Q1 FY 2027 Earnings Call - AVNET INC

Welcome to the Avnet first quarter fiscal year 2027 earnings call. I would like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Thank you, Operator. I'd like to welcome everyone to Avnet's first quarter of fiscal year 2027 Earnings Conference call. This morning, Avnet released financial results for the first quarter of fiscal years 2027, and the release is available on the Investor section of ADNES 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 ABNED's most recent Form 10Q and 10K 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-thinking 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-GAP to GAAP reconciliation can be found in the press release issued today, as well as in the appendix slide of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Adnet's CEO, and Ken Jacobson, Admet's CFO. With that, let me turn the call over to Phil Gallegher. Phil? Thank you, Lisa, and thank you, everyone, for joining us on our first quarter fiscal year 2027 earnings call. We're off to an outstanding start to the new fiscal year. Our first quarter results came in well above our expectations with record performance across all regions of both electronic components and Fresnel businesses. We achieved record sales of $10.7 billion above the high end of our guidance and record adjusted earnings per share of $3.63, cents, also well above our expectations. Importantly, the strength we saw at the top line translated into meaningful operating margin and earnings expansion, once again demonstrating the earnings power and operating leverage embedded in our business model as demand continues to strengthen. I'm extremely proud of how our team is executing in this dynamic business environment, and I want to thank them for the hard work and dedication. Our results show the strength and resilience of AdNet's position at the center of the technology supply chain, supported by our global scale, broad component line card, diverse end markets, deep customer and supplier relationships, experienced and dedicated employees, and the differentiated capabilities we offer across the business. And as we look across the market today, the environment continues to evolve in ways that play to those strengths. Supply conditions continued to tighten during the quarter, with lead times extending across most semiconductor and IP&E, which is our interconnect passive electromechanical product categories, as demand broadened across all of our end markets and applications. Pricing increases also began to extend beyond memory, with additional increases expected in the new calendar year. Given these dynamics, there has been considerable discussion across the industry about what is driving the recent acceleration in growth. The question we frequently get is whether our growth is from true underlying demand or just inventory replenishment. So let me take a few minutes to share our point of view on the question. From what we see in our business today, we believe underlying market conditions and demand are improving across all of our core end markets. There may always be some replenishment or changes in customer ordering patterns as markets tighten, but the breadth of the demand across geographies, technologies, and end markets gives us confidence that what we're experiencing is much broader than any one factor like inventory replenishment. Our key demand indicators continue to support that view. Book-to-bills remain solidly above parity in all regions. Our backlog is healthy and growing. the amount of backlog delinquencies continues to increase as lead times extend. We're monitoring it closely. As investment in AI infrastructure increases, it drives demand for more religious processors. Those solutions require a wide range of other semiconductors and IP and E technologies. As those investments move through the technology supply chain, they create opportunities across Admin's world-class supply line card and our diversified customer base. While we are seeing accelerated growth in the data center market and are experiencing the ripple effects of that growth in our business, the opportunity for AdNet extends well beyond direct AI-related data center sales. This is demonstrated by the breadth and quality of the demand we are saying outside of the data set. That diversity continues to be one of AdNet's important strengths. We have a globally scaled electronic components line cart. We operate across a broad set of higher growing end markets and maintain deep relationships across our customers and supplier base. And through Farnell, we engage with customers early in the product design process and support them from new product introduction through their journey to higher volume production. Now, with that, let me turn to the first quarter highlights for our businesses. Our electronic components business delivered another record quarter, with stronger-than-expected sequential and year-over-year growth across all three regions. We saw profitable growth across All-In markets, led by data center, aerospace, and defense, and networking. In Asia, the region is entering its third consecutive year of growth, with another record order of sales reaching $5 billion. And demand was higher across all end markets year-on-year, led by data center and industrial. As a reminder, Asia is regionally led by Taiwan, followed by China, Southeast Asia, and Japan. In the Americas, sales more than doubled year-over-year resulting in another record quarter for the region. Demand was broad-based and highest in data center, aerospace and defense, and networking. One contributor to the America's region's record performance was our AdNet Integrated Solutions business, which we discussed in our last earnings call. Integrated solutions provides advanced systems integration and services for customers using purpose-built IT hardware. We have long-served industries such as industrial and healthcare, and we are seeing strong demand from our customers serving enterprise, hyperscale, and neocloud data centers. AI infrastructure build-out is a key contributor to that demand, and as we scale the business, it is contributing to greater operating leverage and profitability in the region. In EMEA, sales grew both sequentially and year-on-year for the fourth consecutive quarter, reflecting continued improvement in the région. The region also achieved record sales during the quarter, which was led by demand across several verticals, including industrial and transportation. implementation. Across EC, we also continue to see strong momentum in the capabilities that differentiate Admin well beyond fulfillment component distribution. Our demand creation activity remains healthy, with new design registrations continuing to provide a strong pipeline of future opportunities. Our higher margin IP business also continues to perform well, nearing $1.7 billion in sales for the quarter or more than $6 billion of sales when annualized. As we have said before, every semiconductor-based solution requires a complement of connectors, passive sensors, power, and other technologies around it, and next-generation systems will require ever-increasing connectivity. The growth we are seeing in these complex systems plays directly into the full suite of solutions we provide our customers, combining both semiconductors and IP&E. Momentum in our supply chain solutions business continues to also grow, as large OEMs increasingly rely on our capabilities to provide resiliency to complex and evolving supply chains. Our supply chain services engagements are expanding across a growing set of customers, particularly in data center infrastructure, networking, and transportation, where demand trends remain favorable. Now, turning to Farnell. Farnell delivered a record sales quarter and returned to a double-digit operating margin, benefiting from strong execution by the team and the broader market recovery. We are seeing improving demand across all regions, while our Power of One focus continues to create opportunities by combining Farnell's digital and high-service distribution capabilities and broad customer base with Agnes' global scale in customer and supply relationships. Farnell's growth for on-the-board components comprised of semiconductors and IF&E was similar to the growth we saw across the EC business. We are pleased with what the Farnell team delivered this quarter. The results demonstrate the strength of the business and the operating leverage Farnell can achieve as it grows. For now, we'll also get that in an important position early in the product life cycles, allowing us to engage engineers during the design phase and complementing our capabilities as customers move toward higher-value production. As I step back to the quarter, I think there are several points worth emphasizing. First, as we've been staying for some time now, we embrace our position at the center of the technology supply chain. We are primed to benefit from robust growth in the traditional markets we serve including the powerful emerging megatrends driving electronic component demand, including drones, robotics, and edge intelligence, which are still in the early stages of growth. Second, our growth is broad-based, and we believe it is sustainable. We are seeing improving market conditions and demand across all of our geographies and end markets, and our book-to-bill, backlog, and other leading indicators continue to support our confidence in the underlying demand environment in our current outlook. Finally, we also know that strong markets alone don't deliver results. Execution matters. The capabilities, scale, and infrastructure we have across Admin allow us to support higher levels of revenue efficiency. The margin expansion, EPS growth, and return on working capital we delivered this quarter demonstrate the operating leverage and earnings power in our business model. We will continue to stay close to our customers and suppliers, manage inventory and expenses with discipline, while still making investments and focus on delivering growth, profitability, and returns for all of our stakeholders. So with that, I'll turn it over to Ken to dive deeper into our first quarter results. Ken? Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet. Our sales for the first quarter were $10.7 million, up 82% year-over-year. On a sequential basis, sales were higher by 29%. The first quarter had 14 weeks compared to a typical 13-week quarter. Normalizing the first-quarter growth by excluding the impact of the extra week, sales grew 71% year over year and 21% sequentially. Foreign currency did not have a meaningful impact on our sales growth this quarter. Regionally, on a year-ever-year basis, sales increased 109% in the Americas, 79% in Asia, and 64% in EMEA. On a sequential basis, sales increased 39% in America, 30% in Africa, and 30% Asia, 19% in India. During the first quarter, sales from Asia represented 48% of total sales compared to 47% of sales last quarter and 49% of sales last year. From an operating group perspective, electronic components had record sales during the quarter, increasing 84% year-over-year, and 30% sequentially. Normalized for the impact of the extra week, EC sales grew 73% year- Over-year and 22% sequentially, or now also had record sales during the quarter, increasing 46% year over year and 17% sequitionally. From a pricing perspective, memory prices increased during the quarter at similar levels to last quarter. As a result, approximately one-third of both the sequential and year- over-year sales growth was attributable to pricing increases in the memory product category. We did not see a meaningful impact from pricing in other electronic component categories beyond memory during the quarter. Gross profit margin at 10% decreased about 40 basis points year-over-year and sequentially, primarily due to product and customer mix in the quarter, electronic components gross profit margin was down about 30 basis points, year- over-year, and sequentially. EC gross margin declined primarily due the growth in our ABNA integrated solutions business, which had a lower gross margin than the EC average, but contributed meaningfully to the operating margin expansion. Farnell's gross margin increased about 200 basis points year-over-year and declined about 60 basis points sequentially. The year-ever-year improvement in gross margin is primarily due to the growth of on-the-board components, which come with a higher gross margin. Farnell gross margins at the product category level remain stable. Turning to operating expenses, SG&A expenses were $576 million in the quarter, up $112 million year-over-year and $29 million sequentially. The sequential increase in SG&A is primarily due to a combination of higher sales, annual pay increases for employees that took effect in the new fiscal year, the impact of the extra week in the quarter, and from an increase in stock-based compensation expense. As a percentage of gross profit dollars, operating expenses were 54%, exceeding our near-term target by approximately 600 basis points. We expect to continue to drive ABNET operating expense-to-gross-profit-dollar ratio to the low 50s through the remainder of fiscal 2027. Our EC business had a record low operating expense to gross-profit dollar ratio of 46% for the quarter, compared to 69% last year and 56% last quarter. The Farno operating expense and gross-profit dollar ratio is 65% in the quarter. Which is the lowest level since the first quarter of fiscal 2023. As we move through fiscal 2027, we will continue to maintain a high level of COP discipline while still making the necessary investments in the business to enable profitable growth. For the first quarter, we reported adjusted operating income of nearly $500 million, and the ABNET adjusted operating margin was 4.7%, an increase of more than 200 basis points year-over-year and more than 80 basis points from last quarter. This represents the fifth consecutive quarter of adjusted operating margin expansion and the highest operating margin since fiscal 2023. Adjusted operating income also grew approximately three times greater in sales compared to last year and approximately two times greater than sales compared to the last quarter. This is consistent with our continued expectation of driving operating income growth at least twice the rate of sales growth. By operating group, electronic components operating income was $484 million, and EC operating margin was 4.8% in the first quarter, a 71 basis point sequential increase. Similar to last quarter, the sequential improvement in EC operating margin is led by the Americas, including both the core and avid integrated solution businesses, with all regions increasing their operating margin over 45 basis points sequentially and even more year over year. We expect EC operating margins to reach our near-term goal of 5% in the second half of fiscal 2027. Farnell operating income margin of 10.1% was the highest operating margin in more than three years. Farnell Operating Income Margin grew by over 100 basis points sequentially, achieving our near-term target of returning the business to a double-digit operating margin. We expect to continue to expand Farnell operative margin beyond 10% as they continue to grow and their product mix of online board components improves. Turning to expenses below operating income, first quarter interest expense was $92 million, a sequential increase of $25 million, mainly due to higher debt levels to support working capital investments for stronger-than-expected sales growth. The increase in interest expense negatively impacted adjusted diluted earnings per share by $0.23 quarter-over-quarter. Our adjusted effective income tax rate was 23% consistent with expectations. adjusted diluted earnings per share of three dollars and 63 cents was a quarterly record for avnet and was well above the high end of our guidance adjusted dilute earnings per share grew 4.1 times greater than sales compared to last year and grew two times greater than sales compare to last quarter turn to the balance sheet and liquidity during the quarter we invested 1.2 billion dollars in working capital sequentially to support our profitable sales growth of this increase approximately 2.1 billion dollars came from inventories substantially offset by $1.8 billion increase in accounts payable. Accounts receivable increased by approximately $900 million, which was the primary driver for the use of operating cash flow during the quarter. The increase in inventory was driven by a few factors. Roughly one-third of the inventory increase was due to member-related pricing. Another third was attributable to increases specific to supply chain services engagement. The final third was primarily due to a combination of sales growth, as well as the timing of inventory speed near our quarter end of October 3rd, which is later than the quarter end for many of our suppliers. Inventory continues to be a key driver for our business and helped enable us to achieve record sales and earnings during the quarter. We are positioning ourselves appropriately from an inventory perspective so we can capitalize on the numerous opportunities we see in the markets we serve. Invitory days remain relatively flat sequentially. Our accounts payable and accounts receivable days improve quarter over quarter. Overall, working capital days decreased five days quarter over quarter to 64 days. We continue to focus on disciplined inventory and working capital management, which is contributing to the improvements in our return on working capital. Our return on work and capital improved by approximately 600 basis points sequentially to 25%, which is the highest level of returns in the past 10 years. The increase in working capital led to an increase in debt of approximately $950 million and an approximate $842 million use of cash from operations for the quarter. Because we expect strong sales growth in the coming quarter, we also anticipate using cash to support that growth. As growth moderates, we expect cash generation to catch up, and we are currently expecting to generate positive cash flow by the end of fiscal 2027. During the quarter,we raise additional capital primarily through various debt instruments and facilities to support these increased working capital requirements. We expect to continue to raise additional capital over the coming quarters as we support the anticipated growth through the remainder of fiscal 2027 and beyond. We ended the first quarter with a gross leverage of 3.1 times, down from 3.2 times in the fourth quarter, and approximately $1.2 billion of available committed borrowing capacity. We anticipate reaching our target of three times leverage by the second half of fiscal 1027. Cash use for capital expenditures was $24 million during the quarter as expected. With regard to our capital allocation strategy, we continue to prioritize supporting our profitable growth while maintaining a strong and flexible balance sheet. We also increased our quarterly dividend by approximately 6% to $0.37 per share this quarter. Over the past decade, we have more than doubled the dividend, with the average annual increase exceeding 10%. During that same time, we have also returned approximately $1 billion to shareholders through these dividends. We also expect to continue to explore potential Tuckett M&A opportunities that equip us with the capabilities needed to further advance our strategic priorities and provide a strong, risk-adjusted return on capital. Finally, as cash generation improves, we would also expect to revisit our share buyback program, which still has $226 million of authorization remaining. Turning to the second quarter guidance, we are guiding sales on a range of $11.1 billion to $11 billion, and adjusted diluted earnings per share in the range of three dollars and ninety cents to four dollars and ten cents. Our second quarter guidelines assumes current market conditions and electronic component availability, including in the memory product category, persists. Our guidance implies a sequential sales increase of 5% at the midpoint. Adjusted for the extra week in Q1, Q2 sales are expected to increase 12% sequentially at the midpoint on a comparable basis. This guidance also assumes similar interest expense compared to the first quarter, an effective tax rate of between 21% and 25%, and 87 million shares outstanding on a diluted basis. In closing, we're optimistic about the strong start to the fiscal year and the continued momentum we see in our leading indicators for fiscal 2027. Our first quarter results and second quarter guidance demonstrate that our team continues to deliver profitable growth on the value proposition we bring to our customers and suppliers. With that, I will turn it over to the operator to open it up for questions. Operator? Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate that 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 pull for questions. Thank you. Our first question is from Mr. William Stein with Truist Securities. Please proceed with your question. Great. Thanks for taking my question. Congrats on the great results and outlook. I'm hoping you can talk to us a bit about lead times. We know they're stretching. You cited it in your prepared remarks. I'm wondering if that's challenging your ability to grow, to deliver product and grow, and if so, maybe quantify any impact from that? yeah hey uh thanks will thanks for the comments uh appreciate it um this is phil uh yeah so we did comment on that and we are seeing uh we kind of start to go out more i would say more broadly you know it's uh we know what's happening in memory and the likes uh we're starting now to see it um power well power's been out starting to see them passes mlcc discreet you know so it's much more broad controllers. But I can't say, and with that, as we also talked about, we're starting to see some additional inflation and pricing as well with ASP starting to get impacted again. Probably most of that is probably starting in the new calendar year. To date, I'm going to say, well, to date, we've not seen that directly inhibiting our growth currently through the quarter or in our guidance tough to call in the next year yet as you know things tighten up so right now i would say not a lot um you know are some customers struggling particularly their heavy concentration of memory in their bomb you know they're having a tougher time yes we have some customers that maybe aren't producing uh maybe uh as many tablets as they were before or things along those lines. So that's tough to measure. I mean, they're done. They're just slowed down. But it's not really broad-based at this point. But, of course, we're watching it because we know what's happening. We know what has happened in previous cycles where lead times go out. We start to get into some challenges there. But to date, again, we've not seen that as an impact to the growth or the forecast guidance. Great. I appreciate that. As a follow-up, I'd like to ask about guidance and maybe going out a little bit further. You gave us a great December quarter guide, even considering the extra week that I think you just had in September. The December guide is still, I think, six or seven points above typical seasonality. And understanding you're not guiding further than a quarter, when we look to March, I think normal seasonality is approximately down 1% or 2%. Would that be an appropriate way to think about growth in this part of the cycle or considering the strength that we're seeing, should we expect stability or sequential growth into March? Yeah, well, let me take a shot at that and pass it over to KJ for some comments. Yeah, we don't guide out that far, so you're right. So thanks for saying that. But as far as we look out, you know, the March quarter is kind of a wild card in the last several years if you look at it with the Lunar New Year. Last year did not have much of an effect. The year before it did. You know, you're right, typical, which is a word we don't use much anymore because that doesn't mean it's typical. You know March would be down more dramatically in Asia-Pac through the Lunary New Year and the West would come back up. And it was almost offset, but you're down 1% or 2%. And right now, as we look at it, again, we're not guiding in the wild card being Lunar New Year. We feel the West is going to still be pretty strong into the March quarter. And just looking at the backlog, which I'm looking at as we speak, you know, the backlog looks good for March quarter overall. So in the book, the bills, as We Talk About, continue to be positive. So I'll just say we're optimistic about the March quarter, you know, maybe even being a little bit better than what you call that as typical seasonality. Kent? Yeah, well, I just add that I think at that kind of growth rate you described, you Know, let's say a typical seasonal, that would then also imply, you know, call it a 20 to 40 basis point uplift in gross margin because of the mixed shift to the West. And so I think, you Now, the West is looking good. The wild card is the impact of Lunar New Year and Asia. So the counter to that would be if you have higher growth than that, you know, above seasonal, that's likely because Asia isn't declining as much due to the Lunar New Year holiday, similar to the last couple of years. Great. Thank you. Thanks, Will. Thank you, Willis. Our next question is from Ms. Melissa Fairbanks with Raymond James. Please proceed with your question. hey guys um thanks very much uh so we heard from one of your suppliers earlier this morning they noted that channel inventories are pretty tight across most geographies which i i think is pretty consistent with what you're seeing as well but actually exceptionally low in asia um i know that you've asia has been a very strong market for you for several quarters now Just wondering what you're seeing in terms of your ability to address upside demand in Asia and what your own inventories in Asia look like today. Yeah, thanks, Melissa. I think I know who you're referencing there. Anyway, so, again, right now, you know, again as you saw with Gruul inventories, I'm sure we'll give you a break out on where that growth was in inventory. We're not uncomfortable, but we're very confident, you know, with our inventory position now. But as these times go out, we're going to need to make sure we're replenishing appropriately. And I'm looking at our Asia inventory actually grew sequentially quarter to quarter in total dollars in Asia PAC. And the inventory days actually went up about a day, 1.5 days or so. So, again, right now we're feeling pretty good about the inventory position we have. Again, it can change quickly, you know, based on the market and Will's previous questions. But right now, we feel pretty good. Now, I also need to qualify. It's a broad question, right? The inventory, you Know, so in certain areas in power, in discreet and power caps and things like that, those lines, anything around power, probably going to get a lot tighter than some other products. So I gave you a broad answer to a broad question. You really need to break it down by commodity and see where we're appropriately pipelined and where we have the inventory positions we need. So there could be some pockets that we're shorter than we need to be, but in total our inventory is in pretty good shape. Okay, great. I would be happy to break het down by component if you want to give me that data. Yeah, just hold on. Hold on for you. look at those sheets i want to zoom in um uh so you mentioned that you know demand creation activity remains healthy how much with as much as your mix or just the market mix in general is pivoting to data center aerospace and defense networking you know kind of some of these higher touch areas how much is that impacting your demand creation business are you able to engage with customers, you know, are they reaching out to you earlier in the design cycle? Well, it's a really good question because some of that, obviously, what we're dealing directly into the data center, some of it might be more just fulfillment. So we wouldn't even have demand creation tied to it in many cases, particularly if it's hyperscaler because a lot of that's probably being done direct and we're doing the fulfillment and supply chain piece for that. However, again, good question, because you would think with the growth that we had, you know, and fulfillment increasing in that space, and maybe it's not all demand creation, you would think the percentage of demand creation would come down as a percentage of our sales. And it's actually flat, which is really good news. Demand creation revenue, yeah, as a percent of our total revenues actually stayed roughly flat. Flat as a percentage, dollars were up, obviously. It had to be up to keep pace to stay flat as a percentage of total sales. So we're really pleased with that, frankly, because it's critical. Well, it's clinical to us. It's critical to our suppliers, and it helps the margin profile as well. Okay, great. Thanks very much, guys. Thanks, Melissa. Thank you. Our next question is from Mr. Rupalu Bhattacharya with Bank of America. Please proceed with your question. Hi, thanks for taking my questions. First question is on inventory. Ken, I think you said of this $2 billion sequential increase, one-third was due to supply chain services. How much revenue did supply chain service account for in the quarter, and how should we think about the impact of this going forward, and what inventory days are you targeting? And I have a follow-up. Yeah, roughly a third of the inventory growth came from inventory build for supply chain services. And, again, the revenue there is more of a services revenue, so you're not going to see it a lot on the top line, but would see it in the gross margin. You know, I don't think we'd expect it to build meaningfully in the next couple quarters from there, from the supply chain service's perspective. You know that business is growing pretty well, Rupalu. I would say the rest of the business is growing pretty hot as well. So, you know, I think it's contributing overall. I think from an overall inventory days, you know, we expect things to continue to, you know, be flattish to down slightly. I think we feel pretty good about the days overall. You know, the returns for the quarter are really good and the supply chain service and business really helps on the returns side of things as well, so we are continuing to ramp that business, especially in data center and automotive type customers. But, you know, we wouldn't expect the inventory to continue to build much from here, but be more stable from a supply chain services perspective. Overall, I would say, you Know, we grew $2.4 billion from last quarter. You're going to need some more inventory. And, you Now, some of that was timing differences at the end of the quarter as well. And then the last piece that we referenced was, you Know, the pricing that, you Know, some of the memory-related products, we had a pricing increase during the quarter. And the inventory we had at the End of the Quarter, you know, reflects that price inflation. Got it. Thanks for the details there. Can I ask a follow-up on operating margins? So obviously great performance in both Premier, both Farnell as well as the EC business. EC, you're already at 4.8%, and I think on the call you said you can get to 5% in the second half of fiscal 27. What drives the ceiling or what is the ceiling in operating margins for that business? How should we think about the puts and takes there? And the same question, I guess, for Farnell. I mean, you're already at double-digit margins. Is there a ceiling to this? Can you get back to, like, the 14, the mid-teens kind of operating margins over time? Should we continue to think 1,500 basis points every quarter? So can you just give us, you know, how we should think about, like where the ceiling is for these two businesses in terms of operating margin? Thank you. Yeah, maybe I'll comment this way. I think it's higher than 5% for EC and higher than 10% for Farnell. And we'll continue to drive steady progress there. I think the 50 to 100 basis points you mentioned was more of a Farnell commentary versus EC. EC was a little bit more modest. But, look, you know, we're continuing to drive efficiency. You know, you can see the expenses didn't go up very much. This quarter, the guidance would imply further improvement from our OE to GP perspective. You know? I think we're going to be in the low 50s, right? And we can continue to Drive that lower. And so that will help, you know, continue to drive the operating margin improvement. So, you Know, I think we want to hit those near-term goals and then reset a little bit. But, again, you Now, I Think Farnell in the low teens over time and then, You Know, EC trending towards 6% over time. But, You Now, part of it depends on the growth. Part of it Depends on regional mix. But, you Knew, We'll continue to Drive efficiency with the expense model and the working capital model to continue to DRIVE the returns up 25% this quarter. but, you know, continue to make traction there as well. Yeah, Rupert, this is Phil. Thanks for the comment, and we're proud of the team thus far. But we're not planning on stopping that progression, okay? So Farnell is listening on the call and plans to get that to continue to increase quarter to quarter. A lot of people come back to exactly what Ken just said, the regional mix. As Europe gets stronger, that helps all of our businesses, right? We use the higher margin profile, and then the commodity mix as we expand the home board components. with Fresnel that runs at a higher margin than the traditional test measurement in a single-core computer. So constantly driving that, and same thing on the core. And the key through all of this upside, if you will, is to manage tightly our expenses while making the investments we need to make to drive the growth and efficiency. So it's a maniacal focus on that. Can I just ask, going forward, or do you think regional mix remains a bigger contributor to margins or a bigger factor for margins versus product mix or supplier programs or other investments? I think it goes back to the seasonality more so than, let's say, a fundamental mix shift. I think Asia is performing pretty well. They're well positioned. You can see the growth over the last three years. So we don't see Asia slowing down, although in the third quarter with Lunar New Year, they could have, you know, a little bit lower sales just because of the less shipping days. But, you Know, I think the mix where Asia's, you know, roughly high 40s and 50% of our mix kind of continues into the foreseeable future, but we're still going to continue to drive operating margin expansion in the West. So I think it's hard to say, Rupu, exactly where the regional mix lands, but I think for the time being, we should think about it being, you know, flattish, absent seasonality trends. Okay, great. Thank you so much. Thank you. Thank you for your time. Thank you very much. Thank you so much. Our next question is from Mr. Joe Quattrochi with Wells Fargo & Company. Please proceed with your question. Yeah, thanks. Maybe just following up on that line of thinking, if Asia is stronger than seasonal into the March quarter, do you think you can get EC margins back to that 5% in the second half? Yes. Yeah, I don't think that's going to be a constraint. I mean, I think either way, we'll get it through growth or we'll get it though gross margin expansion from the mix. And as a follow-up, I think, Ken, I heard you say you expect to raise capital over the coming quarters to fund growth. Can you just kind of maybe share some more color on that? Are you expecting to raise some more debt? Yeah, I mean I think with the growth we've seen, you know, $3.6 billion in the past six months, we've just needed to have more borrowing capacity to kind of fund those receivables and the inventory. So, you know, we think it starts to normalize a little bit, but we've done notes, we've done term loans, we're done upsizing to our revolving line of credit, and we've done more securitization. So we'll continue to tackle those things, and will have some maturities coming due that we'll have to refinance. You know, interest rates aren't most favorable right now, but, you We'll be thoughtful about taking some of those notes out and extending them. Maybe if I could sneak one more in. What's embedded in the guide from just a memory pricing perspective in terms of the benefit to revenue growth you've seen over the last two quarters? The guide would imply very modest improvements in pricing. It's just kind of flattish pricing. I think Phil gave some commentary. We're seeing more now in the new calendar year, so we expect maybe a little bit more impact there. You know, we're still digesting that, but, you know, we're kind of going on a guide of flattish pricing and, you Know, consistent availability. Thank you. Thanks, John. Thank you, gentlemen. There are no further questions at this time. I will now turn it back to Phil Gallagher for closing remarks. Great. Thank you very much. And I want to thank everyone for attending today's earnings call. I look forward to speaking to you again at our second quarter fiscal year 2027 earnings report in early February. Have a great rest of the day. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.