Vincent Keenan - Vice President of Investor Relations Richard P. Hamada - Chairman of Executive Board, Chief Executive Officer, Chairman of Global Executive Council and Director Kevin Moriarty - Chief Financial Officer, Senior Vice President, Controller, Assistant Secretary and Member of Executive Board Gerard W. Fay - Member of Executive Board and Global President of Avnet Electronics Marketing Philip R. Gallagher - Senior Vice President, Member of Executive Board and Global President of Avnet Technology Solutions Harley Feldberg - Former Member of Executive Board

Shawn M. Harrison - Longbow Research LLC Brian G. Alexander - Raymond James & Associates, Inc., Research Division Amitabh Passi - UBS Investment Bank, Research Division Scott D. Craig - BofA Merrill Lynch, Research Division Sherri Scribner - Deutsche Bank AG, Research Division Mark Delaney - Goldman Sachs Group Inc., Research Division Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division Jim Suva - Citigroup Inc, Research Division Steven Bryant Fox - Cross Research LLC Louis R. Miscioscia - CLSA Limited, Research Division William Stein - SunTrust Robinson Humphrey, Inc., Research Division

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

Good afternoon, and welcome to Avnet's First Quarter Fiscal Year 2014 Business and Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event. As we provide the highlights for our first quarter fiscal year 2014, please note that in the accompanying presentation and slides, we have excluded restructuring, integration and other certain income tax adjustments, intangible asset amortization and gain on legal settlement, margin purchase and other for all periods presented. When discussing organic growth, prior periods have been adjusted to include the impact of acquisitions, divestitures and the transfer of certain operations from EM to TS. In addition, when we refer to the impact of foreign currency or constant dollars, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-U.S. dollar-based financial statements into U.S. dollars. And finally, when addressing working capital velocity, the return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our presentation. Before we get started with the presentation from Avnet management, I would like to review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause the actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors are set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's first quarter fiscal year 2014 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide second quarter fiscal 2014 guidance. At the conclusion of Kevin's remarks, a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations are Phil Gallagher, President of Technology Solutions; and during this transition quarter, we have both the current and former Presidents of Electronics Marketing, Gerry Fay and Harley Feldberg. With that, let me introduce Mr. Rick Hamada to discuss Avnet's first quarter fiscal 2014 business highlights.

Thank you, Vince, and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. Our team kicked off our new fiscal year with a solid performance, as both operating groups leveraged year-over-year revenue growth into expanded margins and returns. The momentum we saw in parts of our business in the latter part of fiscal 2013 carried into fiscal 2014, as we delivered a fourth consecutive quarter of seasonal revenue growth at the enterprise level and year-over-year growth rates continue to improve. Enterprise revenue increased 8.1% from the year-ago quarter to $6.35 billion, and organic revenue increased 3.5% in constant currency. Asia continued to be our strongest region as year-over-year organic revenue growth was positive for a fourth consecutive quarter. Gross profit increased 7.4% year-over-year to $735 million, while gross profit margin declined 7 basis points as an improvement in gross profit margin at TS was offset by a decline at EM. Even with a $475 million increase in revenue, our SG&A operating expenses declined approximately 1% year-over-year as the cost reductions initiated in fiscal 2013 reduced expenses by approximately $35 million this quarter, which was offset by approximately $30 million of operating expenses of acquired businesses and another $1 million related to the impact of foreign currency exchange rates. These cost reductions, along with ongoing portfolio actions, resulted in strong operating leverage as adjusted operating income grew approximately 5x faster than revenue from the year-ago period. In our September quarter, adjusted operating income grew $55 million or 38% year-over-year, led by our Americas region, which accounted for over half of the increase. Adjusted operating income margin increased 68 basis points to 3.1% year-over-year, with both groups contributing to the improvement. As a result of these factors, adjusted EPS increased $0.28…

Thank you, Rick, and hello, everyone. Our team delivered another solid quarter as revenue met expectations and the cost reduction initiatives taken in fiscal 2013 had a significant impact on bottom line results and both operating groups. As is typical in the September quarter, we used some cash for operations as working capital grew faster than income. Working capital increased $291.6 million or 7.6% sequentially, driven by a $246.4 million increase in inventory and a $94.1 million decrease in accounts payable, offset by a $48.9 million decrease in accounts receivable. If you adjust for acquisitions and the impact of foreign currency, working capital increased 4.9% year-over-year. However, even with this noted increase in working capital, our working capital velocity improved from the year-ago quarter and days of inventory have declined. Turning to our expense efficiency. While our revenue increased $475 million from the year-ago quarter, our SG&A operating expenses declined approximately 1% as the approximate $140 million of annualized cost reductions initiated in fiscal 2013 were more than offset by the operating expenses related to acquired companies and, to a lesser extent, the impact of foreign currency exchange rates. We exited the quarter with $866 million of cash and net debt of approximately $1.2 billion. As Rick mentioned earlier, we modified our capital allocation strategy to prioritize a dividend as a way to return cash to shareholders. In addition, we still have approximately $225 million remaining in our stock buyback program, which gives us additional flexibility in enhancing returns to our shareholders. While we have introduced a dividend, we still have ample liquidity to invest for future growth. As an example, we recently completed the first step of our acquisition of MSC, which will strengthen our position in semiconductor distribution and allow us to tap the embedded systems marketplace for…

[Operator Instructions] Our first question comes from the line of Shawn Harrison with Longbow Research.

First question, just wanted to, I guess, walk through the leverage expected on the sales growth into the December quarter. It looks as if, if you hold the EM margins flat sequentially, TS margins would be down year-over-year, maybe if you could correct me if I'm wrong in that tangent. And if TS margins are going to be down a little bit year-over-year, why is it happening?

Shawn, it's Kevin. Actually, no. TS operating margin, we expect to be slightly up to flattish.

On a year-over-year basis?

Shawn, let me, maybe, anticipate, I think, where the conversation is going overall. You've seen some of the early notes as well. We want to make sure we clarify this to the best extent we can for everybody. Kevin is right, first of all. On TS, I would expect more flattish year-on-year margins. I think part of the missing part of the equation is that we are -- now as a 51% owner of MSC, we are going to be consolidating revenues at the top line, so we're going to pick up 100% of the revenues. And there'll certainly -- there'll be an adjustment on any profitability for MSC. Keep in mind that while it's going to start out for us being, we believe, growth, as well as gross margin accretive, the true operating margin accretion from the acquisition will come post our synergies and integration plans. And of course, they will not start until we're finishing the 2-step acquisition process and get to 100% ownership most likely at the end of this quarter. So I think part of the disconnect is that part of that revenue growth at EM is not coming with the expected profitability due to the fact of this -- the timing of this particular transaction.

Okay. And that was going to be my follow-up, a bit on that transaction. But if you could, I guess, highlight the revenue size of that business right now and if you were willing to talk about either the gross margin or at least kind of where you think the operating margins should be once you integrate that, and when it would happen.

Let me let Gerry and maybe even Harley chime in on that a little bit, Shawn.

Well, we see the company will generate revenues in excess as you saw in the calendar year last year of $450 million. So we -- our projections for revenue this quarter are $110 million.

Okay. And then just on the profitability profile, I guess, where is it maybe right now? Or where would you -- and where do you expect it to end up once your final [indiscernible]?

Right now, we see it as breakeven for this quarter. And then as we work to get our integration plans in place over the next couple of quarters as we move into fiscal year '15, we see it being fully accretive at that point.

Okay. Did I miss it? Was there an accretion forecast, or is it just accretive to...

Well, it starts out, so it's accretive at the gross margin level immediately. It will be accretive at the operating margin level once it is integrated.

Okay. And this is -- but it's below EM margins just because of the mix of the business?

Well, not only that, we're also -- we're picking up 100% of the revenue, and we have to divest 49% of the [indiscernible].

We currently will be auditing 100% of their revenue, but we're only a 51% owner through the quarter. So there's a 49% minority interest we have to treat.

I mean, I guess upon full consolidation, will it be accretive to the EM margin profile?

Absolutely.

Yes, it will.

Yes.

Our next question comes from the line of Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Maybe just to follow up on that and to clarify the EM margins. If you were to exclude the MSC acquisition for the December quarter, where would you see EM margins trending sequentially? It looks like they would still be down on a sequential basis. I realize you're guiding revenue down. But if you could just talk about where you think EM margins will land in December, and how we should think about them beyond that quarter.

Sure. Hi, Brian, it's Kevin. EM margins sequentially have historically been down approximately 10 to 20 bps, and that's primarily due to the geo mix from our first quarter to our second quarter. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: So you would expect that kind of normal decline in this December quarter, excluding the acquisition.

Yes. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay. And then just on the EM revenue guidance, down 3%. If we adjust, again, for the acquisition in currency, that's the low end of seasonal. Most of your suppliers are guiding below seasonal, so just wondering how we should reconcile that. Perhaps, the end markets that are more important to Avnet like industrial are holding up better than the broader market, or maybe your plan to reduce inventory from the elevated September levels would dampen your suppliers' growth, but not affect your own growth. So I'm just trying to reconcile your guidance versus the guidance of a lot of your suppliers.

Yes. Brian, as you know, it's not a one-to-one match with any of our given suppliers. But if you look at some of the suppliers who have a broad market base like in Molex, they're actually looking at a plus 1 to plus 2. So for us, we believe at this point -- and if you look at some of the other results, if you'd back out some of the markets we don't really play in, their seasonality and our seasonality looks pretty much the same. So we don't see a significant difference. The suppliers we've talked to seem cautious about the prospects for growth for the balance of the year. But if you back out some of those one-offs that they mentioned in their earnings call, it looks pretty seasonal, typical to us.

Our next question comes from the line of Amitabh Passi with UBS.

I just had a question on the operating margin for EM. I think, Rick, maybe a quarter or 2 ago, we were still striving to get to 5% exiting this year. Do I assume with MSC that's probably a tougher goal to achieve? And then I have a follow-up.

Yes, so, Amitabh, we would twist it the other way. What we would say is the goal to get back to 5% for the core EM business without MSC by the end of the year is intact. And then, of course, heading into FY '15, after synergies and integration with MSC, the whole thing is hopefully in that profile. But we're continuing to hold to that commitment we had made earlier and expectation we had set on the core business x MSC.

Got it. Okay. And then just as a follow-up. Rick, I was very intrigued by some of the regional performances. You saw strength in EM in APAC. I'm curious what drove that. And then weakness in TS in EMEA. It seems like things, again, turned south a little bit there. So would love to just get your commentary on TS EMEA and EM APAC in particular.

Yes, so let me just turn it over. We'll start with Gerry again, and maybe I'll let Phil speak to TS. So Gerry [indiscernible].

Yes. In the September quarter, we had good growth in our mainstream segments in our communication, consumer, industrial and automotive. And then from a geographic standpoint, it came for us mostly from China and Taiwan. If you look at the China PMI for October, it's very strong. So we continue to think we're going to see strong growth there. And if you look at our growth compared to some of our competitors in that space, we actually are growing a little faster than they are. So I think we took share this quarter.

Yes, Amitabh. This is Phil Gallagher. How are you doing? Yes, good pickup. You saw the -- what we'll call the success in growth in both the Americas, North America and Asia -- APAC. We did have some -- we were disappointed with Europe a bit. Again, Europe becomes a mixed bag for anyone, really. It's not one region, as you know. It's broken up. If you look at, for example, Germany and Eastern Europe, we were very pleased with our performance. It was really isolated to Southern, specifically, more France and the U.K., in which we were -- didn't expect a lot out of the Southern piece as we're building that up. But we were a little disappointed in our performance in the U.K., which was part market and part execution. You take that out, we did well. But we need to fix that, and that's what we're working on.

Our next question comes from the line of Don [ph] Craig with Bank of America Merrill Lynch.

It's Scott Craig. So from a margin perspective, Rick, in TS, I know you've laid out some goals to kind of hit by the middle of 2014. Can you just update us on that? And then secondly, can you go into a little bit more detail on the inventory side of things? And I guess, this sort of goes back to one of the prior questions where some of your vendors, component suppliers have talked about challenging times and are below normal seasonality, where you guys have built up inventory to fill what seems to be some pretty solid demand, particularly in Asia. So just trying to triangulate those few comments.

Yes, sure. So Scott, let me ask Kevin and/or some of the others to jump in. On the TS margin story, obviously, our long-term goal in the range of 3.4% to 3.9% on a fiscal year basis through cycles remains intact. We've got now 2 quarters where TS has had year-on-year expansion. We're looking, as we said earlier, at probably very flattish year for December to match last year. And then my expectations would be, and I think Phil's would match, as we head into Q3 and Q4 of fiscal 2014, trying to keep that track record of year-on-year expansion intact as we look back towards our goals. So that would be my answer there. Inventory, which is usually pretty much an EM story as well, I don't know, Gerry, if you want to jump in a little bit more on the inventory color?

Sure. We had a strong June. It had some encouragement that went on. But frankly, we could have done a better job here. I'm looking at Harley when I say that. When you look at the FX effect and some of the inventory we have for a large fulfillment customer in Asia, it's not really too far off. But we'll continue to work that down this quarter, and we see our Q2 ending inventory level would be similar to our Q1 ending inventory level. But it really depends on what happens with our book-to-bill in the regions.

Scott, let me elaborate. This is Phil, on the TS a little bit. Again, although we were a little disappointed on the top end, okay, and we explained that in the script and a little bit of what caused that. That goes a little bit less in the operating income dollar. But when you look at the operating margin percent, we're actually on target for what we planned for Q1. And that the plan and the forecast for Q2 through the first half of the year will be on the target that we set for fiscal 2014 and ahead of fiscal 2013 in our operating margin percent.

And then, by the way, for everybody who are very detailed modelists on the TS operating margin, I would add that we did consolidate some of the Global Computing Components business under TS to start the fiscal year. That, and that there was some part of a transfer from EM previously with some of the higher velocity, but lower margin products, such as hard disk drives, et cetera. So even a flat year-on-year margin for Q2 is somewhat a positive story given that mix issue, a little higher mix of some of those lower margin products as the total TS global portfolio, okay?

Our next question comes from the line of Sherri Scribner with Deutsche Bank.

I wanted to dig a little bit into the demand trends in the TS segment. It looks like TS was a little below your guidance this quarter, and I know you're guiding for relatively normal seasonality that we've heard from a number of the suppliers that they've had relatively weak results in some of the -- on the server side, at least, we've seen some slowdown. So I was hoping you could give us a little more detail on what you're seeing in that end market, and why you think you're going to see regular seasonality for TS in December?

Sure, Sherri. And you're right, we're a little bit off the guidance in the September quarter. That was partially the fiscal close versus the calendar close. If you do a little bit of math there on our end, we would be much closer to the guidance. We had a very good Monday, in which now rolls into our October quarter, okay? So -- and we did the best we could to plan on that. It just came in there. I'm thrilled that the team did such a great job, and we kept that business and built and built it for the October quarter. We would have liked to have had little bit in the September quarter. So that's playing into it a little bit. I think the other piece is we do play in the enterprise. That's still a good and nice portion of our business, but we're also the SMB and in part, particularly around EM. I think our portfolio is much more diverse, okay, and expanded with a longer tail. And as we do the rollouts across the regions, okay, by brand we're pretty confident at this point with that guidance, okay? And the other thing that's exciting for us and we ultimately will get the cloud question, if not today, during this call, but on a later one, is there is also a diversity of customer set offering new opportunities there with VARs converting to MSP, the MSP as a marketplace coming more into the channel through our distribution, which is also playing a nice opportunity along with the system integrators. So when you look at what the suppliers might be forecasting, again, there might be a bit of a different customer set than what we would be. Also, some of them looked at the emerging markets as a downplay. We're actually seeing that pretty good right now, particularly in Asia-Pac. And it's also not as large a piece of our business as well. So returns are a little bit south. It's not as big a piece of our business as might be in some of the others, right? America is looking pretty good. Europe is the one we got our eye on, okay? And we did count that into the guidance.

Sherri, this is Rick. I would just add that there have been some growing questions around, is there a differential between the SMB and a large enterprise, what's going on here. And some of the commentary from some of our key suppliers have highlighted particular weakness in the government sector, particularly the U.S. government sector. And then there are some others that highlighted this concept of pushouts again. And remember, a year ago, we saw that kind of behavior, and they didn't. But the last couple of quarters, a couple of our big partners have talked about some customer behavior change and pushouts, et cetera. We did not see that in September, and I don't know if that's a difference in phenomena between a medium SMB customer and large enterprise. But certainly, we didn't have anywhere near the impact some of them have referred to in our customer behavior at this point. And I think a lot of it's related in some of the points Phil made.

Just tying into that government comment, roughly how much of your business does have government or federal exposure at least directly or through sort of some of your customers?

So yes. So potential markets, we're up 5% to 10% [indiscernible].

Yes. The best we can calculate that, Sherri, based on who the partner is and service, the government and their direct. It's somewhere in the 5% to 10% range of our total revenue.

Okay. And that's for the whole company?

That's for the Americas statement [ph].

Okay. And that's just TS or it's the whole business?

Yes, that's TS. They're a different exposure for EM in defense and aerospace, but not really GSA, no.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

I was hoping we could talk a little bit more about some of the forward-looking indicators of your margins within the EM segment. Yes, I understand there's some regional mix shift issue that's going on right now and then maybe some pricing pressure in EMEA. But if you look at your design-in work, can you update us on how that's tracking which my understanding would be that when your engineers are helping design in products that it has a higher margin associated with that? And so if you're doing well there, maybe as we get into a more robust part of the macroeconomic cycle, you'll see some better margins.

Gerry?

Yes, Mark, great question. We continue to be positive about our design wins, but we need to see some growth for those to turn into revenue. As you know, we're the market leader in demand creation. But until those industrial projects really go into production, we're seeing a delay in the revenue cycle there. But if we talk a little bit about -- I think you talked about gross margins. Our gross margin pressure continues, but our margins in the West are really beginning to stabilize. And if you look at our Q1 performance, it was really solely down to a reflection on our mix. So while we need demand to pick up to see a significant change, I am encouraged that our margins in the West are starting to stabilize.

That's helpful. And then for my follow-up, Kevin, you talked a little bit about still having some dry powder on the buyback. Can you help us think about at what point you may want to execute upon that?

Sure. We do not buy back any shares in the first quarter, but we still do have approximately $225 million outstanding on the previous program. As we have highlighted in the past, we have statistical approach in place and we buy when it becomes a compelling value based on our intrinsic value. So we're going to continue to update to evaluate the price relative to our internal projections, and we will continue to follow our disciplined approach as we move forward. Rick, anything you want to add or...

Yes. Mark, this is Rick. We have a schedule in place. We have a strike price that we get in. And from that price down, we get more aggressive. And then, that price up, we get less aggressive. So we're holding consistent, and the valuation has been modified over the last few quarters. And we'll report out fully each quarter whether or not we hit those levels.

Yes, that's helpful. If I could sneak one last one in on capital allocation. I know at your Analyst Day, you guys talked about trying to be a little bit more focused on margins as you think about doing any acquisition. And I'm wondering now that you have that philosophy in place and you look at the potential deals, are you still finding opportunities that you think can be attractive? Or is there a less robust M&A pipeline given your more stringent criteria to do a deal?

Yes, I wouldn't say that the criteria has limited the pipeline, Mark. I think MSC is an example of following up on that theme that we have set the tone at for the main meeting. We will -- M&A happens when it happens. Both groups in all regions of the world have an active pipeline. We have our standard rainmaker process. We work through it like any other pipeline, and we'll continue to keep you posted on when the deals come through at the appropriate levels.

Our next question comes from the line of Matt Sheerin with Stifel Nicolaus. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: If I can, I wanted to go back to the margin question on EM. And I know that you talk about gross margins expanding when lead times stretch and the cycle takes another step up. And here we are, probably 4 or 5 quarters now into a very low growth environment. You've got Asia growing faster than the Western markets and still have pricing pressure. So looking at that 5% operating margin number in this low growth environment, if we don't get an acceleration due to macro or other issues, how are you going to expand margins?

Well, Gerry, let me [indiscernible] just jump in. So Matt, I think that we, again, consistently set expectations on the EM core business that with normal seasonal patterns as we ended the fiscal year, we would expect that. Now normal seasonal not only includes certain growth expectations for Q3 and Q4, it also includes a geographic mix shift because we tend to see a tilt back to the West as we get into the early part of the calendar year. Currently, we're nearly 42% Asia. And because we've got the returns coming out of Asia, we don't want to slow that down as well. But ultimately, it will be what happens in that geographic balancing as we enter the latter half of the year. That's one of the biggest factors. So I'm sorry, Gerry, if I pulled your thunder.

That's okay, that's fine. As you know, one of the things I do want to say is hats off to our Asian team because that's not an easy place to grow profits, and they've done a very good job there. But as Rick said, if we get some normal seasonal growth in the West and some lead time extension because of that and our Asia business continues to perform, we think we can approach that long-term profit goal of 5% in the back half of FY '14. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: I guess my question there is what gives you the sense that we are going to get any acceleration in terms of the mix and lead times?

Well, Matt. Even if we don't accelerate, kicking on ahead, we had -- the last 4 quarters of book-to-bill have all been around fairly 3 or slightly above, one just below at 0.99 and take a look at the typical margin expansion for EM in the Q3 versus Q2. Go back and look at you charts, right? So we don't really need a big boost in the growth. We just need normal seasonal patterns growth-wise. And of course, March is always revenue growth because there's just more shipping days, that's part of the issue. And then you have the rotation back to the West and take a look the normal op margin expansion for EM if there is anything as normal anymore. And so I understand that point. But just take a look at the typical op margin expansion for EM in the Q3 time frame, take a look at where we're at. And then all of a sudden, ultimately, it will not seem as a bridge too far to cross. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: No, that's fair. But you have pushed out that 5% target, and that's why I was asking that question. But I certainly understand. And then just on the follow-up, could you update us on your IT initiatives with the IT upgrade? I know this is a multi-quarter event. And where you are, and what's left?

So Matt, there's a lot left because I start with a list. I think most recently, we referred to a consolidation of our platform for our TS EMEA business onto a single instance of SAP. We are now basically 90% done with that. That's been happening over the last year, by the way. Although we didn't believe it's had any measurable negative effect on the business and not contributing to the circumstances there, we believe the team has executed very well, and the last piece of that will be the full Magirus integration, which I think we've highlighted earlier. We had some delayed synergies out of Magirus due to the fact that we do not have our third deployment and final consolidation for the TS EMEA platform until Q3.

Yes, March quarter.

Yes, March quarter. And either way, when that is executed and done, it will be another $7 million to $10 million of synergies that have been delayed out of that acquisition. So that -- I think that's the latest piece of the puzzle that we've updated. But globalizing our platforms is an ongoing business as usual at Avnet. And not only in ERP. We look at areas like HRIS, we look at CRM, we looked at our WMS. It's just part of our doing business. And when there are major developments and, for that matter, major accomplishments along that continuum, we will keep you posted. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: And is there anything big in terms of heavy lifting this quarter on components or other business?

No, no, no, there isn't. The real heavy lifting was really a computer business in Europe the last 6 months, and that's off and running at this point.

Our next question comes from the line of Jim Suva with Citi.

If I understand the pending acquisition, I guess, with the acquisition that's happened, it's just a follow-on of the additional integration of MSC, it seems like that because you recognized the full revenues in the December quarter that you have to pay out to the minority, you're not getting the EPS flow-through. And if that's the case, it appears then that the March quarter, your EPS flow-through would be much greater than normal. Is that the way to think of it?

Yes, Jim. So we -- actually, you're right. But I want to be more clear about it. So even if we were 100% owners today, it would not be accretive on a profitability basis, right? Because there are some synergies. About half the revenues at MSC were component distribution, and the half are the more specialized embedded solutions. So even if we were 100% owners today, it would not be accretive on the bottom line. And the fact that we also have to -- whatever, if there was any profits there today, we have to give 45% away below the line. That's a different set of impacts. So it's really -- for MSC to be bottom line accretive, we have got to get our integrations done and get our synergies extracted, and that will happen during the March quarter, assuming successful conclusion, by the way, I don't want to take that for granted, but assuming successful conclusion here at the end of Q2. And then we get to work on the integrations. It's probably 100% realized as we enter FY '15, to tell you the truth. Gerry, Harley, anything else you'd want to that?

Yes. No, I think that's right, Rick. I think depending upon the implementation schedule, we expect to realize the majority of the synergies in the first quarter of fiscal '15.

So then that would mean a flow-through September of '14 or basically a year from this quarter of reporting, you would see much larger than normal flow-through to EPS accretion. Is that appropriate?

On the MSC revenue, absolutely.

Okay. And then for cash flow perspective, should we be looking at an additional cash flow outflow in the December quarter for the 49% for this acquisition?

Jim, it's Kevin. Nothing significant.

Our next question comes from the line of Steve Fox with Cross Research.

Just a few clarifications. First of all, on the buyback, my understanding was that your interest in buying back the stock was closer to book value. Has that changed relative to the comments you're making today?

Yes, Steve. We've never been very specific. What I will tell you is that our assessment of intrinsic value looks at multiple methodologies. We look at proximity to book, we look at BCF, we look at forward PE based on our own internal financial projections. And we kind of triangulate from multiple dimensions to land on what we believe represents, as Kevin said, a compelling value and we leave our standing orders in accordingly.

Okay, fair enough. And then I'm sorry to beat a dead horse on the acquisition. But Kevin, when you report next quarter, are you going to show a minority interest line, or are you saying that you're going to x out the minority interest that you pay out through the operating income line because it seems...

It will come through as by other income and expense as part of that line item.

Okay. And for this quarter it's a 0. But going forward, it could show up as interest rate [indiscernible] even profit?

Once we own 100%, it will go to that.

It should only be a minority interest this quarter.

Okay, got it. And then finally, just a big picture question because I heard some, I guess, some mixed commentary around just the Technology Solution business. Outside of what you're talking about with seasonality. I mean, I'm trying to understand how you're describing the business environment. And it seems like you're saying there's some contrast versus some of your key vendors. But any more color around what you think is going on from a true end-demand standpoint in growth. And then if you could, Phil, if you could just tie in sort of your typical comments around product segments, that would be helpful.

So yes. Let me -- I'll start, and I'll turn it over to Phil for more detail as well, Steve. So I think 2 things are on my mind on the big picture here for the TS outlook. First of all, the SMB versus large enterprise that I think we talked about that earlier. And then second, keep in mind, with our suppliers across the board, there are winners and losers on the supplier basis as well. So there are some share gainers and some share losers, sometimes among those. So sometimes those reports can be mixed. And in our broad portfolio and some growing trends in areas, well, obviously for us, it continued to be services and software out there and hardware as an example. So there's mix shifts between the suppliers, and there's mix shifts between the commodity segments on a broad basis. And Phil, anything else you want to add?

No, I think that's right, Rick. And kind of tie it back to Sherri's question, the customer tail, if you will, is much longer and broader for us from an opportunity standpoint. It's also the ecosystem's changing quite a bit. There are offering us new opportunities, as I mentioned, with the ISVs system integrators, the xSPs if you're the managed service providers. It's actually -- it's not a new market, but it's an expanded market for us. Storage continues to be strong. Services, as we noted in the script, continue to outgrow hardware as well. And this whole area converged. They offer us a new opportunity, and we've got -- we have the bases really well covered there with our branded line card. We're the only ones in the industry that can offer all of the converged opportunities and solutions out there, and we continue to see that growing very nicely, which is exciting. When you ask about the mix and you go back several years, you see a change here. Hardware is, rough and tough, 6% of our business today. Software is pushing 19% and services, both Avnet brand and end result, is approximately 21.5% to 22%. So that's quite a shift from years ago, and I think that's indicative of what's happening in the marketplace.

Our next question comes from the line of Louis Miscioscia with CLSA.

I guess continuing on that, you mentioned storage, services and converged systems are strong. Maybe anything else on what wasn't as strong or below expectations in the quarter in the TS category?

Yes. Service was certainly a bit weaker. We had to bring it down somewhere, right, if storage and everything else is up. So services are -- server is still down, not down as much as we've seen in the past, led by the proprietary. As a matter of fact, it's a bit of a mixed bag in proprietary. Some of our regions actually did grow in proprietary, which was good news. But what's happening in that space is that space is changing quite a bit as well. There's the volume-based server business, and that's what we're seeing declining. But when you start to look at, again, back to the converged, the server is just an element of a solution. When you look at some of the converged solutions today, whether it's Vblock, FlexPod, IBM Pure, HP Cloud Matrix, the server is just an element of the solution. Then you got the software's becoming a bigger piece. The storage becoming a bigger piece and, of course, you got the networking. So it's playing I think a different role in our business. And as storage continues to grow, servers become -- continue to become a lesser percentage of our total business, but still a very important percentage. But if there's one area that would be it, that was still softer than the rest.

Okay. Let me ask a cloud-related question that we actually talked about a bit back in the GTDC in May. So if a Software-as-a-Service solution starts to get sold by some of your borrowers and supported by you all, wouldn't that end up being a lower dollar transaction sale? Because if you're selling an entire bundled converged hardware, software and services package, you get all the money upfront, where if you're selling a cloud solution, especially Software-as-a-Service, that's generally rented by the month. So wouldn't that have a material effect? And I guess, how are you all thinking about that, I guess, the impending cloud wave coming?

Yes, Lou. Actually, we're excited about what's coming, I would tell you the truth. It represents -- think of it, we're going to get a very high level as another version of CapEx to OpEx on a customer behavior or customer financial model preference basis. And there'll be an element of that in the future for sure. By the way, Avnet as a customer is looking at the same thing from our own internal IT infrastructure. So we're believers. We get it. And there's this move from CapEx to OpEx. But as Phil said, part of the offset for us is that we're becoming an arms dealer to some of these service providers as well. Actually, some of our VARs are making the transition and bolting on some service provider and some -- none of them are out there, at this point, becoming SaaS providers yet. But we're adding a variety of services, sometimes as an extension to what they've done for network management, there's a starting point, et cetera. So as the cloud continues to grow, there are multiple plays for us. And net-net, at this particular point, it has not manifested itself as a material disruption or impact to what we would consider to be some of our normal seasonal patterns in more of the product-oriented CapEx business. However, I think we're in a great spot to offer some of these new financial models and be an aggregator behind this indirect variable cost sales force known as the VAR to help some of these future application as the service providers get to markets, particularly at mid-market, where the VARs have had the strong customer relationships for quite a while.

Two additional comments, Rick. One is the -- this is where our financial services piece is playing a new play in the cloud, okay? As our partners may now -- they want to take the revenue all up front. It becomes an annuity for us, we'll help in financing. So that's an element that's an opportunity for us, and it's very profitable. I think, the other thing, I wanted to just make a comment, when you go back and look at the acquisitions we've made and you talk about services, some of the acquisitions we've made are actually service providers, if you will, consultants, if you will, for our partners to help enable them to go offer cloud solutions to our collective end customers, again, through the partner base. So it's really expanding, the aperture of opportunity for us to offer more services to our partners to the end customer. So we're embracing it, it's here, okay? And we see it as an opportunity.

Our next question comes from the line of William Stein with SunTrust.

Just 2 quick ones. First, on the inventory build that we saw in the quarter. I think you addressed that by saying that you'd expect it to be flat on a dollars basis at the end of this quarter, which we assume -- which would signify a good decline on a days basis. Is that correct? And is this something that we should expect on a seasonal basis to happen next year in this quarter as well because of the new customer engagement? Or is this just kind of a slippage of order or maybe taking inventory in too quick?

So it's Kevin. I -- so the sequential inventory build, I think, for the core EM business, the flattish comments, obviously, with MSC coming on-board, we will have an impact from the acquisition.

And the -- is this -- you talked about an engagement with a customer in Asia or maybe it's multiple customers. Is this a new part of the business that we should expect to kind of be seeing now on the inventories or am I reading that wrong?

Yes, this is Will?

Yes.

Hi, Will. It's Harley. Let me make a comment or 2 on the inventory, if I could. I would not read the inventory increase in the September quarter as a story at all quite critically. I know there are a lot of contrasting signals out there, with a couple of suppliers getting somewhat more tentative really over the last month with their comments and some of the guidance coming in a little lower, and even with us at the lower end of what we'd consider a normal seasonality. So I understand that the inventory increase looks a little bit disconnected from those comments. I would not read a story into that. When we dissect where our increase in the September quarter came from, as Gerry correctly said, it came in a little bit higher than we would have predicted and we would have liked. But it's not a concerning figure. Our velocity metrics are still strong. A good portion of it is due to our prediction that some of the large fulfillment deals that we're managing in Asia will continue to show some strength through December at a rate higher than we would have thought probably going back to July, August. So that's a good portion of it. But the other portion, I think, as Gerry alluded to, is if you look at our metrics for June, we came in at a days of inventory level and a velocity level really lower than anything we've seen in a couple of years. And so some of what you saw in September was really adjusting for that very low level in June. Much of the inventory will again come in, go out in the December quarter, but some of it really is just readjusted pipelines. But I would not read that at all as a signal that we're seeing strong macro growth ahead of us. It really is just management of our pipeline.

Harley, that's helpful. I appreciate it. And one more, if I can, it kind of relates to this, right, and that is the linearity of orders in the components business. Checks that I've done recently suggest things might have slowed down in September only to pick up either at the tail-end or maybe at the beginning of October. And I'm wondering if you can offer Avnet's view on this.

You know what's interesting, Will? Gerry and I have met with a couple of suppliers actually this week, and there was some sentiment that sounded that way. We do not actually see that ourselves, but I had heard that from a few suppliers. And I am suspicious that, as Gerry said earlier, the -- our results and our seasonality doesn't map exactly well suppliers. Some are better than others. I think I saw ST this morning talk about essentially flat December. So some of them are mapped well, others do not. But we didn't see that slowdown. And as Rick said, initially, our book-to-bill for the full quarter was just a speck under parity. And I think, as Gerry said, through the first 3 weeks of the quarter, they popped back up to about 1. So we don't see that. But I have indeed detected that, as well as you have, with some of our key suppliers.

Gentlemen, there are no further questions at this time.

Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation, along with a further description of certain amounts that are excluded from our non-GAAP results. This entire slide presentation, including the GAAP financial reconciliations, can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you.

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