Q2 2020 Earnings Call
Please standby our presentation will now begin welcome to the Avnet second quarter.
Fiscal year 2020 earnings call.
I would now like to turn the floor over to Joel Burke, VP Treasury and Investor Relations for Adnan.
Thank you operator earlier this afternoon I've never released financial results for the second quarter fiscal 2020.
At least is available on the Investor Relations section of the company's website a.
A copy of the slide presentation. There will accompany today's remarks can be found by the link in the earnings release as well as on the IR section about nets website.
Lastly, somebody information contained in the news release and on this conference call contain forward looking statements that involve risks uncertainties and assumptions that are difficult to predict.
Such forward looking statements are not to guarantee of performance in the company's actual results could differ materially from those contained in such statements.
Several factors that could cause or contribute to such differences are described in detail in avnets. Most recent Form 10-Q , and 10-K and subsequent filings with the FCC. These forward looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward.
Looking statements where supply new information regarding the circumstances. After the date of this presentation.
Today's call will be led by Bill Emilio Avnets, CEO and Tom the Dory Avnets CFO .
Also still Gallagher global President electronic components joined us to participate in the queue in a session.
With that let me turn the call over to Bill Emilio Bill.
Thank you Joe.
Thanks, everyone for joining us on our second quarter fiscal year 2020 earnings call.
This quarter, we delivered sales were 4.5 billion doors, which was above the midpoint of sales guidance.
Adjusted EPS for the quarters 40 cents, which was in line with the midpoint of our guidance.
Looking at her business.
We've seen some positive indicators internally and have also seen some good earnings reports coming out in the semiconductor space that lead us to believed that the downturn is mostly bottomed out.
Yeah My activity showed signs of stabilization in the United States and Asia at the end of 2090.
However, there was little to indicate a rebound in your overall, we are reiterating our expectation there will be a returned to growth in the second half of this year.
Let me start with some brief highlights from the second quarter 2020.
Our most recent net promoter scores from October 2019 show that we have improved 97% since may 2070.
Putting us ahead of the B to B industry benchmarks customers are voting for avnet across our major businesses.
We captured important component wins in the aerospace and defense segments, where we were working on a number of notable opportunities.
We also acquired the focus line card distributor Phoenix, and we were pleased to add them to our portfolio.
We completed the construction of our four now new distribution facility in Europe .
We ended the quarter with a book to Bill I'll 0.99.
We completed our acquisition of what Ticky, all which strengthens our software and I O T capabilities at the device level.
We deliver on our target of $50 million of annual operating expense reduction that we talked about last quarter, and which is part of our three year or 245 million dollar cost reduction goal.
We launched Massport development board for low cost embedded computing and AI at the edge.
We announced the Avnet Guardian 100, new wireless as module that adds I O T conductivity.
Existing equipment quickly and securely.
As part by Microsoft is yours fear in addition to retrofitting devices. It can be used enhanced security for enterprises.
We launched a new I O T partner program at CES two weeks ago.
This marks an important milestone and having that I would see offering and was recognized by Forbes magazine as setting a precedent and channel programs that provide resellers, what they need to compete when and monetize I O T based client engagements.
We we see multiple customer and supplier awards in the Americas, EMEA and Asia. We're proud of the recognition Lucas Bosqi Avnets VP of Internet of things being named I O T leader of the year by industrial Aiotv World.
Turning to our business units, let me start with a review of our electronic components business during the quarter like Tronics components delivered sales of $4.2 billion, which was a decline from the September quarter as well as year over year as we continue to navigate the demand correction started in December 2018, and persisted longer than industry anticipate.
Operating margin for electronic components were 2.2% down both sequentially and year over year.
During the quarter, we added a number of new customers to our roster.
This included a leader in the Fiveg Revolution, which will rely on avnet for complete supply chain and new product solutions, and a global innovator aerospace and defense solutions defense and aerospace continues to be a growth engine for our core business. It seems to be a bright spot in the economic engine and the second quarter markets.
Grew 7% year over year, our progress on the supplier front speaks the value proposition of our unique ecosystem. It also reflects the confidence our suppliers have an AD that as a driver of their growth.
This quarter I'm pleased to note that add to confuse you had the global and regional supplier franchises to our line card.
We will continue to focus on driving increased sale from existing suppliers are also seeking out new suppliers, who will find our comprehensive ecosystem compelling.
Our acquisition of savings a well respected leader in established franchise semiconductor distributor brings with it a team with a strong track record of providing best in class service for both customers and supplier partners. Phoenix offers a focused number solutions that are complimentary to ours and we are pleased to add them to our portfolio now I know.
Many of you live in watching the Texas instruments transition closely.
You know our strategy is replaced the gross profit dollars that are currently generate on this low margin revenue. We believe this is achievable by the end of our fiscal year 2022.
Since the announcement, we have not seen a material change in T.I. revenue as we explained we anticipate the changes will begin to take place in second half of our fiscal year. So we will update you as the year Progressive. Meanwhile, efforts to replace the gross profit dollars already underway with a focus on driving our revenue from existing.
As well as new suppliers understanding that there will be a time lag between winning new business and the revenue reaching RPL.
Turning to for now we can do you experienced pricing sales and margin pressure.
However, as of quarter progressed, we saw some signs of stabilization.
We continue to gain traction on our five prong plan, we put in place to improve foreign else competitiveness in the high service market and promote long term success as a reminder, the five areas of focus for for now are.
One increasing skew count and new product introduction to enhancing the pricing in quoting process, three expanding market programs and initiatives for achieving operational excellence and five improving the web user speed and stability.
We believe the combination of these actions will lead to sales growth with best in class profitability and we remain bullish on your opportunities at right now as we make investments to grow our online catalog business.
Our commitment to achieving operational excellence at par now is clear and we're excited that for now new distribution Center in Europe is complete and shipping from this facility will begin in next few months.
We expect these benefits this investment almost immediately these benefits include lower cost improve customer service and the ability to greatly increased our SKU go.
First the fiscal 2020, we've already added more than 47000 skews the inventory.
Were about one third of the way through our SKU expansion and we were ramping up our distribution center, which will allow us to accelerate the remainder of the expansion.
Furthering our commitment to making it easier for customers, who do business with us this quarter, we start rolling out new ways to pay.
And your we're rolling out pay Pal and in China, We are implementing we chat pay pay unionpay.
We're also in the process on evaluating similar opportunities the Americas as we focus on better customer service and satisfaction.
And for now ecommerce global order penetration continues to be a notable success.
We also consolidate more that doesn't have a private label products into one unified brand Multiclient Pro this will make it much easier for our customers are paying the best quality and greatest value electronic products available in the marketplace today.
Through the multi comp pro brand. We are also well positioned to leverage is powerful marketplace differentiator and unique IP to drive additional revenue were higher margins.
Some of the cost savings that Tom Watt line include further integration of back office functions between electronic components and the Farndale business units.
Lastly, the sale Raspberry Pi were strong at the ended the quarter for now I saw award that 15 million units grew this revenue source more than 11% from a year ago based on a sales information provided by our suppliers for now continues to outperform our competition during the downturn and coupled with our byproduct plant.
We are well positioned to outperformed during the next market upturn as discussed on our first quarter earnings call. In October we believe operating margins of 8% to 10% are achievable for for now by the summer and that 15% operating margins are achievable by the end the fiscal 2022.
Making it easier for customers to do business with US is a key aspect of our transformation efforts. We're keenly focused on areas of operations that would benefit from digital transformation, which extend far beyond for now and as a high priority across all bad that physicist for example, we have 125 robotic process automation pride.
Next either completed or in progress we anticipate these projects will save us approximately 5000 hours per week.
Turning towards as an integrated.
In a second quarter, we were encouraged by sequential order activity. It avnet integrate on a dollar basis, our wins increased 46% quarter over quarter and most importantly, they were higher margin solution wins, which are well aligned with our strategy.
Now for the uptick the work we were doing to transform into our technology solution company will allow us to diversify our business and maximize high margin opportunities and reduce our vulnerability to perform in type revenue fluctuations at the same time, we remain committed to delivering on our core component distribution value prop.
Position in support of our supplier partners.
Expansion into Aiotv solutions will not only help drive incremental growth, but it will expand the customer base for both avnet and our supplier partners.
Work is progressing on our I O T initiatives and during the quarter, we established a comprehensive t. biopsy experts around the globe.
This team will help us accelerate our progress in this critical and growing market.
The acquisition of with Ticky out, which we closed during the quarter right immediate customer wins in the United States, including a major European appliance manufacturer.
This would not have impossible without our ability to fully offer solution with our loyalty capabilities.
To that end at CES, we announced our new Aiotv partner program. This new program accelerates time to market for systems integrators bars, I SBS and Oems, who are looking to develop then scale I OTI solutions faster.
They're able to do this by leveraging Avnets I O T connect platform and our ecosystem of experts.
Our new loyalty program of partners to accelerate time to market with rapid deployment of biopsy solution scale quickly to a multi level partner model.
Realize complete solutions and services beyond fast encompassing security hardware logistics and be on managed their cost effectively through a lean opex model and create awareness within avnets global customer base.
In addition, and that will launch in I O T marketplace. The spring, which is designed to help our partners expand their reach and generate additional revenue streams through avnet re occurring billing platform and global loyalty marketplace.
For customers it gives them access to trusted and certified Aiotv devices developed by our partners as well as Avnet smart applications to speed their time to market.
I will also enable developers the right to the platform and sell their solutions into the marketplace.
Our first partner in this program also happens to be one of our customers Capstone, United States based water management company.
In addition to using Avnet Aiotv connect platform that part of their award winning Intel Hctwo Smart water metering solution. There are using our I O T partner program to deploy the same solution the thousands of municipalities.
It allows them to change their business model to deliver water as a service and create an ongoing revenue source for their company as a result, they expect that 35000 devices installed by the end of 2020.
As you May have heard I'd say previously we are confident our identity connect platform can become the I tunes of Aiotv, that's how powerful yes.
As we've discussed over the course of this call. Our five key strategic initiatives are on track to deliver enhanced customer experience and long term growth for the company.
Half way through the fiscal year, we remain committed to those five priorities.
Amplifying, our electronic component distribution business worldwide scaling high margin business segments, including four now avnet integrated and Aiotv aggressively extending our digital capabilities with the implementation of robotic process automation and AI pricing.
Continuously finding new ways to leverage our ecosystem, where the growth with existing customers and attracting new customers.
And driving continuous improvement through the business, which is fundamental to our success.
Overall as the first half of our fiscal years completed we're pleased to have delivered second quarter sales above the midpoint of our guidance and adjusted EPS at the midpoint of our guidance. We're confident that we are the right mechanisms in place to drive growth. The second half a year with that I'll, let Tom report the financials for the quarter in more detail Tom. Thank you.
Bill and good afternoon, everyone.
Well macroeconomic factors impacted our performance this quarter, we continue to execute our strategy and manage those factors under our control.
We made further progress this quarter.
Optimizing our cost by implementing our 50 million annual cost reduction initiative.
Generating 149 million of cash and buying back stock.
Adding two smaller strategic acquisitions to our portfolio.
And managing debt.
We executed on near term plan and generated sales and adjusted EPS at the midpoint of our guidance.
During the quarter, we delivered revenue of 4.5 billion.
Gross margin held relatively steady sequentially at 11.6%.
Well, we have not yet seen margin recovery the steady gross margin reflects a level of stability in demand and pricing which is encouraging.
Adjusted operating expenses increased 7 million sequentially to 443 million in the second quarter.
This is primarily due to a reserve for potential bad debt.
Which is unique to one customer and we do not believe is representative of a broader credit risk exposure.
We continue to manage cost and achieved our goal of removing an extra 50 million an annual cost from our operations.
Working capital days continue to decline ending at 83 days.
And one day sequentially.
And contributed to cash flow from operations.
149 million.
We repurchased $88 million or 2.1 million shares of common stock.
While the average diluted share count for the second quarter in our financials was 101 million. We ended the quarter with 99.3 million of common shares outstanding.
Achieving our goal to be below 100 million.
[noise] book to Bill ratios improved.
Ending the quarter at 0.99.
All regions showing improvement.
Hi region America's ended the quarter at 1.0 for.
Asia was just below parity at 0.99.
In EMEA lets 0.94.
Turning to business performance on slide 17.
Let's try to components performance reflected the slow demand environment.
With revenues of 4.2 billion.
Down, 2.1% sequentially and 10.2% year over year.
You see operating margins declined 39 basis points sequentially to 2.2%.
The declining operating margins is attributable to the slightly higher operating expenses with lower revenues.
Gross margin was flat sequentially.
Sales for Avnet by region were as follows.
[noise] America's delivered revenue of 1.2 billion.
Down, 2.4% sequentially and 8.8% year over year.
Despite the slowing revenues in the second quarter were better than expected in appear to be stabilizing.
Hi, good sign that we may be near the bottom of the downturn.
EMEA revenue of 1.4 billion was down 3.1% sequentially.
And 14.6% year over year.
In constant currency performance was a bit better.
Down, 2.9% and 12.1% respectively.
Overall, the media performance was in line with our expectations.
Asia revenue of 1.9 billion was down 1.1% sequentially and 7.6% year over year.
Constant currency results were similar.
Down, 0.9% sequentially and 7.7% year over year.
Overall Asia appears to be stabilizing.
Turning to for now we have any for the quarter totaled 331 million.
This compares to 336 million in revenue in the first quarter and 368 million a year ago.
The quarter was a bit weaker than expected in both revenue and margins.
Reflecting pricing and demand pressures that persisted during the quarter.
Operating margins were 6% compared to 6.5% in the first quarter.
On the positive side for now operating expense continue to decline this quarter.
We completed the new European distribution center, which should lead to further productivity improvements this calendar year.
Turning to the balance sheet and cash flow statement on slide 18.
This quarter, we generated 149 million in cash flow from operations.
And totaled 948 million over the trailing four quarter period or $9.39 cash flow per share.
We used our cash to buy back 88 million stock.
Pay 21 million and dividends.
And invest 51 million into strategic acquisitions.
We check Yo and Phoenix that Bill described earlier.
We anticipate annual revenues from these two acquisitions to be in the 160 million range annually.
We reduced our revolving debt by 144 million.
Maintaining our investment grade rating is a priority.
Requiring a gross debt leverage in the mid twos.
After the debt Paydown, we ended the quarter with the gross debt leverage of 2.6.
With macroeconomic factors depressing EBITDA.
We maintain our leverage you will make periodic debt repayments as necessary.
Going forward, we expect to have a balanced capital allocation that includes share repurchases dividends.
Smaller strategic acquisitions and periodic debt repayments.
At the end of the second quarter, we had $506 million remaining in the share repurchase authorization.
Regarding the Texas instruments transition.
Revenues from T.I. decreased 44 million sequentially in the quarter.
And 106 million from a year ago.
We expect to see some further decline in March and then continuing through the calendar year.
Meanwhile.
The reduction in cost, which totals approximately 35 million annually.
Well follow in step with the T.I. sales pattern.
Although we may need to incur costs as we execute our recovery plan.
Our goal remains to achieve E C operating margins in the 2.2% to 2.5% range, starting this summer and onwards.
We will continue to update you on our progress.
Looking ahead.
We remain focused on returning for now to double digit margins.
Expanding easy revenues.
And growing higher margin businesses.
We continue to manage cost and focus on generating cash.
Turning to guidance on slide 20.
We are guiding revenue in the range of 4.1 billion to 4.5 billion and adjusted EPS in the range of 30 848 cents.
These estimates reflect similar market conditions to the December quarter, and the impact of the T.I. transition.
With that let's open the line for Q and eight operator.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
If you like to ask a question. Please press star one on your telephone keypad.
Information tonal indicate that your line is in the question Q.
You May press Star too if you would like to remove your question from the Q for participants do you think speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please let me pull for questions.
Our first question comes from Adam Tindle with Raymond James Please state your question.
Okay. Thanks, Good afternoon, I just want to start on Toms last point on guidance, you talked about it being inclusive of the estimated T.I. impact and I'm trying to help quantify that you sound at least more positive or similar on market trends. So if I run kind of normal seasonal revenue in the March quarter up call. It mid single digit sequentially.
I think it suggest you're kind of assuming essentially the full revenue impact from T.I. in guidance, So I want to confirm that.
If so.
Why is that the case given you really haven't seen much impact. Thus far is it just we want assume kind of a worst case at this point and let the rest be upside.
Adam.
First of all.
The seasonality is plus or minus 2% typically going into the March quarter and as far as tea, we anticipate sequentially going down another 50 to 70 million of revenue. So we had to go down 43 million in Q2 further 50 to 70 Q3.
Okay, and maybe just staying on that point, Tom on cash flow trailing 12 months operating cash flow is almost $1 billion like a quarter of your market cap.
I think the T. I change was supposed to be a couple hundred million dollar benefit is that has that been recognizing cash flow or is that still on the call.
No that very little of that's been in cash flows so that would be over the next few quarters.
Okay, and then a question quickly on foreign L. I think on the last call you had talked about pricing and demand slowing in July but appeared to be stabilizing in August and September on this call you talked about those pressure showing signs of receding, but if we looked at the Farndale operating margin. It was still down sequentially in the December quarter, which is typically a little bit seasonal.
The stronger quarter. So I'm, just maybe Phil can weigh in here, but footing some of the positive qualitative commentary that we're hearing on the backdrop that the quantitative data and any color on the deceleration in operating margin.
Yeah for now was a little slower than expected this quarter, both revenue and I would say with pricing and margins as well you know that said, we do anticipate that Marshall pick up and we as Bill said, we have the new distribution center that is beginning operations, which has higher capacity and lower costs.
Continue to work on the cost structure with integrating back offices, streamlining or real estate portfolio things of that nature. Yeah. Yeah. Yeah, Hey, It's just said just to add to that we actually had a part of optimism for the quarter on on for now it really just drop off in the ended December when do you saw the impact.
Kinda typically don't have a lot of visibility to backlog I wanted to four business will ship the backlog the book, but the incoming bookings tend to drop off with the shutdowns and whatnot from the customers. So we saw a little bit more softness in that last week in a hamper zone do some which drove some of that down a lot of the other metrics are looking positive SKU counts are going up.
Activities so far.
You January looks looks pretty good. Okay. So we are optimistic about the March quarter, starting to show some progress on the top and bottom line and Forno.
A couple of comments I have to Adam we.
We still bullish that in the summer, we should be somewhere between 8% to 10% operating income and we still are committed that as you move into the upside will get back to 15% so well on our way to implement a five wrong approached I talked about my remarks, I think that's going to bode well for us to be positioned extremely positively as we see the upswing in the market.
Okay sounds like a lot of positive ahead, thanks and best of luck.
Thanks, Adam.
Our next question comes from Shawn Harrison with Longbow Research. Please state your question.
Hi, good afternoon.
Based upon I guess, you know there's limited visibility right now, but the trends in the book to Bill you saw in the December quarter would you expect your book to be build the above parity or at parity exiting the March quarter.
Yeah, I think that Oh. This is up though how you doing im sure answer is yes.
And and so far.
Early early days, Yeah, we're in a 90 to one right now as we sit and again the first week of January was a little slow the come off the holiday. So as we see it right now or the answer would be yes pretty much across the board youre might still be a little bit less.
As they catch up a little bit, but short answer yes, okay, great and then Tom just on the on the cost takeout exclusive or what will happen with T.I., where are you at now on a run rate basis, and just remind me where you'll exit the fiscal year in terms of run rate cost takeout.
Thanks, Sean well will end at 190 million of the 245 by the end of Q4.
Okay and as of the December quarter, what was the run rate.
175.
Approximately.
Perfect. Thank you.
Thank you.
Our next question comes from Ruplu Bhattacharya with Bank of America. Please state your question.
Hi, Bill Hey, Tom Thanks for taking my question.
Hi.
The first question just on PCI.
So from the commentary you said should we assume that nothing has changed with respect to the timeframe for for the revenue to go out I think last time, you said by the end of December is when we were targeting that $2 billion to to go out is that still the case or is it running slower or faster.
So it's it's more like 1.6 billion.
The new and yes, we saw some decline quarter over quarter, but it's definitely a slower than we would've expected to be no pick up towards the back half of the year and most likely will be gone by the end of the here.
Okay.
Count in calendar year.
Okay got it and then in terms of work verticals I think you talked about aerospace and defense being strong can you talk about retail and healthcare and the other verticals what did you see there.
Yes. This is this is Phil and you know again defense aerospace seems to be strong and we've done okay and will continue through the year at this point time.
Automotive I'm still a little bit slower than historical good news is the content going up in between the automotive and industrial we had the medical you know, it's roughly 27% of our business across the region. So.
We have seen good opportunities as bill touched on I. It was in a lot of our good opportunities in in the core and iOS you've rolled in medical applications. So that continues to be pretty good strong suit force and industrial with particular strength in a in youre starting to see a slow.
A rebound in the industrial segment as well consumers, probably not our largest play although we do play with some some some guys there and that's actually been pretty steady.
Particularly in the December quarter, where you see that pickup in Asia.
You start to see this December October due to the holiday season in that and that was strong for us in the consumer space.
Okay. Thanks for the color on that Phil and maybe my last one for Tom.
You've done two small acquisitions, so far and I think you said 115 million in revenues per year.
You know.
Given you're trying to replace so much of T.I. inventory should we expect acquisitions to continue and that'd be a larger part of your cash priorities going forward.
I wouldn't say a larger I mean, it so it's been a priority the nice thing about the two acquisitions. This 160 million a revenue. So that's about 10% of the tea business and to the extent that we find.
Targets that strengthen our core business by either more customers are different verticals suppliers will continue to do that.
Okay. Thank you are looking.
Okay. Thank you.
Our next question comes from Matt Sheerin with Stifel. Please state your question.
Yes. Thank you.
Commentary regarding gross margin stabilizing we certainly encouraging and when you look into that at the March quarter, you're typically your stronger you know sequentially in Europe , and North America, and weaker in Asia, which would benefit your margins I know now it sounds like youre up so little bit less than seasonal but.
Are you expecting gross margin to be up here and and as you go forward over the next few quarters, what's going to drive that gross margin in terms of what you're seeing with demand creation.
And the mix of the business.
Sure So Matt yes on March seasonally.
Americas EMEA would be stronger and Asia is Chinese new year. So we should see a margin uptick and then going forward is what you just said demand creation, we anticipate AI in I O T continuing to ramp up and really for now I mean.
Hi high priority within the company to get for now back first eight cents and 10% operating margin in 12 in up to 15 and a fair part of that is you know in their gross margin. They havent seen really any recovery in pricing and typically after downturn and there is some recovery.
Phil.
With the demand creation I'll say, we're very encouraged where we sit right now we've seen some real positive signs on improvement in registrations and approvals. So that's really great.
Okay. Okay [laughter].
And actually a premier for that was my follow up question just regarding your targets to get back to double digit margins.
Next year seen seem somewhat optimistic given that you know at this lower base.
Little bit of optimism in terms of business and I know, there's opex, but still relatively tough environment without a lot of visibility. So it just seems like it seems a little bit optimistic here.
Well, we definitely need some macro improvement to get back you know I think the highest RP was 12% from for now so we would need some macro recovery get to 12%, but keep in mind. The new distribution Center just opened up that has more capacity at lower cost Bill talked about the skews and we continue to to leverage the.
Opex, Matt with the back office integration with the support cost you know we continue to work on our facilities rationalization because several of the cities we have no both avnet and.
For now.
So were actually pretty optimistic that we'll get to the 8% to 10% by the summer and that will get to 12% not too many quarters thereafter.
Additionally, in that we mentioned the five from.
Plan that we have all those things, you're making great progress Oh, all those position us to either get more business or good business at higher margins. For example, our pricing April it gives the people that quote the opportunity to make sure that we were quoting at the high as possible price to get the best margin parcels to when the deal we've been seeing some real.
All favorable.
Results with that as we implement that cross Avnets corpus.
I'm going to be totally implemented across four now I mean probably months.
Got it okay. That's helpful. Thanks, a lot.
Thanks, Matt.
Our next question comes from 10 Yang with Citi. Please state your question.
Hey, guys. Thanks for taking the question you mentioned Asia, it's stabilizing but the gross remain negative in the region are enough last quarter I think one of your key competitors have seen you'll grows for December quarter. So can you talk about what are you seeing the region on why you're not.
How big wells that Youre like your competitors.
Yeah, I think shot that tenants. So galleries are you doing.
So we're very careful to words, we choose a for Asia Pac insane stabilizing because there's so many different factors that can affect Asia I can't speak to our competitors only speak to what we're seeing and when we play some parts of the market in Asia, We don't play and as I said, a little bit role we play in some consumer but we met.
Marine processing for example is out of our margin model and Asia Pac she'll be a little bit more selective there as well, but you get stabilizing right time, we saw the book to Bill Okay come back into a net positive a one to one little bit over and.
Well just track it as we go that that's that's just what we're seeing so going on fills point the market end markets that we're playing worried or holding share gain gaining share in Asia. So we're doing we're doing well, we just don't participate across the board and every particular market.
Great. My next question is on the timing for the recovery if I use the midpoint of your guidance and then adding back the R to P value packet thinking you're still guiding march quarter below normal seasonality.
You mentioned some strong results pharmstandard vendors and your book to Bill is improving as well can you talk about based on your experience. How soon we will see the demand come back and advocacy those I'll be trend from vendors.
Well the mid point 4.3 billion a revenue.
And 43 cents Cps.
Well, we're seeing and you know this is as of today more on March April type timeframe for recovery continuing through June I think that's consistent with what others are seeing as well.
Great. Thank you.
That.
Thank you. Our next question comes from Joel Quadracci with Wells Fargo. Please state your question.
Yeah. Thanks for taking the questions I was curious on on the T.I. replacement. If you could give us any update on your visibility into some of the potential share shifting that that occurs they could they could benefit avnet.
Yeah. This is Phil Joe while it's early days, yet and now we have a a very clear three three pronged approach and strategy, we're driving across all regions. All cities, we have narrowed down by account by account manager in the three things are one word in for been replacement we got suppliers.
Lined up to help us there and when we're working with each other suppliers on packages, we have some suppliers adjusting their technology because there's some slight tweaks that you have to make to try and get the design in the socket out too is the complete new design thats a longer Pomona tent aren't a lot of customer them design out something in the current crop.
Okay.
Engineering resources or the cost of the board lay out so they'll wait for next generation design, but again, we've got a key suppliers work will this area with a dedicated resources. We're we're actually adding some dedicated resources based some suppliers a specific programs and then the third share ship, okay with the new account base there's opportunity.
We're very few customers anywhere that are exclusive of any one distributor to distributors I'm sorry, the customers as we've seen in the past will modify their share shift okay. There's about a reason for that one from strength parity and also sometimes can be sure credit line and so then.
The three areas, we're tracking and we've got it.
By count Okay revenue by account manager Autoweb global level, Yeah, I would add that.
<unk> management system on this is really tight and enthusiasm with our team in some large couldn't be better.
Okay. Thanks for that and then Tom just on a more of a housekeeping I think you on this scorecard that you've previously given in the slide deck, you've given a percentage of revenues come from higher margin businesses that are for avnet and the quarter. So I was curious I don't think I saw that this quarter or could you provide that are eight you know any.
Commentary in terms of like the growth that we saw there.
Ticket the percentage is very similar to last time, which is probably roughly 43. It could be it can be much 40, or you know we're focused on getting back to the low 2%, 2.1% to 2.5% operating margin by the summer and therefore.
That's our focus and that's why we did we elected to take it out this time.
Okay fair enough. Thanks.
Our next question comes from Steven Fox with Cross Research. Please state your question.
Thanks, Good afternoon, just two questions from the first of all.
Offer this stabilization that you're seeing in your end markets I guess when you think about the next few quarters in the recovery that you sort of pointed to starting to show in earnest by March or April how do you. How do you envision that happening like where are you most confident that business trends come back what do you need to see more evidence and then just said Tom as a follow up to the key.
Washington about getting back to that she wanted to five margins how much can you do it.
The market stay at these levels, how much do you control your own destiny on and how much you need a little bit uplift in terms of demand. Thank you.
[noise] saw Jago first Steve Thanks, and I'm going to assume you had you were asking about which regions from a stabilization standpoint, I'll comment on that well give you a little bit of vertical as well so from from its Tom said in the in the script, where you started to see book to bills come back.
In all regions, Okay in no not crazy over one of the warm but come back close to one to one so that's that's good news a starting here in the Americas America started to see the downturn, we started to see it in the late summer timeframe and dropped off pretty pretty quick from a book to Bill standpoint, and that were already start.
Turning to see from up so wrote ROE relatively quick and again why that driven by new industrial cores with defense area. As we pointed out a few different times and play more and more to transportation space here in a little that's still Sop, it's still a pretty strong segment for us Asia Pacific well stabilizing again very careful were usable.
We're seeing it kind of steady as she goes I, it's steadied out at a at a lower base number and no no mistake about that but again the book to bills are starting to move into right direction, there and we feel great about our team in Asia Pac and again, there's a lot of lot of political environment. There, we got to watch very closely particularly in China and Europe .
Our European leadership team again as is starting to feel I wouldn't say bullish but definitely more optimistic as it came out of the December quarter and as Tom said, we were thinking March or April a in Europe in getting that heavy based on industrial and were very strong in the central yeah as well in.
In automotive and there are some signs it's starting to turn there as well, though that we're going to watch closely so that that's kind of the regional color of Russian H. bass separate Japan, Japan, So a little bit of a challenged market overall I think because it does.
Yes, Steve on your margin, we gave a fairly wide range to find 1% to 2.6%. So the 2.1 was assuming no market recovery and even in this quarter. If you go through our guidance will be as about a 2%. If you think about where are we with the T.I. transition will you take that.
You know the two sequential declines we talked about that's about a quarter the way through so we feel we're tracking very well to it. If there is no market recovery will still be it will be out to 2.1% and you know the high end is assuming market recovery with both some level of revenue and some level.
Pricing recovery to get to the full 2.6.
That's really helpful. I appreciate that color. Thank you.
Hi, Steve.
Thank you. Your next question comes from Mark Delaney with Goldman Sachs. Please state your question.
Yes. Good afternoon. Thanks for all the details of the committee provided and I appreciated the opportunity to ask questions.
I guess first I, just want to make sure I understood, where the T.I. business was running at for revenue in the December quarter, and I think I'm not this call for the last caught everybody said, a little under 500 million and then west a 40 344 million. So it's kind of roughly in the 450 million range or a little under it and then most completed corners that is that correct.
Well it was running in the for 50 million range. So now down 43, it'd be about 400 million.
At the end of December and there were guiding to March down another 50 to 70, which would be in the mid 300 million range Mark.
Okay perfect. Thanks for a little setting that up and then also is trying to understand just the the timing.
Impacted some of these cost reductions a little bit better so its way back out the 7 million one time SGN a expansion the December quarter, and I think about the you the savings of 50 million cost reduction program I.
There's probably some other puts and takes an end march around.
Maybe merit increases, but BTI revenue going away you know I when I was something like 425 million for fresh DNA, it's kind of baked into a baked into guidance what am I am I thinking about M&A properly for March or the other factors that should be considering mark Mark we think of it being in the for 34 Thirtys million range.
And no part of that is we do you know we do expect some sort of uptake in March April , but that's the way I would model and that's where we think of it the mid four thirtys.
That is that kind of getting getting the full benefit of the 50 million cost reductions and so the fourthirty is sort of a good baseline I know there's some other cost action plan is definitely I would say.
Yes.
Okay got it and there's other cost reductions out of the current plan, but but there's also investments the company will be making so so yes, we should think about below fourth or any and future orders.
Correct.
Okay and then just just lastly, the those two acquisitions that you mentioned Oh I wasn't sure what margin profile that they may have and I'm trying to think about the EPS contribution from those two acquisitions over that I'm not really interested in it the near term, but how to think about if you ask contribution from those acquisitions longer term. Thanks, Steve.
You know when I said the.
The revenue for the two it's about 160 million most of that is on the component distribution as opposed to the software company operating margins of that company are accretive to what we currently are but it's a electronic component distribution company.
Yeah, I'll jump on some color on the company a Phoenix based out of Washington are there more of a a niche a player really focused heavy in the demand creation and I'm very strongly in the comps Oh space Tom's wireless communication space, and we think we will be operating that separately.
Okay and as Tom said are definitely accretive from an op margins. Yeah. So the operative word there is demand creation right. So you have a high percentage do integration, which makes them.
That's very helpful. Thank you.
Thanks Mark.
Our next question comes from William Stein with Suntrust Robinson Humphrey. Please state your question.
Great. Thanks for taking my questions.
First or something that I haven't heard come up on your color or any others, yet is or the potential effects of the city shutdowns that we've seen in China, owing to the Corona virus has that.
Begun to influence your business in any way do you anticipate any impact or is this something you think.
So how do you know shouldn't affect the electronic supply chain meaningfully.
Well it depends how large the problem becomes right right now we actually ever people that are in that city working from home and we were monitoring it very carefully we'll see what happens with some of the supply lines coming out of China, but at this juncture, we've not seen impact, but if it gets worse and they start shutting down airplanes.
Et cetera that not wildly different effect on shipments on China.
It is it a meaningful region from a manufacturing.
Electronics manufacturing perspective.
Yeah of course is yes, yeah, yeah, okay, great well not great, but thank you.
Another question I wanted to ask was about cash flow earlier in the call. There was a very sort of optimistic discussion about free cash flow levels. Today. However.
I think investors understand your counter cyclical or balance sheet and cash flow relative to demand and the PNM all right. So when you have a significant customer that is going away your.
You're taking a lot of you're you're turning a lot of a our interest into cash rate, you're generally are a lot of cash and with the rest of the business still.
Not in a not in a great part of the cycle, you're generating a lot of cash from that as well you're also at the same time doing acquisitions, which seem very important you your debt ratings important.
Restructuring expenses are important.
And so the question is when you come out of these conditions lets say three plus quarters or so from now.
What sort of cash flow.
<unk> do you anticipate being able to generate on a sort of stable basis does that give you an opportunity to continue to support and potentially raise the dividend or would it challenge it. Thanks.
Sure first of all your commentary is spot on and you know that the 900 plus million yeah that is in a downturn counter cyclical good job to everybody I'd have them.
Normalized you know, we've always talked about a 400 to 500 million type annual cash flow number will I think that's a fair number I'm going forward to think of it and an annual basis. You know, we're really hoping that we see some.
Further evidence another uptick in March and April and that'll that'll affect our cash flow and I'd love to report on the next.
The next call that we used some cash for working capital because her or order rate is up you know that dividend dividends very important to us and I think we've always talked about growing that annually in the you know five plus percent said range you know in an orderly basis, a and you're correct on the remaining uses of cash.
We continue to look at.
You know smaller size acquisitions that complement core aiotv as well as we continue with our buyback program.
Thank you.
Thanks will.
Thank you.
Ladies and gentlemen, there no further questions at this time I'll now turn it back to fill Emilio for closing remarks. Thank you. Thank you operator, while the quarter reflected the expect longhorn correction initiate experience. We are pleased to see good signs of stabilization across key geographies and its use. In addition, our transformation initiative. This initiative are helping drive significant cross.
Saving our new way of doing business will keep us nimble and better equipped to serve our customers over the long [noise] <unk>.
We look forward to updating you on our fiscal third quarter results in a few months. Thank you operator.
Thank you.
Ladies and gentlemen, this does conclude todays teleconference. You may disconnect. Your lines at this time. Thank you all for your participation.