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Executives

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

Alain Monié - Chief Executive Officer, President and Member of The Board of Directors

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

Analysts

Scott D. Craig - BofA Merrill Lynch, Research Division

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

Benjamin A. Reitzes - Barclays Capital, Research Division

Richard Kugele - Needham & Company, LLC, Research Division

Osten Bernardez - Cross Research LLC

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

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

Richard Gardner - Citigroup Inc, Research Division

Mark H. Hillman - Collins Stewart LLC, Research Division

Ingram Micro (IM) Q4 2011 Earnings Call February 8, 2012 5:00 PM ET

Operator

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

Ria Marie Carlson

Thank you very much, Jim. Thank you for joining us, and good afternoon. Joining me today are Alain Monie, our President and Chief Executive Officer; and Bill Humes, our Chief Financial Officer. Alain will provide opening comments and then Bill will provide additional details around our financial results for the fourth quarter. Alain will come back to discuss his view of the business and plans for the future, followed by a question-and-answer session.

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

During today's discussion, we will make statements that are forward-looking. These forward-looking statements, and all other statements made on this call that are not historical facts, are subject to a number of risks and uncertainties. Please refer to today's news release and documents filed with the Securities and Exchange Commission, specifically the risk factors listed in Item 1A of our Form 10-K for the fiscal year ended January 1, 2011, for more information on the risks that could cause actual results to differ materially.

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

Before I turn the call over to Alain, I have a personal note. This is my last of 44 earnings calls with Ingram Micro. As some of you know, I've accepted a University position and will be leaving the company in the coming weeks. I would like to thank all of you on this call, from analysts and shareholders to associates and board members for 11 enriching years. I truly appreciate the opportunities the company offered and I cherish the friendships I've made with many of you.

The IR program is in good hands with Damon Wright, who has proven himself as a talented professional in his first 6 months of the company. I wish all of you success and hope our paths cross again. With that, I'll turn the call over to Alain Monie, our President and Chief Executive Officer. Alain?

Alain Monié

Thank you, Ria, and good afternoon, everyone. It is a pleasure to address the financial community for the first time as CEO of Ingram Micro. Since my return to the company in November, I have visited all of our regions and have taken stock of what we're doing well and what we need to improve. I'm highly confident that I have taken the reins of a company that is in overall solid shape. But I am also well aware that there are several areas of focus where we need to drive faster and improve the execution. I intend to ensure we do.

Turning to Q4. We wrapped up the year with a strong quarter. Sales of nearly $10 billion were just under an all-time record and helped drive the second highest quarterly earnings per share in more than a decade. Our ninth consecutive quarter of year-over-year sales growth was driven by solid demand in most parts of the world in our key customer segment, the SMB market.

We also experienced good corporate demand and saw a pickup in sales in the consumer market in some countries, particularly in December, along with pockets of growth in the government space for the first time during 2011.

The quarter benefited from strong revenue growth in several of our higher margin businesses, which helped drive a solid company-wide gross margin of 5.57%, a sequential increase of 62 basis points over Q3. A favorable inventory position and pricing environment on hard disk drives benefited overall gross margin by an estimated 30 basis points as prices rose following the Thailand flooding. That said, hard disk drives are a small portion of our overall sales. And even without this benefit, the sequential improvement exceeded the seasonal uptick we usually expect.

Excellent management of cost and our continued focus on adjusting our operations to the current business climate in Europe and Australia led to the lowest operating expense, as a percentage of revenue, in many years. This focus helped drive strong quarterly operating margins, illustrating the leverage our model can generate.

Turning to some highlights for the quarter. As it has all year, North America delivered another exceptional quarter, with strong sales and operating margin exceeding 200 basis points. The region executed well in its traditional broad-line business and saw particular strength in Data Capture/Point-Of-Sale and DBL consumer accessories, both of which delivered double-digit growth for the quarter.

Importantly, the growth in these specialty businesses is accompanied by gross margins well above the company average.

Another solid gross margin contributor, our Avid home theater business grew for the fourth consecutive quarter and returned to profitability for the first time in more than 3 years.

In the U.S., our fee-for-service logistics revenue was down year-over-year, as one of our large customers had lowered their revenues. However, the on-boarding of new customers in 2011 was very robust and our forward-looking pipeline is extremely encouraging.

In Canada, the Logistics business is growing nicely, posting double-digit sales gains. Our Logistics business will be an area of focus for 2012, and we're confident it will be a meaningful contributor to operating income.

North America's consistent performance highlights the critical importance of our strategy to build out higher margin specialty markets. The region has been our primary template for diversified growth. And as we look to accelerate our development of higher-margin businesses, we have a solid track record to guide us, which we believe will help drive higher returns even faster.

Latin America once again led all regions in percentage of year-over-year sales growth, delivering another double-digit quarter.

All countries grew sales in local currency, with Mexico, Miami export and Chile, as particular standouts. We're making investments in developing the Brazilian market and had a strong sales finish to the quarter. However, the business continues to experience losses.

Turning to Europe. The region delivered record high operating income benefiting the most from our inventory position of hard disk drives. While total quarterly revenues for Europe were down year-over-year, we had a particularly strong December and we are pleased with our Q4 results in the face of an economy that continues to be challenged by uncertainty.

Our anchor countries of Germany, France and the U.K. had solid quarters based on relatively solid spending in our key assembly market and in corporate sales, which helped offset continued weakness in retail. Additionally, our European Data Capture/Point-Of-Sale division performed well, driving good revenue growth and profitability contribution in the region. Again, this performance is another proof point to the importance of executing on our strategy to accelerate the contribution of higher-margin specialty businesses.

Moving to Asia-Pacific. Excluding Australia, the region drove strong local currency revenue growth in the quarter. China continues to be a standout, with growth well above the regional average and operating leverage driving even better operating income contribution. India, New Zealand, Singapore and Hong Kong, all delivered solid revenue growth and very strong operating margins. India sales for the quarter were supported by continued strong demand for mobility products and New Zealand's growth is coming from share gains. Singapore's capitalizing on its position as the strongest player in the country and Hong Kong had solid revenue growth in higher-margin enterprise technology solutions.

While volumes continue to be down from the pre-ERP deployment period, we have been diligently working on regaining share in Australia and believe we are slowly making progress.

Our overall Q4 financial results, as well as the many country and product specific highlights illustrates that Ingram Micro has a solid foundation from which to build and we are generally operating well in the face of challenging economic conditions. I'd like to give Greg significant credit for our Q4 execution and want to thank him for the excellent job he has done in taking Ingram Micro to new levels of both sales and profitability during his more than 6 years as CEO.

We are a better company due to his dedicated service over the past 15 years, and we appreciate his commitment and significant efforts.

Prior to covering some of my thoughts regarding 2012, I'm going to turn the call over to Bill to review our financial results in more detail. Bill?

William D. Humes

Thanks. Alain. I'll start with sales, which can be found on Slide 3. Worldwide sales increased 1% to $9.95 billion, led by solid growth in Americas. The translation effect on foreign currencies did not have a significant impact on growth versus the prior year. In our regions of North America sales were $4.21 billion, an increase of 4% versus the prior year and an 11-year high.

Europe sales were down 5% to $3.2 billion. The decline in sales is primarily a function of the difficult macro economy and competitive environment Alain noted earlier, which also impacted our ability to regain share in those countries where we have deployed SAP.

Asia-Pacific sales were down 1% to $1.96 billion. Excluding the impact of Australia, Asia-Pacific sales grew 8%.

Latin America sales increased 15% to $572 million, a new record for the region. The translation of regional currencies had a negative effect of approximately 7 percentage points.

Gross margin on Slide 4 was 5.57%. We executed well on our traditional broad line business, saw seasonal growth in IM logistics and drove solid sales of higher-margin products. Additionally, hard disk drive pricing benefited gross margins somewhere in the neighborhood of 30 basis points.

A year ago, 2010 fourth quarter's gross margin was 5.66%, which included a $9.1 million or approximately 9 basis point benefit due to a partial release of the reserve for commercial taxes on software imports into Brazil.

The year-over-year decline in gross margin is related to competitive pricing pressures and lower rebate achievement in Australia, weak consumer demand in a number of markets globally, but particularly in Europe, and strong sales growth in low gross margin markets and products.

As you can see on Slide 5, fourth quarter operating expenses of $378 million was the lowest as a percentage of revenue in more than a decade, coming in at 380 basis points of sales versus $393 million or 397 basis points of sales a year ago. Current year operating expenses included $4.2 million or 4 basis points of sales related to reorganization charges as we continue to implement cost-cutting initiatives globally.

On Slide 6, you'll see our operating income was $176 million or 177 basis points of sales versus $167 million or 169 basis points of sales last year. Current year operating income included $4.2 million or 4 basis points of sales related to reorganization charges, as I noted before.

On a regional basis, as seen on Slide 6, North America operating income was $90 million or 214 basis points of sales, up by 40 basis points from 174 a year ago. North America's operating income would have reached a decade high even without the benefit of favorable hard disk drive pricing.

Europe's operating income hit a record of $71 million or 222 basis points of sales versus $60 million or 178 basis points of sales in last year's fourth quarter. As Alain mentioned earlier, Europe benefited the most from hard disk drive sales. Europe's Q4 2011 results included reorganization charges of $1.7 million, or 5 basis points of sales, as we have continued to streamline costs of a possible inter-regional economic environment that continues to be challenged.

Asia-Pacific's operating income was $14 million or 71 basis points of sales, compared with last year's $29 million or 144 basis points of sales. The year-over-year decline was primarily due to Australia, which had 110 basis point negative impact to the region in the current year, which equates to a 22 basis point impact on worldwide operating income.

Q4 also included reorganization charges of $1.8 million or 9 basis points of sales associated primarily with continued actions taken in Australia to align the organization with our current level of expected revenue.

Latin America operating income was $6.5 million or 114 basis points of sales, compared with $17.6 million or 354 basis points sales in the prior year, which included a benefit of $9.1 million or 184 basis points of the region's revenues related to the release of the Brazilian commercial tax reserves.

The strong country-specific performances in the quarter were offset by continued losses in Brazil. Interest and other expenses for the quarter were $20.5 million, up from $9.7 million in the prior-year quarter. While net interest expense in Q4 was lower than last year, primarily due to the lower average debt balances, foreign exchange gains and losses were the primary driver of this year-over-year change.

We had a net foreign currency loss of $6.1 million in the 2011 fourth quarter versus a gain of $7 million in the year-ago period. This fluctuation is significantly attributable to the accounting impact of foreign currency fluctuations on euro-based inventory purchases at our Pan-European unit, which, as we have discussed in previous quarters, is designated as a U.S. dollar functional entity.

Our effective tax rate for the quarter was 32.6% versus 27% in the prior year. The quarter's tax rate was also above our 2011 expectations of 29% due primarily to a change in mix of profits among different tax jurisdictions. Additionally, the prior year's and quarter's effective tax rate included an approximate 2 percentage point benefit from the relief of commercial tax reserves in Brazil for which no income tax was applied.

On Slide 7, you can see that net income was $105 million or $0.68 per diluted share, which includes the negative impact of $2.9 million after tax or $0.02 per diluted share from the reorganization charges mentioned earlier. This compares with net income of $115 million or $0.71 per diluted share in the prior year, which included a benefit of $9.1 million or $0.05 per diluted share related to the release of commercial tax reserves in Brazil.

Turning to some key balance sheet metrics highlighted on Slide 8. Our cash balance at quarter end was $891 million versus $1.16 billion at the end of the year-ago quarter. During the fourth quarter, we repurchased 4.2 million shares of stock at an average purchase price of $18 a share for an aggregate of $75 million. Since the 3-year, $400 million repurchase program was announced in October of 2010, 12.5 million shares have been purchased to date for approximately $226 million.

Our total debt balance at quarter end was $392 million, a decline of $244 million from the end of 2010, which primarily reflects the repayment of the $225 million outstanding principal on our term loan and helped drive our debt to capitalization ratio down to 11% from 16% a year ago.

Moving to working capital on Slide 10, days of sales outstanding were 41, 3 days higher than a year ago. Days of inventory were 28, a 5-day sequential improvement and in line with prior year end and days of payables were 47, 2 days better than last year. This brings working capital days to 22, flat from the end of last year and one day better sequentially.

I am pleased with the hard work our team has done to maintain working capital at the low end of our targeted range of 22 to 26 days.

CapEx for the quarter was $31.3 million and depreciation and amortization was $14.3 million. Return on invested capital for the quarter was 17.3%, significantly exceeding our weighted average cost of capital of slightly under 9%. That completes my financial review. I'll turn it back to Alain.

Alain Monié

Thank you, Bill. Prior to providing our outlook for 2012, I want to give you some perspective on my view of our business and the opportunities and challenges that lay before us. I have the benefit of a relatively long history with Ingram Micro. My approach maybe a little different, but at the end the result will be delivering on our commitments to customers, vendors, associates and shareholders. As I look at 2012 and the opportunities over the next several years, I realize that while many areas are operating well, there's also significant work to be done on a number of fronts to ensure we are making consistent and steady progress towards the 2015 financial targets we provided at our Analyst Day in November.

First and foremost, we must execute on our stated financial and stated goals and on driving a sense of urgency and better execution throughout the organization. When I evaluate where we need to focus, I'm confident we have the correct strategy in place to drive our overriding financial goal of continuous top line growth for significantly deeper profitability.

I have developed the strategy. In my view, there are 3 key imperatives for Ingram Micro. One, we need to continue to improve productivity in our very large traditional distribution business, to ensure we have the optimal environment to foster growth and deepen profitability for this high volume machine. Two, we must grow our higher margin specialty businesses faster. North America's success highlights the importance of this key imperative, particularly in terms of our ability to drive deeper profitability. Because these still relatively small revenue contributors bring significantly better operating income, we need to accelerate their growth. I plan to help drive this effort and support the required investments in order to continue to increase the contribution these specialties add to our profitability. And three, we will also continue to invest to remain a leader in the distribution industry by driving innovation, such as our cloud platform and marketplace.

I do not foresee any significant changes to our strategy. However, I want to ensure we are more forceful and resolute in its execution and increase the urgency with which we deploy our initiatives across the organization.

To help us achieve some of our important strategic objectives, we must successfully move forward with our ERP implementation. I believe this is a requirement to enable our operating results to reach even greater heights.

We will take a very controlled approach to future deployments. First, we will finish addressing the system functionality needed in order to better suit our customers' needs. Ingram Micro has an industry-leading reputation for customer service and it is critical that our future implementations do not impact our standing in our customers' minds.

Second, we will then deploy these upgrades into the 7 countries currently running SAP to ensure we have addressed the issues in customer interfaces.

Third, we will work closely with the remaining countries, emphasizing hands-on training and in-depth testing in order to maximize our state of readiness in these future deployments. All of these steps are being implemented to ensure future deployments proceed as smoothly as possible with minimal disruption. Customers' businesses come first and we are committed to ensure they are not impacted.

Execution on our strategy is all about meeting or exceeding our stated financial targets, and I'm confident that the 2015 financial targets, put in place last November, are highly achievable. As a reminder, those targets are for company-wide gross margin of 5.4% to 5.6%, operating margin of 155 to 175 basis points, earnings per share of $2.60 to $3.10 per share and return on invested capital of 300 to 500 basis points above weighted average cost of capital.

Several of our operations are already achieving or exceeding these levels and we're well on track to achieve our company-wide midterm revenue and margin goals.

Turning to our outlook for 2012. As we look to the full year, we currently expect revenue growth in line with IT spending forecast of low to mid-single-digit growth. For our first quarter, revenues are currently expected to be flat to slightly down compared to the year-earlier period. This is due to expected year-over-year declines in European revenues driven primarily by continued uncertainty surrounding the economy and expectations for a year-over-year decline in Australia's revenue contribution. First quarter 2012 gross margin is expected to trend down sequentially, but in line with seasonal norms after removing the impact of our hard disk drive pricing in Q4 '11, which we do not expect will provide meaningful additional benefit in the 2012 first quarter.

We currently expect our effective tax rate for the full year to be approximately 30%.

For the full year 2012, I see continued improvement along the 4-year trajectory laid out at our November Analyst Day. We may or may not get everything perfect in 2012, but we must and will demonstrate progress on our financial targets. The areas within our control are being well managed overall, as illustrated by continuing improvement in our cost structure and good performance in high-growth markets and higher margin products. Continued execution in these areas will set the foundation for our next level of performance. I will now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Scott Craig.

Scott D. Craig - BofA Merrill Lynch, Research Division

Bill, just a couple of clarifications around the gross margin. Maybe on a quarter-to-quarter basis, can you talk about the change for the fourth quarter versus the third quarter, obviously, gave 30 basis points was from the hard disk drives, but maybe quantify the other areas a little better? And then when you look at the outlook for the gross margin in the first quarter for next year, the clarification -- normally you're down somewhere 10 to 20 basis points. Does that mean you're down more than that because the hard disk drive situation doesn't reoccur for you? Or are you still down basically normal? I'm just trying to get the feel for the stuff on that first quarter gross margin impact.

William D. Humes

Sure, Scott, no problem. Overall gross margin, as you know, came in with a 30 basis point improvement largely through the solid execution and pricing on the hard disk drive sales. So as you said, you already backed that out going forward, so I'll answer the question going forward on that. We don't expect a significant benefit, actually a de minimis benefit in Q1 for the hard disk drive margins there. So overall, the sequential increase from Q3 to Q4, a large part of that sequential increase was the strength on a sequential basis in Ingram Micro Logistics fee-for-service business and that typically does generate somewhere between a 10 to 20 basis point improvement. Now, on the other side though, as we exit Q4 and into Q1, we expect that same kind of IML reduction or pricing sequential -- gross margin decrease sequentially. And I would say the other benefits once you back out the 10 to 20 basis points of Ingram Micro Logistics, favorability in Q4 is generally related to mix of business driving higher end adjacencies and largely in some of the consumer electronics spaces that Alain mentioned earlier, with very solid sales in our DBL and Avid businesses and across the way there. Some of that exist still in Q1, but obviously, Q4 being a consumer electronics related business tends to be the strongest quarter as well. So again seasonality wise, you kind of backout the 30 basis points from hard disk drive sales and/or benefit from thereof. And then you have your normal sequential decline from Q4 to Q1, largely IML driven, but some of it is also the mix of business too.

Operator

Your next question comes from Craig Hettenbach.

Alain Monié

Tim, can we take the next question please?

Operator

Your next question comes from Brian Alexander of Raymond James.

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

First of all, Ria good luck and you'll be missed, as you know, and Alain, congratulations on your new role as CEO. And Alain, just your comments I appreciate on the 3 imperatives. It sounds like not much should change strategically, but the focus on execution may be intensified, which makes sense given your background. So a few questions. One, are you planning to hire a COO? And then two, are you accelerating the timeline for implementing SAP or taking a different approach there? Maybe clarify your comments around the systems conversion. And then finally, just other changes to the org structure or the processes, more specific changes that you plan to make that might increase investor confidence, that execution will be more consistent.

Alain Monié

Sure, Brian, thanks for the kind words. As far as the COO position, given the size of our business and the fact that I think after -- over the last couple of years, both configurations have been tried with and without a COO, I'm fairly convinced that we need to have that position filled. So we're working towards our preference to look internally, but we're looking at all alternatives. But pretty much, that's something that we think we need to do. As far as the acceleration, I did talk about acceleration in several areas, particularly in developing our higher-margin businesses. For obvious reasons. I want that mix to become more meaningful and quicker. At the same time, on the SAP, ERP-related question that you just mentioned, what we're doing there is that we have developed -- deployed that in 7 countries. And as a result, we have seen a number of things that we need to fix and that we need to improve on. So we are not stopping the program at all, but we are just making sure that we're going to implement the improvements and the upgrades in those 7 countries as rapidly as we can as they are ready and then we will continue on our deployment schedule. So if you combined the 2, I would simplify that accelerating on higher-margin businesses and being driven by readiness on the SAP, which might imply a slow down versus the initial schedule we had, but nothing really dramatic as far as the endgame, if you will, of the target of being done by in the next 3 years. Finally on other organizational changes, this is still early in my taking the reins here. I'm obviously, going to be looking at anything that we can do in order to solidify the quality of our processes long-term. And that means not only systems, but probably also putting in place the teams that we need in order to have execution. Execution comes with the proper people, skills, the very strong processes that we need to have in place and then the mindset. So I'll be focusing on any change that reinforces that area of our organization.

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

Great. And then just a follow up, Bill, should we assume the entire sequential improvement in the Asia profitability, I think it was $8 million, was related to improvement in Australia profitability, given that the region sales were down sequentially, but profitability was up. So did all that come from Australia and how far away are we from breakeven?

William D. Humes

Yes. I would say no I wouldn't assume it was all Australia. It was pretty solid performance in some of the key countries like China and India and Singapore. Australia did play a part in that. It did improve on a -- at least on its impact year-over-year, but it's still losing money, but it lost in -- the differential on a year-over-year basis was less, but not nearly the level that explains the whole difference. So it was a combination of all factors, good performance by the rest of the business in the sense of profitability and some improvement in Australia as well.

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

You think that Australia can reach breakeven in the first half of this year or is it going to take longer?

William D. Humes

I would say as we continue to implement and test and drive some of the changes that Alain just talked about on SAP, the -- those will start running, we're on very good track with that and have been implementing stuff all the time weekly. But I would say gaining back the customers continues to be the challenge. We made some progress in Q4 from Q3, and we expect hopefully to make some progress going forward. But I think it's going to take a little bit longer, but hopefully we're it in that trajectory towards the back end of the year.

Operator

Our next question comes from Ben Reitzes of Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

I wanted to talk about the revenue outlook for the year a little bit and I also have a question about, Alain, what you want to do with regard to restructuring. So I guess I'll ask that first. Do you expect any new restructuring charges or realignment as you reevaluate? You said you're going to invest in teams and position them to grow, to grow the growth businesses as well. So I am wondering involves any further restructuring charges and any potential savings? And then I'll follow up on the revenue.

Alain Monié

Yes, on that side, we, as you know, on the several past years, we have had constantly adjustments in our organization, restructuring and charges. I wouldn't point at anything exceptional beyond the usual readjustments that we do on a regular basis, at least at this stage of our analysis, of my analysis. So business, I would say, business as usual but, which includes regular adjustments.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. Then with regard to revenue, you start out the year in the first quarter flat to down, so let's just assume it's like down a percentage or so. Just to take your guidance in the midpoint of what I think you're trying to say, it would imply that there's steady improvement throughout the year perhaps even mid-single-digit growth in the back half. And I was just wondering if that's the way to look at it? And then how do you get that mid-single-digit growth in the back half even though 2.5% or so sounds kind of reasonable is what you're trying to say for the year. When you start out a point in the hole, you really have to get some pretty good growth by the end of the year and I was just wondering where that's coming from?

Alain Monié

Well, again, you have 2 elements there. You have actually what the market is doing and how we capture that and then you have the comparison to last year, which in our case changes as you go quarter, particularly if you're taking into account for instance Australia. So we're seeing -- I think your overall assessment is probably close to what we are looking at. We -- January is very difficult to take as any indicator of the rest of how the year is going to get started. But we believe that if Q1 is flat to slightly negative, there are a couple of things that will kick in the rest of the year along some of the investments we've made already last year in the higher-margin businesses that will start coming through, as well as comparison, in particular with Australia, which turned to the new ERP system sometime in Q1 last year which, as comparison also will help us there. So I think your overall assessment is fairly aligned with our thoughts.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay, and then just finally on a P&L impact. The ESO, the employee stock option expense, when you're buying back, I'm not 100% sure, but it actually seems like it's much lower than I anticipated for the fourth quarter and I was wondering if there was actually something there that -- or was that just an anomaly and will go back to the prior rates on a quarterly basis for the stock option expense? Is that something that permanently lowers the expense structure at all or is it just small and immaterial?

William D. Humes

Yes, I'd say, overall, I don't think the stock repurchases have really anything to do with that. Part of the fluctuation has to do with the fact that a portion of our stock compensation plans are based upon longer-range targets and goals. And we adjust that quarterly, as we continue to achieve or whatever track against those ultimate goals. So what you see from quarter-to-quarter partially is the fact of we are viewing how we are making progress and how we see going forward based upon goals that were set 1.5, 2 years ago. And then on top of that, you also have new grants that come in at times as new years come through or timing of grants change and then you start expensing those. So that's really the factor overall.

Richard Kugele - Needham & Company, LLC, Research Division

Okay. Nothing there. Of course it's not related at all to the stock repurchase I just misspoke.

Operator

Next question comes from Osten Bernardez.

Osten Bernardez - Cross Research LLC

First question relates to, sort of, to OpEx. OpEx as a percent of sales and as a percent of gross profit was pretty impressive for the quarter and looking ahead, how should we be thinking about, sort of, as -- how should we be thinking about where that levels off given that you are saving money given the reduced demand you're seeing in some of your areas, but at the same time you do plan on investing for some of your growth businesses as well?

William D. Humes

Yes, Osten, no problem. Overall, one, we are very pleased with our OpEx management in Q4 and for that matter throughout 2011. So that was the result of very cost-conscious, cost control over normal core operations, as well as adjusting for different revenue and demand levels that we saw throughout the year. And going forward, we'll continue to manage that OpEx on the core very, very tightly. Generally, we'll continue on core business, look at managing OpEx at roughly around half the rate of sales growth. Obviously, when you have low sales growth that makes it more challenging. When you have higher sales growth, that's much easier to do. And then we'll later on things that we need to do with the -- to continue to invest in the longer-range time of the businesses as we see fit. So I'd say, in general strokes for the year, hopefully it's close to that half the rate. Should get a little bit bouncy for each quarter because of different levels of growth or because we may institute investments in one quarter versus the other quarter. So but in kind of the broad picture, that's what we're driving for.

Osten Bernardez - Cross Research LLC

Okay. That's helpful. And when I -- a core question with respect to Brazil, you're still experiencing a few losses there. But my understanding as of at least last time we spoke was that Brazil is still getting better relatively. And so, I guess, long-term, how do we think about what your sort of looking at from the -- from a business continuity standpoint in Brazil?

William D. Humes

Yes. I mean, I'll address overall in Q4 and then Alain could talk more longer-range with that very high growth market. Overall, Brazil, yes, we started getting some traction on revenue wise. I'd say we had some incremental and additional cleanup and process challenges that we had in Brazil. So the losses were not necessarily indicative of the level of progress we're making in revenues. But hopefully going forward, we can start minimizing that. I think we're getting a pretty good handle on the business operations there and we are looking to drive more success there going forward, but I'll let Alain talk about the long-range views of Brazil.

Alain Monié

Yes, if you look at our geographical strategy, it has been pretty clear that we are interested and we want to invest in geographies where growth is going to happen in the future, which was illustrated by, a few years ago, our position with Tech Pacific our investments that resulted also in China, in India. And Brazil is also obviously a geography that we are very interested in. We have been there for quite some time, which has given us the opportunity to both understand it, sometimes to suffer a little bit from it as well, but that goes with the high-growth environment there. So it is a country that we plan on continuing investing in and improving. In fact, if you look at our -- specifically December, we closed December fairly well in our Brazil operations, which is encouraging given that we are going to continue putting the resources required there.

Osten Bernardez - Cross Research LLC

Okay. That's helpful. And finally, with respect to your price computing business and sort of the higher end -- you're higher end computing business, would you be able to share any details with respect to technology verticals and how they did with the servers, storage networking in during the quarter?

Alain Monié

Well, in general, if you look at the different segments, I would say that the systems revenue, and in our case, systems include tablets, so it does come -- systems were fairly strong in general, but the tablets, I would say, is probably what was driving that segment. Most PCs were probably more in the average to the low end of the average growth. Our peripherals were pretty much in line with our average growth. Our software business was a bit weaker than the average. On the other hand, our networking business was fairly solid and I will call it above the average. Beyond that, I did mention on the higher-margin businesses, DBL, our consumer accessories business was very strong. Data Capture/Point-Of-Sale was very strong in North America, in Europe and in Asia, across the board. Handsets were also a very solid category for us, particularly in India. And in Latin America, you can look at games, games consoles, as well as the volume business in general, in Brazil, was also very strong.

Operator

Our next question comes from Craig Hettenbach of Goldman Sachs.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Alain, can you talk about Europe and specifically expectations of when that market could bottom out? And if it were to stay or remain weak, are there any other cost measures you can take to address profitability?

Alain Monié

I wish I had a better crystal ball in Europe. We try and read and understand everything we can. Plus when you start looking at the details on the different geographies we're in, obviously, if you look back, Italy, Spain have been pretty weak for obvious reasons. They were in the newspapers. We know that. On the other hand, our big engines, particularly Germany, France and the U.K., for us performed fairly well. Now, we've seen weakness in retail, in general, as a market. But also some shifts of Retail business going direct to vendors in some cases leaving the channel business. But on the other hand, we see also other pockets of strength in the Consumer business, which has not been as impacted as one would've thought, particularly towards the end of the year. So it's really a hodgepodge of different behavioral patterns. Again, I mentioned Data Capture/Point-Of-Sale, I mean, we had high, very strong growth there, very good profitability. As far as looking down the road, taking any action to maybe counter any potential downturn, if that happens, obviously, we've done it in the past, a couple of times already, we can point at that. We really look closely at following what's happening as soon as we see, if we see any movement downwards that would warrant a structural adjustment, we will do so. We've done it a couple of times in the past. At this stage, we are not looking at -- we have no plans for that. We need to understand the market better.

William D. Humes

I would just add that on that, Craig, that there are things we're doing regardless of the market and the economy there on a global basis. Some of the things that I talked about in our November Analyst Day where we're looking at optimizing our operations structure and how we run those, so driving efficiencies through there. We are looking at continuing to leverage and get benefit from strategic sourcing decisions, both on a regional and global basis. And then evaluating globally the potential for shared service centers and doing those benefits. So those we're looking at regardless of the market. But obviously, you'll have to do other things if Europe turns in a negative sense.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. And then as a follow-up, the buyback spend relatively consistent the last couple of quarters. Alain, what's your view in terms of the appropriate mix of M&A and buyback? And what are you looking to do as you go forward?

Alain Monié

I think the key word you just mentioned is mix. I would say that my personal bias would be to invest in the business long term. That would be the first place I would like to look at where we can use, better use our funding capability. But it is obvious that other avenues to increase shareholder value are not off the table at all. Buybacks are a part of that. But frankly, I do have a bias for investing in the business long term, if, of course, we have the right opportunities at hand. M&A is definitely one that we will be looking -- as you know we have been doing it, but we will increase our scrutiny there because we think that it's obvious that it could -- if it fits our strategic areas, it gives us a quicker access to the size that we need to have there. So it's a mix, yes. Priority, I would say into growing and developing the business. But certainly not excluding share buyback, as appropriate.

Operator

Our next question comes from Ananda Baruah.

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

Alain, congratulations. Ria, we'll miss you, obviously. Hope you stay in touch. I guess just one is just a quick clarification, Bill, probably best from you. The revenue growth, I assume, is that constant currency and not currency adjusted? For '12?

William D. Humes

You mean 2012's low to mid-single digits?

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

Yes.

William D. Humes

Yes, I mean, I'd say in general, yes, that 's -- I mean, IDC Gartner they generally do U.S. dollar growth. But I think overall, we're thinking that's roughly in line with our thoughts on a local-currency basis.

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

Okay. Great. Then just what are the assumptions, I guess, you guys -- I don't have the IDC numbers at my fingertips. What are you thinking I guess for U.S. and kind of as you guys look at emerging market growth?

Alain Monié

The IDC and Gartner numbers range anywhere between 5.4% and 3.7%, but the trend has been going down. So that was the latest or the last picture, if you will. If you look at our own performance in Q4, I mean, Asia has been, if you exclude Australia, Asia has been growing at 10% in local currency, which is fairly solid. Latin America was at over 20%, I think, in local currency, so very solid growth there. Our North America business has been healthy, given that we saw both the Commercial and the Consumer businesses delivering. Now of course the big question is in Europe and that's where the uncertainty will remain.

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

Okay. Thanks. That's helpful. And then, Alain, just a follow-up on I guess your comments about accelerating or just getting more quickly driving growth in the higher growth -- higher profitable businesses. And then also with regards to M&A. Are you shifting the strategy a little bit on the M&A? I mean, I guess, I can you just sort of, I know it might sound like it's splitting hairs, so to speak, but, I guess, are you getting not more aggressive, maybe, like you said, higher scrutiny, but I guess, you look more broadly at doing M&A to accelerate the growth of those businesses? And then are you actually looking at expanding into businesses that you guys maybe didn't talk about at the Analyst Day?

Alain Monié

2 parts to your question. The first one, within the strategic areas that we have already identified and communicated, the answer is, yes. We are going to look at probably accelerating our greenfield investments there, but also, probably being a little more aggressive at looking at what's out there in M&A. Now at the same time, we are very cautious in the way we look at what's out there to be integrated and it has to make full sense for us as far as the equation between the upside and the risk. Risk being not only the business, but the geographies, the type of teams that you see in place, et cetera, et cetera. But, yes, I would say that the acceleration or the increase of activity would be applied across the board in that sense.

Operator

Next question comes from Richard Gardner of Citigroup.

Richard Gardner - Citigroup Inc, Research Division

A couple of questions. First of all, I'd love to, Bill, to understand why you think that the HDD benefit will reverse out during the first quarter, given that the industry seems to think that Q1 represents the peak period of supply constraints for hard disk drives? And it seems like under that scenario drive pricing is unlikely to go down in Q1. It might actually go up even more. So I would love to get your thoughts on that first. And then I have a follow up.

William D. Humes

Sure, Rich. Overall, I would say, a large of our big benefit that we drove and executed on in Q4 was due to the fact that we had a good inventory position going into Q4. So in Q3 so -- and that was at pre, I'd say, pre-Thailand flood prices. And as the market went up and increased, we were able to garner much higher prices on that lower cost of inventory. But as you obviously sell through all that inventory, then you're buying it at wholly new set prices, which reflect the market and reflect what the -- our OEMs can get for that as well. So that's the way it basically normalizes out for someone like us where our inventory has already spun through.

Richard Gardner - Citigroup Inc, Research Division

Just as a follow-up to that. Can you talk about what you expect the supply situation will be for drives and drive-related products in Q1, and whether you expect that pricing on those products will continue to trend higher?

Alain Monié

I mean, we don't really have a lot more information than you on the supply side. Some manufacturers are putting a goalpost there to be back on track in August and September, some others less impacted. Difficult for us to go beyond that, integrating those information that we're getting from that supply base. Now, as Bill mentioned, for us in the channel, it has a different meaning simply because, as Bill mentioned, it has stabilized as far as the pricing. We did get the benefit of timing differences between pricing at purchase and pricing at sale. That is now stabilized so that difference is reducing drastically. Even if you look at the overall supply environment, that maybe not yet where it should be, the pricing environment, which is the one that affects us will not have the same impact.

Richard Gardner - Citigroup Inc, Research Division

Okay. Great. And then there's been a lot of discussion around investments in the specialty businesses during the call and areas of improvement in operating margin, including Australia and Brazil. And then obviously, the HDD benefit going away. And so I was just hoping that you could talk about how you think all these puts and takes on operating margin net out for 2012. I know, Bill you said that OpEx should grow roughly at 1.5 the rate of revenue. Maybe if you can fold in what you think will happen on the gross margin front? And just at least give us some sort of color on how to think about operating margins for 2012?

William D. Humes

Yes, I mean, it's going to be hard for me to give you a model because we don't necessarily give you that type of detail going forward on projections and guidance. But overall, our concentration is continuing to focus on tightening up the gross margins. Overall we'll continue to be very tight on OpEx but invest where we need to. I would say overall, our Australia businesses should start to -- business should start improving on the back half of the year. Our gross margins realized there should continue to improve because we've been able to, as we should, reset vendor expectations on rebates and volume projections, so that will benefit us. In the end, we are focused on driving improvement and we need to execute to get there and the market needs to be relatively stabilized but we are executing on improvement.

Alain Monié

And, Richard, one other comment as well that it complicates the overall puts and takes, as you call it. We've seen a very healthy, strong growth in the mobility area, including tablets and handsets and so on, which is obviously a market that we want to serve and accompany. In general, those high-growth types of products come with an average or lower than average type of gross margin. Even if, on the working capital side, they come with a benefit, which means that overall, the return on invested capital on those businesses is still at a very acceptable level for us. So we certainly are not going to disregard these growth areas that are really solid and the type of products that we want to be in. But they increase a little bit the challenge, if you will, in not having dilution of gross margin. And of course, that also comes as a result of our Asian countries growing faster than the rest of our other countries, in China and India. And as we have indicated in the past, those countries also have a pretty solid operating income. But on the gross margin front, they have a tendency to also drag a little bit down the average gross margin, but not the operating income.

Operator

Next question comes from Mark Hillman.

Mark H. Hillman - Collins Stewart LLC, Research Division

This is Mark Hillman on for Louis Miscioscia at Collins Stewart. 2 quick ones. You talked a bit about what you're seeing in different parts of the European business from the larger northern economies, et cetera, but -- as well as retail. Are you seeing any sort of difference in how your SMB customers are behaving relative to larger enterprises? And are you seeing any sort of increased confidence from euro decline making export-driven economy different and increase in confidence for customers in more export-oriented economies?

Alain Monié

On the SMB market, it is -- you bring a good point. We have seen, in Europe, a fairly strong SMB customer base. And if anything has been encouraging there, it has been the SMB segment. So it is -- it has been one of the areas where we have been able to compensate the weakness on the retail and, to a certain extent, on the enterprise and corporate customer bases. As far as exports, I would assume you're talking about exports out of Europe into Middle East, Africa?

Mark H. Hillman - Collins Stewart LLC, Research Division

Right, exactly.

Alain Monié

That remains nominal as far as our business mix. So it's not really going to be of any material effect, I would say, simply because we don't have a huge volumes of exports. We do serve some of the countries we're not in, in the northern border of African and some of Middle Eastern countries, but I wouldn't take that as any -- whether there is high growth or lower growth there, it will not have any meaningful impact into our overall European numbers.

Mark H. Hillman - Collins Stewart LLC, Research Division

Okay. And then just one last question on the SAP topic. Just strategically stepping back a bit. Is the main objective behind the SAP rollout -- are you getting fundamentally new capabilities from deploying SAP or is it more sort of streamlining your procure-to-pay and order-to-cash cycles and sort of to prime more visibility to customers and getting more visibility into your business and what's the sort of the main business driver?

Alain Monié

Well, it is a combination of. Obviously, with an SAP platform, it's easier for us to have a better connectivity, both upstream and downstream with our customer base, as well as the supplier base, given that a number of them are using similar platforms. So it gives us a much more effective way to connect upwards and downwards. I shouldn't -- we shouldn't be focusing only on SAP as we are also investing heavily in our Web platform where some of the functions reside on SAP, some others are on the Web platform but both need to be totally integrated and seamless, which adds also new functionalities onto our customer base. As far as streamlining costs and process improvement, obviously, that's something that SAP will bring long term. And finally, the other advantage that SAP brings is a much more realtime, detailed analysis of the business, which gives us a much better toolkit and tool set to make the right decisions quicker given the power of the analytics that resides as a result of an SAP implementation. So it's really all across external, external customer facing, external supplier facing, as well as internal capabilities.

Mark H. Hillman - Collins Stewart LLC, Research Division

Great.

Operator

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

Ria Marie Carlson

Thank you, all of you, for joining us and I appreciate the well-wishes. As a reminder, a replay of the call will be available at (800) 678-3180 for one week. Thanks again for joining us.

Operator

This concludes today's conference. Thank you for joining. You may disconnect.

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