not only did we successfully transition, we're now using it to accelerate our execution on ramping up new customers, so very important. At the same time, we also cut across our new Web platform in Canada, so we now have 5,800 customers. We rolled that in 4 phases over the last 3 months. So again, a proof point that when the business is very, very engaged with our IS organization and really owns the project and the transition, we can be very successful.

So again, from a high-level perspective, what do we do to excel inside our core business? That really is that volume velocity side of our business. And it really is how do we maintain share? How do we make sure that we manage margins very well? And I'll go into some of the tools, some of the enablers we've got for managing margins that includes our business intelligence database, that includes our CRM solution. And also we're making investments in the core business, whether it's in healthcare, whether it's in ProAV or whether it's in managed print, these are all initiatives that really help us manage that margin profile even though it's on the value, the volume side of our business as it where.

But really inside excel, it's how do we leverage our operating cost structure to really improve our operating income on a go-forward basis. And I'll share some of the things we're doing in our shared services center down in Manila, which is a powerful and able to do that operating leverage. We've also been using systems for the last 10 years in North America, and we had an Oracle database, as Mario said, that we replaced last year. That allowed us to look at things like strategic sourcing, how to leverage our internal spend. And none of the other countries around the world have been able to do strategic sourcing because we've had that disparate systems. So one of the big advantages of growing our SAP on a global basis is we'll be able to take those lessons learned from North America and systemically roll them out around the rest of the world, again creating that operating income leverage as OpEx flexes very, very strongly. And then obviously, continued success inside the distribution centers using Six Sigma to really drive productivity, leverage that fixed engine as it were. So that's really the excel strategy, and I'll drill down a little later on a couple of those.

Under strengthen, it's really all about making the right investments. So we sit in the middle of a great ecosystem. We're the enablers for both vendors and for reseller partners. So how do we go and make investments on their behalf and earn disproportionate market share? That's going to be at a higher-than-average margin. And I'll drill into some of the things we've done in our Advanced Solutions division. And then obviously, in our Specialty division as well, that's really our incubator for North America. And that can prove things for our global strategies.

So one thing we've done very different in North America in the last 12 months is consistent strategies. But what we've now done is we created an organization that aligns much more closely to those strategies. So down on the bottom here on the Commercial and Direct and Consumer, that's the velocity side of our business, the more volume traditional space. For North America, it represents about 2/3 of our revenue. So again, that's all about how do we maintain share, how do we manage margins, but really how do we leverage that operating expense and create that operating income leverage. So that's really the excel 2 divisions.

Inside strengthen, that's really the data center networking side. So again, Advanced Technologies, Advanced Computing. 12 months ago, we moved over 100 vendors into those 2 brand-new divisions. We moved 900 customers into those divisions. And again, I'll drill down on the increased level of focus and the increased level of execution from an acceleration perspective that, that's allowed us to do. We've had Ingram Micro Logistics for a while. And then last year as well, we broke out Specialty Solutions as a separate division. And that's really got our Data Capture/Point-Of-Sale organization in our 2 CE business units. It's got physical security in it and mobility. So really, those areas that are a couple of hundred million dollars for Ingram but really can expand a good double-digit growth, and again make sure that somebody wakes up every day focused on those high-growth incubator areas, so major structural change from an organizational perspective.

When you think about it again, everything we're doing is very sequential. So again, we're looking at -- we've got the right strategy, excel strengthen, develop. We've now taken North America, created 6 divisions, 22 business units, all with general managers, so the alignment of the strategy is spot-on. And now we've been spending a lot of time with our associates, making sure that from a culture and a skill set perspective, we're very focused on the customer. And putting that customer in the center of everything we do, becoming a much more agile and innovative as a company culture, and then making sure that we've got accountability and empowerment going hand-in-hand. So again, strategies leading to the organizational alignment, leading in enhancement and evolution of our culture and our skill sets. And then as we make traction on all of that, we're systemically enabling that with our SAP rollouts, new website and other enabling tools as it where. So everything we're doing very much flows together, and that's just a quick review from IDC, validating the strategy and the execution of it. Over the last 12 months, we've surveyed all of our customers on a regular basis. The new structure and the better execution of the strategies have led to a 15% increase in customer satisfaction over the last 12 months. So again, customers and vendor partners strongly endorsing the strategy.

Back over on the excel piece of our strategy. One of the tools we've got -- one of the enablers to leveraging our operating expense is absolutely what we've done down in Manila. We started off in 2005 by offshoring originally a little over 400 jobs, and we split that between India and Manila, and we did that with emphasis. Last year, 2010, we made the decision to exit that outsourcing arrangement and take that back in-house as Ingram Micro. We now have 1,200 -- approaching 1,200 associates in Manila that work for the North America organization. So roughly 25% of our North America campus is now in a much more cost-effective area. So really, a big enabler to our business. Also, we've begun to sell that as a service to both customers and vendors. Small at the moment, but we have 160 seats in Manila that we're reselling to customers, helping them their call centers, et cetera.

It's not just call centers that we do. It's basically every single function. When you think about the processes that need to run to support Ingram Micro on a global basis and in North America, it's every single function is based in Manila. So I would say from a transactional perspective, it's everything we do from a transactional nature, allowing the North America associates to just step up the thinking, build more value add as it were. We'll also be leveraging this organization as North America would get ready to go live on an SAP conversion. As Mario indicated, we're able to leverage the sensor because it does do all of our transactional functions to be able to bring associates into Manila on a very cost-effective basis, get them trained up in our mainframe system, our mainstream processes, make sure that North America associates are actually freed up of their day jobs, so they can go invest time in user-acceptance testing, make sure that they go through the data conversions, make sure that they attend all the training and change management. So again, a big enabling resource as we prepare in a couple of years time to go forward with the SAP conversion. So very cost-effective, helps us focus, et cetera, big enabler there of profit improvement the last couple of years in North America. And again, we were able to do that because our processes were scaled and standardized. So again, one of the big benefits as we roll out SAP, standardized processes, scaled processes, blend themselves much more to global shared services as opposed to the U.S. and Canada, being the only 2 countries large enough that to take advantage of the initiative.

Greg mentioned business intelligence. Again, very powerful weapon to enable not only our core business but also it attracts new partnerships inside the strengthen and develop side of our strategy. As Greg said, 90% of everything Ingram ships in North America is drop shipped to an end user. So now we have a database going back 9 years of 3 million to 4 million end users. So again, we don't sell to end users, but we do ship to end users as a service for resellers. We cleansed that database, we've deduced it. We've attached these Dun & Bradstreet SAP codes in it, so we use it in 1 of 3 ways since it's a very powerful enabler differentiator for us. We take it and we run propensity studies and marketing programs and demand-generation studies, and we sell that as a service back to our vendor communities. So again, nice margins, nice value add, big differentiator back to the vendor community. It really rewards us with a breadth of the market we've got.

In addition, we've created a portal, a BI portal that we put on our salespeople's desks. So when they have a conversation with a customer now, they can very quickly -- whether they're in telesales or in field sales, they can very quickly pull up the specific reseller's information and make sure that we're upselling, cross-selling, attaching services, et cetera, to those customers because they may not be aware of the opportunity. So again, good systemic enabler, margin-enhancing inside the core business. And then for resellers. We're also making this available to resellers as well. So again, we control about 40% of the distribution markets, where a very good representation not only of distribution but of the resellers business back into those 3 to 4 million customers. We've been able to sit down with our reseller base and show them that when they work with us and mine their data in our database, we can make the conversion rate. When one of their salespeople talks to an end user on a potential new solution, the conversion rate is threefold. So if they only use just their information, they have a 33% conversion rate. If they use ours, it's 3x more powerful.

That leaves the 3 big benefits for the reseller, increased efficiency, because obviously of the conversion going on, increased profitability and margin improvement for the reseller because they're having a proactive conversation with their end user on industry trends that are happening that we've identified. We're passing that to the reseller, they're bringing up an opportunity end-user level. So again, less chance that something goes to an RFP because that reseller is bringing them the new technology, et cetera, so much more profitable. And then from a morale perspective, salespeople like to win sales contracts. So again if you're working with Ingram Micro, big differentiator from an efficiency perspective, increase margin, and from a morale perspective. So again, big differentiator of why you would work with Ingram Micro versus somebody else and really get rewarded for the breadth of our landscape as it were.

Greg had mentioned Logistics North America, 50% of everything we ship coming out of the distribution centers in North America is on a fee-for-service basis. I would divide our Logistic strategy into twofold. The first one would really be working with traditional vendor customer partners and really saying to them, "We can be your master logistics provider." Other distributors via sales and marketing engine, but really put all your inventory in an Ingram warehouse. And we'll take EDI feeds, meet our competitors, we'll support your direct business, will direct rules, support your direct stores. So again it's really an efficiency play to get all the inventory in one place and really a good improvement and return on invested capital. So we've done that with quite a few vendor partners, and we'll continue to expand that going forward. But the big opportunity, as Greg said, was more ranked [ph] in e-commerce. So again, when you think about our distribution business over the last 10 years, we've seen a couple of trends. We've seen average order size in distribution decline because again, we're now shipping out 90% of our orders directly to an end-user as a service for a reseller, so we've had to handle that declining average order size.

Plus e-tail on a distribution basis has grown faster than retail. So again smaller order quantities. Our distribution centers in North America and around the world have done a really good job of handling that change of order profile. So who else has that business problem as an enabler? Anybody really with a dot-com name of the back of their business name has to put 1 or 2 items in a box and get it out to an end-user, whether it's a consumer or a business. Most people's logistics engines are built out for pallets going in and out, brick-and-mortar as it were. So when you look at the e-commerce space, it's growing faster than brick-and-mortar. Our distribution centers, because of our declining ASPs in our distribution business, have learned that core competency of each. And now we're leveraging that into the e-commerce space. Our analysis shows that of the top 500 e-tailers in North America, only 20% of them outsource to 3PL such as ourselves. We believe that percentage will increase significantly in the next couple of years.

When you look at the e-commerce space, and we can pull it off IDC, et cetera, but the fee-for-service percentage is if you sell $1 as an e-tailer, the fee that we would generate is between 7% and 10%. So if you take the 20% that's outsourced, the addressable market today is between $3 billion and $5 billion fee-for-service revenue. If you look at expanding that 20% that outsourced to closer to 50%, it could be between $9 billion and $12 billion. So again, there's really no large player focused on e-commerce. That's where we think we can really grow our Logistics business and our capabilities coming out of our core distribution business really leverage that confidence, again all going through the same physical infrastructure. As we build out this business, we'll be able to build on very affordable storage space. So when you look at our systems and our automation and our conveyance inside our distribution centers, it's very much the limiting capacity at the minute. It is not the conveyance itself, it's storage, storage very cheap to add on an adjacent space. And that's really what we've been doing with our larger distribution centers in North America. That's what we'll do in the next couple of years as the business continues to grow. And I think it was Matthew, you spelled out the question of do we think we can grow that business. And absolutely, that what's e-commerce is driving at, and we're very confident in the execution.

So Advanced Solutions. Again, that comes down to the strength inside of our capability. This is where we created the 2 new divisions: Advanced Technologies, Advanced Computing. So again, we moved to 100 vendor relationships. We moved 900 customers into these 2 divisions really focused about value space. How do we take that and grow it faster than the regional company average, and something that we can replicate around the world. So again, dedicated field sales, dedicated marketing people, dedicated engineering capability. So we're making investments in order to earn a customer and a vendor's business. We're not doing what we've done the last 20 years and expecting people to pay us more money. We're making the right investments and earning their business each and every day.

When you look at it from a mix perspective 10 years ago, it was about the value, more of this slide represents is more about the value side from a vendor perspective. So it was 15%, today it's 30%. We're going to grow that to 38%. So again, that's the mix of vendor categories. What also is important behind us, which is margin-enhancing for the region, is not only what we sell, which will improve margins, but also how we sell it. I think a lot of our selling today is what I'll call reactive selling. The phone rings, a reseller tells us that they want an RFP. And in that case, my value proposition is I have the inventory and what's the credit and price, et cetera. In the new world of proactive selling, that's where we're using our business intelligence. We've made investments in the technical skill sets, et cetera, so the mix of how we're selling it and what we're selling it, those 2 things go side-by-side. And we're having good success.

These are some of the partners that we cut cross, so these are strong partners we've had for a number of years. We moved these vendor relationships into the 2 Advanced divisions. Some success we've had, so for instance, EMC. We are EMC's fastest-growing distributor. Among everybody else in the value space, we are the fastest-growing distributor. We've done that because we, in fact, created, dedicated not field sales but field marketing resources for the top 30 EMC resellers. So they can actually call an Ingram Micro person who lives in the field, and we'll develop a marketing program targeted at specific end-users. So again, not resident in our campuses, but actually in the field for our reseller base. And again, we've attracted about 30 new resellers in the last 12 months, made investments.

HP, with their ESSN business, so Enterprise Servers, Storage and Networking, we have a separate business unit underneath Advanced Computing. So Advanced Computing is the division. We have an HP ESSN business unit on the new set of structure. So again, we've got Ingram Micro associates who wake up everyday saying, "Yes, I live in Advanced Solutions, I live in Advanced Computing and I live in HP ESSN." So very, very focused. We've attracted another 30 resellers for HP into that space in the last 12 months. We recently had an ESSN summit, cohosted by ourselves and HP, where we invited our top 30 reseller partners. And again, that increased level of focus drives the accountability and the focus is delivering the results as well.

VMware came to us about a year ago when we announced the new division and said, "Okay, in the next 12 months, really want to achieve 3 things: I want to see further increase to end resellers, selling my product; I want to be able to identify people and move them more to the enterprise license; and I want to be able to penetrate the 1 to 999 space, a little bit more deeply on the end-user level." So a good example of how we used our business intelligence to run propensity studies on those 3 objectives from VMware, put a team of people that surround -- that's dedicated inside Advanced Technologies division and go execute that over the last 12 months. So again, increased value, really taking advantage of the breadth we've got in our business and driving that focus to go execute on a daily basis for a vendor or a customer.

Equally, if not more interesting, these are all the vendors we've added in the last 12 months inside the divisions. So again, vendors that may or may not have done business with us, when we had the old structure of we're a large $15 billion region, selling both value and volume through the same structure. So again, really good add there. The one I'll drill down on a little bit, ShoreTel. So ShoreTel came to us because just of our unsurpassed breadth into the networking and the unified communication reseller world. So we've always had that, but as soon as we announce the new division with a separate structure to separate focus, ShoreTel came to us and said, "Always, you had the best breadth, was worried about your focus execution. I like the new division and the fact that you've got dedicated resources." So we sat down with them, we created a strategic business plan. We looked at total addressable market. We ended up hiring separate stand-alone business development resources, presales support, field engineers, and then lastly post-sales tech support. So not only will we sell the product, but we'll also help ShoreTel manage it after the sale is over. So again, very compelling reasons, much more increased focused from an execution perspective. So they're all the partners we got in the last 12 months because of the structure, because of the increased focus.

Another perspective would be where have vendors actually de-authorized other distributors in the last 12 months or where are we the only broadline distributors. So D-Link, RSA, Fluke, Polycom would be examples where because of our structure of pillar [ph] Strategies, because of a new structure of the increased focus, those partners have actually come to us and said, "We're quite happy now de-authorizing another distributor because of your increased level of focus." And in addition to that, from a broadline perspective, the others are really not available to our traditional competitors, the Tech Datas, the SYNNEXs, et cetera. So again, good validation of the overall strategy.

Data Capture/Point-Of-Sale. Again, started North America in 2004 with a small acquisition of Nimax. We've done other acquisitions, as Greg mentioned, both in APAC and in EMEA. And you can see the disproportionate organic growth that we've been able to achieve on a global basis. And that's a great example of how the divisions work together. 50% of everything that Data Capture/Point-Of-Sale sells is sold by a traditional Ingram Micro customer that sits outside the division. So the matrix of the organization is working perfectly the way we designed it to. Resellers like it because we take them to a new technology space. We educate them on the opportunity. We tell them how to sell it. And as a consequence, we're growing multiple times faster in Data Capture/Point-Of-Sale versus the traditional distributors that have lived in this space. So again, a good example of how acquisitions can be leveraged for revenue synergy.

We always say that Ingram Micro is the enabler of your business. So again, from a cloud perspective, what do we actually have to do? As the market moves slightly towards the cloud, we want to make sure we're always perfectly aligned with it. 12 months ago, we started this. Today, we have a B2B app store that basically has 2 different value propositions. One, obviously for vendors, that creates a lot of eyeballs and traffic to their products. So from -- it's a market [indiscernible] so really driving traffic to their cloud provider. On the other hand, for a reseller, the value proposition is basically the aggregation of a solution. So we do aggregated billing. We do aggregated provisioning. And we do single sign-on authentication. So again, if a reseller wanted to get into the world of cloud, they would have to build a billing engine. They would have to build a provisioning engine. They would have to build that authentication engine. They don't have to. The same way they don't have to build physical distribution centers, we built the B2B app store that does all of those things on behalf of resellers. The technology would be our technology, a reseller can take it, put with their brand around it and sit down with end user or customer and walk through their cloud solution, Ingram Micro being invisible to the end user. So again, a very integral piece of a reseller's business going forward, and again leverageable on a global basis.

These are some of the vendors that we've added. You can see BMC there in the middle as an exclusive. So BMC, first time they've really come to distribution, not only on our traditional side of our business but the remedy forced. Again, we're really leveraging the traction we've made in managed services. So these are just some of the vendor partners we've added in the last 12 months. As Greg said, 28 vendors now, 11 added in 2011, 46 very comprehensive cloud offerings, 3,000 unique resellers now selling the cloud in managed services. And we expect that 100% CAGR in this in the next couple of years as we grow it out to above that $200 million of revenue that Greg had mentioned. Again, very good solid double-digit margin opportunity for us. As of today, the Ingram Micro engine is managing about 250,000 end-user seats for resellers. So about 0.25 million people already on the platform in one shape or another.

So again, I think we've proven that North America and our strategies work on a global basis. So again, what we do to excel, strengthen and develop? We've been able to incubate ideas, learn best practice and really share that with the other regions around the world, also learning from them as well, especially on the value side. We've got some very nice value businesses in Singapore and Australia and down in Brazil. So again, we've done cross-sharing of best practices.

And from a close perspective, I would like to thank all of the Ingram Micro associates around the world that they can dedicate themselves to serving customers and vendors on a daily basis. We've really evolved our culture the last couple of years. We're focused on taking the customer and the vendor partner and making sure that they're at the center of everything we do. That's led to a lot of innovation, a lot more agility inside our business and really increase the level of accountability and empowerment. So again, the associates super engaged in executing our strategies on a day-to-day basis.

From a results perspective, we've got to look at the results that we've delivered in North America. 2010, we grew by 18%. We converted that because of that excel, strengthen and develop focus that we've got to 118% improvement in operating income. So you might think that's easier to do when you're coming off a recessionary type environment '09 to '10. But again, first 9 months, first 3 quarters of this year, by executing our global strategies and our new structure, we've grown by about 5% for the first 9 months, and we've leveraged that to a 19% improvement in operating income. So again, a very, very leverageable core business underneath that excel strategy. So again, either we continue to leverage our BI, our CRM solutions, our investments in verticals inside our core business to maintain share, manage margins well and really leverage that operating expense using Manila, using Six Sigma and the DCs, using strategic sourcing, all things have become available to the rest of the world as we push out SAP. So a big driver, enabler to our business.

And then inside strengthen and develop, really, that's where those divisions will grow faster than the regional company average because we're making the right investments on behalf of our reseller partners and our vendor partners, where we'll be rewarded with disproportionate market share, disproportionate margin improvement, while at the same time leveraging a common infrastructure in the background. So hopefully, that gives you a better feel for what we're doing, strategy-wise, how we're doing it, who we're doing it, [indiscernible] who is actually executing it and give you a better feel for our ability to continue to execute.

With that, I'll throw it open to a couple of questions. Brian?

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

Just on the Advanced Solutions. Has that strategy really changed over the last few years? It seems like you guys were focused more on the low end of the SMB market a couple of years ago. And now it sounds like it's a much bigger part of the company's objectives. Could you walk us through kind of the evolution of that strategy?

Keith Bradley

Sure. We had started -- you're right, like 3 years ago where we looked in and said, "Can we take some of the value product and begin to try and sell it in a different way?" But what we didn't do, Brian, was we didn't create that structure around it. So I think we had little progress and we saw some progress in it and it grew a little bit faster than the core. But we didn't have people waking up every day going, "I live in a $3 billion division or I live in a $2 billion division." So I think that structure has really helped us accelerate our focus on it and allow us to make different investments. So again, when you're part of a $15 billion region and you had certain OpEx metrics and margin metrics, we sort of executed a little bit to the average. Whereas now with the new structure, we're able to say, "You live inside the velocity side of our business, you really need to leverage operating expense. You live in the value side of it, you have to make the right investments. We want you to invest in the area." And we've made those investments in the last 12, 18 months, and definitely it's paying us back some very strong dividends.

Unknown Analyst

[indiscernible] on the Enterprise side, where you've made some pretty strong inroads. And there obviously is between yourselves, SYNNEX and Tech Data also blurring into value-add space, up against Arrow and Avnet, particularly in North America, which is still somewhat a closed environment. What's your opinion on that whole landscape enterprise versus commodity? Where that's headed and where that plays in terms of your market share opportunities against Arrow and Avnet?

Keith Bradley

Sure. So again, I think just remember to take 2 major takeaways when you think about Enterprise. One is on our line [ph] cards. So we've had that breadth of products, so we will increase the percentage of what we sell. So again, North America was 30% going to 38% so that's just what we're selling. So we've got more focus on the value space. But equally as important is how we're selling it. So behind that, we'll also increase the percentage of value products sold in a value manner, not a velocity manner. So I think that mix of business is where we will pick up disproportionate market share, which will be more margin-rich. When we make those investments, it's leveraging a $15 billion common infrastructure, both on value and volume. So if I was an A then I've got more of a pure value, value. I think we will have an operating -- I know we will have an operating expense advantage that we'll be able to leverage the entire region and the common infrastructure that both divisions actually use. So I'm confident that we can go execute that. Any other questions? If not, I'll hand it over to Bill, our CFO. Thanks, Bill.

William D. Humes

Good afternoon. So you've heard from Greg. Greg talked about our strategies for the next 4 years, 3 to 4 years. He also talked about our financial targets. And he's given a little bit more transparency on our adjacencies, the size of them, our goals and what we're trying to achieve there. So some great information in that regard and in the market, the market growth, what we expect. So it has given us confidence about our targets and being able to achieve those targets.

Then Mario came in and talked about our overall IS initiatives, all the strategies and the major projects that we're working around there and what it will do and will drive to the productivity as well as just elimination of the incremental costs that we have been incurring over the last several years. So Mario laid that out fairly well for us. Then Keith, he came through and talked about the overall operationalizing of our strategies and showing, as a proof point, how North America has really taken some strategies and driven them home and has continued to drive them home to drive up operating margins, drive up performance, drive up new customer and vendor engagement and our success around there.

Now I'll go a little bit deeper into some of the targets that Greg laid out and how we're going to achieve them. So ultimately, we are keenly focused on driving shareholder value through deepening our profitability and driving returns on invested capital. We want to do that with, obviously, the initiatives and things that he talked about that driving steady improvement in gross margin. We've talked about the overall revenue CAGR of expectations of 4.5% to 6.5%, which is well within overall IDC expectations and market expectations generally. And I'll hit on capital allocation and cash flow production.

So switching into the overall history of our performance and looking at where we're jumping off at a trailing 12-month off of September 2011 level, we want to really talk about 4.5% to 6.5% revenue growth expectations are what we used in modeling. Overall, our targets are predicated upon this. I mean, if the growth ends up being higher, we should be able to drive incremental leverage, incremental performance. But then again on the offshoot, if revenue growth is softer, given macroeconomic environments, some softness that comes around the world, it will be a little bit more challenging in certain areas. If you think about leverage overall, it's a little bit more challenging to get the operating expense leverage when it's -- when revenue's around 2%, 2.5%. But as soon as it gets up to 4.5%, we can start driving some leverage overall.

We talked about gross margins. Greg pointed it out that over the last several years, we've generally been in the 5.4% to 5.5-ish gross margin. We're coming off of obviously a third quarter where our gross margin sits under 5%. So you talked about getting back to 5.4% and 5.6%. Coming from a most recent quarter basis, we are at a little bit of a low point, we're not -- where we weren't pleased on our gross margins, but we have a lot of initiatives to drive those back up. So overall in 2015, we do expect to hit those 5.4% to 5.6% gross margin. There could be some upside in those gross margins, but given where we're coming from, this is what we're comfortable in laying out there.

So what comes down to is operating margin. And operating margin obviously being a key financial metric, key driver of what we view as our overall performance gauge and performance measure. So 155 basis points -- 175 basis points of operating margin, and I'll -- what I'll do is ultimately bridge operating margin from a trailing 12-month basis ending September of 2011 -- starting from September 2011 and going on to 2015 through various different initiatives, so you can see where we've made some estimates, where we used some assumptions. And ultimately, you can make a gauge on whether how conservative or how confident we are in hitting the overall numbers.

But ultimately, with the EPS, $2.60 to $3.10 range, that's a result primarily of our driving of the revenue growth as well as the operating margin improvement. The ultimate $3.10 does not have a substantial amount of accretion through stock repurchases, so we're going to continue to repurchase what we've authorized. But we also issued shares every year as well for stock compensation expense.

So overall, we're going on to ROIC, which is the last and kind of goal target. ROIC has been a massive area, a very, very important key focus area for us since 2002 onwards, when you still see how low we were then. The whole industry was struggling. Now the whole industry is generally performing a lot better. It's a much better, healthier, more mature industry. And all key -- all major global participants have increased their return on investment capital. Our goal and what we're pretty close to being at in 2010 is to perform about 300 to 500 basis points above our weighted average cost of capital. Our weighted average cost of capital right now is about 9%, a little bit lower than 9%. Over time, that fluctuates based upon your overall interest costs, your debt-to-capital mix. But generally, it's fluctuated between 8.5% to 10% over the last 7, 8, 9, 10 years. But we feel pretty comfortable about being able to achieve these returns at the capital levels. We think that's about the right rate of -- one question you might ask, why not higher? Well, ultimately, we think higher, you start losing business because you're squeezing out and squeezing too much profitability out of something. So industry-wise, we believe this is about the right target.

So now moving on to the bridge I was talking about. So starting with our trailing 12-months of operating margins, so 122 basis points of operating margin. Obviously, we've had some setbacks that we've talked about through our SAP deployment in Australia, some tough market conditions in Europe. But overall, we feel fairly comfortable that this is a good bridge to start from and that will drive overall target levels. So first of all, going to general operating margin improvement. This is really comes from the adjacencies that we've talked about through Greg and Keith. So if you think about driving some of the Enterprise business to a more value sell, a consultative, proactive sell where we're getting much better operating margins, much better performance, so that we have over $10 billion of that type of business right now growing to over $14 billion of revenue by 2015. So if we can just move that up by 50 basis points of operating margin, that's 15 basis points improvement. And even then, we would still be probably at less operating margin levels than some of the potential ability of that business.

DC/POS, I mean, Data Capture/Point-Of-Sale business. Again, that's growing -- our target growth is above $600 million. It's going to grow at $900 million or above, and that has -- it's multiples of operating margin of where we're -- of the overall herd [ph] average of the company. Talk about Ingram Micro Logistics fee-for-service business. We have a great pipeline involved that we're chasing. We have a lot of international opportunities in growth. You think about 18 months ago, we really didn't have any business in Europe, and we've grown to over 15 accounts in Europe. Still small in revenue but we're getting some inertia. So by driving the Ingram Micro Logistics fee-for-service business, which generally should run at contribution margin that's higher than the company's overall operating margins, we get operating margin improvement from here as well.

And we need to continue that pricing discipline, mixed management in other areas that Greg talked about kind of built into here as an offset of the overall balancing of different commoditized products. It's the growth of the mobility product, which is right now has a lower operating margin and lower gross margin than the general averages, which balances out. But there is some opportunity there. If we drive some services around the mobility, then we can actually do better than this. So overall, that's the operating margin improvement from those areas.

Then we get to leverage. We talked about our revenue growth anticipation of 4.5% to 6.5% revenue growth over the next 4 years. This has been based upon an OpEx growth rate of 50% [ph] to 75% of sales growth. Generally, we've worked on -- we've kind of made the constant

statement of growing revenue at half the rate of growth. Obviously, if it's the lower end of the revenue growth it ends up being a little bit harder, if it's on the higher end, it's easier to get that low-end of the OpEx leverage or OpEx growth rate of 50%. But we'll strive to be at the low-end but we wanted to put realistic conservative targets up there, as part of our overall operating leverage from the revenue growth.

Moving next, Mario talked about the overall IS cost, the incremental costs we have from running 2 ERP systems. We have Impulse mainframe-COBOL-based system and we have SAP, so fully engaged 3 new data centers running the investments in the software and we're incurring additional costs in there. We're also incurring expenses and have incurred and absorbed expenses over the last 3 years for deployment of SAP in production. So it does not only just goes into capital but also goes in -- some of it goes directly to P&L. So as we get through the conversions as we're able to strip out the old system, we will realize these benefits and reductions of IS cost, which at the size of the revenue, we believe in 2014, should be somewhere around 15 to 20 basis points of savings. So that one, we feel very, very comfortable in achieving.

So moving onto the next business improvement item. So this really represents fixing underperforming businesses. So you think about it, there's lots of businesses over time, that perform a little bit lower than the corporate average and operating margin, some have performed higher than the corporate average. I haven't included those. This is really Australia and Brazil, and a couple of smaller ones that don't necessarily matter. We'll fix those. We'll fix Australia. We'll fix or do something with Brazil. So overall, if you think about Australia on its own, is the 10 basis point impact on overall operating margins, overall performance, we've lost 2 or 3 quarters of 2011, we've lost about $40 million in operating margins in Australia, just absolute. And we'll expect to lose some money in Q4, but we will fix that. We will fix Australia.

Brazil, not nearly that size, much, much smaller but still, it's a loss-making. So really, what this represents is a couple of loss-making entities that we will fix or do something else with. So moving into a lot of things you've heard Keith touch on, you heard Greg touched on, we have a lot of other cost optimization areas and business improvement area, so driving strategic sourcing, strategic purchasing, using basically, the Ingram Micro's huge global leverage and purchasing power and being able to smartly buy in RFP types of cost businesses like corrugated material, buy box filler, other types of supplies, travel, entertainment, using that global leverage of our company, enabled by SAP.

But we're starting it before essentially we get SAP fully engaged, but driving that strategic sourcing at global leverage to really drive down operating expenses. Shared services, leveraging some of our installed base in Manila for global shared services, for global opportunity. There's some countries that could really benefit from this, some countries that may not have some great cost differential because they may have -- already be in a very low cost location. But generally, trying to leverage this for both a cost arbitrage but just as important, optimizing and sharing and getting economies of scale by doing the same activities in one location. So there's definitely some options and opportunities in this area. And then we talked a lot about warehouse optimization and driving our network, to running smooth standardize businesses so there's a lot of opportunity in scale and driving our operating leverage there. So when we continue to have other miscellaneous cost options -- cost containment measures and cost reduction areas that we work on constantly, continuously through Six Sigma or other areas that will drive reductions and additional leverage.

So in this little bucket here, 15 to 20 basis points of overall savings, it's part of our operating margin bridge, it's something that management is very, very committed to achieving. Then if you see -- this is kind of actually a reduction, what this is -- essentially, we need to make organic investments, incremental investments in the business of 20 to 30 basis points of revenue for additional -- let's say, additional cloud investments or additional investments in new trends that are coming out. Let's say, if we are running on all 4 cylinders and easily achieving the numbers, then we'll probably invest more in organic areas to further growth for the next 3 or 4 years after 2015.

But if we're not, we don't have to spend as much as this, but it's an opportunity we want to invest in the business, we want to invest in the future, so we're providing this in our target overall, but it's something that's somewhat discretionary. And then overall, we've built in a portfolio contingency in our operating margin expectations, so if one of the different green buckets increases, it's unachievable or we don't achieve the same level or whatever else we built some hedge in here that provides for not everything running at the same time. If it does, well there's potential upside in our overall targets.

So that's why generally, we're very confident in the sense of the overall buildup of the plan, the foundations of the plan and to drive the 155 to 175 basis points of operating margin. But we're driving for the higher levels ultimately. We're committed to those ranges and hopefully, we can drive there or above. So moving on to overall capital allocation and cash flow production, over the last 5 years from 2006 to 2010, we generated $1.4 billion in operating cash flow. So we generate a lot of cash, Greg talked about the $2.2 billion over the last 10 years or so.

So we continuously generate nice cash flow -- operating cash flow in the next 5 years, from 2011 to 2015. We do project $1.1 billion to $1.3 billion additional cash and the question you might ask is, why is that less than last 5 years? Well, partially it's because we're growing faster, so we're investing more in the business versus the last 5 years where our expectations are to grow faster. But also, as we continue to invest in some of the higher margin, higher growth areas, that will probably drift up working capital days, 1 day, 1.5 days over time. So that 1 day, 1.5 days, each day represents about $100 million, $110 million in incremental capital.

If you think about moving down to our overall usage of our capital or cash flow production, you can see in the last 2006 to 2010 timeframe, our cash allocation was pretty squarely averaged around pay down of debt, a lot of share repurchases and a little bit of acquisitions and some capital expenditures with our SAP deployment and other things with the overall infrastructure investments we've made. About 2011 to 2015, Greg talked about one of the key things here is we will likely continue to search and invest in more acquisitions but we still have a goal for shareholder return of our stock -- through stock repurchases and other means if possible.

And cumulatively, we still have some SAP deployment costs that continue, so you see the CapEx allocation. But ultimately, we don't expect to have nearly the amount of cash pay down like we had in the past. Moving in, I wanted to kind of talk and discuss and clarify a little bit of the model of the business. Unlike -- very much like what I would guess the technology industry in general is like, each quarter end tends to be the most favorable on capital deployed or the least capital deployed at any one point in time. And then once you get back, because one, you push your customers to get paid, you hold off paying your vendors and it just flushes out at quarter end. So you're in an optimal situation at each quarter end. But as the quarter goes through, so intra-quarter, when you can't time exactly when your customers are going to pay you. You have to pay your vendors at certain points of time. So there's some quite a bit of variability in your overall working capital days and as I talked about, each day of working capital represents somewhere between $100 million to $110 million, depending on what quarter you're in, of incremental capital deployed into the business.

So if you think about it, our net -- our working capital days from a quarter end to intra-quarter, it usually fluctuates or generally fluctuates between 5 to 8 working capital days, which means we're deploying $500 million to $800 million on average at some point incrementally, during the quarter as compared to the quarter end. And that generally comes strictly out of the cash.

So when you look at our large cash balances at the quarter end, that generally will get temporarily redeployed into the business, sometime during that quarter. So it's not essentially sitting idle throughout all the quarter. A good part of that is we have ample debt capacity that support all the initiatives and strategies we've been talking about. So we've got $2.7 billion in debt capacity. We've done a very, very solid job of allocating our debt and our facilities based upon geographies, so diversifying our geography, diversifying it based upon type of facility and then also by maturity. So we've built a very good foundation and provided great flexibility for us to be able to take advantage of opportunities that arise and to be conservative to the balance sheet and have a fairly liquid situation and access -- great access to capital.

I wanted to also talk a little bit about our acquisition philosophy. Part about -- as Greg talked about, and I talked about, we're going to continue to search acquisitions to enhance our capabilities. Generally, our acquisitions have to fit a strategic template. They have to be -- they have to improve our profitability ultimately, but they have to drive capabilities or technical skills that we're looking for to search, to enhance our overall abilities in our adjacent markets. So generally, we filter our acquisitions through a strategic filtering process, a decision tree, does it make -- is it the right target, does it enhance our capabilities in the area or geography we're trying to enhance them, does it build a set of customer or vendor portfolios that we don't have or need to have to have the related success in the adjacent market? There's other opportunities. There could be some consolidation plays if it may not be enhancing our overall technical skills, but it may be a significant opportunity to drive huge cost synergies into the business through consolidation. That would be another important area.

And overall, I think in the sense of the requirements and the valuation, we definitely -- we look at the pricing, what the valuation is very, very strictly, that's why we filter out so many different acquisitions, generally through either price or management team or capabilities or due diligence. So there's a very thorough process that we go through. And generally, our valuation, our key valuation metric is discounted cash flows with an expected hurdle rate depending upon what market and what type of risk we're -- of the type of business we're entering into.

But we also compare that to -- or benchmark it to make sure we're within the reasonable boundaries with historical purchase prices, historical multiples and then also, current trading multiples of similar industries or our industry. So we look at that, one of our principles is that it should be accretive to EPS in the near term. And that would generally be within 1 or 2 years depending upon what the nature is of what type of cost we have to incur for integration and so on. But generally, we're striving for something that's going to really enhance our business and give us a good fit for the company.

So I wanted to leave you with something that Greg mentioned about, which is really, we talked about tangible net book value per share, we talked about our stock price. For multiple years, has really generally traded above tangible net book value per share, up until 2008 with difficult market conditions then it dipped down below then it went back to about tangible net book value and then is now struggling a little bit lower than tangible net book value. The management team of Ingram Micro is extremely committed to driving shareholder return. We believe by driving our execution, driving our performance, driving our strategies and hitting these targets or exceeding them, we should be definitely above tangible net book value. Right now, the opportunity is we can get back to tangible net book value for sure. But we should be at an amount above tangible net book value. There's significant upside, both in the stock price and stock valuation, as well as what we believe is our operating performance from here and the management team is very, very committed to achieving and executing on the strategies and the performance targets that we've laid out.

So with that, I will open it up for questions.

William D. Humes


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

The margin expansion related to business improvement with Australia and Brazil, I think you said 10 to 15 basis point improvement, and I thought Australia was closer to a 20 basis point drag in and of itself, so I was just wondering why not more there?

William D. Humes

Yes. Well, it would probably be about that much on a 2011 basis. But since I'm using trailing 12 months, they made money in the fourth quarter of 2010. So that kind of brings that impact on the baseline down a little bit.

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

So your base assumption is you assume Australia gets back to where it was?

William D. Humes

Well actually, that data, the amount there is -- it's getting -- it just eliminates it from being a loss-making entity. So if it gets back and when it gets back to normal operating margins, which it was back in the past, it's a little bit higher than that as an opportunity.

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

Okay. And then just on the EPS target of $2.60 to $3.10, if we just grow revenue by 4% over the next 4 years, and use the midpoint of your margin target, 1.65%, and just assume $300 million in buybacks, which kind of equates to your math on what percentage of cash you would use for buyback, I get closer to $3.25 I don't think so, I don't know if your EPS range is conservative or if there's something in my math that's wrong?

William D. Humes

Yes, I mean, we've overall, tried to build realistic building blocks up to there, Brian. Knowing that especially on the low end, you're going to have more price competition. You're going to have lower end of your OpEx leverage, and you may not be able to achieve some of the different growth areas within some of the high-margin areas. And I would say, overall, what we built into the capital allocation on the EPS range, is the $400 million authorization that we have. So we haven't thrown in additional amount because we don't have that authorization. We'll cross that bridge when we get there but what was in that plan allocation, capital allocation was the $400 million, of which, $226 million we bought up through October. Next question?

Unknown Analyst

So quick question with respect to your acquisition outlook. Should I consider that the foot of future acquisitions would be in line, so to speak, with the split of your growth segments? Or for the portion that you would sit [ph] in your growth segment, would that allocation be proportionate?

William D. Humes

I would generally say, the proportion should -- will be more heavily weighted towards the adjacent markets that -- so for instance, Enterprise and data center-based computing, maybe Data Capture/Point-Of-Sale. And then I would say, emerging markets will be more of our focus, in the sense of investments. I can't say how much relative to the ones that really depends on the size of the target and that capability. But I would say those would be our key focus areas and Greg can add to that one later on if he would like to. But that's generally the view.

Unknown Analyst

Is the outlook for the next 5 years, as far as the compound revenue growth rate impacted at all by the shift to mobile? In other words, is there an impact on the server side of your business, which is pretty big? An average selling price is there, is there a revenue headwind that you face over the next 5 years, does that subside in the face of mobile versus the last 5 years?

William D. Humes

Well, I would say generally, that has been factored into our overall assumptions, it's been factored into IT growth expectations, by an IDC, by Gartner. But also, Mobility and mobile is a growth option as well. So that's been factored in but also being disciplined in type of business you take, pluses and minuses in areas that we may want to rationalize in growth areas, plus we don't know where ultimately where the macroeconomic environment is. So I think all those factors take into the play, come up with our reasonable range of 4.5% to 6.5% growth. It's hard to estimate what really it will be, but that's based upon benchmarks that we have from external factors.

Unknown Analyst

Two questions. First on the acquisition front. Could you talk about what you've learned from your acquisitions from the last several years, both relative to the strategic targets that you set for those acquisitions and the financial targets, and how that might affect your acquisition process going forward, especially any that didn't live up to either of your strategic or financial targets? The second is with regard to cash return to shareholders. As you know, a lot of technology companies who are sort of viewed as GDP-plus growers have decided that it's not very obvious that stock buybacks have really benefited shareholders in the long run, and have gone for the more balanced policy of dividends for part of the cash return as opposed to stock buybacks and I'd like to know how you think about that?

William D. Humes

Sure. Two good questions. One on the acquisitions obviously every transaction, everything you do is a learning opportunity, and we generally try and take lessons learned from those, both the ones where we could have done better and the ones where we actually did well and want to ply them into other acquisitions. There's been a couple where I would say, we caught the market trends a little bit wrong. There's been -- for instance, when we acquired our high-end consumer electronics, home entertainment business, that end up being very, very good for about 2 years, and then the market really took a turn for us both in demand obviously, as the overall macro environment changed and the consumer is affected. But also, average selling prices really took a significant hit. So that was the one factor, but sometimes you can't call the trend, it's like you can -- that was an -- we have to continue to make assessments in different market trend aspects to make sure we consider all aspects and then take an expected value of our risk and opportunity there. But I will also say at the same time, what we probably didn't do is integrate fast enough as well. So we've learned a lot from that and each acquisition that we do, each acquisition that we evaluate now, we come up with a very specific business integration timeline, this is an integration plan, making sure that we drive the most practical but most expedient systems process people integration. Sometimes, because of certain events you have to delay some systems integration because something may be preventing it but that hasn't been a key factor. But generally, where we've had the most success is where we've integrated systems and people and processes fastest and methodically as possible. Going back to your second question, on overall capital and looking at share repurchases. Something, yes, I mean, if you think about, that's why we have a balanced approach. We have looked at other modes of shareholder return through dividends. One of the things that -- and we've multiple discussions over the last year within the management team, with the Board, and we're still consistent -- still interested and continue to evaluate it. What I would say at this point in time, as your stock price is substantially, or at least what we believe is fairly low, that continues to -- you create shareholder value by buying it below your implied intrinsic value. So we continue to believe that right now, share repurchases have better return to shareholder capital. But over time, we'll continue to evaluate. One of the hesitations areas that we have is it is something once initiate a dividend, it provides very little flexibility too, in case new transactions, new initiatives or if the market or environment changes. So it's something that we balance quite a bit but it's something that we have evaluated and continue to be open to. Next question.

Unknown Analyst

What is your weighted average cost of capital currently?

William D. Humes

It's just slightly enter 9% [ph].

Unknown Analyst

And as you look at that formula for maximizing ROIC, is your focus more on maximizing the numerator or shrinking the denominator?

William D. Humes

I would say for the most part, our goal is we are fairly efficient on our capital. Our capital in the sense of how we define our investment capital, which is debt plus equity less cash. We have a very quick working capital, which is days, which is basically, the substantial portion of our invested capital or asset side of the capital. So we'll continue to be very tightly-managed in that regard. But our opportunity really comes in our opportunity to drive the overall return of investment capital comes from operating margin, comes from OpEx. Any other questions? So with that, bring Greg back up here.

Gregory M. E. Spierkel

Thank you, Bill. All right, thanks again, for sitting through everything. I think we're going to open up for more questions. But I do have one chart sort of to close the main messages that you've heard from all 4 of us. Again, we feel good about where we are. We've done a lot of work on the ERP system. We have seen some challenges and issues, we're not happy about it. We're correcting it. There's a lot of focus on it but we're not changing course either. So we're very committed to the continuing investment here, the only change that's really happened is we've stepped back over the last 2 months and said there are some improvements we can make. We've got to make sure that the quality is where it needs to be, that takes precedence on any kind of a schedule, getting the quality right upfront is very, very important, testing that in the locations and operations we've been in. So we're going to make that happen and then continue the voyage as we have already started, some time probably in end of the first quarter going into the second quarter of next year, we'll rollout schedule by country.

So -- and clearly, the investment we're making there is going to serve us well. We're truly of the view, that 2 things happened from a shareholder perspective, the cost story gets better with every passing year, as we said, because we're at a peak now. But more importantly, 2 to 4 years out, that step down varies substantially and the organization is going to be able to do a lot of things differently than it does today, in working with its vendors, with global customers and internal operational efficiency that will serve us quite well over the next decade or 2. So it only gets significantly better again, beyond the framework of time we're looking at here, which is essentially, a 4-year window we've given you today, taking us from the end of '11 into 2015.

From a margin expansion or directional point of view, we've really kind of hit home on the 5 schematic areas over and above, improving the operational efficiency of the organization in the core business, but there are 5 platforms or 5 areas from a technology perspective or solutions perspective that remain very important to us, from an acquisitions or an investment point of view, and there'll activity along both fronts.

As Bill kind of showed you through the waterfall chart or the step up chart, there's clearly ongoing investment that we see ourselves making again, like Bill mentioned, in the Cloud, we've invested millions of dollars last year, doing the same thing again this year. So we are spending significant amount of money that is very important to us to build out capabilities here, to differentiate the company and enable the company for what's going to be a great opportunity for us as we go forward.

So those areas remain very important to us, while we can get the ERP changes through the organization and the one other dimension that is not on this expansion piece that is -- as I mentioned earlier, there's a slight bias as well to invest a bit more in these growing economies where we already have a very strong number 1 to number 3 position in most of these regions or countries that I think will serve us well, in terms of a portfolio of what Ingram Micro represents most product and geography and customers. Capital, which Bill touched on, again, we can't overemphasize, I think from an Ingram point of view that there's a lot of flexibility in the system or leverage levels that are relatively low. I'm not averse to taking it higher, I think as a management team, we will probably leverage up a little bit over the next 2, 3 years, because we do believe there's some opportunity to take advantage of market options in front of us, both from an investment point of view and an acquisition perspective. And we will continue to provide some money back to the shareholders, to partners, but the thinking right now is still very much in share buyback but dividend is not out of the equation, depending on what market opportunities are out there and how well we're executing. We're keeping that in the framework. But if we're going to come out with a dividend play, we don't want to come out with a 0.5% or 1%. If we're going to do it we're going to do it in a more substantial manner. So -- and I think that's what shareholders would prefer, although we've had mixed opinions on that and you're going to get different opinions from different shareholders of course. And finally, we've given you framework of a range based on revenue growth rates of what's feasible. And we think as we leave you here, we're in a very good and conservative view of what the range is. There's clearly some upside on this as the revenues are a little bit better and all the execution green elements that Bill highlighted, work as well as they can, there is upside on this. But like anything, there are market conditions with competitive environment right through to geopolitical environment that could weigh on the business and from that perspective, we're watching those things. And it's hard to put a call on those. So we're being probably a little conservative in terms of hitting the ball and down the middle of the fairway here.

But there is upside from what we're giving you, in terms of guidance on this. But assuming again, all the conditions need to be ripe, from a macroeconomic perspective and IT market perspective to allow for a bit more here. So hopefully, we've given you a good sense of where we are as an organization and as a management team, so that you can continue to follow us, we will come back and revisit this on an annual basis. We do really want to meet these goals, and we're going to live by these goals, in terms of what we're giving to you here today.

I would like to ask the management team to come up here. If there's 1 or 2 other last questions, we're happy to take them. I know you've had a chance with each of the presentations to do that. But it'll be a fast -- or last opportunity to do that. So anything I can take or the rest of the team, and then we'll obviously have a bit of time with you if you want some 1 on 1 time after this, over a cocktail.

Unknown Analyst

Greg, you've been -- you guys have been clear throughout the presentation, that you believe your stock is below tangible book value, and clearly undervalued. And you laid out your use of capital going forward which was mainly acquisitions and share buybacks. You have plenty of excess capital now. I doubt you're seeing many acquisitions below tangible book value in the market. Why not accelerate buybacks, get very aggressive now, while you guys believe your stock is undervalued? Right now, instead of sort of keeping the same ratio of acquisition buybacks? I'm not an expert...

Gregory M. E. Spierkel

I'll give you my perspective and Bill can as well. But we have been pretty aggressive. We bought $625 million worth in the last 4 years. So it's not as if we've been sitting on the sidelines in our view. And we probably would've been more aggressive that way because we have been looking at companies a lot. And usually, we've bought, over the last 4 years, 7 or 8, no, actually, 11 companies, but they've been small. But we've also been looking at some big plays and we've been cautious in light of the big plays that we've been looking at so that if there's something that's several hundred million dollars of cost, like at Tech Pacific that we did 6 years ago, we want to be able to do that and not be overly leveraged and have some flexibility still in the system. The way we look at it as a team, we're generating $250 million to $300 million of free cash flow/profits each year. That's the starting place from which, as a company, that we're comfortable with saying how much are we ready to sort of throw back into a number of choices? Operating investment that we've talked about here, a matter of also what are we doing with share buybacks, how much money we want to spend on acquisitions? We want to try to hold on a neutral state but we can leverage up a little bit more, but we want to have some flexibility if we are spending that kind of money and we have been in the last 2, 3 years with share buybacks. We've been spending a big portion of our profitability and cash flow back into share buyback. And we want to make sure that, that's one route to improving shareholder value but I don't believe it's the only one. And you do need to make some investments and acquisitions in other areas to drive longer-term shareholder value. And that's where the debate comes up with a pure financial modeling perspective versus where do we want to take the company. And I'm interested in both. And I want to keep flexibility for the latter, which we've not been doing as much of thus far. So that's where we come from, maybe not give you the answer that you want. But I'll talk to a number of other shareholders, and I'll say that's exactly where I want you to focus. So it's a balancing act between those 2.

Unknown Analyst

[indiscernible] I guess the reason for the question is because your stock is below tangible book value.

Gregory M. E. Spierkel


Unknown Analyst

That's the clue that I have the question. It's just [indiscernible]...

Gregory M. E. Spierkel

It's natural they ask, that's where it leads.

Unknown Analyst

Higher I think -- I understand. But I feel like there's a unique opportunity here that if you guys believe in the long-term goals you laid out today, buying back stock now below tangible book value will be extremely accretive down the road. [indiscernible]

Gregory M. E. Spierkel

You wouldn't believe, Phil [ph], but as the question was posed earlier, it doesn't necessarily drive the stock value right away either. Although we have been buying at an average cost that's below what the price of the shares are right now. Clearly, it's got some upside and I'd just say at some point, the stock has got to come above tangible book. And that's going to be dependent more on the strategy side of the equation rather than just going out and buying more stock. I think people want to see both, so there is truly in my mind, a balancing act here on trying to do both right.

William D. Humes

And in this last, what? 7 months, we have bought $227 million of stock. So we've allocated quite a bit more, we probably allocated one year's full free cash flow towards repurchasing stock so that is an acceleration. That is putting a lot of money in repurchasing this year. We talked about also, the volatility of the overall cash deployed in the business, so we have to balance that in the sense of running the business. And then as Greg mentioned, we have to worry about growing our capabilities for the longer run. We have to worry about developing our skill set around the data center, enterprise computing and logistics, so those are all important things that we need to balance both, in now as well as the future.

Unknown Analyst

So should we assume the $75 million a quarter is kind of the right run rate right now, given where your stock prices...

William D. Humes

Currently been our pattern.

Gregory M. E. Spierkel

That's been a pattern for a little bit but I wouldn't hold that out as the go forward pattern for sure. Again, without being more specific here, things we're looking at, and we've tried to give you a pie allocation pool for the next 3, 4 years. So you can imagine there's things that we're looking at. And so if those things wouldn't happen, then we reallocate. We have to make the judicious call based on things that you don't unfortunately see, but you got to believe the management team are looking at.

Unknown Analyst

One question with regard to the operating margin going forward and how management is incentivized to achieve those margins. You put up a few contingency kind of buffers for yourself and for us, which is fine. Actually, it's probably good to temper expectations that way. Internally, however, are you planning on compensating management for achieving those buffer goals or for achieving the maximum that you think is possible?

Gregory M. E. Spierkel

Well, we have 2 major drivers not unlike most companies and what our -- where the focus is for the executive team and I'd take the executive team from Director level and above, on a global level, and there's about 350 people out of the 15,000, 16,000 that are in the company. And first and foremost, those people are driven on an annual basis off the back of a plan that we're hoping to achieve on an annual basis, not unlike all companies. And in my case as the CEO, that might mean sort of a doubling of my base salary. Someone like Bill, it might mean a 70% opportunity. So that's a goal for what are we trying to achieve in the year, and that set of targets that we shared with you are clearly, one element that we need to make steps in that direction. More near-term in the feature of -- but clearly, an important dimension, and we tend to be driving that off -- the decisions there are off of 2 major levers of the company. What are we doing in driving profit before tax, and what we are doing to manage the working capital, really tightly within a certain band, so that we don't lose the leverage and the return of invested capital story for the company in the longer-term. So that's the annual cycle that we're rolling through and would align with this. The long-term incentive plan, which is the rolling every 3 years, new plan being put in place, typical again, in most companies. There, we're focused on long-term EPS compounded CAGR expectations and also, return on invested capital expectations that are going to be in line. And generally, we've stretched ourselves on the stretch goals rather than tempered ones when we've done that. Again, that's a decision between the Board and what the Board thinks is reasonable and we as management in forwarding a view what the world could look like in the next 2 or 3 years for the company, and the number of initiatives we have. If we don't achieve those, as we are this year, on some things that -- and some goals that we set ourselves. We've fallen, I think, short on some of our own expectations, a number of us are not going to get either annual and/or elements of the long-term incentive plan are going to get taken away. So we're very sensitive to that, we're managing against that. So there's clearly, a lot of focus on it and making sure that we're stretching ourselves as an organization.

William D. Humes

Yes. On top of that, the long-term incentive plan is stock-based as well, so you have that element of the double implement of driving shareholder value, tying and aligning it to shareholders' interest, tying it to targets to make it performance-based. So management and the Board try to align us very well to shareholders.

Gregory M. E. Spierkel

So there are long-term incentives, without getting into too much detail but you can see it in our proxy statements and what have you. But most of us, at the most senior level team, there's more money in that than there is in the annual or the bonus structure. So again, we want to drive against these longer-term incentives and the compensation is all in shares. So it should drive behavior in terms of the shareholder expectation.

Unknown Analyst

Okay. I think we would just encourage you to -- if you do think the upper end is achievable, barring all buffers and things occurring, to set that as the stretch plans...

Gregory M. E. Spierkel


Unknown Analyst

It ends more -- and also to take into account, a profit dollar target so that the margin isn't necessarily driving behavior either, so that you're maximizing the dollars, in addition to actual operating margin?

William D. Humes

Yes. Generally -- historically, our target is at least on the long-term plan, it's been EPS, CAGR, as well as return on invested capital so that would take into account, your dollarized profit level, as well as asset efficiency utilization on our return on investment capital. And then to Greg's point, we first developed a strategic plan for those going with planning part of it, we developed a strategic plan, we developed the longer-range area. Which ultimately, will be the baseline and yield back-end what we think is reasonable, achievable target or whatever else for the 3-year plan. And then the one-year incentive plan, as well as the budget are all tied together as an integrated financial plan. So it's something, the process that we go through throughout the year, every year. Next question?

Unknown Analyst

In your last Analyst Day, you talked about a 150 basis point operating margin in the next 2 to 3 years. I guess you're sort of -- you're now pushing that out a little bit further. I was just wondering why that is, and it seems like you're making progress a little bit, especially in 2010?

Gregory M. E. Spierkel

Yes, we definitely were making progress towards it. We were tracking and expecting to be much closer to it this year. But we've had, as you know, some internal challenges with our system conversion activity, which has taken us off track. And likely, the market conditions of Europe have also created some of the pressure on the results. So we've had a setback from our view of what we wanted to do, there's no question about that. But again, the goals that we're setting here are above where we were, they may be protracted a little bit more but we want to be clear that we've got to get through these significant investments. We do believe we're going to move measurably better each passing year going forward. And it's probably going a little bit more of a step up or improvement in the last 2 years, but there's definitely going to be measured improvement over the next 2 for certain. So yes, we've walked away from that shorter-term number because of the current year challenges that we've had. But we're picking on some numbers that are frankly, a little bit better than that as we go forward, potentially, substantially better than that as we go forward.

Unknown Analyst


Gregory M. E. Spierkel

Did that number include contingencies? Initially, yes. It assumes some challenges with the market, we didn't anticipate the challenges with the system changes. Yes, there were some expectations, but clearly, we stepped into some bigger changes, challenges than we anticipated. Please.

Unknown Analyst

Just a quick question on your IML business. Is that with the near term contract that your -- that you may sign at some point? And with the growth trajectory that you're expecting, will that business become a more stable business throughout -- obviously, it will have a seasonal effect but will it become something more tangible? I guess...

William D. Humes

[indiscernible] I think it will do, it'll [indiscernible] add, and as what Greg said, we've got 40 plans at the minute, 3 to 4 of them are large. As we ramped up that business, especially with the e-commerce side of it, we'll end up developing a portfolio more in that medium and longer-term so I think after a couple of years, you will see more us more stable, except we'd lose one client or one client steps dying [ph] we'll be much more of a portfolio as we onboard and off-board various clients.

Gregory M. E. Spierkel

Again, our reliance on 2 or 3 was a little bit too high, they make adjustments in the business, they're still very happy with the work we're doing, so that's not the issue. So you say, if they're happy, why -- Well, if you set up a large extra facility, they want to get the utilization out of what they've done. They're still relying maybe for 50% of their business, on one partner like us, but it was 60% the year before. They grow, they say we can do a little bit ourselves and get the great utilization out of an extra facility. So those step functions that they may make could have an impact on us, which they have. Again, not because of our ability to execute, more to do with some of the decisions that they're making, so that's why we'd like to have a slightly better diversification of the top, let's say, 5 or 6 customers rather than sort of the concentration we have now, and we're encouraged as I've tried to signal here, with some of the opportunities that are in the pipeline that are good, medium-size opportunities that can weight and improve that balance as we go forward.

Unknown Analyst

And when I think of the Cloud services that you're investing in, the potential that you have with Mobility and IML and in other parts of your business, how -- what's management's focus on improving the stickiness of revenue, the ability to have more recurring revenue as part of your portfolio?

Gregory M. E. Spierkel

Well, there's -- each area is slightly different. We've got a dedicated team in the logistics space that we didn't have before. Now there's probably the better part of about 15 salespeople led by a business development leader, and then above that is someone who's overseeing truly all our warehouse operations and making balanced decisions between the investments and what I would say, our core business needs are versus the investments from a logistics point of view. So separation on the division and organization and one part of that is focused completely on -- in making sure that there's real stickiness in logistics and landing some new relationships and that team has been in place for a little over a year, and that's why we're getting some traction as I mentioned before, there are multiple months and sometimes, multiple quarter sales cycles to change a supply chain for a relationship to come our way. If you go to the Cloud example, where at the very early stages of what's the transformational move in the industry. We think we've got a lead on our competition here, but it's so early stages that we've signed up 3/4 of the vendors that you saw up on the charts here in the last 12 months. Most of them have effectively just designed whether it's a hardware as a service offering, or a Software-as-a-Service offering. They've got very limited commercial sales of those, most of those successes that we hear about and what's going on in SaaS or Software-as-a-Service is predominantly small applets that are sitting generally in the consumer space. Now we're taking some big pieces of software around security, network optimization and everything else, and you're trying to take that cadence and sales cycle and move it into an annuity. That stickiness is going to start happening. What we're doing at Ingram Micro through Mario, is very typical of what a lot of businesses are now getting comfortable with. The CIO has opened up their thinking to bursts of data or bursts of certain applications coming in via different ways into the organization. All the momentum that we see and we're seeing sales ramp up and we're talking triple-digit, very healthy triple-digit growth rates in the Cloud as we speak with the early start we have. Of course, it's coming from a small base but we anticipate that continuing, there's just way too much marketing money and investment from the vendor community for anything but, I would say, success there. But the flip side of that, that people keep questioning us on though is, what's the risk? And are some of these vendors potentially going to go in directly into some of the small to medium customers or the VAR community. Generally the VARs, as well as the customers are saying, hey, no we're the IT department, the VARs don't have the infrastructure skills to build some of the tools that we've just been recently building and put out there to make sure they can become very sticky to Ingram Micro and sticky as they have been buying a one-stop solution from Ingram, in terms of servicing their end-customer needs. Both the credit management, the asset management, all the things that we do very well for them, we expect to do in this sort of new route to market options under annuity structure. So that's another good example where I think we're going to have a lot of success in its early days, but the ramp up that we're seeing right now is very encouraging, and we didn't give you the specifics but it's a small number today, but we gave you a sense that it grows up at a multi-hundred million dollar business with better margins than we see in what I would say, the On-premise business. And we hope that, that continues but that's what we're seeing early days at this stage. I don't know if you want to pick on another one. [indiscernible]

William D. Humes

Yes, I would add that even back on the core distribution group business, Greg is absolutely right on the services decline, logistics, much stickier, high switching costs but even on the core business, think about the investments we're making. So again, tech support, on the direct marketer side of our business, the most velocity [ph] piece of our business, they're now leveraging that as a service, so they've effectively cut -- shut down their own tech support and they're now leveraging ours. So again, there are revenue and margin targets associated with that, if you switch your business away, you're going to not fill [ph] up the space. You're going to get a service bill instead of delivering revenue when start thinking about the business intelligence. Again, you get to use our business intelligence, as long as we can track your market share, if we start to feel that you're moving away, our margins dropping down, we're going to take that business intelligence away from you. But all of those field resources we're adding on advanced solution, they're not understanding just your business, they're understanding your customers' business. We're developing those relationship success and becoming a much more indispensable partner and we go in the core distribution and the monthly recurring revenue is much stickier as you said.

Unknown Executive

If I could maybe just add another point, Keith actually had a slide up there where he actually shared with you, the image of, and if you were to go out to one of our sites that's already converted over to the new website and looked to see the website itself, what you'd see is almost an identical branding, and we did that purposely and we also built a unique -- a technical layer that's exactly the same and what that allows you to do is so -- I don't think there's any definitive answer as to which way cloud computing will go or if it's on-premise, off-premise, or it's a hybrid, a different model. We wanted to make sure that we give the final customer and actually our back-end partners, all the flexibility to really buy and move around in either version that they want or any hybrid model that they want. So we try to really spend a lot of time on both the branding piece which you'll see on the front end, if you go out to the Web. And also, on the technical layer, a very consistent model that we can drive across our business.

Gregory M. E. Spierkel

All right. There being no additional questions in the open question period. I want to thank you again, for the time that you spent with us this afternoon. I know it's important to you, as well as to us. We'll be here for another hour or so, milling around before we have other dinner engagements. So if you want to catch us one-on-one on anything, happy to take some further questions from you. Thank you again, for your time today. Appreciate it.

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


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