Ingram Micro Q4 2007 Earnings Call Transcript

Ingram Micro Inc. (IM)

Q4 2007 Earnings Call

February 13, 2008 5:00 pm ET

Executives

Ria Carlson - Chief Strategy and Communications Officer

Greg Spierkel - CEO

Alain Monie - COO

Bill Humes - CFO

Analysts

Richard Gardner - Citigroup

Brian Alexander - Raymond James

Rich Kugele - Needham & Company

Matt Sheerin - Thomas Weisel Partners

Min Park - Goldman Sachs

Ananda Baruah - Banc of America

Ben Radinsky - Bear Stearns

Matt Whitaker - FTN Midwest

Bob Reitzes - New Castle Partners

Presentation

Operator

Welcome to the Ingram Micro fourth quarter earnings report conference call. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now, I'll turn the meeting over to Ms. Ria Carlson, Chief Strategy and Communications Officer.

Ria Carlson

Thank you very much, Sarah. Good afternoon everyone. Joining me today are Greg Spierkel, our Chief Executive Officer; Alain Monie, our Chief Operating Officer; and Bill Humes, our Chief Financial Officer. Greg will lead off with the highlights of the fourth quarter and the fiscal year. Bill will provide a financial review then we'll turn it back to Greg to provide business highlights and his talks about the future. Alain will answer your questions and provide more color about the operations. The financial portion of this call is accompanied by presentation slides, which can be found with today's news release at the Investors Relations section of the Ingram Micro website at www.ingrammicro.com or by calling 714-382-2015.

Before we get started, I have a Safe Harbor announcement. During today's discussion will we 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 the Form 10-K for the fiscal year ended December 30, 2006 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 re-broadcast 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 web site at www.ingrammicro.com or by calling 800-678-3180.

Now, I'd like to turn the call over to Greg Spierkel, our Chief Executive Officer. Greg?

Greg Spierkel

Thanks, Ria and good afternoon, everyone. In 2007, we raised the bar to deliver another record setting year. Sales and net income hit historic highs reaching $35 billion and $276 million respectively. Annual sales grew 12%, the third double-digit growth rate year in four years. For the fourth quarter, sales grew 13% driving quarterly sales above $10 billion for the first time. Both sales and net income surpassed the top end of our guidance range in the First Call mean.

The quarter also delivered solid operating leverage with every region generating more than a 170 basis points of operating margin. Gross margin expanded 37 basis points to reach our highest level since 1998. We continue to have four strong engines throughout the world moving this company forward.

As I look back on 2007, I think there were four key factors that drove our success for the year. First, Asia-Pacific, we placed a big bet on this region with Tech Pacific acquisition as well as our focus on China and that has paid off handsomely. What was once an investment area, struggling to break even, is today a fast growing, consistently profitable business. At this rate, Asia-Pacific maybe our largest region in a few years.

Second, our solid management team. This team is committed to flawless execution. It addresses challenges head on and doesn't rest on its laurels. As a result, the company's performance has been consistently strong even in challenging environments.

Next, innovation. We've been the first broad-based distributor to develop new area such as consumer electronics, data capture and managed services. We recognize that these areas which are currently small will become drivers of profitability and customer retention.

Finally, our commitment to partner's success. We are building broader capabilities in marketing, customer support, outbound sales, services in value-based technology solutions, all areas that help our vendors and resellers thrive, cultivating greater customer loyalty.

Our number one competitive advantage is our people. We would not be successful without our bright, dedicated and creative associates throughout the globe. I want to thank them for another outstanding year.

Now, I will pass the call to Bill for more detail on our financial performance. Bill?

Bill Humes

Thanks, Greg. Now let's turn onto financials. To start with sales which are found on Slide three. As Greg mentioned, it was a record quarter. Sales grew 13% to hit $10 billion. The translation impact of the relatively stronger foreign currencies contributed approximately 6 percentage points of growth over the prior year. Sequentially, sales grew 16% in line with normal historical seasonality. Fourth quarter sales are usually the strongest of the year they until the yearend holidays.

On the regional basis, North America sales were $3.83 billion, a 4% increase over the prior year and about 38% of our worldwide sales. The net reporting of warranty contract sales on behalf of our vendors, which are recognized on a net fee basis, had a 4 percentage point negative effect on year-over-year comparisons.

EMEA sales were $3.75 billion or 38% of total revenues. Growth over the prior year was 16% of which 12 percentage points were attributed to the translation impact of relatively strong European currencies.

Asia-Pacific sales were $1.94 billion, or 19% of total revenues, a year-over-year increase of 29%. The translation impact of the relatively stronger regional currencies had a 12 percentage point effect on comparisons to the prior year. And Latin America sales were up 8% versus last year to $481 million, representing 5% of our total sales.

As depicted on slide four, gross profit was $583 million or 5.82% of sales versus $482 million or 5.45% of sales in the year ago quarter. As explained in today's news release, the pressure release of the commercial tax reserve on software sales in Brazil had a positive impact of 4 basis points. And the change in recognition of warranty contract sales as net fees had an 8 basis points favorable impact. The remaining 25 basis point increase in the gross margin was driven by the resolution of operational issues related to the warehouse management system upgrade in Germany. Growth in our fee-for-service logistics business and higher margin sales in the recently acquired DBL distributing also had a positive effect on gross margin comparisons.

On a sequential basis, gross margin improved 30 basis points driven by holiday activity in our fee-for-service logistics unit and our higher margin specialty businesses. Operating expenses found on slide 5, we are approximately $407 million or 4.06% of sales compared with $341 million or 3.85% of sales in the prior year. The translation impact of relatively stronger foreign currencies had a six percentage point affect on expenses compared to the prior year.

Sales growth, more services provided by our logistics business, higher stock based compensation expense, and investments in our diversification efforts, including recent acquisitions, also contributed to the increase in expenses. And the change in recognition of warranty contract sales and net fees had a 5 basis point negative impact on the expense ratio.

On slide 6, you'll see that worldwide operating income was $176 million or 176 basis points of sales. This includes the partial release of the Brazilian commercial tax reserve of approximately $3.6 million, as well as a gain on the sale of our Asian semiconductor business of $2.9, which is discussed in today's release resulting in an aggregate positive impact of 6 basis points of sales. In the prior year, operating income was $142 million or 160 basis points of sales, which included a $4 million recovery from a customer bankruptcy.

North America operating income was $68.9 million or 180 basis points of sales. Operating income in the prior year was $64.6 million or 176 basis points, which included the $4 million recovery from our bankruptcy that I just mentioned.

In EMEA, operating income was $64.7million or 172 basis points of sales, a 32% increase over the $49.2 million or 152 basis points a year ago. The region benefited from Germany's resolution of operational issues relating to their warehouse management system as well as improved operational efficiency in other countries.

Asia-Pacific's operating income and margin increased 58% and 33 basis points to $35.9 million or 185 basis points of sales respectively. This includes a $2.9 million gain or 15 basis points of sales on the disposition of the regions semiconductor business. The regions’ operating income hit a quarterly record even without the gain, as every country grew profitably compared to the prior year.

Latin America reclaimed its position as the highest operating margin region with 335 basis points. The partial release of the Brazilian commercial tax reserve had a 75 basis points positive impact on the regions operating income.

Other expenses for the quarter were $18.2 million compared to $16 million in the prior year period. Our effective tax rate for the quarter was 28% compared to 27% in the prior year with the increase primarily attributed to a changing mix of income across different tax jurisdictions. For the full year, the rate was 28.4%, compared to 27.7% in the prior year, with the increase partly attributed to the lack of tax benefit related to the first quarter, Brazilian commercial tax charge as well as the changing mix of income I just mentioned.

On slide 7, you'll find that net income rose 24% to a $114.1 million or $0.54 per share, which includes the partial release of the Brazilian commercial tax reserve. In the prior year period, net income was $91.7 million or $0.53 per share. As previously mentioned, the gain from the sale of our semiconductor business in Asia had a benefit of approximately $2.9 million pretax or approximately $0.1 per diluted share.

Now let's turn to slide 8 for a discussion of the balance sheet for the fourth quarter. Our cash at the end of the quarter was $580 million, an increase of $246 million versus the end of the previous year.

Total debt was $523 million, about $14 million higher than at the end of last year. At the prior year end, debt balance excluded $69 million of our balance sheet debt related to the receivables that were sold under a factoring facility. Payables exceeded inventory by approximately $1.6 billion versus $1.1 billion at the end of the prior year.

If you turn to slide 9, you'll find the related working capital metrics at quarter end. Days of sales at 37 were three days higher than the prior year end but two days better than the third quarter. Days of inventory were 27, two days better than the prior year end, and three days better than our third quarters.

Payables were 42 days, in line with historical norms, and 1 day better than the previous year end. This brought working capital days to 22 essentially flat with the prior yearend and a sequential improvement of two days. This is well within our targeted range. Our debt-to-capitalization ratio was 13%, which is two percentage points less than end of 2006.

Before I pass the call back to Greg, I'd like to give you an update of our $300 million share repurchase program, which was announced in November. During the fourth quarter, we repurchased approximately 1.3 million shares for an aggregate amount of $425 million and additional 900,000 shares repurchased through the end of January for approximately $15 million.

With that, I'll turn the call back to Greg for discussion of regional highlights and closing comments. Greg?

Greg Spierkel

Thanks Bill. In the reference to streamline our calls here and leave more time for questions, I will deliver the regional highlights with the lamp providing more detail during the year's Q&A session here in a few moments.

I'll start my review with EMEA, because most of the questions over the last several weeks have been focused on this region. I am pleased to report that our EMEA region had an excellent quarter, generating 32% operating income growth on 16% sales growth. While we received about a 12 percentage point tailwind from currency translation, nearly every country generated year-over-year growth in local currencies.

As you can imagine, our most improved country was Germany, which is now benefiting from upgraded warehouse management system that was installed in the prior year. Sales margins and profitability improved there as well as in Austria and Switzerland. We take full advantage of the growth opportunities expected from these countries and the surrounding emerging markets as well as the benefits of our upgraded warehouse management system. We are currently improving our distribution facilities.

We believe our infrastructure enhancements will help us extend our leadership position and support our growth in multiple markets. Our two other cornerstone countries, the UK and France also performed well. As some of you know, France faced the frustration of a transportation strike during the quarter, which made our progress even more notable. Our Nordic operations had a strong fourth quarter and delivered the profitable 2007 after a long turnaround period. I'm pleased with the progress of the Nordic team, but there is still a ground to cover before we are performing at acceptable operating margins.

Italy continued to be our most challenging market with the tapered economy, political volatility and a carrier strike in December. Despite the fact our annual profits were down from the previous year, we are committed to this large Italian market. So we're building a stronger management team to help us enhance our presence there.

We also added to our adjacency expansion. Earlier this month, we announced the acquisition of Paradigm, Data Capture and Point-of Sale distributor serving the UK and Ireland, coupled with our acquisition of SymTech in mid-2006 strengthened our regional flow. Our goal is to be a strong Pan-European player in this adjacency within two years.

I'm pleased with the progress made in EMEA in 2007 and I recognize that this will continue to be a complex market. GDP growth in the region is projected to a range from 1% to 2.5% in 2008, which means conditions will reward innovation in cost effective companies.

This team has proven that it can perform excellently in slow growth markets and we have confidence in the region’s new leader, Jay Forbes, who has done an outstanding job during his first full quarter as President. We remain committed to being a profit leader in this region. And through a steady long-term fiscal management, we will prevail to become an even stronger company here.

Our largest region, North America continued to deliver healthy sales growth and operational margins while investing in growth initiatives. Excluding the change in recognizing warranty contract sales on a net basis as Bill discussed, the region generated above market sales growth while delivering a healthy 180 basis points of operating margin.

This represents a four basis point improvement over previous quarter and a sequential improvement 22 basis points in line with historical seasonality. Driving the sequential improvement was strong performances from our IM Logistics business and new consumer electronics units.

We're pleased with the progress we are making in our specialty units and adjacencies. Our Data Capture and Point-of-Sale unit exceeded our expectations in sales and operating income, becoming a valuable contributor, while our CE investments took advantage of the holiday season. DBL had a good December while transitioning into the Ingram Micro family and Avid produced solid results in the face of slower housing market and declining flat screen prices.

On the services front, seismic, our managed services' offering continues to gain traction. Only 16 months after our launch, we finished the year with more than 400 customers. Our efforts were recognized in a December issue of Business Week, which noted Ingram Micro as a service innovator and called out the effectiveness in our social networking form in enhancing customer engagement.

Also in the region, we continue to cultivate the infrastructure technology solutions division to help out our customers more effectively sell higher end solutions to the SMB market. This is still in the investment phase, where we are adding specialized higher margin vendors who want to bring their complex solutions to a broader customer base.

North America has been an incubator for many of our growth initiatives, which are becoming increasingly important for the Company overtime, driving the best practices throughout the organization. I'll move next to Latin America, which had the highest operating margin of the regions. The team has done a great job of addressing the challenges of volatile emerging markets, delivering consistent profitability.

Over the last year, we've invested in new initiatives by expanding into Argentina and ramping up the Brazilian software sales, both of which put a bit of pressure on our operating income. That will help diversify our income streams in the years to come. Our Miami export business experienced the regions strongest growth, boosted by renewed demand for components compared to the prior year.

While, Mexico's growth was relatively flat due to strong prior year comparisons and certain consumer products and current year changes in government procurement practices, the country remains one of the more profitable business units. In Brazil and Argentina, we continue to expand our product portfolio, while Chile remains a steady contributor. Overall, this region continues to perform well. Our goal is to realize more consistent profitable growth in Latin America through a reliable product mix, stronger customer relationships and strategic growth initiative.

My final review regionally-wise is Asia Pacific, our top performer for 2007. We closed the fourth quarter, as it performed all year, with impressive sales leading to record profits. Operating leverage was excellent, even with adequate sale of the semiconductor business. Every country in the region was profitable and exceeded our operating income expectations for the year. Every country in the region performed well, and China was the headliner. After years of quietly building our management team and operational expertise, 2007 was a true breakout year for growth and profitability.

Our success is based on the limited number of key metropolitan markets with a compact lying card, creating encouraging opportunities for profitable expansion. Our momentum and our transparent business practices are getting the attention of many vendors, who want to team up with us. As a result, we see China as a continued platform for growth in the years ahead.

Other anchor countries in the region, India and Australia, also improved profitability compared to the prior year. Both expanded into higher-margin value businesses, such as data capture and enterprise solutions. Australia for example, created standalone units dedicated to these two areas and India has also build the unique telecom business. Elsewhere in the region, the countries in Southeast Asia and New Zealand also performed well. We have recently ordered New Zealand as our most improved country in 2007 generating a significant jump in year-over-year operating margin.

Looking ahead, we expect continued growth throughout the region with China leading the way. Part of this growth will be generated through our traditional business, as we add new vendors and move to new metropolitan areas. Growth will also come from adjacencies such as data capture, enterprise solutions and consumer electronics.

The combined momentum of developing new customers and adding new lines makes us uniquely qualified to help our business partners find greater opportunities in the Asian market. I congratulate the team for the record breaking fourth quarter performance and I'm confident they will lead the region to even greater heights in 2008.

Looking ahead, our regions are preparing for another solid year, but early indications are playing to a softer economic environment in North America and Europe. While we still think strength in Asia-Pacific and Latin America, our outlook for the first quarter is somewhat cautious. We expect first quarter sales to be within the range of $8.75 billion to $9 billion, which reflects the year-over-year growth of 6% to 9% and a sequential decrease of 10% to 13%.

We expect the translation impact of stronger foreign currencies to have a 5% positive impact on year-over-year comparisons. We anticipate seasonal decline from fourth quarter a bit greater than historical norms, but our expected year-over-year growth seems to be in line with third-party forecast for overall IT spending.

Net income, we expect from $63 million to $71 million or $0.36 to $0.40 per diluted share. This is based on approximately $177 million diluted shares outstanding and a 20% effective tax rate. As you know, concerns about an economic slowdown have been widely reported around the world for several weeks now. We don't see evidence of it affecting our business -- we didn't see evidence of it affecting our business until early this year following what was a normal holiday season for us.

The softness, we are seeing in North America and Europe is driven by the macro economy but the impact felt in most countries end market segment. Our market share position with most of our vendors and customers remain stable.

In Asia-Pacific and Latin America, demand in every country remained strong. The strategic investments we have made over the recent year will service well during uncertain economic times. Our geographic diversification is already helping us with healthy growth in Asia-Pacific and Latin America offsetting the slower demand of the other two regions.

Our business model diversification is also beneficial. We have strengthened our small, but strategic data capture services and enterprise solutions businesses. Our specialty business added DBL, Securematics are all providing greater customer loyalty higher margins and unparallel capabilities.

As we have described in the past, our diversification efforts are indeed mitigating the risks by a single geography business model or market segment. In the months ahead, our primary focus will be on tightly managing expenses, while continuing to cultivate areas that drive growth transforming our strategic investments into significant profit contributors, while eliminating excess cost in all areas of the company will be top priorities in the coming months.

In closing, I look forward to the coming year with a bit of caution, a fair share of optimism about the longer-term, and an enormous amount of motivation. I believe we are better equipped to overcome the challenges that may lie ahead of us because we have, in my opinion, the best team in the business. I'm confident that my fellow associates will join me in making 2008 an exceptional year.

We'll now take your questions.

Question-and-Answer Session

Operator

At this time, we are ready to begin the question-and-answer session of today's call. (Operator Instructions) Our first question from Richard Gardner, Citigroup. Your line is open.

Richard Gardner - Citigroup

Okay. Thank you. Obviously, first question is on the guidance. You are guiding revenue down more than in any other first quarter since the last recession. And I am just wondering if that’s really what you're seeing in terms of demand turn out there, or are you just trying to be a little bit cautious with the guidance? And second question is, are you seeing the softening in demand in North America and Europe? Does it have an impact on competitive pricing yet?

Greg Spierkel

Yeah. Let me answer that, Rich. It's Greg, here. I would say, yes that we are a little bit of a bigger step than we have in prior period. We typically range from Q4 to Q1 in the range of 4% to 8% and we are now guiding closure, as you know 10% to 13%, another step down from quarter-to-quarter. We're really guiding that based on the trends that we're seeing. As we have said in the comments in the call here, there is a bit of softness in North America and Europe. We've seen some of the major external -- their points kind of corroborate this.

Foster just came out earlier this week with the revised view of the outlook for the year and they had North America 2.8% and worldwide dropping from 9% to 6%. So that was an interesting data point and we've also seen some of our larger partners in the last week or two -- I can point to Apple and Cisco -- with public results coming out providing a little bit more of, I would say, a bit more of a cautious outlook. And they've been at close parameters to what's happening in the marketplace.

As far as the impact on pricing, again we're very diligent in monitoring and holding to our margins. I think we've added very nicely to the portfolio. So in times of the market softening a little bit in North America and Europe, you would expect a little bit of pressure there. I think we’ve got a lot of diligence and capabilities and tools to be careful here as we go forward. So, we don't see that as a major concern at this stage.

Richard Gardner - Citigroup

Okay. Just a follow-up. If you take into account five points of year-over-year currency impact in Q1, Greg, you're now guiding to just one point of year-over-year growth in revenue, despite the fact that you've got roughly a third of total revenue now coming from emerging markets that you do not believe, well you've indicated, you're not seeing any sort of slowdown. And so is the slowing that you're seeing in Europe and North America really that dramatic?

Greg Spierkel

Yeah. You're right. If you take the 5% out, we're guiding somewhere in the 2% to 5% kind of range of growth overall for the company in local currencies. And I think that kind of reflects the mix of what we're seeing. So there is clearly a little bit of softness in North America, last year and in local currencies, we're seeing a little bit of softness also in Europe. We're trying to give you a closer pulse as we typically do. We try to give everybody a good understanding of what we are seeing in those two geographies by providing the guidance that we have that's in front of us here.

Richard Gardner - Citigroup

Okay. Thank you.

Greg Spierkel

You're welcome.

Operator

Brian Alexander with Raymond James, your line is open.

Brian Alexander - Raymond James

Thanks. Greg, just to follow onto Richard's question and focusing specifically on North America and Europe, if we just look at those two regions, back into what we think you're implying from your guidance, it looks like you're not expecting any growth in each of those regions. And maybe you're actually expecting the decline year-over-year, which I don't think necessarily reconciles to the third-party reports you referenced. Is that the way to think about two regions or is that too conservative?

Greg Spierkel

At this state, we don't breakout the specific nature of each of the regions, but again you have to sort of take a look at our overall growth rates in the other two regions, which are relatively small between the two of them, representing around 25% of our revenue versus the other two broader regions taking the balance. So any kind of a little bit of moment that's flat or negative will have an impact, but we don't try to split that out.

Brian Alexander - Raymond James

And I think in your prepared remarks, you referenced that the weakness you're seeing is broad-based, so I don't know if there is any more specificity you could provide within each of those two key regions by customer segment or product segment? And then also, when did you really start to see things trend below seasonality?

Greg Spierkel

Okay. As far as outwardly looking on which segments, again, you're right. The comments were essentially broad-based. So it's touching the SMB sector a little bit. Clearly, where we're it more is in the large corporate, large VARs that support large corporates. But I would say that in those areas that we've seen healthier growth from a product point of view, those tend to still be growing a little bit further.

So, software, direct marketers, and maybe the very small VARs, may be doing better in some segments on a global level. Again we don't split that out specifically by GL. So, I hope that helps you a little bit. But it's fairly broad based and again with all the data points that we were seeing through January and now that a little bit beginning of February is kind of a pointing to what I'm talking about.

Brian Alexander - Raymond James

And then maybe just the last question and this for Greg or for Bill, but your operating expenses continue to grow faster than sales due to some of the investment you've been making in the business. And in light of the softness that you're now seeing, how should we be thinking about operating expenses, as we go forward? Are there any cost reduction measures that you're considering or that you might implement because your guidance would imply that expenses are likely to grow faster in the first quarter than revenue once again? And I'm just wondering if that pattern might change, now that we've seen some weakness in revenue?

Bill Humes

Yeah. Let me give you a sense. So, I did kind of signal a couple of messages in there. But in essence, we've been talking about for the last two or three quarters, an importance for us as we look at things over the longer-term. And so, we've seen expenses run a little bit higher just because of a number of initiatives that we had. One, we've launched the Infrastructure Technology Solutions division last year. We bought acquisitions with DBL Distributing, VPN Dynamics both of which have higher operating cost, as a percentage of sales. We've continued to ramp up managed services, consumer electronics.

We opened up some additional facilities late in 2006 and we haven't seen all of the optimization of those facilities yet, and we've been putting more money into the data capture. We've also entered Argentina. We had stock-based compensation expenses that are higher than the prior year. So, we've had a number of areas and of course we've had in Q4 the re-class of contract warranty sales having a negative impact.

All these things have been in play, have been working through and if we're seeing a slight decline in the growth rates of our sales, which is what we're talking about here, we now have to start stepping on the pedal vis-à-vis the expense side of the portfolio. So, over the last two or three weeks, we're going to take, and we've decided to take a number of reasonable actions internally to cut the corners, wherever we can in operating expenses and so there is a continued diligence and attention to that. And that will continue through this quarter and in our mind going through the Q2, largely because some of that will take several weeks before it manifests itself in terms of touching the full business.

Brian Alexander - Raymond James

Is there anything you would try to quantify at this point, Greg?

Greg Spierkel

No, it really is a number of small things that we're doing internally. It's the right prudent things to do with the market looking a little softer than we anticipated to be coming into the year.

Brian Alexander - Raymond James

Okay. Thank you very much.

Greg Spierkel

You're welcome.

Operator

Rich Kugele, Needham & Company, your line is open.

Rich Kugele - Needham & Company

Thank you. Just two quick questions. I guess, first, Greg, can you compare the softness that you are seeing now in any way to previous downturns at the onset, both severe and minor downturns?

Greg Spierkel

Yeah. I'd characterize this as minor only because I think most people have kind of seen this coming for the last little while. There is a lot of talk and because we touch a very, very broad base of customers it doesn't look to us like a huge step down not like what we saw with the collapse of the whole IT infrastructure in the Netherlands 2001, 2002 very different set of dynamics there. So, I view this as a bit of a sign wave if you may, just a transition that hopefully is relatively short in duration. I think most people and most things that we're seeing and hearing from believe that's that case.

But there is a sense that we've that a lot of the businesses that we're selling to and I just saw a number of customers earlier this week at an event that we are having here; most of them are saying generally the businesses are more service oriented for the short-term a little less hardware, people may be being a little bit more careful on signing off on some of the expenditures just as they are watching and reading everything else that's going on around them. So, I think that's kind of the standard that we're at right now, at least in our two larger matured markets and that pattern seems to be in place with the two markets at the same time.

Rich Kugele - Needham & Company

So, is it fair to say that rather than being an inventory pure demand downturn that this is, people are waiting to see if there is a real effect, and therefore they are not spending right now?

Greg Spierkel

I'd say, yeah, the spending slowdown; our sense is that it is there, it's just not a case of waiting. Some people are actually moving off to some extent. Is it severe? No. But again it's looking like a flattish North America/Europe perspective and still some solid growth in the other two major regions.

Rich Kugele - Needham & Company

Okay. And then just lastly some of the balance sheet items. Can you just talk about, given the softness you've seen since January that your comfort level with your inventory levels, the quality of receivables and any changes you think you're going to have to implement on the payment term side and any comments on that stuff?

Bill Humes

Rich this is Bill. I mean overall in the sense of the balance sheet, we'll continue to have one of the strongest balance sheets in the overall industry. So we're very diligently managing that. And coming out of the year with 27 inventory days, we feel very, very comfortable about that. But obviously as growth is slowing a little bit in our two major regions, it’s a scenario that we'll continue to focus on but we have absolutely no concern there. But we'll mange that as diligently on the day-to-day basis as we always have.

And then, switching over to receivables, obviously that has been another area of our core competency of managing credit and credit collections. But at any time when there is a little bit softness in the marketplace, you also step up your diligence even more, and review, and make sure that you're catching all the different things that may occur. And I feel very comfortable that we've done that to a good degree and we've got excellent credit capabilities and monitoring capabilities. So I have no issue in that regard either.

Rich Kugele - Needham & Company

Okay. Thank you very much.

Bill Humes

Welcome.

Operator

Matt Sheerin, Thomas Weisel Partners, your line is open.

Matt Sheerin - Thomas Weisel Partners

Yes, thank you. A question on your gross margin and guidance, you're typically down in gross margin, obviously in the March quarter because of logistics business and the mix of your business. But to get to your net income guidance, it looks like it maybe down a little bit more than seasonal. I guess, my question is, are you starting to see a little bit more pricing pressure in your core markets because demand is a little bit weaker?

Greg Spierkel

Again, we don't go into specific guidance, as you know, on the gross margins, per se, but I will give you a little bit of transparency here, visibility. Yes, it will step down. Usually Q1 is a little bit down from Q4 because we have the strength of the logistic businesses and some of our consumer-based businesses which have bigger buyers in Q4. That said though, as I mentioned before, we're not seeing any horrible or accelerated pricing challenges, there is always a pricing dynamic in play with all of our, us and our competitors. But it is not accelerated or gotten significantly worse.

So we don't see that as a major issue. We're going to be careful as we go forward. We think we've got some good initiatives. I think we've got some great discipline. And we plan to hold our margins at 5.4 or above. That's been a pretty consistent mantra for us as a management team and as we keep developing in business.

Matt Sheerin - Thomas Weisel Partners

Okay. Thanks. And then, just a question on Asia where you've had nice operating leverage. It looks like it solves a little bit, in December quarter, you had nice sequential growth. Is there a mix issue there? Why you didn't get as much leverage on a quarter-to-quarter basis? And as you move forward, you're still growing in double-digits, what kind of short-term or long-term operating margin goals do you have for Asia?

Greg Spierkel

Let me take a quick crack and then maybe Larry might want to add a comment or two. I think our operating leverage was pretty good during a quarter-to-quarter for Asia if we went up. I think it was 165, Bill, to 185 and you take the 15 basis points off because of the sale of the semi business. So there was some leverage on operating income. And we had healthy growth. So it was a record quarter for us very significantly better than prior year. And every quarter as we’ve gone through last year it's been very, very strong in terms of year-on-year improvement for us in the region.

As far as, how far can this go? Right now, we are operating very well. I think, as we add new vendor lines and go into a broader base of customers, I think there is still potential leverage for us, there in the region. I know the team is working towards that, but we've had very good run as you can tell over the past four quarters from prior year and the year before.

And this region, I think will continue to be a strong region for us, because we end up being one of the better and bigger players in each of the countries we're operating in, being number one in virtually every country we are in, except for China. So I think the outlook is actually pretty good for us there, but again, we don't give specific guidance on the operating income for unit. But I would say, as we say all the time, I think there is some upside for us here. Larry, if you want to add a bit more onto that?

Larry Boyd

Maybe just a comment on the side, that if you look at our performance and growth overall in the past year, we have clearly over performed the market growth. And so the combination of the whole market having still healthy growth clicked as well as us taking an even better position in there, is the leverage that you have seen in the past. And I'm confident that that leverage factor will be able to sustain a good portion of that as we continue to grow particularly in China, India and those geographies.

Matt Sheerin - Thomas Weisel Partners

Okay. Thanks. Good point. And then just my last question regarding your OpEx, you talked about looking at opportunities to pair expenses, if you look at the areas that you've invested in, the consumer business, the infrastructure business, and some of the other businesses that overtime will give you a better mix and hopefully your better margins. Are you also pairing back some of the investments there?

Greg Spierkel

No. Generally, on most of those; I'll have to say, we're being cautious with those. And again we're going to follow the same rules, if you may, throughout the rest of the organization. So where there is discretionary spending vis-à-vis travel, replacements for heirs, conferences and those sorts of things, the obvious low-hanging fruit we're going to -- in the investment areas -- we're going to come on the same degree of discipline as we go forward.

But they are all doing a slightly better margin and contribution rate except maybe for two or three of the totally new operations like Argentina like the investments and services these are fairly new, they're still not positive contribution. But, we may slow some of the growth in headcount in those but we'll continue to stay very vested and interested in supporting their growth.

Matt Sheerin - Thomas Weisel Partners

Okay, thanks a lot.

Bill Humes

You're welcome.

Operator

Min Park, Goldman Sachs, your line is open.

Min Park - Goldman Sachs

Great, thank you. Just a couple of questions, please. First, how much conservatism is actually built into your target? I guess you can put it another way; is your outlook more indicatively a performance quarters to-date, or do you actually anticipate incremental deterioration or demand through the March quarter?

Greg Spierkel

We'll try to give a view that is good as any and we're always diligent to try to make sure that we give you a view that's very close to what we think we are going to be able to achieve. I think we've had a great pattern of doing that over the last three or four years. And when there have been little inflections as there are right here, frankly, nothing tells me or nothing that we're looking at this stage changes how we're looking at it.

We usually have a pretty good run rate view on our business and while we might have seen just a little bit of quieter business right at the end of December, we definitely saw this little step down in January and it’s been consistent for every passing five weeks, six weeks here that we've been into the new quarter. The pattern has been consistent. So, the guidance, we believe is the right kind of range and I don't believe there is any degree of new caution or a balance at one end of the quarter versus the other will come up. Is there anything else you want to say, Bill? I think that's kind of where our heads are at.

Bill Humes

No, I mean essentially we do a detailed rollup of both the results through the date as well as our forecast throughout the business. We have pretty good foresight of what we believe in the current quarter our outlook has generally been, and so it's a combination of both run rate up to-date as well as what we expect for the rest of the quarter.

Min Park - Goldman Sachs

Okay, great. And then second, with credit becoming tighter, are you seeing greater demand from your customers for financing support and if so how do you expect to manage that incremental risk?

Bill Humes

Yeah. I mean, this is Bill. Yeah, obviously, as credit becomes tighter across the board, which has been probably more or so in the corporate space but across overall, it ends up being both risk and opportunity. Obviously, as customers are looking for additional financing and there good customers -- like I have said before we have a core competency in providing credit and monitoring credit and collecting.

So we review that diligently and we provide credit work, credits due and alternatively in times of software economies or whatever, we also review things very closely and take away credits. So, it's both an opportunity and something that you need to watch and I think we are probably one of the best in the world doing it.

Greg Spierkel

Yeah. I'd made just an extra comment or two on Bill’s comments though. Interestingly enough, while credit has gotten a bit tighter, our credit controls over the past year have been second to none and best in our corporate history. So, that's been part of what's been helping us as an organization. Our teams are very good and we have great relationships with a lot of the customers we deal with. And then frankly, we also are only using anywhere from 30% to 40% of our credit limits out there at anyone point in time. So, we still have scope for additional business if the market will allow for it and assuming that we're competitive and providing good services. So, we don't have an issue here in regard to this thing tightened and us being able to service our customer base.

Min Park - Goldman Sachs

Thank you very much.

Greg Spierkel

Welcome.

Operator

Ananda Baruah, Banc of America, your line is open.

Ananda Baruah - Banc of America

Thanks guys for the question. Two if I could. The first one, I guess on revenue given the degree to which you're guiding sort of seasonality down much more then you typically do, can you give us any sense for maybe how we should think about seasonality going into the June quarter? I mean, should we think of greater maybe not this type of sequential kind of decline in the June quarter, but is it going to be the order of magnitude stronger than typically is? Do you think maybe would kind of back to normal seasonality albeit maybe towards the lower end? That's the first thing.

And then on the second thing, on margins, what's implied in your EPS guidance is margins down on year-on-year basis probably just slightly. You've talked about doing some things on the cost side, as you move ahead. Do you think you can pull those levers quickly enough to get back to flattish margins on a year-over-year basis, or do you think you can even start to show leverage again as we move into the second quarter?

Greg Spierkel

Ananda, I'll take the first part and it’s Greg here. On the revenue front, again we don't provide guidance beyond the quarter. We usually are very good at giving a gauge on what's going on in the quarter and the nature of our business, as you probably heard me say in the past is one where we don't have a lot of backlog. We're dealing with one day of backlog and we do watch, monitor, and can tell things from trends pretty well because of the many data points that we're getting.

My sense again, is what we're looking at here is probably a couple of quarters and from what we see, from what we hear. But I don't know if that's going to step down any further. I think the normal seasonality will probably come into play after that. So to your point I think, there has been a bit in, from what we see, a little bit of a step down, we're not trying to kind of gauge beyond the quarter, although, we're trying to moderate as much as anybody can. But I think this will be a normal transition from quarter-to-quarter of Q1 to Q2 as we go forward, but albeit a little slightly softer market environment.

Bill Humes

And overall in the margins and operating expense management as Greg mentioned earlier, we've just last couple of weeks have initiated several different tightening of those areas specifically in the more discretionary expenses. That obviously will continue to gain traction week-after-week, month-after-month. So it will probably gain more traction whether or not we can -- I'll say, that it’s going to help leverage and obviously it will help saving and help to offset the softness we're seeing in the two major marketplaces. But we don't give guidance this past Q1 anyhow. But it should have some effect positively on going forward as we move down this road.

Ananda Baruah - Banc of America

Okay. And then I guess, just finally on share buyback, you've done in the market buying back some shares, but your guidance for shares just kind of implies maybe relatively flat down very slowly. Should we assume that you might become a bit more aggressive?

Greg Spierkel

I think we have bought a fair bit already. If you think about since we've announce this mid-November, we bought over 2 million shares and $40 million worth, if the shares continue to go down, we may buy a little bit more. We’ve got limits there. Keep in mind that we are a under specific repurchase transaction setup under a 10b5-1 structure. So we've said our guideline that way. Within an open window, we've got some flexibility, a trading open window, we've got some flexibility.

So we're going to be continuing to buy if there is some softness. Keep in mind that the share count has probably not come down as much as you would expect because there were some options of investing and some people have been exercising those. So there is a countervailing factor that's a play here.

Ananda Baruah - Banc of America

Okay. Thank you.

Greg Spierkel

You're welcome.

Operator

Ben Radinsky, Bear Stearns, your line is open.

Ben Radinsky - Bear Stearns

Thanks. The first question is on the OpEx side. Do you think that you'll be able to accomplish where you need to just buy the minor tweaks that you've been making over the past couple of weeks or are we going to see a major restructuring effort?

Greg Spierkel

I have to say at this point the focus is on being very close to everything that we're doing. We feel we're doing a lot of things right that we don't need to go take drastic action at this stage, Ben. And any good company is going to say, what do we need to do to, sort of, cut the corners all over the place so it's not just minor, it's significant efforts by a lot of people. But if the economic situation or the market situation would get worse, then we would revaluate things, but we don't feel we're at that stage. Not at this point.

Ben Radinsky - Bear Stearns

And then, as we go into 2008 and if your guidance is in fact true, it's likely that you'll start generating a bunch of free cash from a lower inventory account and perhaps lower accounts receivables as well. What do you think you would do with all that cash that would be generated?

Greg Spierkel

Well, it's one of the things that I feel pretty good about. One, we've obviously been using the share buyback process that we started just two and half months ago, but we're being true to our strategy. I want to leave a clear message that we're still very positive about our outlook even though the short-term doesn't look as encouraging as I think all of us would like to see it. You know what's important is our strategy and what Bill and I and others look at, which is where we are taking this company.

And so we're saying investing in services, point-of sale, enterprise, computing storage solutions, I would say M&A activity is still and as far as we are concerned, a fair game. Because we are generating free cash and feel that we're in a good financial situation from a leverage point of view to do that.

So if the market does present greater opportunities than we might have seen a year ago on value and in position and it compliments our broader goals, we're going to continue to invest just like we're continuing to invest to some degree in IT and infrastructure, and process improvements, and standardization, just because, again, we feel it's the right thing to do for the long-term. So we're all about mid- to long-term value creation, and if the free cash flow allows us to make those investments in a tactical way and as well as in long-term way, we will continue to do that.

Bill Humes

And we'll also continue, obviously, to evaluate the share repurchase and we're continuing to buy that on a daily basis. So that is also a use of the cash flows.

Ben Radinsky - Bear Stearns

Okay. And then the last one for me: where do you feel comfortable with the debt-to-cap? Right now, it's a little bit lower than it probably should be optimally?

Greg Spierkel

Well, we've said this before. We could go higher. There is no question. It has drifted down, because again we're managing the balance sheet very well as an organization. So if there is an opportunity, the right kind of opportunity for leverage, we'll take it. But you know the economic times in front of us and the situation being tighter in several markets, we're going to also be smart about making the balance and discussion about what for we move forward.

Ben Radinsky - Bear Stearns

Okay. Great. Thanks.

Operator

Bill Fearnley, FTN Midwest, your line is open.

Matt Whitaker - FTN Midwest

Yes, thank you. This is Matt Whitaker for Bill this afternoon. My question was again, you've given some pretty good detail on your outlook based on the geographic trends you are seeing. I was wondering what kind of detail you can give on the product customer segment and vertical trends you're seeing and how that formed your outlook?

Greg Spierkel

Okay. Well, I'll talk to what we just came through and there has been some degree of pattern rolling in through the first quarter. But our customer segments that were the strongest in Q4 were direct marketers, retailers, so again some of the big companies that you hear about there.

And some of, I'd say they are very lower end of the VAR segment of those SMB markets. Corporate resellers, larger consumer companies and VAR serving larger organizations probably as the category we saw a little more softness in ours seeing that has we speak going into the current quarter.

As far as segments, we tend to still range within the same segments that we always talk about with peripherals of 40% to 45%, systems 24% to 29%, software 15% to 20% and networking 10% to 15%. What we saw in the most recent quarter was essentially that all of them grew and so all sectors were up. But given our 13% overall growth rates too grew faster than that and that was software.

Software was fairly robust through the quarter and we also saw some good growth in systems. And that's probably driven more than anything still by the continuing trend around mobility, which I mentioned before. So, laptops and mobile related products continue to still be catalyst growth for us in our portfolio.

Matt Whitaker - FTN Midwest

All right, thank you.

Operator

Our last question is from Bob Reitzes, New Castle Partners Bear Stearns. Your line is open.

Greg Spierkel

Are you with us Bob?

Operator

Please check the mute feature on your phone Mr. Reitzes. I'd now like to turn the call over to Ria Carlson for closing remarks.

Ria Carlson

Thanks everyone for joining us. Our call has concluded. We will have replay until February 22nd that number is 800-678-3180 or at www.ingrammicro.com. Thank you very much. Bye-bye.

Greg Spierkel

And I'll let you go. Have a good evening.

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