Avnet's (AVT) CEO Rick Hamada on Q3 2016 Results - Earnings Call Transcript

| About: Avnet Inc (AVT)

Avnet, Inc. (NYSE:AVT)

Q3 2016 Earnings Conference Call

April 28, 2016 02:00 PM ET

Executives

Vince Keenan - IR

Rick Hamada - CEO

Kevin Moriarty - CFO

Gerry Fay - President of Electronics Marketing

Analysts

Louis Miscioscia - CLSA

Brian Alexander - Raymond James

Shawn Harrison - Longbow Research

Steven Fox - Cross Research

Ananda Baruah - Brean Capital

Mark Delaney - Goldman Sachs

Sherri Scribner - Deutsche Bank

Jim Suva - Citigroup

Matthew Sheerin - Stifel

Operator

Please stand by. Our presentation will now begin.

I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Vince Keenan

Good afternoon and welcome to Avnet's Third Quarter Fiscal Year 2016 Business and Financial Update. As we provide the highlights for our third quarter fiscal year 2016, please note that in the accompanying remarks, we have excluded certain items, including intangible asset amortization expense, restructuring, integration, and other items, and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar-based financial statements into U.S. dollars. When we referred to organic sales, we have adjusted the prior period to include the impact of acquisitions and other items.

In addition, when addressing return on capital employed, return on working capital, and working capital velocity, the definitions are included in the non-GAAP section of our press release.

Before we get started with the presentation from Avnet management, I would like to review Avnet's Safe Harbor statement. This call contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. There are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's third quarter fiscal year 2016 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide fourth quarter fiscal 2016 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also here today to take any questions you may have related to Avnet's business operations is Gerry Fay, President of Electronics Marketing. Unfortunately Patrick Zammit, President of Technology Solutions will not be joining us today due to a death in the family.

With that, let me introduce Mr. Rick Hamada to discuss Avnet's third quarter fiscal 2016 business highlights.

Rick Hamada

Thank you, Vince, and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. In our March quarter our revenue was within our expected range even as our sequential decline was slightly below our normal seasonality given an expected drop in select high volume supply chain engagements at EMEA Asia and weaker than expected demand in certain legacy technologies at Technology Solutions.

Revenue of $6.2 billion decline 10% sequentially as compared with our normal seasonal range of down 9% to down 5%. On a year-over-year basis organic revenue decreased 7.2% in constant currency. As TS was down 13.6% and EM declined 3.3%. Gross profit margin increased 57 basis points sequentially and 44 basis points year-over-year with both operating groups contributing to these improvements. Operating expenses declined $12.4 million or 2.3% year-over-year due to ongoing expense efficiencies including our Avnet advantage initiative and the translation impact of the stronger U.S. dollar, partially offset by the impact of acquisitions.

In our March quarter we realized roughly $3 million of expense savings from our Avnet advantage initiative which when combined with the realized benefits from the first half of fiscal 2016. Equals of cumulative total of approximately $57 million of annualized savings fiscal year-to-date towards our revise commitment of $16 million as we exit fiscal 2016. Given that we are accelerating several projects we now expect the exit our fiscal year with $70 million of annualized savings.

Our declined in revenue led to a 10.9% year-over-year decline in adjusted operating income dollars and a 10 basis points decline in adjusted operating income margin. Adjusted earnings per share of $1.1 decreased $0.3 from the year ago. Given the overall revenue trends due to past few quarters we have initiated focused expense management action where our revenue declines have created gaps to expectation.

Even as we adjust to the current market conditions, we are continuing to invest in areas of growth highlighted that our own Investor Day last June including the Internet of Things, embedded solutions and third platform technologies. In addition, we continue to advance our digital transformation with the launch of a significantly enhanced web portal at EM and the ongoing development of our Avnet Cloud marketplace. These digital platforms represented a growing foundation for our future as we embrace new technologies and business models that reflect changing customer preferences.

As expected our counter cyclical balance sheet resulted in another quarter of strong cash flow from operations as we generated nearly $600 million over the trailing 12 months. In addition to strong cash flow we strengthened our capital structure with the issuance of 10 years notes and continued to invest in our equity through our disciplined share repurchase program.

Now, I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial performance. Kevin?

Kevin Moriarty

Thank you, Rick, and hello, everyone. I would like to start with some commentary on EM. Strength in our western regions, offset some of the expected decline in select high volume supply chain engagements in Asia, as revenues decline 2% sequentially as compared with our normal seasonal range of down 1% to up 3%. Revenue grew a better than seasonal 17% and 6% from the December quarter in our EMEA and Americas regions, while our Asia revenue declined 18%.

Revenue of 4 billion declined 3.3% year-over-year in constant currency as the 9.4% increase in EMEA was offset by declines of 12.3% and 3.6% in our Asia and Americas regions. The strong sequential growth and year-over-year growth EM EMEA represents the 12th consecutive quarter of year-over-year growth in constant currency.

Gross profit margin increased to sequentially due to the geographic mix shift to the western regions and increased modestly year-over-year as an improvement in the Asia region, was offset by a decline in EMEA.

Operating income decline 7.1% year-over-year to a $183.3 million driven by the translation impact of the stronger dollar and declines in our Americas and Asia region. Operating income margin decline 15 basis points year-over-year primarily due to a decline in our Americas region where we have planned for and have incurred additional expenses related to the ERP implementation that went live in early April.

Even with the varied growth by region foreign currency headwinds and quarterly fluctuations and high volume supply chain engagements. The EM team has done a solid job aligning resources as operating income margin on a trailing 12 months basis, as approximated 4.6% over the past six quarters.

In the March quarter working capital in constant currency was essentially flat with the December quarter and increased 7.9% in constant currency year-over-year primarily due to an increasing inventory. The year-over-year increase in inventory was driven by an increase in EM Asia to support the specifically identified demand for the June quarter and increase in EMEA related for organic growth and an increase in the Americas region to support the previously mentioned ERP go live. As a result of the decline in operating income, return on working capital decline 222 basis points from a year ago quarter.

Now, turning to TS, TS revenue came in at the low-end of our expectation as all three regions experienced weaker than expected demand and select areas of legacy data center products which resulted in organic revenue declining 22% in constant currency as compared with the typical seasonal range of down 19% to down 16%. As a result, revenue of $2.1 billion decline 13.6% year-over-year organically in constant currency with all three regions experiencing double-digit decline.

Year-over-year growth in networking and services was offset by declines in storage, servers and software. Gross profit margin increased year-over-year and all three regions driven by portfolio actions and product mix. Operating income dollars declined 18.5% year-over-year and operating income margin declined 11 basis points as the gross profit margin increased and the reduction in operating expenses offset some of the impact of the revenue decline.

Despite the double-digit decline in certain legacy technologies, TS delivered significant growth in areas where we have been investing, such as our all flash array storage business, which grew over 40% and our converged infrastructure solutions business which we were up nearly 20% from a year ago quarter.

Working capital decrease 7.7% year-over-year or 6.7% excluding acquisition and the impact of changes in foreign currency exchange rate. And return on working capital decreased 219 basis points from the year ago quarter. Given the March results and the aforementioned declines in certain legacy data center products. We have initiated expense reduction that will reduce annual expenses by approximately $25 million.

During this period of transformation in TS’s end markets, we will continue to redirect investments into higher growth. Are recently introduced, Avnet cloud marketplace, which offers a growing portfolio of solutions from cloud service providers, flexible payment options and a powerful cloud Management toolset, is gaining traction with our partners and independent software vendors bringing innovation to the IT ecosystem.

Going forward, we intend the balance investment with profitability as evidenced by our recent performance as TS’s trailing 12 months operating income margin was 3.3% in the past two quarters, nearing our long range target of 3.4% to 3.9%.

Now, turning to cash flow from operations. In this slower growth environment, we continue to generate strong cash flow from operations as during the March quarter, we generated $213 million and have generated $596 million for the trailing 12 months. During the quarter, we returned approximately $146 million to shareholders via our disciplined share repurchase program, as we capitalize on the pullback in equity markets early in the calendar year and repurchase 3.7 million shares during the March quarter.

For the first nine months of the fiscal year, we have returned approximately $400 million to shareholders through dividends and our share repurchase program. In addition, we improved our capital structure with the well-received debt offering of $550 million of 4%, 5.8% 10 year notes. The debt offering allowed us to lock in a favorable rate while increasing our percent of fixed rate debt.

Some of the proceeds will be used to retire the $300 million of 6% and 5.8% notes that are due in September of this year. We ended the quarter with just over $1 billion in cash, which when combined with our strong cash generation and credit facility availability provides us with ample liquidity to fund the profitable growth initiatives that Rick highlighted earlier.

Now turning to our outlook, looking forward to Avnet’s fourth quarter of fiscal 2016, we expect EM sales to be in the range of $3.9 billion to $4.2 billion and TS’s sales to be in the range of $2.05 billion to $2.35 billion. Therefore, Avnet’s consolidated sales are expected to be in the range of $5.95 billion to $6.55 billion. Based on this revenue forecast, we expect adjusted diluted EPS to be in the range of $0.95 to $1.05 per share.

This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 131 million average diluted shares outstanding and an effective tax rate in the range of 27% to 31%. In addition, the above guidance assumes an average U.S. dollar to euro currency exchange rate of $1.13 to the euro. This compares with an average exchange rate of $1.11 to the euro in the fourth quarter of fiscal 2015.

With that, let's open up the lines for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from Louis Miscioscia from CLSA. Please go ahead.

Louis Miscioscia

Maybe if you can go into the component weakness in Asia and just how long is that from a transitional standpoint and obviously the sort of the same question on the TSI obviously you called out servers and storage any visibility if that's going to change this year or do you think that trajectory of weakness and maybe give the magnitude of it that would be helpful to continue?

Rick Hamada

Well, Jerry start with EM, Louis and I will comment for Patrick on TS.

Gerard Fay

Sure. Thanks. First of all as we recently recovered by the high volumes supply chain business in Asia so sequentially that was down 15% sequentially and down almost 44% year-over-year. So that was one of the big downs on the revenue side, if you look at core business, actually core was down 11% sequentially. We saw a weakness in the industrial market and where we saw some of the strength is in alternative energy for us and so when we look at the Asian market it continues to be weak from the industrial base perspective.

Rick Hamada

And Louis jumping over to TS. On the outlook here so our guidance for the fourth quarter would tend to indicate we see a similar situation that we saw this quarter as far as the year-over-year comparison, where we are tracking the specific segments of the server and storage business that our exhibiting the areas of decline and of course redirecting and trying to steer our investment towards where the opportunity areas for growth is because they are out there in the overall portfolio, we are just underexposed to some of those key areas at this time and we do not typically offer a multi core outlook, but as I said for the fourth quarter guidance that was provided we see at least a revenue midpoint we've provided is very similar year-on-year comparison what we experience and what we've seen here in the March quarter.

Louis Miscioscia

Are you getting the feedback for why sales are weak and I see that obviously you highlighted the Cloud marketplace, I guess do you think it is because of the Cloud taking businesses away, should FNBs and even enterprises are moving off of their own datacenters to the Cloud. And then giving the answer to that maybe if you can just give us a little bit more detail about your Cloud marketplace and how it's doing?

Rick Hamada

Sure. So, Lou what I think is multiple factors contributing to the March quarter results. First of all I’m not sure the general macro environment is the greatest, well there is obviously a variety of our key partners that have reported some results similar and in line with the type of experiences as we are talking about in the legacy technologies as part of the overall story.

Second the specific areas of exposure we have in these legacy technologies that the storage was a continuation of a trend from what we saw in the December quarter and in the servers space even though we see convert infrastructure growing it’s the standalone server space that’s got the declines year-on-year and in addition to seeing what’s happening with convert infrastructure we’re seeing growth in the hybrid arrays and flash array area as an offset to the overall storage story.

So there is still I believe a tremendous amount of private cloud and hybrid cloud investments taking place however we are very excited about what's happening with the Avnet cloud marketplace as an option to offer the opportunities for our borrowers to enable their customers to implement new consumption model, subscription or consumption base to tap in to a variety of platform infrastructure and software as a service solutions.

Based on -- there is small numbers and high growth with our cloud marketplace today but based on the total traction and activity we’re seeing there can't call that it's a major offset what we think there is a direct line of sight from what's happening in the legacy environment and then the traditional on premise environment to what's happening here but I would absolutely put us in the campuses, we are a big believers in the cloud and we believe the future for TS is in the cloud and we are very excited about getting that digital platform establish as a very key element of the digital distribution models in the future.

Operator

Our next question comes from Brian Alexander from Raymond James. Please go ahead.

Brian Alexander

Alright, just on the revenue outlook for EM which appears to be below seasonal. Can you just talk about a little bit more about the outlook your comments about book-to-bill being at or above parity in its region seem to be somewhat contradictory to the outlook so is that all related to SAP implementation in North America or you just being conservative on the outlook or could you just be able to more specific there?

Gerry Fay

Sure, Brain its Gerry. What I would say is that you look through within our seasonal range and Q3 in the core business due to the sequential growth in the Americas and the EMEA market we ended the quarter at 1.02 to 1, book-to-bill, this was the first quarter in a year we've been above parity, quarter to date we continue to be above parity in the Americas I think if you look at what we’re seen in both Americas and in Asia, we’re continuing to see weakness in the industrial and automotive market whereas in Europe, we continue to see strength in those two area. So anything related to the ERP improvement is baked into our forecast at this point. So that’s how we see the market at this time.

Brian Alexander

So Gerry, just a follow-up on that, can you quantify the impact to your guidance related specifically to the SAP implementation both in terms of revenue and the margin drag that you’re expecting for the June quarter and when do you think that will no longer be a drag on earnings?

Gerry Fay

So how I would look at this Brian. So if you think about the ERP expenses today that we have to make sure we’ve got smooth transition or running about 5 million to 6 million a quarter that’s to support the additional staffing needs, support customer service in the transition. We won’t see much in the way of expense reduction in the June quarter and that will start to taper in the September quarter and it should be all up by the end of the calendar year. So we will see a decreasing impact to margins when you get to the end of the calendar year.

Brian Alexander

Okay and then maybe just for Kevin. When do you expect the cash conversion cycle to normalize the increase we saw year-over-year and DSO’s and DIO’s, I think you touched a bit on inventory. So when do you think the cash conversion cycle will normalize and how you’re thinking about cash flow trends going forward?

Kevin Moriarty

Sure. Thanks Brian. So first, I’d point to two primary factors both associated with our technology solution business in the most recent quarter. The first is tied to the linearity of our sales this quarter and the second contributing factor was tied to our revenue mix and the dollar amount of net treated products for sales reporting we treat them as net, so when you look at the AR, the full customer billing is included, so that was one of the contributing factors this quarter. When I think about our current quarter cash flow from operations, I would range in $150 million to $200 million range and what I’ve been highlighting on a trailing 12 months basis, we will stay with the neighborhood of $400 million to $500 million during this growth cycle.

Brian Alexander

Okay. Thank you very much.

Operator

Our next question comes from Shawn Harrison from Longbow Research. Please go ahead.

Shawn Harrison

Just getting back into TS, if we discuss I guess two factors, back of envelop math if hardware is 50% of TS, dollar TS was down in the teens that would imply the server, storage, et cetera were down 27%, am I right and then math on a year-over-year basis? And then second just the linearity was at the quarter started off slow or you never saw that the back end improvement that is typical or did you see projects not close at the end of the quarter?

Rick Hamada

No. Shawn, this is Rick, I’ll start with the linearity. I would tell you, my impression on linearity was January started on contract, we had a little hangover remember from Q2. I’d say February was a little bit of a dip in actually March was more in line with what we expected. So it really wasn’t an end of quarter story to tell you. On the breakdown of the hardware software and services. Keep in mind, when we share those percentages, we’re doing that at gross billings. We’re doing at the gross revenue level and when we report, Kevin mentioned that there is a portion of our transaction apply for net treatment.

So we sold service maintenance contracts, some large software ELAs, et cetera. So when we say it was 50%, we say well your net revenues were 2.2 billion, revenues hardware 1.1. You kind of start off in the wrong comparison there, because there is a gross revenue part of the story that it’s not part of our reported numbers sort of speak. Didn’t mean to confused anybody understand, but it’s been the consistently we’ve reported along the way, what’s been happening is that the gross to net conversion has been going up as we continue to grow our software and services business.

Shawn Harrison

I guess absent my poor math there. Is there way you can provide us kind of range what servers and storage were down year-over-year that the legacy products?

Rick Hamada

Yes. Let me give you a breakdown in store is an example Shawn. Because we have shared in the past, but the storage represents the largest component, larger than servers’ raw dollars as far as component of our hardware business. But now I’m going to speak about the storage solutions in general. And if we take a look at our total storage solution.

Today, the balance we’ve got there is about 60% of that revenue is what we would call the legacy all spinning disk storage environment, which is declining our calculation summer North of 20%, low 20% and then about 40% of our revenue is in the hybrid and all flash array and we have hybrid arrays growing 15% and all flash arrays going North of 40%. But net-net that whole storage package for us is down year-on-year, because of that mix today. So just trying to give you a flavor for the way we break it down and remember, we’re talking about total storage solutions is that includes the hardware, the software and the services as part of the storage solution, which is the way we’re looking at the overall tracking within our business. So hopefully that give you some more color and how we’re breaking that down and looking that, as we talk about it on the call, making sure we’re steering more and more of investment resources and focused to what areas of growth and reassigning and redeploying those resources from the areas of decline.

Shawn Harrison

That's very helpful and Kevin as a brief follow up the 25 million of the new expense actions as well as the 10 million of incremental from advent advantage, I guess when will the full 25 million be in the numbers and how does the new 10 million break it out as well?

Kevin Moriarty

Sure. I’ll start with the 25 million and I would say that that's aligned to areas Shawn, where the underperformance to our expectations, we’ll begin to see some of that in our June quarter, but to your broader question concluded by the end of the calendar year. And then on the other 10 million similar type of framework, I would say another 2 million to 3 million coming up in our fourth quarter and then continuing through the balance of the calendar year.

Shawn Harrison

And is it more weighted towards TS than EM?

Kevin Moriarty

Yes.

Shawn Harrison

Okay, thanks Kevin.

Operator

Our next question comes from Steven Fox from Cross Research. Please go ahead.

Steven Fox

Just following up on that detail on that $25 million savings. So is this mainly people related and when you say you are outfitting resources into some of the growth in the areas can you just sort of being more specific on what that mean? And then I have a follow up.

Kevin Moriarty

I would share with you that primarily people from other areas where we are looking to be reducing investments outside of that category, but clearly when Rick commented on in his comments and on the digital transformation and then cloud marketplace really reallocating investment to those areas is those high importance for us right now.

Rick Hamada

Yes, so just to be clear Steve. That is a net number that's coming out and there is a variety of other reallocation activities taking place, as we align to where the areas of growth are and future growth are.

Steven Fox

And not to delay, the point but when you say reallocating investments do you mean you are moving sales people in two different areas to focus more on the growth areas or is that?

Rick Hamada

Yes not just limited to sales Steve it could be materials management people, it could be marketing product marketing people, it could be insight sales, it could be outside sales, it could be business development, it could be solutions architect, and sales experts. There is a number of moving parts to the transformation to the solutions focus.

Steven Fox

Okay and then just some of bigger standpoint, the detail in terms of how the legacy business sort of breaks out is really helpful and I'm sure you have similar pressures on the server side. But this is still a significant feature business declining at a rapid pace. So without even getting into what the markets are doing you guys are getting out of that and you are looking at down 5% down 10% in start rates. So how do you overcome that in a fairly quick amount of time besides the restructuring issues and sort of accelerating to go to market beyond maybe what the market is sort of already at?

Unidentified Company Representative

You don’t see it, it's the traditional playbook overall obviously those organic activities and there is inorganic activities as well and we are looking we have the capacity and the ability to step up and invest and take advantage of growth opportunities. There is a significant amount of work that’s got to take place organically in the, again the reallocation and redistribution of existing resource towards these series of growth, but we’ll also proactively be looking for new partnerships, engagements, perhaps new other acquisition investments that can help to still lay down [ph] progress along here as well, and as we are going to try the forecast so as along the way but it is well known we do have the capacity to step up when we see good opportunities to do that and just in general M&A remains an important part of our overall profitable growth plan.

Steven Fox

Great, thanks for sharing all that color. Thank you.

Operator

Our next question comes from Ananda Baruah from Brean Capital. Please go ahead.

Ananda Baruah

I guess two from me. Along the same line -- to that end, what to that end so what is that again this is to the comments that you guys made at Evermarch, that I'm paraphrasing that there is under exposure in the key server areas and maybe key storage areas, how do you guys -- the way you view it today is that is it more functions do not having exposure or line card to all that you would like to have line card too or is it more a function of not having sort of I guess optimal distribution of the line card, which you do have and then how does your cloud services portfolio actually fit into this as well and then I have a just one quick follow up. Thanks.

Rick Hamada

Yes Ananda. The way I would think about it is it's not just about line card, see today we believe we are well positioned in some key areas of growth. We talk about conversional infrastructure, we've talked about hybrid and all flash arrays as an example. So there is some of these areas we think we are well position other areas perhaps in the total package, networking is good, could we up our game in security, could be up our game in analytics and that's not just about line card, it's about making sure that we have the relevant value prepositions, the ability to enable our ecosystems take advantage of these opportunities and grow, help train and get them up to speed on how they help their customers with these problems. The same ecosystem enabled value and services we brought for years and a variety of other traditional areas as well as vertical areas in markets like healthcare, et cetera.

So that's what we're talking about is building the value prepositions in those areas and that's some good critical mass to where we’re starting from today, got some work to do, we think to get align with some of the current areas of growth which by the way, we think some others have some better mixes and offerings on.

When it come to the Cloud market place now that’s another move out towards the digital future, we’re trying to take advantage of evolving procurement and consumer model and putting our ecosystem in a position to be able to go provision either by consumption or a subscription models to add to their total IT environment and they can make the choices on what’s physical with virtual with on prem, what’s off prem, what’s going to be a CapEx opportunity versus what they would wanted convert to an operating expense opportunity.

So it’s not just about line card, it’s about building the value proposition in this relevant areas. We’ve got solid base in a couple of key area today, we’d like to upper gain in a couple of other just part of this transformation story.

Ananda Baruah

That’s very helpful. And then just quickly as a follow-up. Did you see -- what impact of any did you see Europe, European spending and thinking primarily on the TS side, but to the extent that this, this is sort of EM, I would love to hear it. In Europe post events in Belgium as you went through the quarter? Thanks.

Rick Hamada

Yes. Ananda, I can’t really point to any particular impact due to those events, those tragic events. If I offer some color commentary though I would tell you. As we highlighted in the script, our components team in EMEA continues to perform very, very well 12th consecutive quarter year-on-year growth in constant currency. We disrupted some nice momentum, we had going with our TS business in Europe and if you just go one click down on where some of the regional flavor was there.

Actually the area of biggest gap to our expectations was in the North, primarily in the UK. And again I don’t want to make any political commentary on whether this has to do with rumors or not expect, but just for us on our scorecard as Europe came in and where we saw the biggest gap to our expectations. Central region for us in the computer business, Eastern region and actually the Southern region still performing to what we expect it was the North region primarily in the UK that was the gap.

Ananda Baruah

Interested. Okay. I appreciate the input. Thanks.

Operator

Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead.

Mark Delaney

Yes Good afternoon and thanks very much for taking the question. Question is on the OpEx level, just trying to better understand some of the moving pieces and maybe we can start on the March quarter. The SG&A dollars increased about 9 million quarter-to-quarter year-end revenues is down 10% sequentially and I guess 5 million to 6 million was there any from the ERP system, but little confused about SG&A rising when some of the Avnet Advantage cost savings were going to, if you could help me understand that, it would be helpful.

Rick Hamada

Kevin?

Kevin Moriarty

Hi Mark, this is Kevin. So sequentially what I would point to us the first element is we had two acquisitions that we’re in the full run rate for the quarter that added expenses sequentially. We also had our employee merit program beginning of the calendar year. We talked earlier about the evolved project. So all of those would have been additive and then net of the productivity from the Avnet advantage program.

Mark Delaney

Okay. It’s helpful. And then I’m trying to just make sure I understand all of the different moving pieces around OpEx as we go forward. So I think, if I understood this probably 70 million from Avnet Advantage as you exit fiscal ’16 and you may get closer to another 10 million from some of the incremental TS savings that you announced. How much more should we think about you go from fiscal ’16, under fiscal ’17 or the under calendar ’17, I’m assuming those are -- sounds like there gross target. So maybe you can help us understand what the net and kind of how much that gets reinvested and just an actual SG&A dollar decline, if hypothetically revenue is flattish and 2017, can SG&A decline or you should be think about being more flattish absolute SG&A dollars as you move through the year?

Rick Hamada

I would point to some amount of net and I’ll continue to update, as you know we don’t give much more than one quarter outlook. But clearly as revenue is based in this category or area, we will continue to make the right decisions to ensure our cost based support for revenue that we are generating.

Mark Delaney

Okay. And then just last one for me. Do you expect to participate in more high volume program as you move through the year? I know in the EM segment I understand that was an area of weakness, but later in calendar ’16, we do expect to see better revenue from that specific type of engagement?

Rick Hamada

Again as Kevin said, we will give much of a forecast outside of one quarter at this point. But if you look at where, we’re projecting that business to be, we project that business will be down both quarter-over-quarter and year-over-year as in Q4.

Mark Delaney

Thank you.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank. Please go ahead.

Sherri Scribner

I was little confused by some of the growth and net comments in the TS piece. But it seems like with more net business with that business it sounds like software and what not growing. It seems like there is going to be a challenge to revenue growth as that proportion continue to change added to that declines in a legacy business which still represents more than 50% of the revenue and then difference segments is that a fair way to think about that and when do we get to some balance their where the net is less of an impact and the legacy is less than the impact.

Rick Hamada

I'm not sure I think it's a fair assessment and another way to we look at it is contracting what the trends are with the revenue line versus the trends in the gross profit dollars as well. So again we will continue to try to be as open and transparent as we can on what's happening with the commodity mix and you are right in software and services continues to grow that would probably increase the amount of the net treated transactions causing more of this differential between the gross and the net revenues.

The issue, the other side of the coin is if we take growth hardware revenues and compared it to a net revenue number, it over exposes it, it over calculates, certain expectation of hardware is a bigger proportion of our sales than it really is, which is why we like keeping to the consistent gross revenue comparison simply when we offer that high level commodity breakdown of hardware and software and services.

Sherri Scribner

Okay. And as you shift the business and so it related to my question about gross margins I know you managed the business in operating margin but the gross margin was pretty strong this quarter how should we think about gross margin going forward is there a positive impact to gross margins as you move to more net and generally has some of the cost savings impacted cogs line or is it all coming out of the SG&A line. Thanks.

Rick Hamada

The way I think about this point Sherri is yes, continued growth in the gross in that treated area will be a headwind, a positive for gross margin overall. And based on some of the actions there is really not much impact on the cogs part of the equation.

Operator

Our next question comes from Jim Suva from Citigroup. Please go ahead.

Jim Suva

Understanding the changes that are going on with the cloud legacy business are emerging and continuing are you guys changing your capital allocation strategy and what I mean by that are you looking at buying back more stock or you looking at banking more acquisitions and if so are those acquisitions are more focused on like skill set or software or in the past you've been very successful at rolling up other distributors, so how should we think about capital allocation on the new area of computing?

Rick Hamada

Jim. This is Rick. I'll take a start maybe a Kevin might want to weigh in a little bit. So I believe we are being highly consistent with our general capital allocation priority scheme. Obviously the dividend is now at the top of that list, investing in growth has always been second that comes both organically and possible with the acquisitions and then third we have got a very disciplined approach to repurchasing our equity which we intend to continue with us well. When it comes to the acquisition targets.

I think we have commented in the past that the main driver is that the error of consolidation and deal expansion while maybe not a 100% done, we’re not clear it's going to be a really the big driver of M&A going forward so setting expectations that we would expect more acquisitions to be selective strategic acquisitions and actually add skill sets as the term you used, add more critical mass emerging areas of value creation such as digital platforms et cetera, that's probably more what you should expect from us going forward as we continue to build out towards our vision of the future and leading in digital distribution.

So the plays of consolidation will still present themselves, there will still be some great opportunities to do so, we love adding that on to the core business and those when they need our total cultural strategy and economic hurdle race we were still execute on those as well, but as far as where I think we’re proactively looking to stimulate and go finding new opportunities to deploy capital it's in support of these very, very what we believe critical long-term growth strategies.

Jim Suva

Thank you very much.

Operator

Our next question comes from Matthew Sheerin from Stifel. Please go ahead.

Matthew Sheerin

Just a question in your tech solutions business regarding the PC components and on hard disk drive business, which I know has been a drag in recent quarters, you haven’t called that out. So wondering if that's stable or is that weak as well.

Kevin Moriarty

Matt. This is Kevin. It’s exactly been relatively stable this quarter and included in our guidance is a stable revenue outlook.

Rick Hamada

And actually then for the March quarter Kevin, I guess it's fair to say from an expectations point of view the business was where we wanted it to be.

Kevin Moriarty

Yes.

Matthew Sheerin

Is that because you have been restructuring in such a way that you are targeting the right markets that need the right returns in margin goals.

Rick Hamada

That's we are happy with the returns in margins from that business today and it's just still just under 10% of TS global.

Matthew Sheerin

Okay. In the electronics marketing you talked a lot about the supply chain engagement, being a drag on revenue in Asia. Looks like it’s going to be down a lot again, but just talk about the strategy there. I know initially, basically the justification was low margin but high velocity, so good returns. Now at the lower volume I would imagine that the returns are lower as well and I know there is a lot of customer concentration there we can get wiped around quarter-on-quarter so, what’s the strategy with the business going forward?

Gerry Fay

Hi Matt, it’s Gerry. Great question. As you know, this is opportunistic business for us, so we continue to assess it and we’ll continue to do that and to your point, I think it’s pretty well known in the marketplace that the business is slowing down and based on the numbers that I just put out you can see, it continues to slow, so we will continue to look at it and at this point at which it doesn’t meet our metrics, we will exit the business.

Matthew Sheerin

Okay. And just lastly on the Latin America on the commentary and CFO commentary you talked about weakness there certainly not the only one. Has that market bottomed or stabilized at all or is that kind of continue to be weak?

Rick Hamada

I would comment that I would think it will be consistent with some of the broader trends that we’ve been experiencing in the other parts of the business, in the near-term.

Matthew Sheerin

You mean, while meaning it’s going to continue to be soft?

Rick Hamada

Yes.

Matthew Sheerin

Okay. Alright. Thanks a lot.

Rick Hamada

Thanks Matt.

Operator

Our next question comes from [indiscernible] from Merrill Lynch. Please go ahead.

Unidentified Analyst

So you don’t want to understand that EM strengthen, EMEA. How much of that is coming from pick-up in design activity and how have you seen that trend over the past few quarters? And is that an indication of a future pickup in demand or acceleration? And then I have a follow-up.

Kevin Moriarty

Okay. Well, I’ll start, I’ll talk about the market first and I’ll talk about maturation. We normally don’t talk about the maturation by region original level and I'll talk about a globally. So when it comes to Europe, I would say, I think Rick [indiscernible] it up nicely. Only market we saw weakness in the components section is there in the UK, other than that we still see strength, and particularly in Germany we’re very strong. Regarding the end market, we still see strength and industrial automotive, I would say less so in coms and military and aerospace. As Rick said, Q3 represented the 12th consecutive quarter of year-over-year growth and those compares are going to continue to get harder. But my hats off to our European team for continued strong performance and their market leadership there.

When it comes to demand creation, actually our demand creation metrics continues to improve which bodes well, for business in the future. Our demand creation revenue was up 4% versus the prior year and registrations are up 17%, with design wins up 6%. And Q3 alone generated close to 80,000 new registrations. So we continue to make investments in this space, we think it’s a key unit differentiator for us and then with some of the other strategy Rich’s talked about particularly focused on the Internet of Things and getting our suppliers IP in the hands of our customers, demand creation continues to be a key strategy for us.

Unidentified Analyst

Quite a clarification on that. So I mean do you have a way to clarify what’s IoT related at the end of the day still fails in industrial demand picking up short of it right?

Rick Hamada

How we look at the three main building block technologies in IoT, which is sensors, processing and communication protocol devices, that’s kind of proxy stores for IoT, because those are the three main building blocks. And of course we have ways to identify projects that are specific IoT. So that’s how we measure in order to inside of Avnet today. As it gets more legs and more and more projects get identify as specific to IoT, we’ll be able to give a little more clarity.

Gerry Fay

Yes. We’re actually working on that associated with a lot of visibility and communication around IoT. And Gerry has got a very good line of site here, but we also with our President of IoT starting on January 1st and looking how bridges over to the analytics portion on our TS business and how we want to count that is part of the overall IoT revenue and market stream so of speak.

We’re actually working on designing and defining those metrics. But we can come back to this group on a more consistent basis, with some metrics around that. So stay tuned, definitely a work in process as it is with the number of players across the industry overall, but a definitely big play for us in the short medium and long-term.

Unidentified Analyst

Great. Thanks Gerry, Rick. So I’ll just follow by one or two follow-up question from an analyst earlier in the call. Now how much of that year-over-year TS to margin decline was related to your hard disk drive business versus revenue decline and then how much was offset by your average advantage program over the past year. If you could break that down it would be really helpful?

Rick Hamada

I’m not sure we’re going to have that detail immediately available overall. As we commented earlier the Avnet, what we call our Avnet Global Computing Component businesses as a part of TS was pretty much on the plans and expectations, we’ve had for that portion of the business for the March quarter. So it didn’t really contribute to the overall results. The overall results for TS were much more in the keys areas we’ve already identify and talk about.

As far as all the moving parts, we do understand, there is a lot going on there with the long-term Avnet advantage, some transitory incremental expense actions we’ve announced in reaction to the market realities. The incremental investments here in the short term for this making sure that we have a very successful and well-trained organization ready for newly ERP go live. We don’t put all these projects in place to trying to confuse everybody. But I’ll tell you what I would but I’d say what our recommend follow-up with Vince or Kevin and maybe after the call here, we’ll see, if we can get more specific some of the breakdown.

But there is a lot of moving parts going on, a lot of things going on in our business. Overall long-term trend, we know what we going to be from an OpEx and that GE perspective and we know where we've got to make sure we're investing for the future no matter what the overall environment is, those are the two big key things I’d ask you to keep in mind.

Unidentified Analyst

Thanks really helpful. Appreciate it.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Vince Keenan

Thank you for participating in our earnings call today. Our third quarter fiscal 2016 earnings press release and related CFO commentary can be accessed in downloadable PDF format at www.ir.avnet.com under the Quarterly Results section. Thank you.

Operator

Ladies and gentlemen, this does conclude today teleconference. You may disconnect your lines at this time. Thank you for your participation.

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