Avnet, Inc. (AVT) on Q3 2022 Results - Earnings Call Transcript
Operator: Please standby. Our presentation will now begin. Welcome to the Avnet's Third Quarter Fiscal Year 2022 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.
Joe Burke: Thank you, operator. Earlier this afternoon Avnet released financial results for the third fiscal quarter of 2022. 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 Avnet's website. Lastly, some of the 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 the 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 Avnet's 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 Phil Gallagher, Avnet's CEO; and Tom Liguori, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?
Phil Gallagher: Thank you, Joe and thank you, everyone, for joining us for our third quarter fiscal year 2022 earnings conference call. I am very pleased to share that our team's continued focus on execution has yielded yet another quarter of strong financial performance and competitive gains across our business. Our focus on accelerating the growth of Farnell and on strengthening the operational efficiency and critical partnerships of our core distribution business is yielding consistent results. And this is demonstrated in the numbers. We posted 32% year-over-year revenue growth with Asia exceeding expectations by defining the traditional March quarter seasonality, 2 years in a row. Margins were also very robust. In the quarter, revenues of $6.5 billion were up sequentially and year-over-year. Our adjusted operating margin increased sequentially to 4.7%, driven by the continued margin expansion of Farnell and electronic components business. We are competing favorably across the board and are pleased to see continued improvement in our Americas business, where strong demand and expanded supply chain orchestration opportunities helped us grow revenue by over 40% year-over-year and achieved our fifth consecutive quarter of operating margin growth. We are also especially pleased with strong results from Farnell, which has proven to be an important needle mover for total Avnet and is now responsible for 7% of our sales and 23% of our adjusted operating income. Robust demand was again widespread across our end markets. We continue to see strength in the Automotive, Transportation and Industrial segments. And we expect the Aerospace and Defense segments to remain elevated over the coming quarters. Overall, we continue to forecast favorable demand conditions to hold throughout the second half of this calendar year. Before I turn to segment performance, I would like to briefly address the conflict in Ukraine. Our team has been deeply saddened by the violence that has unfolded and continues to closely monitor the safety of our colleagues in the region. Our thoughts are with all who have been affected by these tragic events. We have just a small number of employees in Ukraine, most of whom have safely left the country. We also have some in Russia and of course, many partners, suppliers and customers in the region. Due to that, we do expect some minor impact to our business. While we have no distribution or integration centers in the region, we have ceased all business activities in Russia, which represents less than 1% of our annual revenues and gross profit dollars. Our focus remains supporting our impacted employees and partners. And while I'm deeply unsettled by the situation in Ukraine, I have been heartened by the incredible efforts undertaken by Avnet and the Farnell employees to provide direct support to Ukrainian refugees entering Poland, including through the delivery of supplies and equipment. I couldn't be more proud of these efforts and the supportive culture we've built here at Avnet. Turning to the performance of our Electronic Components business. Revenues were up 11% sequentially and 33% year-over-year in the quarter due to strong sales across all of the regions. We posted double-digit sequential growth in EMEA and in the Americas. And as previously mentioned, this is usually a seasonally slower quarter in Asia due to the Lunar holiday. So we were very pleased to see results in Asia that exceeded our expectations for the March quarter, which we believe was driven by share growth in the region, solid demand creation and growth in the power and programmable logic controller segments. We saw a continued rebound in our Americas region, which was again up significantly year-over-year and sequentially. What's more, the team's ability to maintain expense levels, while also capturing significant business opportunities from new and existing customers, driving improved margins in the region. Of note, we have expanded opportunities in the Americas and EMEA to engage directly with Tier 1 automotive and transportation companies, very exciting. This broad engagement speaks to the value add it brings with our deep expertise in supply chain orchestration and is exemplary of the new contracts we are winning across our business. Our book-to-bill ratio at the end of the quarter remained strong. Lead times remain consistently extended at this point in time. We continue to tightly manage our backlog and are satisfied with our inventory levels as we support strong demand across our operating regions. Our continued investments in digital and design tools and field application engineers are paying off, as demonstrated by another solid quarter of design and engineering activity across all regions. These high levels of design registrations and wins in prior quarters resulted in yet another quarter of record, demand creation sales and gross profit. Turning to Farnell. Sales were up over 18% year-over-year, a reflection of the impact of our investments in Farnell inventory and its e-commerce capabilities. We added over 19,400 SKUs in the quarter, which gets us well on our way toward our plans to add 250,000 SKUs through 2022. Our sustained investment in Farnell's e-commerce platform and improving the user experience has yielded meaningful results. 56% of our total sales and 72% of the total transactions were placed through Farnell's e-commerce platform this quarter, and we expect that to continue to see increased traffic and new customer acquisitions in quarters to come. Our e-commerce web feed is 54% faster than in the same quarter one year ago, providing a much better customer experience. Over the past 18 to 24 months, Farnell has added 40 new supplier partners. Quite a few of whom are existing electronic components partners. This really speaks to the distinct value proposition of Farnell and the complementary offering it provides alongside our electronic components business to Avnet, its customers and suppliers. In summary, we are very pleased with our performance over the past several quarters. I'd like to personally thank our employees for their unwavering commitment to executing on our strategy and delivering top and bottom line growth. Their efforts, coupled with the durable changes we have made to our business over the last several years have helped us gain considerable share and continue to position us to capture new opportunities as we progress through 2022. I remain very optimistic about what lies ahead for Avnet. I look forward to sharing more on these opportunities at our upcoming Investor Day. So with that, let me turn the call over to Tom to report on the financials for the quarter. Tom?
Tim Liguori: Thank you, Phil. Good afternoon, everyone, and thank you for attending today's call. As Phil mentioned, we are very pleased with our third quarter performance. Our team's focus on growth and margin expansion continues to drive higher top and bottom line performance. I'm excited to share further highlights from the quarter. Our revenues of $6.5 billion and adjusted earnings per share of $2.15, both exceeded guidance. Farnell revenues grew 18% year-over-year and 6% sequentially to $469 million. Operating margin in Farnell increased 123 basis points sequentially to a record 14.9%. The growth in margin expansion is in large part due to the Farnell team's focus on improving the total customer experience. And as Phil mentioned, adding suppliers, many of which have been long-term electronic component suppliers and are now also with Farnell. Electronic Components grew revenues to 33% year-over-year to $6.0 billion, driven by increased demand creation and IP&E revenue, as well as new supply chain orchestration engagements. Both Americas and EMEA benefited from the growing supply chain engagements. These are large-scale engagements to help customers manage supply chains. We were specifically pleased by the continued improvement in our Americas business, which grew 17% sequentially and over 40% year-over-year. We also had better-than-anticipated results in Asia, where we did not see a seasonal decline. Electronic Components operating margin improved to 4.4%, an impressive 92 basis point improvement from the prior quarter. Each of our regions grew gross margin over the prior year quarter, benefiting from pricing and continued expense management during this period of significant growth. For total Avnet, we couldn't be happier with our seventh consecutive quarter of adjusted operating margin improvement. A 4.7% operating margin is far higher than we've seen in the past. The reason is we are a different company, a stronger, more resilient company. Today, we are focused on our distribution capabilities, being efficient and meeting our customers' supply chain needs. Our supplier base is solid with suppliers like AMDs-Xilinx, Broadcom and others that differentiate Avnet and it's a wide breadth of suppliers with no one supplier greater than 10% of revenues. Our investments in FAEs and online design tools have increased our percentage of revenues from demand creation. Demand creation as a percentage of revenue, is now 500 basis points higher, which means higher gross margins. Our Americas team has made great progress with strength in automotive, industrial, EMS and aerospace and defense, all high-growth verticals. This quarter, operating margins were well ahead of our previous expectations. Americas is now a solid contributor to our success. And for now, we've invested in Farnell for 4 years to create a better customer experience. We have an engineering community, online tools and product info, our ordering process is streamlined. We offer a much broader selection of inventory, as well as more payment options, all of which make it easier to buy from Farnell. And best of all, most product is shipped same day. All of these contribute to the higher revenues, better pricing and a more efficient fulfillment process has reflected in their financials. Lastly, our expense structure is more streamlined today. We've talked to you for 4 years about our $245 million OpEx initiative, saving money in the back office and investing in the front office. Compared to 4 years ago, our quarterly revenues are $1.7 billion higher, yet our adjusted operating expenses are up only $30 million. That is why you see tremendous drop-through to the bottom line. All of these contribute to Avnet today being a stronger and more resilient company. Some of our investors and analysts are concerned about pricing and its contribution to our operating margins. We've been very transparent about this and will continue to be. In this quarter, we estimate that higher year-over-year pricing contributed 220 basis points to Farnell margins. In electronic components, the contribution is about 45 basis points. Combined, our Avnet adjusted operating margin of 4.7% would have been a healthy 4.1% without the benefit of higher pricing. Our teams continue to manage our balance sheet and generate cash. Cash flow from operations this quarter was $244 million. That was comprised of $77 million of cash generated by operations and $167 million from a cash income tax refund. Our days working capital decreased to 67 days this quarter, down from 70 days in the prior quarter. Inventory dollars increased sequentially by $138 million, though continue to be in line with the increasing customer demand, as evidenced by the slight decrease in inventory days from 60 days last quarter to 58 days this quarter. We continue to maintain a solid liquidity position with cash and equivalents of $199 million and $1.6 billion of available lines of credit. Our gross debt leverage this quarter was 1.4%, and net debt leverage was 1.2%. To build on what Phil said about our business activities in Russia and Ukraine, we took non-cash reserves of $26.3 million, primarily related to reserves on receivables in the region. We do not expect to incur any further reserve adjustments going forward due to the conflict. Regarding progress on our capital allocation priorities, we repurchased 1.1 million shares in the quarter and our dividend of $0.26 per share represented a 23.8% increase over the prior year. We remain committed to increasing shareholder value by delivering a reliable, increasing dividend and continued share repurchases. Let me finish with a few notes on guidance. Our fourth quarter guidance today is based on current market conditions, including ongoing strong demand in pricing and the current state of COVID restrictions, as well as geopolitical events. For our fiscal Q4, we are guiding revenue in the range of $6.0 billion to $6.4 billion and adjusted diluted EPS in the range of $1.90 to $2. In conclusion, we remain committed to providing reliable returns to shareholders through revenue growth and margin expansion and a commitment to our dividend payout and share repurchases. With that, I'll turn it over to the operator for questions and answers.
Operator: Thank you. Thank you. Our first question is from Melissa Fairbanks with Raymond James. Please proceed with your question.
Melissa Fairbanks: Hi, guys. Great quarter and outlook. Thanks for taking my question. I assume you'll be giving us some updated long-term margin targets in June at the Investor Day. But I was just wondering if you could maybe give us a little bit of kind of near-term expectations. The operating margins have been running kind of well above where your target was exiting last year in the back half of the year. Just wondering if you could maybe guide us to the sustainability of those margin levels? How much of that is demand creation and how much we should factor in from demand creation going forward?
Tim Liguori: Sure. First of all, hello, Melissa, thank you for having us at your conference this year. We thoroughly enjoyed it. Near term, operating margins, 4% to 5% range is pretty solid. We feel very good about the execution and the demand creation and the cost structure and that will continue for the near term. Longer term, we will address it at Investor Day. Like we said at your conference, this is all about investing for growth and margin expansion. So it's growing Farnell, embedded Americas, our digital platforms and more, and we'll be showing a path to a greater than 5% operating margin. So more to come. And everybody on the call is June 6 in New York, and we welcome your attendance.
Phil Gallagher: Yes. I'll just jump on that on top. Hi, Melissa, it's Phil. Thanks for the question and the compliments. On the demand creation specifically to your question, that we had a record demand creation revenue a quarter and the pipeline actually grew nicely as well. So that is for sure contributing, and we'll continue to, okay? So it's not a spike by any stretch. It's just it's continuing to grow in a positive direction.
Melissa Fairbanks: Excellent. Look forward to - very much look forward to the updated targets. Maybe one quick follow-up. I know you said that demand creation has grown 500 basis points. Have you broken out what percentage of total revenue demand creation is today?
Phil Gallagher: Yeah, it's roughly 30%, 20%, 32% in that range. And that's total revenue, which includes a lot of products that aren't sole-source on proprietary.
Melissa Fairbanks: Okay, fantastic. Thanks very much, guys.
Operator: Thank you. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.
Ruplu Bhattacharya: Hi. Thanks for taking my question. And congrats on the strong quarter. I have two questions. Maybe I'll start with the one for Phil. Some investors are concerned about recession either in the U.S. or maybe in Europe. So Phil, can you talk to us a little bit about if there is a recession, how would your playbook change? And when you look back at the '07 - sorry, the '08 or '09 downturn recession then, how has Avnet changed over the years? And do you think the company is better prepared to weather a downturn if it happens. So maybe just give us your thoughts on how you see the company positioned if there is a recession coming. And in a recession, do suppliers use distribution more? And how would you see that - your services trending?
Phil Gallagher: Yeah, I'd say, yes, that's a great question, A big question, by the way. So first of all, versus 2008, 2009, we're 100% components now. So we don't have the computer side of the business. So that's - we're free from that. I shouldn't say free, disengaged with that, obviously, as you know. And our whole model is about variability, right, and driving drop through. So a lot of our costs are variable from a standpoint of commissions and freight and logistics costs and whatnot. So we adjust those as we go and some of them just self-adjust, right? As far as the mix, so back on the component side, we have a much higher margin business that we think is sustainable. Tom talks about it in Farnell that even in the downside, that's going to - we believe that will maintain a double-digit operating margin line, okay, even if there is a downturn. So we think between the mix and the Malissa's question on demand creation continuing to grow, our line card, we think we can - we can drive through, hey, we'll have to make some adjustments. And then the other thing we do, Rob, there's a downturn, and we spin off a lot of cash, which makes Tom real happy, okay? And Joe, right? So we're countercyclical. So at that point, we spin off the cash. On the supplier side, I'm really excited more about the suppliers. I mean right now, they're - we'll work with them in more and more new and advanced opportunities I think the engagement is as good as ever. Even in downturns, they leverage us as much as they possibly can because it's a variable model that we bring them from a scale standpoint. So I don't see much adjustment in the mix from a supplier standpoint of TAM to DTAM or whatnot. So I'm very confident there. Never comfortable, right? I talked about that all the time, but very confident that our supplier engagements, whether it's an upmarket or downmarket.
Ruplu Bhattacharya: Got it. No, that was quite helpful. Maybe the second one and my follow-up for Tom. So Phil mentioned strong cash flow during a downturn, and you've had strong cash flow quarters. Can you update us on your capital allocation priorities, I mean, in a macro environment like this? And then you mentioned investments in Farnell have really driven margins in that segment and your - a lot of your customers are using the e-commerce side of that business. So can you tell us how much more investment is still left in that business and how that impacts margins going forward?
Tim Liguori: Yeah. Good question. So a lot there. Capital allocation, I think you're really driving at dividend and buybacks. We're committed to both. We're committed to shareholder returns. The dividend, we're really happy with where it's at. We're going to get it on a an annual sequence, so you'll see increases. But the last couple of years was to get it to the level it is today. On buybacks, we bought back about 1% of our shares this quarter. Last quarter, we talked to you about over 3 years, reducing the outstanding share count by 8%. And that's still our minimum intent. And one thing we will talk about at Investor Day is buybacks are a very important part of the shareholder return. And we'll be doing more. So that will be explained in June. I think what Phil said is very important. We look at this as in a growing economy with our investments in Farnell and Embedded, yes, we are in over 4% out margin faster than we thought. And over 3 years, we can get it up over 5. The way we think of a downturn, even though we've done a lot of work internally about maintaining margins during the downturn, the opportunity for us in the downturn is generate cash and buy back shares. And that's the way we're going to be thinking about this. You mentioned the recession. Last time in 2007, 2008, I believe we had more debt. One of the things we said a few quarters ago was our debt level today is pretty similar to at least 2010, 2011. And I say that because we're much better positioned going into a downturn when and if it so happens, right? So Ron, if you look at our metrics internally, we show no evidence of anything slowing. Our book-to-bill is still high. Our percent of the quarter booked is higher than it's ever been. There's more price increases coming. But we'll lay this out at Investor Day. Capital allocation, shareholder returns is very important. As far as for Farnell, where we still have a lot of inventory we're going to be adding, and this is a good thing. This is what's helping driving revenue and margins. We're going to be expanding what's in the Farnell inventory. We have semis IP&E. We have SEM-MRO. Chris Breslin, our President will talk to you more about this in June. But in terms of dollars, you still have another $100 million to go in Farnell, its not OpEx is primarily inventory. But - that's what we've done in the last 3 years. And with those expenses and those inventory investments Farnell has continued to expand operating margins, continue to expand returns on capital, and that's going to continue our plan for the next 3, 4 years.
Ruplu Bhattacharya: Okay. That's very helpful. Thanks again and congrats on the strong quarter and guide.
Tim Liguori: Thanks.
Operator: Thank you. Our next question comes from Matt Sheerin with Stifel. Please proceed with your question.
Matt Sheerin: Yes, thanks. And hello, everyone. My first question, guys, is just on the guidance and guiding sequentially down. I think if you exclude the TI divestiture a few quarters ago, it looks like you've been growing sequentially for like seven and eight quarters in a row. This is going to be the first down quarter. And is that coming from across the regions? Or is it more Asia because what you're seeing with covered restrictions and the fact that you probably had some significant pull-in in the March quarter in Asia?
Phil Gallagher: Matt, it's Phil. I'll take first crack at it. Yes, we think the guide is actually quite good coming off of the strength. I mean so, as we pointed out in the script, Asia, now two years in a row, has gone against the grain of the typical seasonality being down to March quarter and they were actually up, okay? So we had a really strong quarter in Asia. As we did in Europe and the Americas, as you saw. So I look at it more at - last quarter, we were up 25% year-on-year this quarter, 34%. Next quarter, the current guide is still an 18% growth year-on-year, okay, taken out, and that's given even Maxim, which you didn't mention. So we're actually pretty confident with the guide I feel pretty good about it. Tony, do you want to comment on that?
Tim Liguori: No, Phil, I think you said we're coming off a really strong quarter. And there's more uncertainties with Asia COVID restrictions and geopolitical. But those are reflected in and we think we'll do quite well.
Matt Sheerin: Understood. And then on inventory, your inventory remains lean and a lot of suppliers already this week are pointing to distribution inventories as being low and no concern about an inventory build. And if you look at most of the EMS players and OEMs, their inventories are at record highs. And the concern about an imbalance of inventory where obviously, they're waiting for hard to get parts and building others. Are you seeing that at all? And at what point do you - would you start to see in your order book? Is that when lead times stabilize in the ERP systems, correct? Or what are some of the things that you'll be looking for?
Phil Gallagher: Yes. Thanks, Matt. Yeah, we're watching that with our customers as well and anticipated that question. Yes, there's for sure a bit of a build out there. But - and I've been to most of those guys you're referring to that are public and their backlog is solid. So they feel really good about their backlog, although inventories might be elevated a bit and they're just determines the golden screw, right, everybody's wait for that golden screw. And then when you go back, you check with their OEM and you work back up the line or down the line anyway you want to talk about it, the demand looks really solid and real for lack of a better word. On our end, we're tracking that very closely on the amount of MRPs we take in across the spectrum, the MS, OEM, et cetera. And we feel confident with the backlog that we have as well, okay? Now it's further out, right, because lead times are further out, but we feel really good about the backlog. And yeah, we'd love to have a little bit more inventory that would be a good thing. But we're servicing the customers pretty done well, although on expedite calls pretty much every day still. The sign - the indicator we look for, Matt, is the book-to-bill will start to come down, if there's any kind of correction and they've remained elevated as we pointed out. And then we look at cancellation rates, right? In cancellations, we look at cancellations and in that bucket, we look at pushouts or pull-ins, right? It's a combination number, if you will. And that is steady state right now. We are not seeing an elevation in adjustments to backlog that are out of the norm. And our normal adjustment is in the, let's call it, the 18% to 20% range in any given day. That's typical, and that's about what we're running. So that will be - that's what we'll be watching really, really closely.
Matt Sheerin: Okay. Thank you. That's super helpful. And just if I can then just ask another question regarding the supply chain engagements or orchestration engagements that you talked about with big customers needing help. That sounds fairly new. I know you've been talking about it the last couple of quarters. But could you tell us how big that is, how many customers and what the margin profile, I would imagine, maybe lower margin or perhaps you get a consignment fee that's higher?
Phil Gallagher: Yeah. It's a very in-depth question. We will be covering that in detail. By the way, at the Analyst Day that Tom referenced in June because it's - yes, it's continuing to grow, Matt, which is a good thing. And we call that in our - we call our Avnet United, which is the large global engagements as well as velocity, okay? And it's growing in numbers of opportunities of what I'll call them non-traditional customers coming our way and suppliers taking us in that need help with the supply chain management and the orchestration of the control towers, if you will, to help the end customer manage their supply chains through and with the EMS providers, if they're using those. So that's some of the - as far as financial modeling, a lot of these reports right into finance, I believe that's not, right? So we don't do any of these without a model that gives us the fair returns. So some might be more inventory heavy. Others may be inventory light or zero inventory and a service fee, right? So they're all above our return on capital, okay? And that's how we model that, Matt. So it's a completely different when we keep that out of our core distribution business. It's - they're capacity and growing, which is exciting. Go ahead, Tom?
Tim Liguori: Just to add to what Phil said, Matt, a good portion of these are services type arrangements. So we're not really taking the inventory, so to speak. So they tend to be higher margin. They tend to be higher-margin engagements. And that will help us over 3 or 4 years.
Matt Sheerin: Okay. All right. Thanks a lot.
Phil Gallagher: Thanks, Matt.
Operator: Our next question is from Jim Suva with Citigroup. Please proceed with your question.
Jim Suva: Thank you. You mentioned the consignment model some and some of these new terms like Avnet Tower and one stuff like that. Is this kind of the result of having gone through COVID trade wars, shipping constraints, challenges, logistics, power outages and all that? And if so, is it kind of more the consignment model you see is winning out more or more of your customers like EMS companies or your end customers asking you to hold more inventory? I'm just kind of wondering how this sorts out. Is it more becoming a confinement model with the new chapter or more wholly more inventory and getting paid for it or some type of hybrid?
Tim Liguori: First of all, what you started off with, Jim, is true. Even though we've owes on these engagements, they've really accelerated because of the last 2 or 3 years and the supply chain disruptions, the shortages. And so - but our team here, and we'll talk about this more at Investor Day, these are typically main customers, large-scale engagements where they want Avnet to manage some portion of their supply chain because we have multiple routes to move material. We do hold inventory, but many of these because they want us to sell the problem, even though it has the same financial effect is consignment, it's not take consignment. It's more a services type arrangement we have. Phil, anything to add on...
Phil Gallagher: Yes. No, Jim, we've talked about this a little bit before. I wouldn't say hybrid is the right word, but it's a mix of all of those, Jim. So some are traditional consignments are still alive and well. We do consignments. But we don't do any of these again without the financial modeling, right? The consignment and there has to be more inventory held, great. That's fine. But who's going to pay for that. But I would sum it up just saying and I've said this many times, we're in the center of the technology supply chain. And I think in these past several years, I think companies in general, in our industry and outside kind of took supply chains for granted, right? And so they can't get what they need. So I think we've always known as a depreciation for what we do and the expertise we bring, I think there's a renewed appreciation of what we can bring to the party with the analytics and the expertise that we have. So again, these are very complex engagements. I mean these aren't done in a week or two. You're talking months to rebuild the processes from the back end all the way up.
Jim Suva: Great. Thanks so much, and look forward to seeing you in June.
Phil Gallagher: Yes. Thanks, Jim.
Operator: Thank you. Our next question is from Nik Todorov with Longbow Research. Please proceed with your question.
Nik Todorov: Hey, guys. Good afternoon. And congrats on great results. A question on - I think the acceleration in the March quarter is quite substantial, either sequentially or year-over-year. So it really begs the question, are you seeing any signs of supply loosening? I mean, based on your comments, I don't think so, but how would you explain that acceleration? And maybe similar to how you broke down the impact of pricing on margins, can you give us any sense of how pricing impacted revenues sequentially or year-over-year?
Tim Liguori: Yes. Nick, I'll take the first crack at that. This is Phil. And I'll turn it over to Tom. As far as - let's just talk about - you real first part of your question is our lead times coming in or whatnot. For the most part, as we pointed out in the transcript, there's no real indication of lead times coming in. And that's a general statement. There's some that might be getting better and some that are getting worse. But overall, it's still pretty tight out there. As I said on calls pretty much every day with customers and suppliers trying to work the expedites. But again, pretty much across the board. It's still - has it got worse, okay, for the most part, but it's pretty steady as far as lead times goes. As far as ASPs, it's a great question. We've got a lot of analytics around this. We have a lot of conversation internally and met with the customer last week and shared some of the data. Some ASPs have actually come down, right? So if you look at - we look at this by average selling price from zero to a dime and dime to quarter and you can imagine the amount of data and the millions of items that we're shipping. And then above $10 ASPs, which we love to have more of those with the above $10 and 5 to 10. When you average it all out, that's - the biggest increase has been in the higher ASPs parts that's where we've seen more of the price increases. And we average it out we're estimating somewhere between 6% and 7% of the growth is in ASPs. And again, that's an estimate. I will say in all categories, the units, okay, which is the real demand, the units are up, okay, in all categories, units increased. So hopefully, that helps give you a little bit of color. When we look at that again by average selling price by technology, discrete, analog, controller, caps, et cetera.
Nik Todorov: Yes, just to kind of follow up again. So is that pricing impact, 6% to 7% first, I'm assuming it's a year-over-year comment. Is that substantially different from what you were seeing in the December quarter? Just again, because by the sequential increase in revenue, it implies that you were able to get your hands on a lot more product than you probably anticipated going into the quarter?
Tim Liguori: No. It would be similar in the December quarter. I would just say that we got the products we needed to suffice the backlog that we had. Some of that, you don't know all of that going into the quarter. There are some suppliers or certain commodities that there aren't commit dates yet, but we have the backlog, right, but there's no firm commitment to supplier based on all that's going on. So we got some shipments in the end of the quarter that were - they come in and you go right out. So yes, we've probably got a little bit more in some products that we weren't expecting. They're not shipping ahead, make it really clear not ahead. It's to the backlog, but we did get some at the end of the quarter that enabled us to have a good quarter. But today it was just good demand, Nick. And I got to get my - give our product teams - again, our supply chain teams that call out. I mean they're doing a heck of a job and some constrained times, work with our suppliers. And again, our team has done a nice job in product and asset.
Nik Todorov: Yeah, most definitely. Tom, one question. If we look at the guide sequentially, is there any way you can give us any kind of direction or breakdown, what are the assumptions in terms of impact from China lockdowns and potentially for Maxim. You mentioned that it's - some of that is starting to tail off as well. Any color or additional would be appreciated?
Tim Liguori: Yeah. We're - Maxim is way behind us. We've made up that business. So the way we look at our guidance is it's a similar mix, very similar gross margin. Our OpEx will be down just a bit because we're guiding the revenues down. The operating margin because of slightly lower revenues, they're not going to be 4.7%, but they might be in the 4.3% to 4.5% range. Everything else, Nik, down the line should be about the same, same interest expense, same tax rate, 23%. Hope that helps.
Nik Todorov: Okay. That does help. All right. That’s all okay. Thanks, guys. Good luck.
Tim Liguori: Thanks, Nik.
Operator: Thank you. Our next question is from Joe Quatrochi with Wells Fargo. Please proceed with your question.
Joe Quatrochi: Yeah. Thanks for taking the question. One, I think you earlier mentioned that you're seeing further price increases coming. I'm curious, how do we think about the percent of increase relative to maybe what you've been seeing in the past quarters? Are you starting to see that price increase percentage kind of slow down in terms of the momentum there?
Phil Gallagher: Good question. No, I don't see a big dramatic - much of a change, Joe. And what makes it hard to answer that question is it's so many different suppliers and different types of commodities. So it's hard to make a one fell swoop. It's just - at this point, we've had well north of 50 different suppliers, rate prices upwards of six to seven different times and more coming, as was pointed out in the script. So tough to answer the question. When you net it out, as I just shared, when you net-net, we think it's somewhere been 6% to 7% total because remember, some - some commodities are still very competitive and ASPs aren't going up.
Joe Quatrochi: Got it. That's helpful. And then I think earlier you mentioned opportunities maybe opening up at Tier 1 auto suppliers. Can you just double-click on that, help us understand what that opportunity looks like. Is that more of a fulfillment? Or are there some kind of additional services and things that you can add on from a supply chain perspective that those could be pretty good margin looking opportunities?
Phil Gallagher: Yeah. You obviously can't share who, but there's different types of vehicles out there, right? And it's really - we try to use transportation. We did say automotive in the script. But internally, it's transportation because it's really broad, right? It's from golf carts, to cars, to tractors and trains and everything else. But it's some are services, as Tom pointed out earlier, where it's going to be more of a, I'll call supply chain as a service, okay, very working capital light. Others are, I'll just call it maybe a little bit more traditional in our supply chain services. And then others, we're actually doing demand creation right on through supply chain, okay? Particularly when you get in the EV and the grid and battery management, things along those lines is a huge opportunity for us. And in that - in those cases, it's everything that we do from demand creation, IP&E, semi auto supply chain. They're a little bit different.
Joe Quatrochi: Thank you.
Phil Gallagher: Thank you, Joe.
Operator: Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.
William Stein: Great. Thanks for taking my question. And congratulations on these really eye-popping results. A lot of my questions have been asked and answered, but I have a couple of sort of off the beaten path ones. First I wonder what you're seeing in terms of your customers and your own ability to source completed kits during the quarter versus what the ability looked like a quarter ago? Do you think that, that ability has been improving in the last quarter that's sort of how I'm interpreting the inventory reduction that we saw?
Phil Gallagher: Let me try and understand the question. What you said - do we think customers have more with...
William Stein: Let me try it again. I think inventory had been somewhat elevated in at least the last quarter. And one of the things you spoke to, Phil, was this problem of not being able to source complete kits. And in some cases, you have these mismatch situations and that was driving at least part of the elevated inventory. This quarter, we saw that reverse. And I wonder if that's a message that, in fact, either you or your customers through using your services and maybe others are a little bit better able to source complete kits today? Or am I over interpreting that?
Phil Gallagher: Yeah, you might be over interpreting it a little bit, Will, I think. It's a great question though. And you're right, because our inventory did - you're right, it's a couple of quarters ago, and we shared with all of you on the phone that we refine in that inventory because we knew it was going to go back out. So it did. I would say it's going to be really customer-specific, Will. - where we're - and to the earlier question, we did get some good shipments in the end of the quarter that we've been expediting and yet customers that lines down that you're trying to help out. We did have a nice last few weeks of the quarter. I think it was a little bit ahead of what we thought.
William Stein: Appreciate that. The other question is about Farnell. And I think in your prepared remarks, you noted that there were a lot of suppliers that you added to Farnell that you already had in the components business. And I want to make sure I understand what this is. This sounds like there's a supplier that you serve, sort of regular way components distribution. And you're now adding the same supplier and same product in this Farnell channel, which is, of course, I don't know, we could call it higher service, but we know it's higher margin also. Is that the way to interpret that? Or is there something else going on? Is it the same supplier, but you're adding more unusual parts or more, I don't know, lower runners - or is there some other way to this?
Phil Gallagher: Yeah. No, it's a good question. Well, the point we're making is we talk and from day 1, the opportunity of Farnell gives a new product introduction to the core business, right, because they're servicing a lot of new product introduction, a lot of FAEs and designers. And then we can transition it, if you will, or share that lead with our core business, which is great. We get our account managers, salespeople. What we wanted to point out is there's a lot of leverage and opportunity the other way around, too, where Farnell Newark here in the U.S. may not have had lines like a Micron and I don't want it down the whole pipe. But where we have great relationships with some major suppliers that Farnell didn't have, okay? Farnell was definitely higher in the IP space than the semi. So we were able to now share those lines, expand the authorization, the franchise authorization to Farnell. So when we look at it over the last several quarters to years of wow, it was a big number. But it's not of the same products, but again, remember, the difference though is Farnell carries a really broad SKU count, right, because they're handling the engineers and it is higher service with - and they want to get to ship complete kits. So we then having the broader line card expanded SKUs and help service that customer base better. So that's been a real opportunity. Then there's otherwise we've added, and we've talked about this before, like national instruments, and I don't carry that on the core side, but that was a big win for Farnell to get to one of the top instrumentation companies out there, and that's on the Farnell. That's just been added in the last few quarters, and we expect that to drive some really nice top line growth. So hopefully, that helps.
William Stein: Great, Thank you. And congrats again.
Phil Gallagher: Thanks, Will.
Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Phil Gallagher, CEO, for any closing comments.
Phil Gallagher: Yeah. Thank you. And I'll, brief. I would appreciate everyone joining our call today. Much appreciated. I look forward to speaking to you all and seeing it at the upcoming Investor Day on June 6. And by the way, we'll have a lot of our executive team with us from around the world and supply chain and design demand creation. So have a chance to meet much of the team that makes all this happening because without them, we don't have a business. So anyway, thanks again. Appreciate it, and we'll catch you June 6, hopefully, if not, we'll catch you in August at the fourth quarter earnings results. Take care.
Tim Liguori: Thanks, everyone.
Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
