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Ingram Micro (NYSE:IM)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Damon S. Wright - Senior Director of Investor Relations

William D. Humes - Chief Operating and Financial Officer

Alain Monié - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

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

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

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

Benjamin A. Reitzes - Barclays Capital, Research Division

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

Osten Bernardez - Cross Research LLC

Louis R. Miscioscia - Collins Stewart LLC, Research Division

Shaw Wu - Sterne Agee & Leach Inc., Research Division

Richard Kugele - Needham & Company, LLC, Research Division

Operator

Welcome to the Ingram Micro Second Quarter Earnings Report Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Damon Wright, Executive Director of Investor Relations.

Damon S. Wright

Thank you, Gabriel, and good afternoon to all of you on the call and joining us on the webcast. Joining me today are Alain Monié, our President and Chief Executive Officer; and Bill Humes, our Chief Operating and Financial Officer. Bill will start off today's call by providing details around our financial results, followed by Alain, who will comment on regional performance, demand trends and our outlook. The call will then be open for a question-and-answer session. We have also prepared presentation slides to highlight key aspects of our financial performance, which may be found with today's news release at the Investor Relations section of Ingram Micro's website at ingrammicro.com.

During today's discussions, we will make statements that are forward-looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today's news release and documents filed with the SEC, specifically the Risk Factors listed in Item 1A of both our Form 10-K for the fiscal year ended December 31, 2011, and our Form 10-Q for the fiscal quarter ended March 31, 2012, for more information on the risks that could cause actual results to differ materially.

In addition, this conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of the call will be available for 1 week on the company's website or by calling (888) 562-2781.

I'd now like to turn the call over to Bill. Bill?

William D. Humes

Thank you, Damon, and good afternoon, everyone. We reported another solid quarter with relatively strong organic sales growth in local currencies, particularly in light of the overall IT spending environment. We also maintained a sharp focus on aligning our cost structure with both the level and mix of revenues in each region. This helped provide good levels of profitability and returns on invested capital that exceeded our weighted average cost of capital by approximately 150 basis points.

Turning to some specifics of our second quarter performance. Worldwide sales were essentially flat in U.S. dollars at $8.78 billion when compared to Q2 last year. The translation effect of foreign currencies had a negative impact of 5 percentage points.

North America sales were the highest for a second quarter in more than 10 years, increasing 2% to $3.8 billion. The increase was driven in part by strong growth in our specialty and enterprise technology value businesses, as well as a solid increase in our U.S. broad line business. This growth was somewhat offset by decline in our Canadian broad line business, as the year earlier quarter benefited from a significant new product launch from a large vendor.

Europe sales of $2.5 billion were down by 7% in U.S. dollars, but up by more than 3% in local currency, led by double-digit growth in Germany and the U.K.

Asia-Pacific sales grew year-over-year for the second consecutive quarter, increasing 4% in dollars and 9% in local currency to $2 million, an all-time second quarter high. Sales grew 16% in local currency, excluding Australia, which continues to face challenging economic conditions in a highly competitive selling environment.

Led by robust growth in many countries, Latin America sales also hit a high for a second quarter, increasing 14% to $442 million, despite local currency headwinds of 13 percentage points. Worldwide gross margin was 5.16% compared with 5.25% in the year ago quarter. The overall selling environment continues to be competitive.

Additionally, gross margin was impacted by a larger mix of high-volume, lower margin product sales in our broad line business, including more sales into e-tail and retail customer segments in international markets.

Although lower gross margin, each sale generated require relatively low incremental operating expenses, which helped drive acceptable returns on investment. The regional teams did a great job of managing costs, resulting in excellent operating leverage.

Q2 operating expense was $355 million, or 404 basis points, which included charges of $6 million or 7 basis points, primarily associated with acquisition-related costs and asset impairments related to the shutdown of our Argentina operations.

Worldwide operating income was $98 million, or 111 basis points of sales, which includes the $6 million or 7 basis points in charges I just described. On a regional basis, North America operating income was the highest for a second quarter in over a decade, coming in at $69 million or 179 basis points of sales, which includes charges totaling approximately $4 million or 10 basis points associated with acquisition-related costs.

Europe's operating income was $15 million, or 61 basis points of sales. The region continues to experience macroeconomic challenges, which led to heightened competitive selling environment and a higher mix of revenue in lower margin customer segments.

Asia-Pacific operating income was $15 million, or 73 basis points of sales. Operating income was primarily impacted by Australia, which had an operating loss of $9.3 million for the quarter. This is a modest improvement over last year loss of $11 million and the $10 million loss in Q1 of 2012.

Australia's economy remains weak and is hindering our ability to recover business as quickly as originally anticipated. Latin America operating income was $4.4 million, or 100 basis points of sales, which includes charges of $2.1 million or 48 basis points, primarily related to the shutdown of our Argentina operations.

Interest and other expenses for the quarter was $14.3 million compared to $13.3 million in the prior year. Each of these 2 periods benefited from foreign exchange gains of $1.6 million and $2.6 million, respectively, related to translation impact on euro-based inventory purchase in our pan-European purchasing entity.

Our effective tax rate for the second quarter was 26.6% versus 28.7% in the prior year. This was lower than anticipated due to net discrete tax benefits of approximately $4.4 million, or $0.03 per diluted share, as outlined in our press release.

Excluding the benefit, the effective tax rate for the second quarter would have been just below 32%, which is in line with our expectations for the remainder of the year.

Net income was $61 million, or $0.40 per diluted share. EPS includes an aggregate benefit of $0.01, which consists of previously mentioned acquisition-related costs and charges related to the shutdown of our Argentina operations, which are more than offset by foreign exchange gains and tax benefits I covered earlier.

Turning to some key balance sheet metrics. At quarter-end, our cash balance was $981 million and our total debt balance was $464 million. We ended the quarter with debt-to-capitalization ratio of 12%.

Moving to working capital. Days of sales outstanding were 38, 1 day higher than a year ago. Days of inventory were 35, an increase of 1 day from the year ago quarter. And days of payable were 48, 1 day better than last year, which just brings working capital days to 25, up 1 day from Q2 of last year and flat sequentially from Q1.

The team continues to do a good job of maintaining working capital within our targeted range of 22 to 26 days. CapEx for the quarter was $21 million and depreciation and amortization was $14 million. That completes my financial review.

I'll now turn the call over to Alain. Alain?

Alain Monié

Thank you, Bill. I'm pleased with our performance in what continues to be a challenging macroeconomic and selling environment throughout much of the world. We continue to do a good job executing on our core competency, of capturing appropriate sales opportunities, while aligning operating expenses with revenues.

We are also executing on our strategic initiatives. We're investing organically in the business across all regions to fuel future accelerated growth in higher-margin markets, such as enterprise data center, logistics and cloud services.

We're also delivering on the external growth objectives I outlined when I took the helm as CEO, focusing on acquisitions, to increase our presence in high growth and greater value products and services.

We recently announced the signing of a definitive agreement to acquire BrightPoint, a global leader in providing device lifecycle services to the Mobility industry. BrightPoint's offerings are highly complementary to our logistics, services and distribution businesses, which will give vendors, partners and customers one-stop access to one of the widest ranges of mobility and technology products, services and solutions.

Additionally, our expanded geographic footprint and strong financial position will create growth opportunities for the combined company. This transaction is expected to be meaningfully accretive to earnings per share as soon as 2013 and is a key milestone in the execution of Ingram Micro's steady strategy as it accelerates our entrance into a strategically important and rapidly expanding market with higher-margin services and solutions offerings. It also delivers on several key initiatives to an extent that we have been challenging to achieve on our own.

This acquisition clearly supports our longer-term growth and profitability targets and meets our return on investment criteria for creating shareholder value.

We currently anticipate closing by the end of the year subject to the regulatory approvals, and we're looking forward to beginning the integration process.

During the second quarter, we also repurchased 2.7 million shares of stock for an aggregate price of $50 million. We have now repurchased 15.2 million shares, or $276 million, under our 3-year $400 million authorization that we announced in October 2010.

With the pending BrightPoint acquisition, we currently do not anticipate repurchasing additional shares for the remainders of the year.

Turning to our regional execution. As outlined by Bill, North America delivered strong results. Sales grew year-over-year for the 10th consecutive quarter and the region continues to demonstrate good operating leverage. The U.S. was particularly strong with good growth relative to market across most divisions. While rational overall, the selling environment remains competitive, which pressured broad line gross margins. This pressure in broad line was offset by strong performance in our specialty businesses, which delivered total gross margin well above the company average. We had particular strength in BBL consumer accessories, data capture and Physical Security, all of which grew at double-digit rates over last year.

Our enterprise technology value business also had a solid quarter, contributing to North America's strong operating margin, as we continue to benefit from our investments and this higher margin business.

Our Logistics business delivered growth and profitability above our internal expectations, while investing for future growth at the same time. IML added several customers during the quarter and its pipeline is getting stronger. In June, we held our third annual Cloud Summit, which was highlighted by the launch of 56 new offerings as part of Ingram Micro's expanding cloud platform.

While still a small contributor, we're experiencing rapid revenue growth and our cloud marketplace now offers more than 100 solutions from 40 different technology vendors.

Latin America continued the strong momentum with which it started the year. Mexico, Miami export, Brazil and Peru, each delivered double-digit growth in local currency. In Mexico, the SMB business remains robust and the country's value business is growing nicely with strong demand, bolstered by the organic investments we have made there. Miami export continues to grow share in key vendors.

Brazil experienced very strong revenue growth across most segments in markets with a particular resurgence in its volume business as our vendor and customer breadth continues to expand. While Brazil's business is improving ahead of plan, we still are not where we want to be.

In Europe, we had solid growth in local currencies, benefiting in part from stronger sales in e-tail and retail customers. The SMB market remained a relatively highlight for most of the region and we believe we're gaining further share in this important segment. SMB growth was a driver of strong double-digit revenue increases in Germany and in the U.K., which has now grown its SMB business for 9 consecutive quarters. Additionally, our data capture business had double-digit sales growth, as we continue to expand our customer base in the region.

France's revenues declined modestly, primarily due to a large deal last year that did not repeat. France had solid sales into SMB and corporate resellers, which helped drive an increase in gross margin versus last year. The country is also adding new vendors, which resulted in a slight increase in market share during the quarter.

The Benelux region continues to be impacted by very weak economic conditions. However, our focused efforts in the SMB market are paying off and we're regaining ground. Looking out over the next several quarters, we're not anticipating that the European economies or the demand environment will improve. As such, we will continue to take prudent actions to help ensure that our cost structure is appropriately aligned with the level and mix of anticipated revenues and margins.

Asia-Pacific performed well, led by China and India, both of which had revenue growth in excess of 20%. Several countries delivered improved gross margins, as we're executing on our strategy to expand our higher value enterprise technology and software solution businesses.

While sales in our value business continue to increase, margins for the region were dampened by overall revenue mix. This was particularly apparent in China and India, where the predominant driver of strong sales growth continues to be high-volume distribution of handsets and tablets.

We have excellent relationships with the leading mobility OEMs, and we look forward to the opportunity to expand on these relationships as we augment our Distribution business with higher-margin value-added services and solutions.

While we're not satisfied with our improvement in Australia, we're starting to see better revenue trends and increases in gross margin versus a year ago. Vendors and customers are growing more confident in our execution and we're winning new vendor authorizations while customers have increased their levels of business. These improvements, however, are being slowed down by challenging economic conditions that are impacting demand and exacerbating already extremely aggressive competition. This has resulted in lower-than-anticipated revenues for the country, which has been kept staffed for more rapid growth. We continue to evaluate our revenue run rate and underlying cost structure and we'll make adjustments if necessary, while being careful not to impact our customers' experience.

Turning to outlook. Given the current macroeconomic environment, we currently expect third quarter sales to be flat sequentially with gross margins remaining under pressure. We are also incurring incremental interest costs for approximately $2 million in Q3 associated with the bridge financing facility entered into at the time of the BrightPoint acquisition announcement.

Overall, our companywide Q2 revenue performance was solid and we drove good returns on capital. Margins have been under pressure, but our expense management has again been very good and our working capital management consistent. Our steady investments in value segments will, in time, help increase our mix of higher margin sales and we're moving the company in the right direction.

Finally, I'm very excited with the prospect of adding BrightPoint services capabilities and customers, which will provide excellent new revenue and profit platforms with great growth opportunities.

We'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question does come from Brian Alexander with Raymond James.

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

Bill, how much of the sequential decline in gross margin in Q2 was due to incremental pricing pressure versus the dropoff in HDD benefits and also the dropoff in IML's contributions seasonally? I'm just trying to isolate pricing and going forward, when you say you expect gross margins to remain under pressure, do you mean that they'll get incrementally worse? Or that they're just going to not recover any time soon?

William D. Humes

Sure, Brian. I'll answer your last piece first. Going forward in at least in Q3, we believe it's relatively constant in the sense of the margin impact of both pressure and mix. So not further worsening from where we're at today in this second quarter. And then moving on to your others. I mean, I think as we disclosed in Q1, I believe we had about a 10 basis point impact from the hard disk drive sales in Q1. So that, for the most part, went away in Q2. So that's one impact on a sequential margin basis. And then, obviously, if you remember Q1 to Q2, it usually has an IML logistics fees reduction in business impact. So seasonality and typically, Q4 and Q1 have been the strongest in the Logistics business. And then Q2, Q3 have been less solid. So that's always an impact as well. And then moving on to your differences on mix versus profitability, that's going to be a tough one to answer overall. In circle of competitive pricing area, I would say they were both fairly important with probably the mix both overall and mix geographically probably being more important.

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

Okay. And then just to clarify, is the flat revenue outlook in dollars or local currency? I think you're going to have a 2 point drag from currency sequentially. So I'm wondering if you're actually guiding revenue up in local currency a few points, which would be more seasonal than flat.

William D. Humes

Yes, generally, I think it's dollars that we're thinking about.

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

Okay. And any regional color that you can provide on kind of the sequential change you're expecting in Q3 on revenue?

Alain Monié

Brian, this is Alain. That's a difficult one to predict, particularly with Europe. But I would say, we don't see any major change, vis-à-vis, Q2. So extrapolation from there is probably a good base.

William D. Humes

Yes, other than the fact that Q3 is generally always softer than Q2 in the sense of Europe, given it's a vacation period.

Alain Monié

Yes, but given where it is now, it has -- I think that impact has already been taken into account.

Operator

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

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

The comments of double-digit growth in Germany, U.K., can you just talk about how the business feels today? And as you go into the back half of the year, do you expect that to slow, or do you think you can kind of sustain growth there?

Alain Monié

Well, double-digit growth in Germany, U.K. and that market in Europe is probably difficult to sustain for a long time. I think we've been pretty successful at capturing opportunities, particularly when they came in e-tail and Retail business, as well as capitalizing on our SMB success there across the region. If you asked whether we should continue looking at that kind of growth in the future, I think that would not be very prudent. And I would expect that to come back to a more normal environment, although the U.K. and Germany had been, in our case, really the 2 engines that have been performing the best in Europe.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Any comments on just southern Europe? Has it stabilized at really low levels or still getting worse?

Alain Monié

As far as our operations are concerned, we're seeing more stability than it has. I would say that the impact, the negative impact has happened in the past. We are, I would call it, stable, but not in a great environment, obviously.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. And then just last one, the comments about the mix in China and India of handsets and tablets. Can you maybe bring the BrightPoint acquisition into the conversation here in terms of, do you see any help as you integrate that business from a margins of what you could do in that market?

Alain Monié

Yes, those 2 markets are going to be important, I think, as far as potential synergies on the revenue side, I would call it more than on the cost side. Simply, the China, BrightPoint was in China years ago and decided to exit. Our own presence there is a very solid presence, as you know. And we feel that that's -- it's a very important potential leverage that we can exercise by introducing BrightPoint's capabilities and experience having our own presence as a backbone of infrastructure. So that's for China, where today, BrightPoint is absolutely not present. In India, we're both present and both with a fairly solid mobility business. In fact, India, it's probably one of the most solid, if not the largest Mobility business we have in Ingram. And when we think about combining this with BrightPoint, I think it will give us a very good position in that country.

Operator

Our next question comes from Ananda Baruah with Brean Murray.

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

Just a couple of things, if I could. I guess, kind of pertaining to gross margins, are you expecting in this environment sort of some of the extra incentives from your suppliers that oftentimes can occur to, I guess, sort of go out and help them sell product? And, Bill, it doesn't seem to be implied in the September gross margin guidance of, I guess, kind of flattish on face. But is there some implied, is that what kind of keeps it flat? Just wanted to get some of your thoughts on that.

William D. Humes

No, I mean -- this is Bill. Ananda, I would say, we're planning probably consistent and continued relative reasonable back-end margins from our vendors and then similar front-end pricing environments across the globe. So I won't say we're building in any less or any more than what we have been seeing in the recent quarter.

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

Got it, Bill, that's helpful. Can you just remind me how pricing in Q2, was it consistent with pricing in Q1 as well? Or did it get a little bit more aggressive?

William D. Humes

No, I mean, I'd say overall, I mean, it's in pockets. It probably got a little bit more aggressive in certain areas. But in other pockets, it was pretty stable. So as I said earlier, when I was answering one of the questions from Brian, is overall, I think, the majority of the impact really comes from the mix and volume of the business, the type of business. And then there's probably some pockets in Europe and Asia that may be a little bit more competitive, but not tremendously so from Q1.

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

Got it. And for both you and Alain. Just interested in getting -- what's the way we should think about the BrightPoint accretion, sort of beginning to manifest itself in the P&L? Do you think it will be revenue accretion at first or cost accretion or both?

William D. Humes

Well, I mean, overall -- again, I'll answer that and then, Alain, pitch in if you...

Alain Monié

Yes.

William D. Humes

Overall, given the profitability and the performance of BrightPoint alone, they're already a very well-performing business unit. But combined with us and then driving some of the synergies we talked about, I would say there's opportunities definitely for cost synergies. But there's also opportunities for volume and revenue. There's probably some low hanging fruit to start with, and then there's some longer-term kind of, I'd say, service capability revenues and fees and margins that we can -- that we will capitalize. But that will take a little bit more -- a longer time.

Alain Monié

Yes. And I think those will be in parallel, both the cost and the revenue synergies. As we explained before, there are some probably easier areas where we can try and get our revenue synergies, particularly where our footprint is not overlapping, where 1 of the 2 has a presence, a strong presence. I think that would be the areas we would go first in order to cross leverage each other's organization.

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

Okay, great, got it. That's very helpful, Alain. And then, I guess, just last one for me. How would you -- how are your inventory levels sort of right now, I guess?

William D. Humes

Yes, I mean, overall, our inventory levels, I think, are pretty consistent and flat on a kind of Q1 to Q2 basis at 35 inventory days. That's a little -- that's slightly up from last year's Q2 of 34. So in the end, I think we're well-positioned for inventory. It's something we always watch and always manage very tightly. But we're comfortable with where we're at right now.

Operator

And our next question comes from Ben Reitzes with Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

You mentioned in the quarter that the Australia was down, I guess, 9-point something in operating profit. I just wondered if you can confirm the number. It doesn't seem like it's improving very much. And I was wondering when you're targeting breakeven there? And then I have a few follow-ups.

Alain Monié

Yes, the -- that's correct, $9.3 million is the loss that we communicated here and we are not happy with the speed of recovery, if you will. We had talked about targeting the end of the year for being on a profitable path. We're still working very hard towards that same goal. I think that the team there is now -- as we have mentioned in the past, we have kept the cost basis and the infrastructure cost at a place which was not optimum for the level of sales we had at that time with the expectation of increasing our revenues in order to catch with that level. Now what happened is that, as we are improving our revenue capture and our gross margins at the same time, at the same time, the economy there has really taken a slowdown. And so that's really impacting the speed at which we are able to execute on our recovery plan.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. So you're still working for year end, but -- and that's your target for now to reach breakeven?

Alain Monié

Yes.

Benjamin A. Reitzes - Barclays Capital, Research Division

And then with regard to -- did you mention what Hewlett-Packard was in the quarter as a percent of total? Do you not break that out anymore?

William D. Humes

No, we do in the quarter -- the 10-Q, which will come out probably next week or so.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. Was there any market change there in your relationship or the percent of -- as a percent of sales as you went towards more tablets and handsets?

William D. Humes

Well, I mean, I would say it's generally consistent but obviously, we're growing some revenue that may be in other vendors, in other areas. So that may have a net impact overall. But I would say our relationship is very solid.

Alain Monié

Yes, I would say we would mirror what HP's overall performance is.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. And then with regard to tablets, did you get what you needed? And did you notice -- are you noticing a big change in any verticals, like education, and did you get enough product in terms of your tablets? And that's my final question.

Alain Monié

Yes. Well, in tablets, we have not been constrained by supply. We've been able to get -- in fact, that's been one of the drivers in growth in many of our geographies. As far as the segments, we frankly don't have today an analysis on whether there are major shifts there. But it's obviously, both enterprise and education are becoming much more solid markets for the tablets, and we're seeing that as well.

Benjamin A. Reitzes - Barclays Capital, Research Division

All right, just -- sorry, real quick. Do you -- my last thing, I promise this one. Windows 8 and Ultrabooks, do you expect any catalyst there? Your guidance with a launch in October and you're guiding for, I guess, constant currency barely up sequentially. It doesn't look like you're looking for a big bounce in the retail side, which is a small part for Windows 8 or Ultrabooks. But I just wanted to be sure.

Alain Monié

Well, yes, our belief in our forecast is based on the fact that even if it starts in Q3, we will -- we may start seeing some results in Q4. But frankly, probably won't really be meaningful until next year.

Operator

And our next question comes from Matt Sheerin with Stifel, Nicolaus.

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

So just a question on your comments, Alain, about revisiting the cost structure in Europe and perhaps taking some costs out. Could you be a little bit more specific in terms of any programs that you have in place to lower the cost structure there? And then in part to that question, if you look at the SG&A overall for September, both in Europe and the rest of the regions, should you expect that to be down because of some cost cutting?

Alain Monié

Well, we're doing several things in parallel. In Europe, as we're doing in other regions, on one hand, we're controlling our costs as much as we can to adapt our structure to the new mixes of types of products and geographies where it's happening. And at the -- but at the same time, as you know, we are steadily continuing our investments in higher margin business. So you have the combination of both good control and specific reductions, cost reductions, which I cannot get into details here, particularly for Europe or other regions. But at the same time, we keep investing, as we said we would, in our organic growth. So I think -- our cost control as you see, the results of all of these actions is very good given that we are absorbing those investments.

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

Okay. So you roll that all up. What are we thinking in terms of expenses in September? Should it be down with -- on a flat revenue environment, or should it be flat?

William D. Humes

Well, we're not going to give you the exact specifics, Matt. But what I'll say is a couple of things to consider. One, if you can imagine very closely, if we haven't initiated actions or haven't recorded the actions, usually until now, it takes a while, obviously, to realize savings going forward. So I would expect more of kind of constant environment with the fact that we did have with our normal grants of equity based, stock-based compensation, that got moved into this quarter of Q2 towards the end of the quarter. So you'll have some little bit higher run rate of .com next quarter. But other than that, I would say we'll probably manage the OpEx fairly closely.

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

In addition to that, that bridge loan you talked about impacting interest expense next quarter. Are there any other acquisition-related expenses that we should expect in the September quarter in SG&A?

William D. Humes

That's very likely. I mean, I would say we'll break it out as we get there and I don't want to disclose specifically. But there are continued costs that we incurred post acquisition. And ultimately, as we close the acquisition, there'll be some more. And then into postclosing, we'll have acquisition integration expenses that we'll try and outline for you when we get a better handle on timing and everything else. So we can't give you specifics, but there'll be some but we'll pull it out separately.

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

Okay. And back to the gross margin issue. I know you talked about mix, you talked about the disk drive impact and also some pricing pressure. So what I'm trying to get at is, how much of it is due to basically taking on more, as you talked about, lower margin, higher volume type of products, and as you look at your business, particularly, Alain, as you're trying to expand into the higher value-add enterprises specialty businesses. What's the strategy in terms of balancing that and focusing on the broad line lower margin business?

Alain Monié

Well, the strategy is to do both, is to continue taking the opportunities of higher, very successful products, like tablets, that are now giving us a solid growth at very acceptable returns. But at the same time, steadily continue investing in our value business because that is very important for our future and strengthening the gross margin profile that we want to get to. So we're doing both. Now timing-wise, the investments are going to take -- are taking longer. But if you look at the performance of North America, for instance, and you look at their operating income, that is clearly -- which is good, very good, that is clearly the result of having invested in those areas earlier than in other regions and you can see there the payback already coming into the operating income line.

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

Okay, that's helpful. Then just lastly, on the interest expense line. Other than that incremental bridge loan you talked about, should we expect it to be in sort of the similar rate that it was at this quarter, Bill? Or are there any other moving parts that we should expect?

William D. Humes

Yes, I mean, I would expect, except for the bridge loan, any other type of new financings or other things that we may do or may not do. I would expect, generally, it to be relatively consistent. It can always fluctuate on the other lines, like the foreign exchange lines, up and down from quarter-to-quarter but interest cost should be fairly consistent.

Operator

And our next question comes from Osten Bernardez with Cross Research.

Osten Bernardez - Cross Research LLC

With respect to the -- your specialty -- excuse me, your specialty businesses, particularly in North America, and your enterprise computing business, would you be able to address how these sales segments, particularly your enterprise computing, storage, servers and software, performed during the quarter versus your expectations?

Alain Monié

We have good growth in that segment. In fact, it's one of the segments that we had the best growth in North America. So we are seeing -- we're starting to see the results of our investments there and that includes, not only what you mentioned, enterprise, computing and storage, but also in networking. Networking was probably the area that grew the strongest in North America this quarter.

Osten Bernardez - Cross Research LLC

And do you see that persistent to this going to the next -- through September?

Alain Monié

Yes, I think we could -- if the question is, was there anything exceptional that would have -- that is not repeatable? No, I think it's really the result of the strength of our team. The vendors that we're adding and the expertise that we have been building with the certifications and the traction we're getting with the customers. So I would call that probably a sticking prospect.

Osten Bernardez - Cross Research LLC

Okay. And could you clarify for me with -- regarding the e-tail and the retail growth that you're seeing in Europe, the lower margin sales, is this -- is that particular growth something that you see continuing? And what particular products are you handling in that subsegment?

Alain Monié

On e-tail, retail, it's all around notebooks and tablets and consumer goods, accessories as well. Whether that's going to remain at the level that we've seen in Q2, the question is for Q3, obviously, in Europe particularly, there's probably going to be a slowdown there in that area. But Q4 is a good quarter for those types of products.

Osten Bernardez - Cross Research LLC

So the growth you had in the June quarter was not necessarily a surprise to you?

Alain Monié

No, no, I think -- well, it was maybe slightly above what our expectation was, but it was something that we've been working on. I mean, the e-tail and retail is one of the areas where we're doing a very good job, I think, particularly in Germany.

Osten Bernardez - Cross Research LLC

And then could you just clarify for me the comments with respect to Australia and your ability to gain share there versus the challenges of the economy being what it is there? Is it fair to say that -- in prior quarters, you've mentioned that some of your competitors have been serially aggressive. But now, if not for the economy being as tough as it is, that you should be able -- would have been able to gain share or are they not being as aggressive as they used to be?

Alain Monié

I think both on the customer side and on the vendors side, we are now in a position where, I think, the confidence levels have come back. And so it's difficult to say, absent the macro or the economic environment, what would our share do? We do think that we are, as much as the market is allowing us, regaining the confidence and thus, the share and businesses, both supported by customers and vendors, who want to have the appropriate distribution ratios among the different players. And I think that we have -- we ended up in the place that was less than what the expectation was, not only on our side, but also on some of the vendors that we have supported very successfully in the past. And so it's unfortunate that the economic environment is not very favorable right now because we feel that we would be now in the best -- in a much better position to start regaining those positions. So yes, it is slowing us down a bit.

Operator

And our next question comes from Louis Miscioscia with CLSA.

Louis R. Miscioscia - Collins Stewart LLC, Research Division

Just to clarify a thing. Just trying to understand the demand trends a little bit better. If you go back over the last 5, 6, 7 years, you usually grew about 2% to 3% quarter-to-quarter, but you do have that FX headwind. So is it mostly due to currency that you're guiding flattish revenue, or is it more demand or maybe if you could give us a percent of both, if it's both.

William D. Humes

This is Bill. Overall, I would say, given -- yes. Historically, we've usually seen flat to up slightly in our Q2 to Q3 revenue demand. But given the environment, given the situation in Europe, I think, being fairly prudent in not expecting significant upsurge into Q3. So yes, that's kind of what we went through in our mindset, at least on a dollar basis.

Louis R. Miscioscia - Collins Stewart LLC, Research Division

Okay. And then over in Europe, obviously, you had -- it sounded like you had 2 good regions. Maybe you could give us a little bit more color? Were there any other regions that were generally better, or was it more the typical that the northern half did a lot better than the southern half?

Alain Monié

Well, in general, the northern half did better than the southern half, as you mentioned. We mentioned already Germany, U.K. being strong. In France, there was a mix of countereffects where we had both negatives and positives. But I think on the positives, was that we were gaining share with new vendors and we also, at the same time, increasing gross margin. So as -- the economy there is not very strong, as you know, with all the uncertainties post their presidential election. But I think our country is doing fairly well there. Italy, Spain, the environment, as I mentioned before, we're more in a stable environment than further degradation. And then for the other countries, Austria, Switzerland and Sweden, I would call it more stable.

Louis R. Miscioscia - Collins Stewart LLC, Research Division

Okay, great. And this really will be my last question. China, you mentioned, obviously, doing well with tablets and handsets, high-volume things but you really want to get more into value add. Can you maybe give us an idea as to how the mix is there right now, and how the progress is in getting into more into the value add?

Alain Monié

Yes, in China, we have a very strong success with these high volumes businesses. So we are taking it. It's good business to take. We're taking it. At the same time, it is impacting a bit the average gross margins that we get out of that. But we have -- we are investing in data -- not a data center, but a demonstration and configuration center in Beijing. We have had good support from vendors and we've put our own investments there. We decided that probably 4, 5 -- 4 months past, we expect that new center in the value business to be up and operational in August this month, this coming August or September at the latest. So we're making, I think, good progress there in executing and having the infrastructure and the people. We're hiring a number of people there that have the skills in that domain. And again, we are going to start being operational in August.

Operator

And your next question comes from Shaw Wu with Sterne Agee.

Shaw Wu - Sterne Agee & Leach Inc., Research Division

I know this is a little far out, but any color you can share with us in terms of the feedback you're getting in terms of the holiday quarter? Obviously, with all the macroeconomic headwinds, there's concern. But on the flip side, you guys continue to -- it looks like you're actually doing quite well. So any color you can share there?

William D. Humes

Yes, so you're really talking about the fourth quarter. I mean, at this point in time, I think, a large part of the environment we're building into, into Q3. That being said, still would expect to have a normal seasonal fourth quarter from Q3. So overall, I would say, yes, there's, especially in Europe, there's a heavy level of retail and consumer-related business. But I think our expectations in Q3 normalize that out. And so there will still be a pickup.

Alain Monié

We're planning on Q4, for instance, on our IML business, which is related to that seasonal uptick to be, I would say, normal vis-à-vis with what we've seen in the other years. And that's how we are planning for.

Shaw Wu - Sterne Agee & Leach Inc., Research Division

Okay. And then just to go back on margins. I know like almost every question has been on margins. It sounds like one of the reasons is the mix shift towards the higher volume areas, like, I guess, tablets and smartphones. I guess, if that continues to be the case, will you adjust your expenses accordingly? Or I don't know, anything you can share there?

Alain Monié

We have adjusted our expenses accordingly on that business. We're managing that business as more as a fulfillment type of business, although it is distribution in terms of taking title of the product and extending credit to the customers. At the same time, it is a business where the velocity is much higher than in more traditional IT products. So velocity and certainty of sales is much higher. That allows us to turn that much quicker and to deliver with a much lower cost infrastructure, much less technical support infrastructure, much less proactive sales. So our cost is adapted for that type of business already.

Operator

And our last question comes from Rich Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

My question is actually just on BrightPoint and more relative to your continued ERP deployment. And obviously, history has shown that sometimes, trying to integrate or consolidate companies while doing that ERP deployment can be complicated. We've seen, obviously, other companies have issues there. You had issues in Australia and that wasn't even going on. So it's not easy. Has it changed your plans at all, your rollout schedule for the rest of the ERP countries, what's going on with BrightPoint?

Alain Monié

I'll start and, Bill, you can comment on that. You're correct to mention that, that is a compounded risk that you probably don't want to take, and we're very conscious of that. We are now, as you can imagine, within the constraints of what we can do legally as far as getting engaged in the integration planning. But we are very active there. We understand fairly well what the landscape is on BrightPoint's infrastructure, on the IS side. We obviously know ours very well. We are going to concentrate and focus on the integration of BrightPoint separate from our SAP deployments. We are still working on it. So I cannot give you details simply not because I don't want to, but because we don't have them. We need to do some work with BrightPoint. But we are certainly very conscious of the additional risk that would be presented, if we were to combine our SAP deployment with the integration. So we're going to take a very prudent approach there.

Operator

And that does conclude today's question-and-answer session. I would like now to turn the call back over to Mr. Monié for closing remarks.

Alain Monié

Well, thank you very much. Thank you, all, for having participated in this call and for your questions. And I want to thank all of our associates for another very solid quarter. Hard work continues to be reflected in our financial results and continued commitment of our troops is really appreciated. Thank you, all, for being on the call.

Operator

And that does conclude today's conference. Thank you very much for your participation. You may disconnect at this time.

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