Avnet, Inc.

Please stand by. Our presentation will now begin. Welcome to the Avnet fourth quarter fiscal year 2022 earnings call. I would now like to turn the floor over to Joe Burke, Vice President, Treasury and Investor Relations for Avnet.

Joe Burke Thank you, Paul. Earlier this afternoon, Avnet released financial results for the fourth quarter and fiscal year 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 AFNET's website. Some of the information contained in the news release and on this conference call contain forward-looking statements that involve risk, 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 would be led by Phil Gallagher, Avnet's CEO, Tom Liguori, Avnet's CFO, and Ken Jacobson, Avnet's Corporate Controller, an incoming CFO this September. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Joe, and thank you, everyone, for joining our fourth quarter and fiscal year 2022 earnings conference call. What a year it has been for Avnet. On the heels of our centennial anniversary, we've built on the prior year's momentum to deliver robust financial results including a record EPS year, nearly reaching $7 for the fiscal year. Our sales for the fiscal year were up nearly 25% year-over-year. This was supported by a strong year for electronic components and, notably, a record revenue year for Farnell. We had a great performance from both operating groups, and we're really excited about the revenue synergies we're seeing between the two as well. As announced earlier in the year, we also achieved and surpassed our near-term operating margin targets and we're pleased to cap off the fiscal year with operating income margins of 4.5%, this recently ended quarter, and 3.9% for the fiscal year. Beyond the numbers, we were excited to host our investor day in June, where we had the opportunity to see many of our stakeholders in person in New York. We also announced a couple of key executive successions this fiscal year, including the appointment of Dana Badhorn, a 24-year veteran of Adnet, as the new America's leader for electronic components. And more recently, the appointment of Ken Jacobson, who has been a key contributor in our finance organization for nine years, to CFO effective in September. These moves are part of our succession planning process, which ensures continuity in executing our strategic plan. We've continued to make investments in inventory, including SKU additions at Farnell, and in field application engineers and online design tools that have delivered meaningful value and growth. Additionally, we continue to make investments in our employees and are kicking off fiscal 2023 with a compensation increase across our employee base and merit-based rewards to acknowledge strong performers and remain competitive in a challenging labor market. As I've mentioned throughout the year, we've been immensely proud of our team's commitment to executing on our strategy amid an increasingly complex macro environment. Their contributions have enabled us to grow, share, and secure exciting new business opportunities. Enhance the value proposition of our supply chain engagements and high-service R&L offerings. Provide uninterrupted support to our customers and suppliers looking to decrease risk in their supply chains. And lastly, to surpass our near-term operating margin targets sooner than anticipated. Our teams are unmatched in terms of experience, expertise, and diligence, and their efforts are instrumental to Aetna's success and role at the center of the global technology supply chain. We have a strong foundation to build upon in the coming fiscal year and are well positioned to deliver value and adapt even if market conditions change in the future. From a demand perspective, this past quarter we saw continued strength in the industrial, automotive, transportation, and aerospace and defense segments. Additionally, we expect some applications like EV charging and other alternative energy applications to pick up based on current energy supply concerns. Lingering COVID-19 impacts from inflation and impacts from the conflict in Ukraine continue to have some ripple effects on supply chains. While supply of some of the parts has modestly improved, we expect supply chain challenges to persist throughout the remainder of this calendar year. It's in these types of environments that our role as a distributor is particularly critical. As we've proven over the years, the value of ADNET in a complex operating environment is our ability to serve as a control tower for our customers, helping them proactively manage their supply chains. We expect customers and suppliers to leverage these solutions more fully in the coming years. Now, turning to our electronic components and Fresnel highlights. Electronic components had a strong year, reaching nearly $23 billion in sales. We were pleased to maintain robust sales this quarter following a very strong third quarter. These results were primarily driven by another record quarter of demand creation engagements, expanded sales in Asia, and solid sales in the Americas and EMEA regions. Notably, this was our fifth consecutive quarter of growth in Asia, which enabled us to reach a near-term milestone of $10 billion in sales for the region for the fiscal year. And we saw year-over-year growth this quarter of over 34% in both the Americas and EMEA on a constant currency basis. Our book-to-bill ratios at the end of the quarter remained above parity. Lead times are mixed. Some remain extended, particularly for controllers, while some lead times of other products have been moderating. We continue to effectively manage our backlog. We brought our inventory levels up this quarter to support the ramp-up of sales in Asia into the seasonally strong first fiscal quarter. As a distributor, we pride ourselves on our ability to meet and support strong customer demand, and I am proud of the success we've had in managing key relationships with customers and supplier partners to get the right parts in the right place at the right time. From a demand creation standpoint, we again had a solid quarter of design and engineering activity across all regions. High levels of design registrations and wins in prior quarters resulted in yet another quarter of record demand creation sales and gross profit. Demand creation revenue as a percentage of total electronic components increased to 31.2% for the year. Now, moving on to Fresnel. As I mentioned earlier, it was a record revenue year for Fresnel, with full-year revenues increasing 20.2% year over year. With demand indicators remaining fairly consistent, we continue to make investments in Fresnel, adding over 18,000 new inventory SKUs in the quarter. Our investment in Fresnel's e-commerce platform and improving the user experience continues to yield meaningful results. Nearly 56% of Farnell's total sales and 72% of total orders transacted were placed through Farnell's e-commerce platform this quarter. We expect to continue to see increased traffic and new customer acquisitions in quarters to come. As we continue to improve our digital capabilities, we expect Farnell's value proposition to increase and enhance the synergistic collaboration between Farnell and Electronic Components. This collaboration allows us to serve our customers from new product introduction to mass production and is a key differentiator for Avnet. As we head into fiscal year 2023, we see opportunity for Avnet to leverage and build upon the value of its demand creation capabilities, supply chain services, embedded products, and front-end offerings. We're a different and much more resilient company today due to the durable changes we've made to our business. There's never been a greater need for global distributors, and we remain confident in our ability to meet those opportunities. Before I turn it over to Tom to dig deeper into the financials, I'd like to take a moment to thank Tom for his immense contributions to Avnet. Over the past four and a half years, Tom has been a big part of our transition into a stronger, more profitable, and resilient company. Our balance sheet hasn't been this strong in decades. Tom and his team have built a high-quality finance organization And importantly, he has served as an invaluable partner to me since my transition into the CEO role. I'm going to miss working alongside Tom and having him join me on these calls, but I'm absolutely confident we're in excellent hands with our incoming CFO, Ken Jacobson. Ken is a seasoned AdNet executive who many of you have already met. He has served as our corporate controller and has been a critical leader in our financial organization for the past nine years. So with that, let me pass it over to Tom.

Thank you, Phil. It's been a pleasure working alongside you and the entire Avnet team. I want to personally thank the finance team at Avnet for their support and friendship during my time here. They are a talented group of professionals and a joy to work with. And I echo your point, Phil. Avnet will be in very capable hands with Ken as CFO. I look forward to seeing Avnet's continued success under your leadership. We are very pleased with both our fourth quarter results and the record earnings year we've just completed. I will share some of the highlights from the quarter and full year before turning it over to Ken, who will discuss first quarter 2023 guidance. In the fourth quarter, our revenues were $6.4 billion, up 21.9% year-over-year, and at the top end of our guidance range. Adjusted EPS exceeded guidance. coming in at $2.07, compared with $1.12 in the prior year quarter. For the fiscal year, we achieved sales of $24.3 billion, up 24.5% year-over-year, a record GAAP EPS of $6.94, and a record adjusted EPS of $6.93. Job well done to the entire Avnet team. Throughout the year, Our teams continue to improve execution and efficiency while also managing expenses. We achieved and surpassed our near-term operating margin targets, resulting in fiscal year 22 operating margins of 3.9% for total ABNES. This was supported by operating margins of 3.9% for electronic components and 13.4% for Fresnel. Turning to the income statement, Our revenue comparisons are affected by changes in foreign currency rates. Our reported revenues for the fourth quarter are $6.4 billion. Changes in foreign currencies had a negative impact on our sales of $150 million sequentially and $326 million year-over-year. Risk margin of 12.2% was down just slightly on a sequential basis. For the total year, risk margin of 12.2% was up by 73 basis points from the prior year, both evidence that we are effectively managing pricing in this supply-constrained market. In the fourth quarter, we continued to process many price increases. Adjusted operating expenses of $492 million for the quarter were down 3.4 percent sequentially. Adjusted operating expenses has a percentage of gross profit dollars was 63 percent in the fourth quarter. This is a substantial improvement from the 76% in the prior year fourth quarter, illustrating the disciplined expense management of our global teams. On the non-operating front, interest expense in the quarter was $30 million, up $4 million sequentially due to higher levels of debt within the quarter, as well as a slight increase in short-term borrowing rates. We booked a 20.5% adjusted tax rate in the fourth quarter, and ended the total year with a 21.9% adjusted tax rate. Fresnel achieved revenues of $442 million in the fourth quarter and operating margins of 14.2%. Revenues declined sequentially due to product shortages of semiconductors, jungle board computing, and test equipment. As a result, Fresnel ended the fourth quarter with a record customer order backlog. On a total year basis, Finnell achieved record revenues of $1.8 billion. Finnell's fourth quarter operating margin of 14.2% benefited favorably from higher year-over-year pricing, which contributed 180 basis points of margin. Without the pricing benefit, Finnell operating margins would have been 12.4%, consistent with a 10% to 15% range through the cycle that we discussed during investor day. We are very pleased with Fresnel's results and expect to build upon this momentum as we continue to make investments in SKUs, analytical tools, and the e-commerce platform. Fresnel is a large part of our plan to target upward of 50% of gross profit dollars from higher margin business. Electronic Components achieved revenues of $5.9 billion in the fourth quarter, up 23.9% year-over-year and down 1.5% sequentially. The sequential decline was mainly EMEA due to currency rates. However, ABNET EMEA fourth quarter revenues were 34% higher in constant currency than the year-ago quarter. Operating margins were 4.3%, a 122 basis point improvement from last year. Our electronic components groups performance this quarter was driven by another record quarter of demand creation engagements. as well as very strong sales in Asia and Americas. Turning to cash, liquidity, and the balance sheet. Our liquidity position remains strong. We ended the quarter with cash in equivalents of 153.7 million and 1.4 billion of available lines of credit. We are seeing an improvement in our ability to bring in inventory, which increased this past quarter. This was primarily to support strong sales and bookings in Asia, and was accompanied by a corresponding increase in accounts payable. Sales in Asia have grown sequentially for five quarters, and we require the right inventory to support current demand. Our total ABNET inventory is 64 days on hand, which is still slightly below our normal 65. Total net working capital days at year end were 69, down from 74 in the prior year. We remain committed to disciplined work and capital management and to maintaining our strengthened balance sheet. We are pleased with our debt position, with debt coming in at $1.6 billion and net debt at $1.5 billion. Our gross debt leverage was 1.4 and net debt leverage was 1.3. Moving on to capital allocation, in the fourth quarter, we returned $25 million to shareholders in dividends. representing an 18% increase in the per share dividend payment year-over-year. As we said at Investor Day, share repurchases remain a meaningful part of our capital allocation strategy. This quarter, we repurchased $102 million of shares, up from $45 million last quarter. Moving forward, we remain committed to increasing shareholder value by delivering a reliable increasing dividend and continued share repurchases. With that, I'll now turn it over to Ken to discuss outlook for the first quarter of 2023. Ken? Thank you, Tom.

I will provide some color about our expectations for the next quarter. But before I begin, I'd like to thank Tom for his leadership over the past several years, and on a personal note, for his mentorship and coaching that has allowed me to succeed him as CFO. I look forward to getting to know some of you on this call in the weeks to come. Turning to guidance. For our fiscal Q1, we are guiding revenue in the range of $6.2 billion to $6.5 billion and adjusted diluted EPS in the range of $1.85 to $1.95. Our first quarter guidance today is based on current market conditions, including a $100 million negative impact on sales guidance at the midpoint from the recent strengthening of the U.S. dollar as compared to the fourth quarter. This guidance implies a sequential growth rate range of down 1% to up 4% in constant currency and assumes a typical seasonal shift in sales to Asia from the western regions. This guidance assumes an effective tax rate of between 21% and 25% and 96 million outstanding shares on a diluted basis. We have spent the last couple years making Avnet a stronger company, one that is not only able to operate effectively in today's complex environment, but also one that can provide even greater value for our customers by proactively managing their supply chains. With the synergies we're seeing between electronic components and Farnell, our investments to support future organic growth and steady progress toward our operating margin goals, we are confident in our ability to continue delivering value to our customers, suppliers, and shareholders in fiscal year 2023 and beyond. With that, I will turn it back over to Paul to open it up for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is from Nick Todorov with Longbow Research. Please proceed with your question.

Yeah. Thank you, and good afternoon, everyone. And congrats on great results. And, Tom, thank you for – it was a pleasure working with you, and good luck on your new endeavors. Thank you, Nick. First question, I guess, is on inventory. I guess you guys spoke about preparing for a seasonal – volume in Asia. But I guess at the same time, you mentioned still some shortages impacting the Fresnel business. Maybe can you talk about the composition of inventory? Where are you guys being able to build that inventory and what sections of the component business? And are you starting to see some loosening of maybe the components that were kind of mostly tied, kind of the golden screw, call it? That's kind of the first question I have.

Yeah, Nick, this is Phil. Let me take a first crack at that. First of all, we're definitely very confident and comfortable with the inventory levels and the mix as well, by the way. And to meet the sales for the coming quarter, as we noted in the script, and overall days are still 64, which is below typical. So we're really comfortable. And the quality of the inventory is good, very good as a matter of fact. Some of the – it's a mixed bag on the commodities and what's coming in and what's going out. So if you look at overall lead times, still in analog, discreet, MCUs, et cetera, we're 20, 24 weeks, 30 weeks plus, respectively. you know, moderating for sure, but still above levels, you know, pre-COVID, if you will. All right. So we are seeing some moderation. In some of the passive area, we're definitely starting to see some, based on mostly due to the consumer side of the equation, starting to see, you know, some areas in the MLCC, for example, you know, coming in on lead time. But it's really complex. It's really by product, by commodity. But overall, A lot of the inventory that did come in came in near the end of the quarter, and we'll be looking to turn that this quarter.

Okay, great. And the second question, just around demand, I was wondering if you can provide us a little bit more color. There's obviously well-known weaknesses in the consumer electronics markets, but recently there's been some signs of, at least in some areas of the semiconductor market, that areas like data center, automotive, and industrials are also starting to see signs of softening. Just what are you seeing from a booking standpoint, particularly in areas where lead times, you mentioned, are starting to kind of come down?

Yeah, so let's start with the latter part of the question. Overall, you know, book-to-bills are, like I said, moderating, okay? They're not where they were, you know, six months or a year ago, but still above one, okay? Which I see as a good thing, that book-to-bill coming down a bit to begin with, yeah. maybe that closer to a reality. As far as the, yeah, we already mentioned consumer. We don't play a whole lot there. That doesn't mean some capacity can't move from consumer products into other applications. But right now, as we sit here today, the aerospace defense still very strong. The industrial space that we see as our backlog and what's booked on us, and we're taking, as you know, Quite a few MRPs in our supply chain engagements still strong in transportation. I always call it automotive slash transportation because the applications are so broad outside of the automotive. It's, you know, from e-bikes to dump trucks, right? I mean, they're all using more and more electronic components. So still seeing that as we see it today, still pretty steady. And the backlog, okay.

Got it. Thanks, guys. Good luck, Tom.

Thanks, Nick. Thanks, Nick.

Thank you. Our next question is from Toshi Ahari with Goldman Sachs. Please proceed with your question.

Hi. Good afternoon. Thank you for taking the question, and a big thank you to Tom as well for all the help over the years. I had two questions as well. First, on the guide, again, I just wanted to follow up. So inventory grew, I think, 15%. sequentially, and you talked about supporting growth in Asia. I get the FX headwinds in the quarter, but even the FX headwinds, you're guiding September quarter revenue up 1.5% or 2% at the midpoint. So I guess what's the disconnect there? Should we expect further growth into December? Any color around that would be helpful. Thanks. Thanks.

This is Ken. I think, you know, part of that increase is, you know, the timing of sales, you know, came in later in the quarter. But if you think about, you know, EMEA and Asia in particular, right, July is a pretty big month. If you kind of look at the prior year, I think our inventory grew like 17%, you know, a comparable level, you know, and then kind of moderated. So, you know, we feel, you know, the sales demand is there and, you know, there is a cyclicality within the underlying quarter that we see that drives some of the higher levels. At the end, and again, our net inventory days is really flattish when you take the inventory days less the AP days. So you can see a lot of that came in, and, you know, it supports the near-term sales.

Yeah, Tashia, in Asia, typically in the September, December quarter, it does accelerate from a growth standpoint. And we're seeing that. As we sit here today, we're still seeing that.

Got it. Very helpful. Thank you. And then as my follow-up, just wanted to get some context around what you're seeing from a pricing standpoint versus what you're seeing on the volume side of the equation. You know, for June, for example, you know, your EC business grew, I think, 23%, 24% year-over-year. X some of the foreign exchange dynamics. What was kind of the mix between volume growth versus pricing growth and And, you know, what's the outlook for the back half of the calendar year? Thanks so much.

Yeah, no, thanks. I'll take the first crack at that. This is Phil. So the bulk of the growth was still volume growth, okay? There's no question about it. And we're estimating from an ASP inflation, if you will, somewhere between 7% and 8% of that was pricing inflation. And we track that by commodity and by ASP. So you say maybe it takes 78% on 24%, so maybe 25%, 30% of the growth might have been due to ASP inflation. And we're still, by the way, we still saw many price increases from the suppliers this past quarter, and we're seeing more coming, which is interesting.

Thank you so much.

You got it.

Thank you. Our next question is from Jim Suva with Citigroup. Please proceed with your question.

Thank you. Tom, I'm not sure you're allowed to leave. Sorry about that, but if you coach football, you might be right back, just like Phil. But anyway, I'm going to miss you. Thank you. So I have one question. I have one question, and it might just be because I'm not the smartest analyst out there, but it was asked a little bit on the prior question, but your sales outlook, again, is kind of flattish quarter over quarter, and if you include FX, up a smidge. But your inventory, and I'm not saying inventory is bad, but your inventory is up materially both year over year and quarter over quarter above sales. So I guess I don't understand the disconnect around why the inventory build is isn't translating into a similar or even closer sales growth rate unless maybe, you know, people will say you're holding the wrong inventory or it's in the wrong place and then it's going to hurt you. So if you can just help us bridge the gap between the inventory build and the sales outlook. Again, I know it was asked a little bit earlier, but help some of us just really conceptual and grasp the bridge there. Thank you.

Yeah, I'll take that one, Jim. This is Phil. Yeah, as Ken said earlier, it's a similar scenario last year. So as we bring in the inventory, some of it was for, as we said, the Asia growth, others for strategic customer opportunities that we've won in the past quarter and had to bring some inventory in. And then it was really the timing, as you see the AP offset it. So as we look at the next, you know, we're only guiding three months. We look at the next three to six months, we feel the inventory is, positioned correctly for the growth that we're seeing in the marketplace through December. The quality of the inventory, let me get on that one, that is extremely good. It's what we call non-moving inventory that we calculate is at an all-time low. So the inventory that we have is the right inventory and the quality inventory. And most of the inventory we have, too, or more and more versus even many, many years ago that we've been around, I've been around, is for customer contracts, right? We have customer contracts. We have firm supply chain engagements. So there's either backlog or contracts backed up with NCMR on top of that. We pass them through from the suppliers. That gives us the confidence that we're in a good position and going to be just fine.

Thank you. Our next question is from Rupalu Bhattacharya with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions. I like the sentiment. Tom, we're going to miss you, and Ken, congrats on the new role. For my first question, I'm going to ask the margin question again in a different way. So on the core side, margins were up 120 bps year on year. How much of that was because of ASPs going up? You said 180 bps on the Farnell side. I guess, Phil, my question to you would be, you know, if you're seeing prices still going up from vendors, how should we think about, you know, margins in both of these segments over the next couple of quarters? And when do you think, you know, margins start to normalize back down to more, you know, more of the, you know, the levels that you've talked about on a through cycle basis? What are some of the things that can keep these margins high? over the next couple of quarters?

Yeah, so on the price, I'll go first. Let Ken jump in or Tom. But on the ASP and the cost increases from the suppliers, that doesn't as much impact our margin as it does our growth, right, that we just talked about on the previous question or two. Because, you know, we have contracts with customers. We get a price increase. We're passing that cost an increased amount to the customers, but it doesn't necessarily positively impact the margin. Just FYI. The balance of most of the margin influx, whether it was sequentially up or moderated down, is more of a mix issue, more of a regional mix issue, with the West being stronger in the June quarter and a little bit less in the September quarter as Asia As we forecast, we'll outpace the West, and that has a different margin model. And as Tom's pointed out before, some of the appreciation we've gotten on Fresnel, we have seen some positive margin impact based on the way they price things in the market that we've been in. It's been 100 to 180 bps we think we're getting in margin impact there to the positive.

And then maybe... Go ahead. I was just going to say, you know,

When we say Fresnel 180 basis points and that, you know, their 14.2% would be 12.4% without the pricing, you know, that's an extreme. That's saying if all of the pricing went away, and that was to alleviate concerns that, you know, all of your margins, all of our margins were based on pricing, they're not. So, you know, we don't anticipate that happening. And, you know, I think we had, you know, at current volumes, there's no reason that margins would not stay at, you know, current or similar levels.

Okay. Thanks for that, Tom. Maybe for my follow-up, if you can talk about CapEx, you know, expectations for the year and also your capital allocation priorities. I know you've been investing now and, you know, you've had good e-commerce sales there. I mean, how much more investment is needed in that business to get to your long-term target revenue goals for now? And so if you can just talk about your investment areas and thoughts on capital allocation. Thank you.

Yeah, this is Ken Ruplew. I would say, you know, as we kind of communicated our investor day, you know, the CapEx will go up. We've been at pretty low levels the past couple of years, part of that pandemic related. And, you know, so I think the guidance we gave there was, you know, around $100 million or kind of double where we've been. You know, but a lot of that's focused on Farnell, right? Systems, warehouses, you know, getting the right digital tools in place. From the rest of the capital allocation priorities, I think the thing we talked about was the $600 million of buybacks the board authorized. We did a fair amount in the quarter, about $100 million. If pricing in the market continues to be favorable, we expect to continue to put some capital towards buybacks.

Yeah, and Rupal, on the balance investments we're making outside of CapEx, and we're continuing to, which really ties your margin, right? The higher value businesses, you know, Farnell, we're seeing terrific success. I know we'll continue to invest in e-commerce. We're continuing to invest in inventory there. I mean, back to Jim's question, inventory, we're continuing to publicly disclose the amount of SKUs that we're adding. And frankly, we'd like to have even more inventory at Farnell. We're doubling down on our interconnect pass electromechanical business. Much of this we talked about at Investor Day because it's higher margin business. Our digital offerings for not only demand creation but supply chain and then demand creation in general. The field application engineers, all those things we're continuing to invest in because they drive a higher margin business. And the last of which was, again, talk about Investor Day, the embedded business, which is a higher margin business. So just to reiterate, we're still in that investment mode to drive growth and profitability to maintain those margins that we talked about.

Thanks for all the details. Appreciate it.

Thank you. Our next question is from Matt Sheeran with Stifel. Please proceed with your question.

Yes, thanks. Good afternoon. Phil, I'm hoping to ask another question regarding inventories and and the outlook, and really not just your inventories, but inventories across the supply chain. They're at record levels within the EMS customer base as well as OEMs. Mike Kwan earlier this week talked about seeing an inventory correction not just in consumer, but also auto and industrial. And I know the memory market is sort of a different animal cyclically than the business that you're in. But at some point, we are going to see inventories start to come down. And I'm just wondering, you know, are you seeing any signs at all of that, any rescheduling? And when we do see that happen, are you likely to be the first guy to see it or would the direct OEMs, will they start to see the cancellations first?

Yeah, thanks, Matt. It's a great question because we are tracking the publicly held companies. I'm looking at the data now, and you aggregate them. For sure, their inventories are up on queue on queue and up year on year, whether it's EMS, OEM, or in our supplier set, right? So you're absolutely right. We continue to pulse that with our customers in the OEM and the EMS set. As you know, we know them well and well. We do most of them, we're doing supply chain engagements with. And much of that inventory is being held up by, I think Nicholas mentioned it, what's called the golden screw. So as we pulse that, I was out this week with a major EMS guy and he said, yeah, the inventory is up, it's good. I mean, it's industrial, it's defense, they've got contracts for it. So we're doing the best we can to make sure that we're validating the demand. And as far as who will be first to see it, it's a great question, too. We track our cancellations, okay, and our push-outs, right? So there's, you know, what gets canceled, what gets pushed out. And we're not seeing an increase of any significance, maybe slightly in some cancellations, and very little in cancellations, I'm sorry, and slightly in some push-outs. We're not You know, maybe that's surprising to many, but we're not seeing that backlog disappear. You know, we've got to work with our end customers to help them, too. If they can't take the product right now, how do we help them with that? Some of the smaller customers, et cetera. So it's very complicated, as you guys can imagine, thus the questions. But we're just giving you visibility that we see based on the data that we watch daily, multiple times per day on a global basis on what's happening in We're not seeing those early indicators, but we're watching it very closely.

Okay, that's very helpful. And on the gross margin question earlier, you talked about really not seeing any positive impact from ASP increases in the core business. But on the other hand, you could argue that the competitive environment is less important. severe now because supply um is has been an inch uh constrained and very so strong demand so we're in an environment when maybe there's weaker demand would you see at least a return to more competitive pricing which would put pressure on your margins it's possible um you know again we didn't see the uh that much appreciation as we talked about i mean again

I believe ASPs are going to more firm up, Matt, is my take on it. I know historically we could look at ASPs as an average in the industry. I think it's going to depend on the technology and the products. If it's commodity standard products, multiple source, yeah, that might get a little bit more pricing pressure. But it might just be ASP pressure, not margin pressure, right? Because you still might be able to hold the margins. This might be an average selling price pressure. In the higher end, which we're not seeing a lot of movement on from a lead time standpoint, high-end micros, and don't get any specific suppliers. I don't know. I mean, there's still price increases. This is what's kind of strange about what's happening, right? You just called out inventory days going up and these different mixed signals in the marketplace, yet we have north of 25 suppliers elevating prices in the last 30 to 45 days, and some talking about more. So I I think, Matt, it's going to come down to by commodity and where it sits from a technology standpoint.

Okay, great. And just my last question, a modeling question for the incoming and outgoing CFO, if I may. On the mix of margin, you talked about some OPEX increases, some salary increases. So what should we expect for OPEX? And I'm imagining that gross margin should be down a little bit sequentially just on the seasonality issues you talked about with the strength in Asia. Does that make sense?

Yeah, Matt, that makes sense. You know, I would say the mix shift is going to cause a gross margin impact, you know, OPEX. you know, flattish, you know, maybe up a little bit from his investments, but we've, you know, done some offsetting things as well. So we're making investments in our people, but there's still things that we can improve upon on the OPEC side of things.

Okay. All right. Thanks a lot, guys. Appreciate it.

Thanks, Matt. Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.

Great. Thanks for taking my question. And I want to add my congratulations to everyone. Um, I was hoping to ask about the book-to-bill trends. I think you highlighted, Phil, that the bill faded a little bit in the quarter, but still nicely above one. Is that true of both segments? And can you give us any color in terms of both the difference in performance and trends in that ratio from last quarter to this quarter?

You broke up a little bit, but I think I got it. Thanks. Thanks, Will. So for both operating groups, the components and Farnell were both positive book to bill through the quarter and are as of today as well, by the way. But as I pointed out, but it moderated a bit, which, again, I think is a good thing. So, you know, it wasn't off the charts. It just still came in as a good positive book to bill. And And remember, we look at book-to-bill, and then we've got the supply chain engagements. So they're kind of outside the booking. So we've got to look at that as well. And through the quarter, at a global level, it's similar. The mixed-buy region is a little bit different in a book-to-bill, but at the global level, it's still positive. Close to where it closed out, frankly, at the end of the June quarter for both Farnell and the electronic components.

And then a follow-up, if I can. At the end of the day, you discussed some new tools and services that you're providing to customers. I think even in your prepared remarks, you mentioned this control tower concept. Can you maybe talk about that? Maybe just help us understand the effect on your business. Is it a direct revenue effect? And is it here and now? Is it more of a future thing? Or is it less of a revenue or margin impact and more of a matter of increasing your stickiness with customers?

Yeah, thanks, Will. We did talk about both of those. So let me start with the – and they're both under what I would call the digital category. The one was our design tool, the long-line design tool we call Avail. And that is live. And effectively it has thousands of block diagrams in it. And we're pushing that out directly to customers in an API or a cloud-based accessibility. And it really helps our demand creation. It helps us not just with demand creation, but more and more customers. And it was covered at the investor day with our panel as well. More and more customers are looking for solutions. And more of our suppliers are looking for us to sell solutions. So that tool helps us design in, influence design, and win more of the design on the whole board. So that's the tool we talked about. It's called Avail. And that's, again, that's been rolled out internally for our field application engineers. Now we're kind of turning that around to give direct accessibility to our customers. And that's in process pretty much as we speak. And on that note, demand creation in general is over 30%, almost 31% of our total revenues last quarter, which is a record number for us. Again, important because of the when designed a big chip, it helps us pull through and helps us with the stickiness down the line and still critical for our suppliers. I mean, they lean on us for demand creation and we respond. The other one, you're right, we call it the control tower. It's around supply chain orchestration. We've had, you know, it's already roughly 50% of our business where we're more where we're actually managing a customer's MRP. We're taking in fees, whether it's an EDI, an API, a fax, however they want to give it to us, we're managing their pipelines for us. And what's happened in the last couple years is more and more customers are coming to us because they need more assistance. And some of these are maybe tier ones, large OEMs that weren't doing business with us directly and are asking us to help them rebuild their supply chains when it comes to technology and semiconductors. And yes, we've call that the control tower. And we've had some big wins. And one, it helps revenue. Some of this is supply chain as a service, as we talked about, where it's low working capital or no working capital on really gross profit kind of billing. And then third is, yeah, it does integrate us more with those customers. And really, the partnerships just go to a new level where we're integrated and it does create more stickiness. So Hopefully that answers the question. Thank you. Thanks, Will.

Thank you. Our next question is from Joe Quattrochi with Wells Fargo. Please proceed with your question.

Yeah, thanks for taking the question. I'd echo my congrats to Tom and Ken. I just kind of wanted another question on the book to bill and the change that you're seeing there. Can you maybe just help us understand Is this a change in maybe the breadth of orders in terms of the number of customers or maybe the quantity that your customers are ordering in terms of, like, the amount at one time or just the, you know, maybe month of visibility they're giving you in their order book? Any help there would be great.

Yeah, thanks, Joe. It's not customer count because that I can tell you. There are going to be some customers, as you guys know, that are slowing down and others that are picking up. A lot of it has to do with the lead time. So if lead times in some areas do come in, a lot of the MRPs that drive the bookings or supply chain engagements, they'll adjust those MRPs based on quoted lead time, published lead time, or actual lead time. So more of it's that than it is anything else. And like I said, some customers are slower than others. I mean, you're going to always have some verticals that are up or some that are down.

That's helpful. Thank you.

Thank you. Our next question is from Joe Cardoso with JP Morgan. Please proceed with your question.

Hi, thanks for the question. Just two quick ones for me. First, you modestly narrowed the revenue guidance range for the quarter, so just curious to see what's driving the better visibility heading into the September quarter, if anything. And then second, you mentioned the supply shortages with Farnell. Has that improved at all in the first quarter to date? And are you baking in a continued headwind from the shortages in the first quarter guide? Thank you.

Let me work on the side. Joe, could you repeat the first part of that question? You broke up on it. I got the Farnell one, but I didn't catch the first one.

Yeah, sure. So just the first one's simple. It's just in the revenue guidance, you narrow the range that you typically give, at least for the prior two to three quarters. Just curious what's driving the more narrowed range there. Is it better visibility? You know, just curious to hear if there's anything behind that. And then the second one's just the Farnell.

Yeah, for the guidance question, Joe, I'd say this is Ken. I would say there's not really anything that's changed. I think maybe the prior quarter we expanded a little bit with some maybe more uncertainties, but this would be the typical kind of plus or minus $150 million on the midpoint. So I think you'd see that going forward.

Yeah. And, uh, thanks Ken. Then on the, uh, for now, yeah, no, what would you say with for now? They, they, they've got quite a bit of backlog. We've been increasing or working increase the skews to 200 plus thousand. And we're, we're just about 70, 80% there. So it's not, well, yeah, we can get more inventory. It always helps their growth, but it's not really built into a negative guide or anything on that. Anything around for now would be more just seasonality. They're, they're also heavy in Europe, right? That's where, you know, and, uh, your, your tends to be a little bit slower in the summer. and we're probably going to see a more normal seasonality in Europe than we had the last two years because the last two years were somewhat anomalies in the Europe market. So I think we're going to go back to more of a bit of a slower seasonality quarter in Europe. But, no, it's not having a heavy impact.

Got it. I appreciate the call, guys. Yep, you got it, sir.

Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.

Great. Thanks for taking my follow-up. I apologize if I missed this, but I'm just, you know, as I look at the segments, I'm realizing that Farnell is, you know, about flat year over year, and the traditional components distribution business is still growing at a healthy clip. Can you comment on the difference between these two? You know, I've noted that, you know, in times of sort DESPERATE DEMAND RELATIVE TO LIMITED SUPPLY THAT YOU MIGHT, YOU KNOW, SEE THIS THUMP IN FARNEL THAT COULD THEN FADE. IS THAT THE DYNAMIC WE'RE SEEING NOW? ARE CUSTOMERS, YOU KNOW, GETTING, YOU KNOW, FILLED SLIGHTLY BETTER THROUGH MORE TRADITIONAL METHODS AND THEREFORE BACKING OFF OF FARNEL OR IS THERE ANOTHER DYNAMIC THERE?

WELL, YEAH, NO PROBLEM. DID YOU TALK ABOUT THE GUIDE TO SEPTEMBER? I think the Q4 versus Q4. Q4 versus Q4? Yeah.

Yeah, I mean, well, I guess, Ken, I would say, you know, some of that is FX driven. They've got a lot of your businesses, Phil mentioned. So, you know, but they have had some, I'll call shortages of some parts that they could, including single board computing and things of that nature. So, you know, I feel like in the market, demand is still pretty strong, you know, and and the pricing is still relatively good, so I don't see anything indicating there that would signal anything more different than what we're seeing in the broader electronic components business.

Yeah, I don't think there's anything to read there. It's the long and short of it, Will. But all the catalog guys do pick up maybe a bit more, and we've talked about that. When there's shortages out there, they definitely see a little bit more action than they typically would. But we've not seen anything dramatically change there. Thanks. You got it, Will.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Phil Gallagher for any closing comments.

All right. Thank you very much, and thanks for the questions, and thanks for participating in today's earnings call. And I look forward to speaking to you again following our first fiscal quarter earnings report in October. At that point, I wish Ken all the best of luck, and Tom, thanks for everything, and hope everybody has a good rest of the day.

Thanks, everyone.