Avnet Inc

NASDAQ:AVT

Earnings Call Analysis

Avnet's Challenging Year with Optimistic Outlook

Avnet reported fiscal year 2024 revenues of $23.8 billion and $5.43 in diluted earnings per share. Despite a 15% year-over-year revenue decline in the fourth quarter, sequential sales were resilient. The Electronic Components and Farnell segments saw reduced sales, while aerospace and defense demand grew. Gross margins dropped to 11.6%. Strategic inventory management and cost-cutting actions improved cash flow and reduced debt. For fiscal 2025, Avnet expects continual benefit from cost reductions but anticipates some headwinds. First-quarter guidance projects sales between $5.25 billion and $5.55 billion, with EPS ranging from $0.80 to $0.90.

Introduction

In this latest earnings call, Avnet reported on its financial performance for the fourth quarter and full fiscal year 2024. The conversation was led by CEO Phil Gallagher and COO Ken Jacobson, who discussed the company’s achievements, challenges, and future outlook. The overall message is that Avnet has managed to navigate a tough market environment, ending the year with results that exceeded top-line and EPS guidance.

Financial Highlights

Avnet delivered $23.8 billion in revenues for fiscal year 2024, with $5.43 in diluted earnings per share. For the fourth quarter, sales reached $5.6 billion, representing a sequential decline of 1% in constant currency. Despite this, the results surpassed the company’s initial guidance. Adjusted operating income stood at $193 million with a margin of 3.5%.

Segment Performance

The Electronic Components (EC) segment reported $210 million in operating income, translating to a 4.1% operating margin. However, sales decreased by 15% year-over-year. Farnell, another key division, saw sales decline 16% year-over-year, with an operating margin remaining at 4%. The performance of the Western regions was below expectations, contributing to the overall decline.

Cost Management and Margins

Through a series of strategic cost-reduction actions, including both temporary and permanent measures, Avnet managed to reduce SG&A (Selling, General, and Administrative) expenses by $56 million year-over-year and $17 million sequentially. Despite these efforts, gross margins fell to 11.6%, marking a year-over-year decline of 92 basis points.

Market Environment and Trends

Aerospace and defense were the only sectors showing year-over-year growth globally. Lead times for semiconductors and interconnect products are becoming increasingly manageable, suggesting stabilizing supply conditions. The company's upcoming Tria brand aims to capitalize on the demand for embedded compute modules, anticipating growth driven by AI and data center trends.

Balance Sheet and Liquidity

Avnet’s focus on working capital efficiency led to a sequential decrease of $228 million, driving down inventory levels by 5%. The company ended the quarter with $759 million in available borrowing capacity and a gross leverage ratio of 2.7x. Debt was reduced by $56 million due to strong cash flow generation, which amounted to $274 million in the fourth quarter.

Capital Allocation

Avnet repurchased $79 million worth of shares during the quarter—about 2% of shares outstanding—and paid dividends amounting to $28 million. The company plans to continue prioritizing share repurchase and dividend payments in fiscal 2025, targeting a 5% reduction in shares outstanding and an increased dividend payout.

Future Guidance and Outlook

For the first quarter of fiscal year 2025, Avnet anticipates sales between $5.25 billion and $5.55 billion, with diluted earnings per share ranging between $0.80 to $0.90. The company expects fiscal 2025 to offer stabilization with some market correction. In particular, Avnet sees recovery prospects in its Asian markets and aims to leverage its strategically positioned inventories to capitalize on this trend.

Conclusion

Despite market challenges, Avnet's leadership remains optimistic about its future. Strategic cost-management practices, along with careful capital allocation and a forward-looking approach to emerging technologies, position the company well for the anticipated market recovery. Avnet's focus remains on solidifying its role in the technology supply chain while delivering robust shareholder returns.

Earnings Call Transcript 2024-Q4

[Operator]

Welcome to the Avnet Fourth Quarter Fiscal Year 2024 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President, Treasurer, and Investor Relations for Avnet.

[Joseph Burke, executive]

Thank you, operator. I'd like to welcome everyone to the Avnet Fourth Quarter Fiscal Year 2024 Earnings Conference Call. This morning, Avnet released financial results for the fourth quarter and fiscal year 2024, and the release is available on the Investor Relations section of Avnet's website along with a slide presentation, which you may access at your convenience.

As a reminder, 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 a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in 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.

Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

[Philip Gallagher, executive]

Thank you, Joe, and thank you, everyone, for joining us on our fourth quarter and fiscal year 2024 earnings call. For fiscal year 2024, we delivered $23.8 billion in revenues and $5.43 of diluted earnings per share. Looking back on fiscal year '24, we began the year with great momentum from fiscal year '23, which was a record year both for revenues and earnings per share. As 2024 progressed, we faced a softening demand environment, and I want to thank our team for their execution and perseverance in these challenging market conditions. Their continued efforts will allow us to emerge from the correction stronger as the market recovers.

Turning to the completed fourth quarter. I'm pleased we delivered another quarter of financial results that exceeded our top line and EPS guidance. In the quarter, we achieved sales of $5.6 billion and adjusted operating margins of 3.5% highlighted by a 4.1% operating margin in our Electronic Components business. With the structural improvements we have made over the past few years, our EC business has now delivered 10 consecutive quarters of greater than 4% operating margin.

We also had another good quarter of cash flow generation, primarily the result of executing sound working capital management as we navigate through the market correction. Sequentially, demand declined across most of the end markets we serve. On a year-on-year basis, aerospace and defense was the only end market with increased demand globally. Semiconductor lead times have continued to decrease and remain relatively low for most technologies. And as I mentioned last quarter, the growth in data center build-outs surrounding cloud and artificial intelligence is driving longer lead times for certain products, and we would expect this to continue.

On the IP&E side, lead times are generally stable and have returned to what I would characterize as a normal range. And we are seeing increasing demand for some interconnect products and capacitors for certain applications. Our global book-to-bill ratio improved modestly over the last quarter, led by our Asia and Americas regions, both finishing the quarter approaching parity. Our EMEA business, which has a large portion of this business driven by the industrial and transportation end markets, is seeing softer bookings and billings due to lower demand.

Our backlog is lower as a result of shorter lead times and customers working through their inventory on hand. Cancellations have remained at normal levels. I'm really pleased with the progress our team has made in improving our inventory position. This is a key focus area for our organization and we still have some work to do. While we have more inventory than we need for near-term demand in some areas, there are other areas where we want to make strategic investments. Having the right inventory is still a key growth enabler and is an important part of our value proposition at the center of the technology supply chain.

Now with that, let me turn to the fourth quarter results. At the top line, our Electronic Components business declined on a global basis. In EMEA, demand in the aerospace and defense end market increased sequentially and year-on-year as military budgets have increased across Europe. In the Americas, demand increased sequentially for aerospace and defense, and industrial end markets and aerospace and defense was strongest on a year-on-year basis.

I mentioned on our last earnings call, we were seeing signs of a bottoming in our Asia region, giving us reasons to be optimistic that the market correction may be nearing its final phase in Asia. So it is notable that our Asia revenues increased sequentially as demand in the industrial, transportation, and consumer end markets all increased with transportation showing the best growth on a year-on-year basis. We expect to return to overall year-on-year growth in Asia in either the September or December quarter.

On the demand creation side, our engineering teams continued to engage with our customers and suppliers on design wins and registrations. This drove increases in revenues on a sequential basis and validates the value proposition we can deliver in any type of market.

Before we get into Farnell's results, I would like to highlight that Rebeca Obregon has been recently named President of Farnell. In her time at Avnet, Rebeca has demonstrated the ability to develop and execute strategy and drive cultural alignment not only with our employees but with our customers and suppliers globally. I'm confident that her experience, relationships, and collaborative approach will drive important synergies to accelerate Farnell's profitable growth.

Farnell is not immune to overall market softness, and the fourth quarter sales were down sequentially and year-on-year, similar to the sales trends in our EMEA EC business. Sales were lower sequentially, mostly due to lower demand for semiconductors. Gross margins at Farnell have stabilized and with the previously announced cost reductions which are proceeding as planned, we expect margins to improve over the course of fiscal year 2025.

We continue to expect Farnell's high service offerings to enhance the synergistic collaboration between Farnell and Avnet. The combination allows us to serve our customers from new product introduction to mass production as 1 Avnet. Avnet is positioned as one of the only broadline global distributors that also has a global high-service distribution business. As a key player in the global technology supply chain, we continue to leverage our value proposition in other areas, such as demand creation, IP&E, and embedded computing. I've already mentioned our demand creation and engineering capabilities. IP&E continues to be a key focus for our team, and in Q4, we saw a nice increase in this area, particularly in Asia, much of which is related to the build-out of data centers.

In addition to IP&E and demand creation, we're also focused on driving value through our embedded solutions offerings. OEMs are increasingly look to move from chip down manufacturing to using modular compute solutions into their products. Because of this trend, we recently announced the launch of the Tria brand for our business unit that's designed to manufacture embedded compute modules and systems. The new distinct brand will improve our ability to compete with other stand-alone brands in the embedded solutions business. The market opportunity we target through Tria is just another example of how we have adapted to the changing needs of our customers and the technology offering of our suppliers over the past 103 years. So stay tuned for future updates on our progress in embedded space.

To conclude, I continue to feel optimistic about the long-term trends and the demand for technology and the pervasiveness of electronics in so many applications today and in the future. This includes those driven by AI adoption as companies explore innovative ways to leverage its capabilities in both the data center and, ultimately, edge computing applications. We are participating in the AI growth trends through sales of components into data centers as well as providing supply chain services surrounding the data center.

This participation is expected to grow over the next several quarters and should positively impact sales across several verticals. I'm excited that Avnet's position at the center of the technology supply chain will allow us to continue to deliver increasing value to our customers and supplier partners. As we enter fiscal year '25, the prevailing belief is that the market correction seems to be in its last stages. Our Asia region appears to have bottomed, and we're awaiting signs for a similar bottoming or inflection point to manifest in the Americas and Europe. Until then, we will continue to navigate through this market and control what we can control in anticipation of a brighter demand environment in the quarters to come. Now with that, I'll turn it over to Ken to dive deeper into our fourth quarter results.

[Ken Jacobson, executive]

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our fourth quarter earnings call. Our sales for the fourth quarter were approximately $5.6 billion, above guidance and down 15% year-over-year or down 14% in constant currency. On a sequential basis, sales were down 1% in constant currency due to sales declines in the Western regions and below seasonal sales growth in Asia. On a year-over-year basis, sales declined in constant currency, 2% in Asia, 21% in EMEA, and 22% in the Americas.

From an operating group perspective, Electronic Components sales declined 15% year-over-year and 14% in constant currency. EC sales declined less than 1% quarter-over-quarter in constant currency. Farnell sales declined 16% year-over-year and 15% in constant currency. Farnell sales declined 8% sequentially in constant currency. For the fourth quarter, gross margin of 11.6% was 92 basis points lower year-over-year and 28 basis points lower sequentially. Our fourth quarter gross margin benefited from the impact of some of the strategic inventory opportunities we mentioned last quarter. EC gross margin was down sequentially and year-over-year. The sequential decline was primarily due to a lower mix of sales from the Western regions. Farnell gross margin was down sequentially and year-over-year, largely due to continued weak market demand for on-the-board components.

Turning to operating expenses. SG&A expenses were $450 million in the quarter, down $56 million or 11% year-over-year and down $17 million or 4% sequentially. As a percentage of gross profit dollars, SG&A expenses were flat sequentially at 70%. In the fourth quarter, we incurred additional restructuring, integration, and other costs for our previously communicated cost reduction actions at both Farnell and our EC business. These actions included a combination of permanent and temporary cost reductions across all regions. We saw some impact from these actions during the fourth quarter, including at Farnell.

Moving to fiscal 2025, we expect to realize further benefits from those cost reduction actions. However, some of the impact will be offset by operating expense headwinds driven by the start of the new fiscal year. For the fourth quarter, we reported adjusted operating income of $193 million and our adjusted operating margin was 3.5%. By operating group, Electronic Components operating income was $210 million, and EC operating margin was 4.1%. Farnell operating income was $15 million and Farnell operating margin remained at 4%. Farnell's expenses were lower this quarter by approximately $10 million, but this benefit was offset by the sequential sales decline driven by the overall market correction as most of Farnell's business is in EMEA and the Americas.

Turning to expenses below operating income. Fourth quarter interest expense of $64 million decreased by $11 million year-over-year and was down $9 million sequentially, primarily due to lower debt levels throughout the quarter. Our adjusted effective income tax rate of 15% was lower than expected in the quarter, driven by various factors, including truing up the full year adjusted effective tax rate of 22% during the fourth quarter. Adjusted diluted earnings per share of $1.22 exceeded our expectations for the quarter due to a combination of higher sales, lower interest expense, and a lower tax rate. The adjusted EPS benefit from the lower-than-expected interest expense and tax rate was approximately $0.18.

Turning to the balance sheet and liquidity. During the quarter, working capital decreased $228 million sequentially, including a decrease in reported inventories of $283 million, a $71 million increase in receivables, and a $16 million increase in payables. Working capital days decreased 6 days quarter-over-quarter to 110 days. Our return on working capital was essentially flat quarter-over-quarter. Our inventories were down 5% during the quarter, reflecting decreases in the Americas and EMEA regions of EC and, to a lesser extent, across Farnell. Declines in EC inventories were net of increases in inventories due to strategic opportunities we saw this quarter.

Inventory days decreased 5 days sequentially to 104 days. Our near-term goal is to get inventories below $5 billion. As Phil previously mentioned, although our inventories are elevated in certain areas, we will be looking to invest in other areas where it makes sense for our business. Our goal continues to be to ensure we are well positioned to take advantage of the market recovery. We expect to make continued progress heading into fiscal 2025 by adjusting our inventories lower in the areas where they remain elevated.

Our decrease in working capital led to a decrease in debt of $56 million. We generated $274 million of cash from operations in the quarter, $773 million over the past 2 quarters, and $690 million for the full fiscal year. We ended the quarter with a gross leverage of 2.7x, and we had approximately $759 million of available committed borrowing capacity. With regards to our capital allocation, we continue to prioritize our existing business needs. During the quarter, cash used for CapEx was $26 million as expected. We expect CapEx to remain at historical levels in fiscal 2025 of approximately $25 million to $35 million per quarter.

In the fourth quarter, we paid our quarterly dividend of $0.31 per share or $28 million. We also repurchased approximately $79 million worth of shares, which represented nearly 2% of shares outstanding. As we enter the new fiscal year, we have so far repurchased an additional $46 million. Our share price continues to trade below book value, which was $54 a share in the fourth quarter. Our capital allocation priorities have continued to include returning cash to shareholders. Since the start of fiscal year 2019, we have returned nearly $2 billion to shareholders, with nearly $600 million in dividends and nearly $1.4 billion of share repurchases. We have repurchased 32 million shares over that time frame, which has reduced our diluted share count by an average of 5% per year.

Share repurchases will continue to be an important part of our capital allocation priorities in fiscal 2025 and beyond. We are targeting a reduction of shares outstanding by at least 5% as well as increasing our dividend during fiscal 2025, thereby continuing our commitment to provide consistent and dependable shareholder returns.

Turning to guidance. For the first quarter of fiscal 2025, we are guiding sales in the range of $5.25 billion to $5.55 billion and diluted earnings per share in the range of $0.80 to $0.90. Our first quarter guidance assumes current market conditions persist and implies a sequential sales change of flat to down 5%, with greater-than-seasonal sales declines in the Western regions and the lower-than-seasonal sales growth in Asia. On a year-over-year basis, this guidance implies flat sales in Asia as we are close to returning to year-over-year growth in that region.

Assumptions for the first quarter operating expenses include some headwinds specific to variable compensation resets and seasonal increases in stock-based compensation, which will offset some of the cost reduction initiatives we have implemented at Farnell on the EC level. This guidance also assumes similar interest expense compared to the fourth quarter, an effective tax rate of between 21% and 25% and 90 million shares outstanding on a diluted basis.

Despite our near-term outlook, we still have momentum entering our new fiscal year. We are well positioned and remain focused on capitalizing on growth opportunities once the market improves, which we expect to happen in the coming quarters. Our focus remains on execution over the things we can control as we continue to demonstrate the value that Avnet provides to our customer and supplier partners at the center of the technology supply chain. With that, I'll turn it over to the operator to open up for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from William Stein with Truist Securities.

[William Stein, analyst]

Congrats on the good quarterly results. I wanted to ask about a couple of things. Perhaps first, inventory. I think in recent quarters, I'm not sure if you used this word but I would call it spiky or not well dispersed by supplier and maybe also by region or end market. Can you provide an update as to whether that condition improved and your inventory became a bit more dispersed by supplier or we're still in that sort of spiky situation?

[Philip Gallagher, executive]

Yes. Thanks, Will, and I appreciate the comment. This is Phil. I'll start and then Ken jump in. I think what you're referring to is when we talk about our inventory being up and it's higher than we want it to be still and we've got goals to get it -- continue to bring down. Even with our own team, it's not up across the board. I think that's what you. It's not like it's up in every single commodity or every single product line. It tends to be a little bit more top heavy, let's say, in 5 or 6 lines where maybe it's a little bit more imbalanced, if you will, that we're working down.

And of course, we had, as we've noted 2 quarters ago, at kind of a special buy that we had as well that's starting to come in, which was good for us and good for the customers. So yes, still a little spiky, I guess, is the right word. I'll leave it at that. Ken, you want to jump -- so again, not all the inventory, Will. We're still investing in inventory. That's why we deliberately put that in the script so our suppliers know, hey, we know we still -- distribution, you got to have inventory, right? We're just a little imbalanced in certain commodities or certain lines.

[Ken Jacobson, executive]

Well, I'd just say each region is making progress but it is -- each region has its own kind of situation, even though there are some similarities that cross through it. So again, everyone's got some progress to make, but certain regions have had better progress than others. And we'll continue to drive it through the end of the calendar year.

[William Stein, analyst]

One other. As I listened to some of your suppliers or large semi companies that may, some of them maybe not, even suppliers anymore, there were 2 interesting takeaways from my perspective. One was that demand conditions both for orders and for bookings as well were less dispersed by end market, maybe if we take out aerospace/defense, maybe that 1 in particular has been strong.

But ex that end market, it hasn't been as much of an end market story. It's been much more of a geo story. And the story that the semi companies have told have been that geographically, they saw a meaningful recovery, a big snapback in China. Have you begun to see a similar trend? It didn't sound quite like that in your prepared remarks so I'm hoping you can clarify. And if you can identify the -- maybe the difference between what you're seeing and what your suppliers are talking about, that might help us understand the broader picture.

[Philip Gallagher, executive]

Yes. Thanks, Will. And your overall statement is correct. There's still -- demand on bookings is still slower than we'd like to be. I think most suppliers would have said that we track them as well. They want more visibility, right, because lead times are down and there's just, I would say, false assumption that everything is going to be available anytime anybody wants it, and we know what happens when the market starts to turn. So generally slower.

Defense/aero has been -- is fine, actually good. The big down market really, right now, it's affecting us most and most as far as industrial. If you're in data center, hyperscalers, AI, you're probably in pretty good shape. As far as Asia Pac or China specific, yes. We've seen a modest, I wouldn't say robust, but a modest recovery in China. We may or may not be playing in some of those suppliers end markets that you're referring to, particularly the lines that we don't have. They might be more consumer-based. I'm not really sure.

But we're holding our own in China. We're seeing, as we talked about, in Asia, we saw -- I was looking at the vertical markets now. We did see some increase in transportation. We did see some increase in, although modest, in consumer space as well and sequentially in industrial. So that's our Asia Pac number in total. But Asia, as we did talk about in the script in total now, including Japan, we're going to see sequential growth either in September or December. Depending how strong September comes, then we'll begin to see year-on-year growth in Asia Pac, which it was a good sign overall as typically the recovery starts in Asia Pac and works its way West. Hope that helps.

[William Stein, analyst]

Great. Yes. Thank you.

[Operator]

Our next question comes from Matt Sheerin with Stifel.

[Matthew Sheerin, analyst]

Just following up on Will's question regarding demand. I know you -- and I appreciate you're just giving September quarter guidance, but it sounds like you're not ready to call the bottom yet, Phil, in North America or Europe. And so given that and what we're hearing from other suppliers, should we expect those 2 markets to be below seasonal, meaning down sequentially, offset a little bit by Asia so that your overall business may be flat to down sequentially? Is that the right way to think about it at this point?

[Ken Jacobson, executive]

Yes, Matt, I think when you think about the guidance, you see the sales decline from last quarter, so obviously, there's an impact there. But it would be a heavy mix shift, primarily Asia from EMEA. So we're seeing definitely lower than seasonal in EMEA. Now typically September is the seasonally slow quarter for EMEA. You have the vacation periods here in August so august is usually a pretty weak month. But this is definitely lower than we had hoped or expecting.

But I don't think there's anything we necessarily see that says it's getting worse, but I don't think we're ready to call bottom either, right? Again, I mean, it's been our strongest region so they're having a little bit of softness, industrial, transportation, right? But generally speaking, that business is still very healthy.

[Philip Gallagher, executive]

I think if you call out -- thanks, Ken...

[Matthew Sheerin, analyst]

Yes. Actually, Phil, I was actually just talking about the December quarter, kind of looking past September based on your backlog. And my question was, should you expect that to be below seasonal, those 2 regions?

[Philip Gallagher, executive]

December quarter? Okay. Well, we don't give guidance out that far, Matt. Can you hear me okay, Matt? You can, right?

[Matthew Sheerin, analyst]

Yes, yes.

[Philip Gallagher, executive]

Okay, all right. Well, Asia, we called bottom. I mean, Asia, we see -- we called that last quarter that we think March was the bottom in Asia. And that's, we believe, going to hold true through the calendar year into March. Americas is actually pretty stable right now sequentially. The view into December is still foggy and I would say the same thing for Europe. So it's really just tough to -- so many moving pieces.

I would like to believe September is pretty much nearing the bottom. You got to remember, in Europe, we're coming off of June and September quarters a year ago that were all-time record quarters. So we're going to get some tough compares on the year-on-year compare as well. But I think it's safe to say the industrial market, in particular, in Europe is down, and that's pretty consistent and that's a big play for us in many of our suppliers in that industrial space in Europe.

[Matthew Sheerin, analyst]

Got it, okay. And then regarding your margin or backing into your margin guidance, it looks like component margins would be below that 4% target that you have. And it also looks like gross margin will be down by at least 20 basis points sequentially. Is that really all mix-driven at this point or are you seeing incremental pricing pressure as well?

[Ken Jacobson, executive]

Yes, Matt, it's mostly mix. I think that dip, you're right, it does dip below 4%. We're hoping that's the only quarter but it may be a couple of quarters. But again, it's a big mix shift primarily to Asia from Europe and that's what's driving a lot of it. We did mention OpEx being up a little bit, too, from some change in the fiscal year and kind of timing difference kind of headwinds. But we feel overall really good about our expenses but it will be up from last quarter.

[Matthew Sheerin, analyst]

Okay. And just on OpEx, Ken, looking past the September quarter. You talked about some incremental restructuring so should we expect OpEx to work out from there or not?

[Ken Jacobson, executive]

Yes, I think modestly but not significantly, right.

[Operator]

Our next question comes from Melissa Fairbanks with Raymond James.

[Melissa Dailey Fairbanks, analyst]

I've got 1 a little related to some of your commentary on the inventories. Just wondering what we can expect moving forward either in terms of investment in end-of-life products. I know you've had some unique kind of strategic opportunities there or maybe some expansion of your supply chain services business.

[Ken Jacobson, executive]

Melissa, this is Ken. Specifically to end-of-life?

[Melissa Dailey Fairbanks, analyst]

Yes.

[Ken Jacobson, executive]

I mean, I think there's several suppliers that are doing some, we call it, last time buyer end-of-life programs. I think we don't necessarily love to hold product for those engagements for multiple years, right? We can do something for 1, 2 years. But when you start to talk about beyond that, we look for alternative methods. So we do see that as a historical and current opportunity within our supply chain.

But a lot of stuff, it's cheaper for the customers just to take it, right? So we see some of that being more temporary holds versus the longer term. But we are open to serving whatever the customer needs are, but again, we got to get a fair return for that. And with the cost of capital, it becomes more expensive to do those kind of last-time buy holds than it was a couple of years ago. But we're seeing pockets of opportunity. I wouldn't say anything meaningful. A lot of the stuff we're seeing on end-of-life is back-to-back type of things where we'll hold it for a little bit to pipeline it but it gets shipped.

[Melissa Dailey Fairbanks, analyst]

Okay, okay. On the supply chain services business, I think this maybe going back to the December quarter or maybe even a conference in the December quarter. You had some opportunities. You onboarded some inventory. I believe it was for an industrial customer. And then you saw potentially some opportunities longer term in the auto space. Can you give us an update on that business?

[Ken Jacobson, executive]

Yes. I think just overall supply chain as a service is there's puts and takes. What I would say is we still see lots of opportunity, in particular, in transportation, but even more broadly. And I guess the other commentary I'd give is some of the legacy supply chain engagements more for, let's say, technology type companies that have been buying components for years, that's down with the broader market being down, right? So we're optimistic that some of that will start to recover.

And then that will be on top of some of the new wins. But again, these things take a little while to ramp, but progress being made but not ready necessarily to give more specific financial metrics there outside of the percentage of inventory, which was roughly 8% this quarter, consistent with last quarter.

[Melissa Dailey Fairbanks, analyst]

Yes, okay. Love to see the good progress on the inventories by the way. Maybe if I could squeeze in just 1 more quick 1. We've talked a lot about Asia today, but we've heard about some increase in competitive or pricing pressures in Asia. I'm wondering what you're seeing there if that's impacting anything. Obviously, Asia has been one of the better performing regions for you. But if you can comment on the competitive dynamics there.

[Philip Gallagher, executive]

Yes. Melissa, thanks for the questions. I appreciate it. This is Phil. Nothing -- you hear from a couple of suppliers in certain markets, maybe even in China, you may have some more indigenous suppliers and whatnot. But overall, I mean, Asia is a competitive market all the time. So we're not seeing anything that's out of the norm affecting our business at this point. But we do hear about the -- some of the pricing pressures in certain commodities from certain suppliers. Again, net effect to us has been minimal.

[Operator]

Our next question comes from Joe Quatrochi with Wells Fargo.

[Joseph Quatrochi, analyst]

Just kind of curious on the target of being sub-$5 billion inventory, how long do you think that could take? And then just to clarify, is that including the supply chain service inventory that you're holding as an agent for your customers -- or suppliers?

[Ken Jacobson, executive]

Yes, Joe, I think that goal, I would say that's a net goal. I think there'll be puts and takes throughout the fiscal year so I'd say as we get towards the end of our new fiscal year, you should see that be achieved. I think we'll continue to kind of report out what percentage of supply chain. There's nothing near term that we see would be a drastic increase there that would materially change the number, but there will be puts and takes within that number and we'll update accordingly.

Again, we're -- Phil mentioned the kind of pockets that are elevated. That's what we're focused on reducing and we'll continue to give progress updates on where that's at. But clearly, I think there's capacity to invest in inventory but still reduce overall is how we're kind of thinking about it.

[Joseph Quatrochi, analyst]

Okay. And then on the -- you talked about the opportunity on the data center side. Just kind of curious, how big is that from a revenue perspective for you today? And how should we think about the margin profile relative to the corporate average?

[Philip Gallagher, executive]

Yes, Joe, this is Phil. We don't quantify the number. On a relative basis to our total enterprise, it's relatively small, Joe, okay? But we see increased opportunities there. And particularly out of our Asia business tied to some of the hyperscalers, and the margin profile has been about average to our typical margin that we're getting from those suppliers or customers.

I think the other opportunity, I believe we talked about in the last call, which makes it a little bit more difficult to measure is we're selling directly to the hyperscalers or a lot of our OEM customers sell into the hyperscalers and AI, right? So we're, in particular in the industrial space, we've got a lot of customers that we're doing business with that we're supporting their end customers are the hyperscalers, if you will. So we're also benefiting from that.

We're working to quantify that. It gets more difficult as you can probably imagine. But either way, the overall ecosystem that gets built out there, as time moves on, we will certainly benefit.

[Operator]

Our next question comes from Ruplu Bhattacharya with Bank of America.

[Ruplu Bhattacharya, analyst]

First 1 is on Farnell. So what do you or Rebeca plan to do different to turn the Farnell business around? And Ken, you talked about margin improvement throughout the next fiscal year at Farnell. How should we think about the cadence of that? I mean, where do you think the margins in Farnell can get to by the end of the fiscal year?

[Philip Gallagher, executive]

Yes. Thanks, Ruplu. I'll go first. I'll let Ken touch on the margin. We do have a plan there and you can imagine we have a walk. So yes, just overall, certainly disappointed where we are with Farnell. That said, we're also excited about the opportunity because it becomes a complete tailwind for us as the market recovers.

As you know, yes, we announced Rebeca in the role. She's a 25-year veteran of the industry, been with Avnet 18 months and has already jumped in with the team on resetting the strategy and the structure for Farnell. We talked a couple of quarters ago about the OpEx adjustments at Farnell, which are -- I think we talked about in the transcripts as well that we are starting to see the net effect there. It's just that, that effect of the OpEx did not show up as positive in the OI due to the further softening of the market, particularly in Europe where Farnell's largest region.

So we're going to continue to look at the strategy structure, continue to leverage the best of Avnet, okay, in total, with Farnell. As we talked about in the script, we've a unique opportunity there. We continue to invest in the digital front end, the e-commerce front end. We're not slowing down on that at all because we think it's critical for the long-term value prop that we see Farnell can bring Avnet and its shareholders. So stay tuned for more, and I'm sure we'll get more in the one-on-ones with you. Ken, anything on the...

[Ken Jacobson, executive]

Ruplu, I'd just say I think on the operating margin improvement, when you're going to see it, I think it's pushed out a little bit. The sales obviously were softer than we anticipated going into the quarter, and that's kind of the broader impact of the EMEA market. So at the current level of sales, we're not going to see a lot of improvement.

The good news is gross margin, we feel pretty good about it being stable, and that's for on-the-board components as well as overall. And the OpEx actions are taking effect, right? We saw a pretty good sequential decline there. So we feel good about those things that we can control, the top line softer than anticipated and we expect that to continue for at least the next quarter or 2. But everything else is in good shape for the recovery.

[Ruplu Bhattacharya, analyst]

Okay. Maybe for my follow-up, if I can ask you on your capital allocation priorities. I mean, from the prepared remarks, Phil, it seems like we're nearing the end of the inventory correction in the channel. So I mean, how many more quarters do you expect of this correction? And in this environment, where would you focus your investments? And how should we think about the trade-off between buybacks or doing any M&A or any other type of investments that you may have? So if you can just kind of weave in like how many more quarters of correction you expect? And where do you focus your efforts in terms of investments and capital allocation?

[Ken Jacobson, executive]

Ruplu, I'll start off by just saying I think our -- with some of the market turmoil here, we dropped below $50. We've been steadily trading below book value of about $54. So we feel buying back shares is the appropriate use of our capital right now. I think we've talked about it. We're not really pursuing M&A aggressively. We're open to listen to things and a lot of things would be capabilities or tuck-in type of opportunities but nothing transformational.

And again, we have to support the dividend. We still see there's opportunity in inventory so although it's getting better with our customers, we wouldn't say across the board, every inventory levels are where they should be at, right? So it's still going to take a few quarters to get through the inventory side of things. But we anticipate continuing to invest in ourselves. That's some combination of our own team and then also when it comes to the capital projects, but we think that's kind of largely subsided with the investment into Europe. So again, I think it's going to be mostly buybacks and dividends, some piece of debt pay down, depending on where the debt levels are at and continue to drive improvements in the business.

[Operator]

Gentlemen, there are no further questions at this time. I'll now turn it back to Phil Gallagher for closing remarks.

[Philip Gallagher, executive]

Great. Thank you very much, and I want to thank everyone for attending today's earnings call. And I look forward to speaking to you again at our first quarter fiscal year 2025 earnings report in October. Have a great rest of the day. Thank you.

[Operator]

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