Q4 2019 Earnings Call
Please standby.
Our presentation will now begin.
I would now like to turn the floor over to.
Joe Burke Investor Relations at Avnet. Please go ahead.
Thank you operator.
Earlier. This afternoon eminent released financial results for the fiscal fourth quarter of 2019.
The release is available on the Investor Relations section of the company's website.
A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnets website.
Lastly, some of the information contained in the news release and on this conference call contains forward looking statements that involve risks uncertainties and assumptions that are difficult to predict.
Such forward looking statements are not a guarantee of performance and 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 and its most recent Form 10-Q , and 10-K and subsequent filings with the SEC. 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 or supply new information regarding the circumstances. After the date of this presentation.
Today's call will be led by Bill Amelio, Avnets, Chief Executive Officer, and Tom Liguori, Avnets Chief Financial Officer.
Also Phil Gallagher Global President electronics components joins us to participate in the Q and a session.
With that let me turn the call over to Bill Amelio Bill.
Thank you Joe and thanks, everyone for joining us for our fourth quarter fiscal year 2019 earnings call.
I'm pleased to report that our fiscal fourth quarter, we delivered sales of $4.7 billion. This was a mid point of the target guidance range. We provided to investors in April we closed our fiscal year with sales growth of 3%. Despite the deceleration we saw in the second half of our fiscal 2019.
Since April companies across the industry have seen signs of slowing.
Due to the macroeconomic headwinds and tariffs.
Avnet was no exception, we remain agile as market conditions worsened and we acted quickly to accelerate cost reduction programs that were already part of our long term plan.
Hi, taking these swift actions, we met our commitments to keep SGN a expenses on a downward trend year over year spending was down meaningfully and we remain very disciplined in our spending and our investment priorities.
Pricing and margin pressures certainly were greater than anticipated.
This was due to multiple factors.
These include the shortening of lead times and reduced average selling prices or ASP.
This occurred for an l., which happens when supply rebounds, and demand moves back to broad line distributors.
The pricing pressures felt broadly across the catalog sprays and is expected in a down market.
Based on our supplier and our outside analysts checks for els declined with equal to or less than the market.
Assuming working conditions improve we see a clear path to achieving foreign hours long range goal of 15% operating margin and I'll talk about that more in a few minutes. Let me first finished reviewing some of the key metrics.
Avnets adjusted operating income margin for the fourth fiscal quarter was 3.3%. This is down from 3.6% a year ago and down from 3.8% in the March 2019 quarter.
We delivered another quarter of strong positive cash flow from operations at 335 million and this was running heels a solid positive operating cash flow of $269 million, we recorded in the March quarter.
Overall, our performance this quarter reinforced that regardless of market fluctuations.
Our ecosystem strategy and the plan, we presented at our 2018 Investor Day remains the right course for the company.
We are building on our core expertise in electronic component distribution supply chain and logistics in ways that allow us to expand into new market opportunities for solutions, where the higher margins reside.
Over the long term this plan will enable us to return value to our shareholders and capitalize on several important trends, including Aiotv artificial intelligence and Fiveg.
Now I'll provide updates on our core elements of our strategy. They encompass amplifying our electronics component distribution business scaling higher margin segments.
Extending digital capabilities.
Leveraging our ecosystem for growth and driving continuous improvement.
Let me start with the result of our electronics component business for the fourth quarter, our electronics component business had sales of $4.3 billion.
What's notable here is that this business will help operating income margins fairly steady at 3.3%. Despite a 7.1% sales decline from a year ago.
Over the course of this past year, the Avnet integrated business, which is reflected in the electronics component financials improved this mix of customers.
We expect that when avnet integrated completes the transformation activities you will see margin gains as well as you may know their primary focus is on Barrett for solutions displays and datacenter solutions.
When we look at our pipeline of embedded solutions the margins are higher than in our electronic components business is this progress that will build upon in fiscal 20 and beyond.
Now, let me break down our fourth quarter for electronic component performance by region.
The Americas continue to gain momentum it was a bright spot for the quarter.
The Americas electronics component business grew its sale sequentially year over year, they achieved nearly 10% growth in demand creation design win dollars. They also continue to gain market share. The quarter also saw another significant increase in the Americas net promoter score clearly, indicating customer satisfaction remains on the rise despite challenging market conditions. The Americas exited Q4 with a book to bill ratio above parity.
Turning to on there.
Europe in particular saw market factors take their tool and on our EMEA book to build it remains below parity for the year may have IP segment saw faster growth in semiconductors and finished ahead of target.
We believe IP any remains an underpenetrated high margin opportunity and we're looking to grow it and even a more accelerated pace than last year, recognizing that ASP pricing pressure is still factor.
This past quarter, our EMEA team recognized for delivering strong growth for our suppliers in Q4 and receive more than 20 awards as a result.
In Asia revenue was up sequentially, but down from a year ago. The inventory correction that started in Asia and worked his way across other geographies persists.
Book to Bill in the region ended the quarter below parity.
Our foreign L. business was hard hit by market decline. In addition demand shifted from the high service catalog business back to volume players as our inventory stabilized.
Fourth quarter sales and foreign our 343.5 million down 6.5 sequentially and down 12% from a year ago discussions with outside analysts and our suppliers confirmed that revenue and pricing pressure was felt broadly across the catalogue space.
Pricing pressure across the board also translated into lower margins for an l. saw a decline in sales of higher margin products and IP any especially passes.
We expect the pricing pressure to persist through the end of the calendar year and into 2020.
At the end of the fourth quarter for an L. sales benefited from the launch of new Raspberry Pi for modeled the computer.
This is the most powerful raspberry Pi MRO ever made for now continues to be the largest license distributor a raspberry Pi single Board computer.
Our schools of customization agreement allows us to develop the avnet smart edge industrial Aiotv gateway interest in this secure industrial gateway as high and it has applications in vehicle monitoring building automation predictive maintenance the smart factory.
The successful launch reinforces cornell's position as the market leader in Raspberry Pi is a testament to the strong partnership between four now and a Raspberry Pi Foundation.
During the quarter Forno added 159000 skews to its website, while also adding three new supply lines, including Renaissance.
E Commerce Global order penetration also rose for the 11th consecutive month to date in commerce represent 70% of all foreign our orders our new warehouse in Leeds is expected to come online in December .
This will enable us to reduce cost dramatically increase our SKU count and improved service.
And as the market turns around we will be able to capture market share as it rises due in part to the increasing SKU count.
Our optimization programs will deliver margin improvement we remain extremely pleased with the opportunity for knowledge created for us in the catalogue space and we believe for now is well positioned and will continue to grow.
Next I will take a few minutes to cover our digital transformation.
[noise], expanding and deploying our digital capabilities. This year was critical to driving growth customer satisfaction and of course efficiency.
For example, we leased 53 robotic process automation projects in fiscal 2019.
We're now in the process of launching our artificial intelligent pricing tool than DAVA.
We also deployed Salesforce in the Americas and in Asia Pacific Europe will come online later this summer.
At the same time, marketo or marketing automation tool has already generated thousands of lead and millions of dollars in revenue and it's still in its early stages.
Combining these tools gives us a 360 degree view of our customers worldwide and have led us to 20000 leads being shared between foreign health and our electronic component business in the fourth quarter alone.
We also continue to get better penetration into the demand creation category versus the fulfillment category with the implementation of our available.
Now, let's turn to how we are leveraging our ecosystem to expand opportunities with both existing and new types of customers.
As a larger technology trends around data driven economy takes hold avnet is well positioned to add value as an end to end solutions provider.
In Iowa City, we have a unique ability to help customers United device Gateway network cloud analytics insights in a seamless way this is creating opportunities for us to help customers achieve their business objectives and create new business models opportunities are expanding within our existing customer base too as we focus on connecting the unconnected.
Sure, we're helping customers add new connected technologies to their existing equipment in such areas as in industrial and manufacturing settings.
We closed the year with approximately $70 million of sales and Aiotv.
This includes end to end solutions that encompass device software gateways security and cloud applications. It does not include device or components sales.
Our three year I healthy pipeline has now reached $630 million in a market with a tam that exceed the $150 billion today and is growing this demonstrates the significant potential of scaling this high margin business.
Our strategic partnership with Microsoft is an important part of royalty strategy and continues to deliver customer opportunities.
We're seeing strong pick up since we started delivering tens of thousands of seed units of our onshore sphere starter kit in July .
Of course, we are kids support rapid prototyping of highly secure end to end aisle T solutions.
And finally, I'll provide an update on our continuous drive to operational excellence.
We are continuing to mine the data we now are able to collect given our increased level of transparency insight into each customer.
This improves our visibility and lays the foundation for driving excellence across Avnets operations.
Looking to add this performance by vertical for the fourth fiscal quarter, we saw new and emerging opportunities in retail healthcare specifically in medical devices.
Signals continue to be positive for defense and aerospace industrial and automotive are among the verticals that were hardest hit when the market slowdown began.
And we first of all this in Asia.
These verticals were further impacted by slowing that we've seen more recently in Europe .
As for how macroeconomics will play out as I indicated we believe the correction will persist through the end of calendar year 2019, and potentially into 2020. Some of the key indicators that we're watching to gauge whether the market has turned the corner include how quickly excess inventory gets worked through the channel any pickup in demand in Europe and in China.
And momentum in automotive and the industrial verticals.
Regardless of what the market does we're focused on the areas that are within our control. We've already made plans to put in place and navigate through the challenges ahead of us and will continue to be agile and respond to any new ones that arise.
There is significant opportunity ahead for Avnet, and we are committed to our long term strategy to deliver a great customer experience improve execution and deliver our long term growth targets. This includes our long term target to achieve 4.5% to 5% operating income margin with that I'll, let Tom give you more details on the financial benefits of the actions that we're taking and how the contingency plans we have put in place pay off significantly when the market recovers Tom. Thank you Bill and good afternoon, everyone.
This quarter, we effectively manage those variables that were within our control.
Now responding to shifting market dynamics, as well executed strategies and contingency plans.
We were disciplined in our efforts to control costs and improve cash flow, while product and customer demand was negatively impacted by external factors.
Let me take you through our key metrics for the quarter on slide 14.
Ill discuss in more detail, how our fourth quarter operating margins and earnings were affected.
And the actions we took to mitigate those impacts.
We delivered revenues of 4.7 billion in line with our guidance.
This was down 7.5% from a year ago.
Again, four tenths of a percent from the prior quarter.
Gross margin declined 30 basis points year over year to 12.7%.
Predominantly due to lower sales and margins in personnel.
We continued our focus on managing costs with SGN, a expenses declining 40.6 million year over year.
Our tax rate improved to 18.9% in the quarter to 20.5% for the total year.
We continue to opportunistically repurchase shares at attractive valuations.
We ended fiscal year 19 with diluted shares of 106 million.
Down from $118 million a year ago.
Adjusted earnings per share totaled 95 cents.
A 4% decline year over year, reflecting the items just discussed.
Turning to business performance on slide 15.
Starting with for now.
Revenue declined 12% year over year to 343.5 million.
The inventory and lead times stable for passive components, the market demand shifted from catalog distributors, including for now.
Back to high volume distributors.
Mr price erosion during the quarter as well.
For now operating income decreased 12.4 million sequentially.
Predominantly due to the decline in passives.
Q4, Honeywell operating margins were 9.7%.
Morning for now later in this discussion.
Well I'm trying to components results were fairly solid.
Slowing demand environment.
Revenues were flat sequentially at 4.3 billion and operating margins came in at 3.3%.
Year over year electronic on us revenues were down 7%.
So operating margins of 3.3% within 20 basis points from the prior year.
While we see revenues decreased year over year cable gross margins, coupled with lower SGN a cost.
And in improving America's have stabilized operating margins close to prior year levels.
Sales for Avnet by region were as follows.
Asia, which further South America declined in the March quarter.
Show signs of stabilizing.
As revenues were up sequentially by 7% to 1.8 billion.
Still 8.5% lower than the prior year period.
EMEA revenues of $1.6 billion.
Sequentially, 5.9%.
As expected in our guidance.
And 7.9% lower than a year ago.
Americas with revenues of 1.27 billion.
Lets down 2.4% sequentially to 5.4% year over year.
So the Americas easy business managed to expand operating margins with an increasing gross margin and good leveraging as expenses compared to the prior year.
We ended the quarter with a book to Bill of 0.9 children.
By region.
Americas was above parity at 1.01.
EMEA was 0.82.
In Asia finished the quarter at 0.92.
Turning to the balance sheet and cash flow statement on slide 16.
Cash provided by operations in the quarter was 335 million.
Bringing our total for the last six months to 604 million.
We returned 138 million to stockholders in Q4.
The price of 117 million in buybacks.
And $21 million in dividends.
We recorded a goodwill impairment totaling 137 million.
This was related to the electronic components operating group it was driven by the declining macroeconomic environment and outlook.
The impairment is related to acquisitions prior to 2013.
During Q4, we reduced revolving debt by 354 million.
And ended the quarter with 1.2 billion of net debt and a net debt leverage ratio of 1.4.
Our solid capital structure positions us well to continue our capital allocation strategy of buybacks dividends M&A and other strategic investments.
Now, let me take a few minutes to discuss our management focus for the coming months in light of the macro slowdown.
First for now.
Well in the near term, we are seeing market pressures and anticipate operating margins below 10%.
We continue to believe our goal of 50% operating margins is achievable.
On the cost side, our teams are integrating for now back office functions as well as transitioning to lower cost geographies.
With a roadmap to achieve an additional 20 million plus of annual savings.
This quarter for analysts moving approximately 100 wells to our India based share service operations as well as streamlining headcount.
Our new for now EMEA distribution center is scheduled to ramp operations in the second half of fiscal year 2000.
This will enable us to continue expanding the number of skews offer.
While also reducing operating costs by close to 20 million per year.
The capital investment for the distribution center is largely complete.
We anticipate another $100 million of inventory investment in for now over the next 18 to 24 months for SKU expansion.
This is in addition to the 159000 skews Bill mentioned being added in Q4.
For comparison in fiscal year 19.
We added $60 million of inventory and for now.
Which is included in our financials and cash flows.
While these cost efforts are underway, it's important to know that we are continuing our investments in pricing and quoting tools.
Targeted marketing spend and ecommerce improvements.
To fully achieves a 15% operating margin target, we also need market demand and pricing cross the catalog industry to stabilize.
For the broader avnet.
We remain focused on three key aspects of our financial strategy.
Optimizing cost generating cash flow for buybacks and minimizing taxes.
On Slide 18, you can see our progress two or three year goals.
Optimizing cost has been a key part of our three year strategy to grow operating margins and EPS.
We've shared with you many times, our opex roadmap for savings of $245 million.
Weve made good progress.
In fiscal year 19, we reduce our operating expenses by 117 million compared to fiscal year 18.
It's important to note. These are net bottom line savings taking into account the additional expenses for investments we made in engineering design tools.
Ecosystem expansion Aiotv staffing.
SaaS based pricing and CRM tools and more.
Our approach to managing cost is that we are disciplined in reducing opex.
We reinvest part of the savings back into the company for growth.
And we are sure a portion of the savings dropped to the bottom line.
Our Q4 operating expenses of 460 million represent an annual run rate of 1.8 billion.
Which is favorable to our three year target.
Due to the macro slowdown we are pulling forward 50 million of cost reduction actions that are included in the 245 million plan.
We anticipate these will be implemented in Q1, the savings realized in Q2 and Q3.
Next cash flows.
We reduced working capital by close to $400 million in the last six months and generated over $600 million of cash flow.
We put our cash to work with opportunistic buybacks.
As a result, our diluted share count is now 106 million shares at 10% year over year reduction.
We have a path to get below 100 million shares in the coming quarters.
Taxes.
Our tax rate in fiscal year 18 was 23%.
And at Investor Day, we explained our goal to reduce our tax rate to below 20% over three years by realigning our business operations.
We ended this fiscal year at 20.5% well on our way to achieving that goal, while we anticipate some level of fluctuation in our quarterly tax rate.
We remain confident in being able to achieve a tax rate in the high teens over two to three years.
Turning to Q1 fiscal year 20 on slide 19.
Our guidance reflects a full quarter of expected continued headwinds.
Compared with our last quarter were softness was apparent later in the quarter.
Our conservative approach to macroeconomic factors lead us to guide revenues in the range of 4.4 billion to 4.7 billion and adjusted EPS in the range of 60 to 70 cents.
While we continue to monitor all geographies our guidance today reflects a sequential decline in Americas in EMEA.
Asia is stable.
And continued revenue in ASP pressures across all businesses.
In summary, we continue to manage the factors that are within our control costs working capital cash flow and buybacks.
We believe the actions we are taking today, but may has financially stronger when the demand environment improves.
With that let's open the line for Q and a.
Operator.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tonally indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, while we poll for questions.
Please limit yourself to one question and one follow up thank you.
[noise].
Our first question comes from Param Singh with Bank of America Merrill Lynch. Please state your question.
Hi, Thank you for taking my question so.
Just wanted to first dive into.
Guidance and how your EPS guide in particular, it would just imply that this illness flat sequentially flat revenue guide you would probably have to see a significant dip in electronics marketing margin and possibly even premiere.
Maybe you could help me bridge the gap.
Then I have a follow up.
Sure, Brian I'll take it first and I'll pass it on its own so what we saw in the back half of the quarter was.
A fall off in the catalogue space and as you know lead times arc are coming in significantly and then there was a migration as I pointed out in my remarks from the catalogue space back to the broad line, guys, which affects our margin because the mix then changes between four now and the core core held up pretty well with respect to margins. So in the next quarter guidance, what you'll see is a full quarter of far now at a different place that we saw it ended this quarter and that explains the majority of why the guides down the way it is Tom.
Not much to add high farm, you know demand softened throughout the quarter and pricing soften throughout the quarter.
Pricing news somewhat across the board, but most notably in passes.
So what you're seeing from Q4 to Q1 is a Q1 has the full effect of what we saw.
So I'm sorry for my follow up just to just to get the breakdown if I were to assume that that.
Yeah margins are down only marginally year over year that would imply a significant fall off in premier Farnell margins, probably even lower to when you acquired them.
Unless my math is off and then also wondered I have a follow up after that.
Yes, so for now figure in the 7% to 10% range, so still higher than when we acquired them, but most likely down sequentially from our fourth quarter and most importantly, we see this as a temporary thing as the market rebounds, again, we're positioning ourselves extremely well to be able to play heavily in the upside and we also did channel checks with what's happening with all the catalog suppliers. This is not a phenomena that is for an l. only this essentially across the entire catalogue space each of the Kellogg players also significantly the decline quarter over quarter with this particular slowdown that we're seeing and as the market rebounds back which is looking like something towards the end of the year or into next year, we'll see this.
Respond well and as you know, we're putting in our new warehouse and we will have lots and lots more skews I mentioned, that's bringing on board a lot there this quarter, but we plan to bring on even more by the end of the year. It just in time for when the market rebounds.
Got it so as my follow up I mean are you know you had previously alluded to getting towards a 4% margin by the end of the year. So you can keep on your trajectory for four and a half five.
Do you think that 4% margin, even exiting fiscal 20 as possible and if so.
What would be the moving pieces to get those back into what would be the core improvement, but again in America, maybe EMEA volume.
Premier maybe if you could help you bridge that if you still think that's possible.
So part of this is all about you know the work we're doing today is to position us for when the demand picks up.
And that's why the focus on off that's working capital cash on buybacks I don't want to put out a timeframe because we clearly would need you know markets to stabilize and pick up to where they were to hit the 4% loan. When we think of this as far as what are we executing to our plan you know really what we're missing is missing the topline growth and we're missing the mix because for now is bearing the brunt of of a lot of this downturn.
The good news is you know when you do your model take or take or metrics take what we're talking about and I think you'll see will where we plan to land.
That helps thank you so much yeah, absolutely. Thank you so much.
Thank you. Our next question comes from Shawn Harrison with Longbow Research. Please state your question.
Hi afternoon, everybody else wanted to.
Not surprisingly follow up on for an L.
The 15% EBIT margin target does that require it to get back to a similar scenario that was out there and six you know 16 through 2018 because.
Yeah pricing and lead times don't get that far out of whack very often incentives and passes and so wondering what type of environment, you really need to be and to hit that 15% operating margin.
Well, if you recall last earnings call I laid out the investment plan that we have within Forno. We still are very bullish on getting to the 15% I think in the near term would be back to 12 to 13 first and then more like a three to five years to get us to the 15%, but what we're what we're investing in is more skews that was one of the areas that if you looked at our growth gap with the other competitors was because we didn't have the same skew coverage that they did so that that's going to be fixed as we move into next year. We've got we also invested in some improvements in pricing and quoting tools, our web speed, our infrastructure, which was one of the things that we pointed to when we acquired the company that we had to start changing out systems that were relatively old and finally, we have done a really good solid piece of work on marketing so pay per click and how we do FCO more efficiently and more effectively in order for us to be able to get more traffic on the site more conversion at higher margins.
Okay, and then as a follow up you pulled forward 50 million of savings.
Tom If you could talk about just what was the savings realized last fiscal year end.
Are you or what is the total target of savings that you're forecasting for this fiscal year.
So we're still on the 245 plan in the fifties part of that to 45.
So you know we're planning.
I think we said.
We should be in the high 100 million by the end of that by the end of this year. We have a line of sight to 210 of the 245, we have a number of projects to pull into 245, you know to help everybody with a model you know expect that this quarter will be flat to slightly up perhaps you will see the 15 million reduction in the December quarter, and all of it you know being in our financials by the March quarter.
And how much did you received this past fiscal year and savings sorry.
Hi, <unk>.
We were down 117 million net of.
Hmm.
Best ones.
Okay. Thank you.
<unk>.
Our next question comes from Adam Tindle with Raymond James Please state your question.
Good afternoon. This is Madison on for Adam. Thanks for taking my question. So I think you mentioned on the call you expect some of these pricing pressures to persist throughout calendar year 19 and into 20. So should we think about similar levels of negative operating leverage during these quarters are there some accelerated offsets were negative leverage should begin to be more muted.
Well the $50 million of cost reduction will definitely.
Yes will improve our opex to GDP ratio going forward.
Okay Fair enough and then from.
So thats. Your question end does that answer if not.
Well, if I sort of healthy.
No.
Yes.
No problem ill go over to cash flow, which is.
Actually been fairly robust over the last several quarters I know you have generally thought about cash flow has conferred in greater than 75% of net income is this something we should continue to see on a forward basis and as we think about fiscal year 20, what are the puts and takes to cash flow that youre thinking about.
Yes, I think you should continue to see more of what we're doing we've explained before our buybacks based on a pricing grid. So the lower the share price the more we buy back the higher the share price. The last few buyback so it will fluctuate a bit.
Every quarter you know we still have.
Plenty of opportunity for the working capital reduction so that will contribute to the cash flows going forward on top of our.
Operating income net income.
Okay. Thanks for taking the questions.
Thanks Madison.
Our next question comes from Matt Sheerin with Stifel. Please state your question.
Oh, yes. Thank you.
I'm just following up on the the question is around the margins and how they are they may play out over the next few quarters, it looks like sort of backing into your.
The gross margin number it looks like it's going to be in the low 12, so or lower so it sounds like its.
The SP in pricing impact you're seeing is clearly affecting both businesses and I guess the question is as you look forward for the next couple of quarters, particularly.
Given that December should be a down quarter at least in your higher margin regions why should we not expect margins to be depressed here gross margin at least for the next few quarters.
Well, we would agree with your your assumption you know I think we were trying to say Matt that.
We expect the softness you continue at least through December it was hard to predict when it will recover.
You're correct you know the gross margin percentage well most likely decline in the current quarter due to pricing you know again. So therefore, you know in the meantime focus on.
Put in to place.
Her metrics that will and lands us in a good place once the recovery begins but no clearly our margins will be at a.
This or lower level for the next quarter or so exactly the reason that that we pulled in some of the Opex improvement we're going to continue to look for opportunities to do more <unk>. Okay. And then I mean, just on on that and the Opex and as we roll through.
Jeff why 20 on an absolute dollars basis do you expect.
Operating or sorry, Opex are estimated to be down significantly and like in the $50 million to $80 million range.
Yes.
Okay.
Okay and just lastly, just on the is your commentary about it the more stable demand in Asia.
That sounds encouraging, but you're also guiding I think kind of stable in Asia and it's typically up sequentially. So you are you seeing sort of the tail end of a inventory correction and would you expect.
The December quarter to be up sequentially at this point.
Let me, let Phil take that one.
Hey, Matt how are you doing.
Oh, yes, yes, yes.
As far as Asia goes we see it.
Stabilizing and not stabilized there's still so many variables playing there seasonally were actually up in Asia, Okay, a bit this quarter, which is good news tough to call December quarter, yet, but we're pretty optimistic about it again stabilizing plus a bit of a bump in the December quarter, but just really tough the tough to call with everything going on well just talking to our team there. The other day it stabilizing at a lower number. Okay. You know what we did here in December and you know what we did there last quarter. So it's still down substantially but doesn't doesn't appear to be continuing to fall and I think is.
We start to see the book to Bill a stabilized are there as well, including Japan by the way we're back to a one to one book to Bill in Japan.
Okay. That's helpful. Thanks, a lot.
Mhm.
[noise] [noise].
Your next question comes from Tim Yang with Citi. Please state your question.
Hi, Thanks for taking my question. It seems like you are one to two quarters lagging versus component vendors in terms of seeing the energy mezz weakness.
So my question is based on your experience if the end demand recovers maybe next year would you still be Aladdin lagging indicator to see that a recovery compared to the vendors and if so are you using any tools too.
Monitor or increase your visibility or seeing anything Matt and I have follow up.
Yeah, Let me talk about the visibility end demand one of the things that's great about having a catalog.
Company with US is we've got a lot of data that we can look at and whether its actual lead times versus stated lead times, whether its gross margin ASP declines.
Book to bills you name. It we have a lot of the indicators that we're looking at we're hopeful we'll be able to sort this out and be able to give us better headlights on when this thing starts to turn back around again, and we don't think there's going to be much of a lag between us and our suppliers. We think will come right back again, and I think it will jump ball is what's happening with the China Terrace and Brexit those two are major overhangs on the entire market and hopefully we'll get some certainty sooner than later.
Got it. Thanks, that's very helpful. You mentioned softness in industrial and automotive.
Kinda talk about other segments are particularly in communication.
Some of your component vendor structure, you mentioned that the mess office in that space as well. Thanks.
Our exposure to communications is a lot less and I will give you. Another vertical is still doing well mil aero still going well, it's very healthy and continuing to be robust and we have seen pressure in the industrial and automotive as you pointed out, but hopefully as things turned back around we'll see more robust growth there and I pointed to aiotv as a as a real bright spot for us we're seeing the pipeline increase dramatically there to $630 million three year pipeline, we expect that that over half of that will convert over the next three to five years. So that's really encouraging signs for our solutions piece of our business, which is a much higher margin opportunity for us it's more like a 15% operating income business.
Yeah, Bill I can jump on that your defense Harold clearly a strength for us strength in the market and the strength Radnet, which is great and then tying to Bill's last comment and with Io teams on the new solutions. We're also seeing quite information out of opportunities in medical too. So that medicals is one that's a particular comes to aiotv definitely seeing some nice opportunities in some new customers emerging in that space.
Got it thank you so much.
Thank you.
Animals against a reminder to queue up or re queue for question Press Star one on your telephone keypad at the Star key followed by the one key on your telephone keypad.
Our next question comes from William Stein with Suntrust Robinson Humphrey. Please state your question.
Hey, guys. This is Joe dialing in for will thanks for taking my question.
You've done a good job of explaining like what's going on at.
For now I'm just wondering if.
In the process of doing at your channel checks with the catalog as if Youve heard any reason why customers are shifting to the broad the more broad based.
Players Yeah, Yeah sure. This is a common phenomenon, we probably should have described in earlier calls, but when leap lead times are extended what happens is.
Our suppliers moves a ship more the allocated supply into the catalog guys because its a higher margin opportunity for them and of course higher margin opportunity for the catalog guys East and you saw most catalogs to be actually put all the catalog companies together you'd see that outweigh outgrew the broad line at the same time when the lead time started to collapse. What happens is supply becomes more available and then becomes gets back into the broad line guys and customers will naturally shift from something that cost them more to something a cost them less and that's the phenomenon that you're seeing.
Got it I guess, what Sean was getting on earlier.
That's that's helpful for me.
Hi, Thanks, guys.
Thank you.
There are no further questions I would now like to turn the call back over to Bill Amelio for closing remarks.
[noise] well in summary, I'd like to make the point that we are controlling those areas of the business, where we can make an impact regardless of the macroeconomic situation. We firmly believe that successful execution of the strategies that we've put in place we had significant value to all of our stakeholders, including our investors. We look forward to reporting to you in our progress in the coming weeks and months ahead when everyone have a great day. Thank you.
Thank you. This concludes today's conference all parties may disconnect have a great day.