Avnet, Inc. (AVT) Earnings Call Transcript & Summary

All right. I think we're going to get started. So thank you, everyone, for attending day 3 of Bank of America's Global Technology Conference. My name is Ruplu Bhattacharya, and I'm part of the equity research team here at the bank, covering IT hardware and technology supply chain companies. This year, we've had great attendance. This is the first time we are holding this conference virtually. And we've had over 150 corporates attending and over 1,100 clients registered for the conference. So for the clients who are listening in, you can text me your questions using the box that's on your screen as we go through the chat, and I'll try and include as many as possible. So today, we're honored to have the team from Avnet. Avnet, as you know, is a global components distribution company. We have CEO, Bill Amelio on the line. Bill has over 40 years of experience in this space, so he's seen many ups and downs. He joined Avnet as CEO in 2016, but prior to that, he's held leading positions at CHC Group, Lenovo, Dell, NCR Corporation, Honeywell and IBM. We also have CFO, Tom Liguori. He has been with Avnet since January of 2018, but prior to that, he was CFO of Advanced Energy. And then prior to that, he was also CFO of MFLEX. And on the call, we also have Phil Gallagher, who is Global President of the Electronics Components business. As you may know, Phil has been with Avnet since 1982. And so again, he's seen a lot of the ups and downs, and he's held various positions in sales and marketing and operations. So before we get started, I'm going to pass the call on to Ken Jacobson, who you may know is Avnet's Corporate Controller, who will give a fair harbor statement. So go ahead, Ken.

Hello, everyone. As a public company, we are subject to the requirements of Regulation F-D prohibiting the selective disclosure of material nonpublic information. Today's discussion may include forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict and actual results could differ materially. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q, Form 10-K and subsequent filings with the SEC, and include the scope and duration of the COVID-19 outbreak and its impact on global economic systems and the company's operations, employees, customers and supply chain. Any forward-looking statements are only as of the date of this investor call, and Avnet undertakes no obligation to update or supply new information after this call. Back to you, Ruplu.

Thanks, Ken. So Bill, thanks again for attending our call. I think you have a set of slides you want to run through. So maybe I'll hand over the call to you.

Sure. We've turned to Slide 3 because everyone's on the webcast and they can control their own slides. Let me give you a little overview about Avnet. We play literally a critical fundamental role in the entire supply chain of Electronic Components, both for semiconductors as well as Interconnect, Passives & Electromechanical. We supply components to over 140 different countries. We stock inventory and ship components to those customers. And if you think about it, we are the bridge between our supplier partners and our customers. Our suppliers when they go to market, if you think about their top customers, they'll tend to take those direct. So anywhere from 20 to 40 or 50 customers they will handle themselves. But then their cost to serve gets prohibitive and the longer tail customers are what distribution handles. So that's kind of where we fit. Our function that we provide for our customers is the following: we do demand creation for them. We actually help them select the right technology for the project they're working on. So we have field application engineers that are all over the world that spend time with their customers, understanding their needs and wants, and are able to select components that help them get cost competitive, improve their time to market and reduce their complexity. So that's what our field application engineer is doing the value that we help provide to our customers. We additionally give customers inventory and receivables financing because our rates are clearly better than a lot of our customer rates because we're investment grade, and we're -- hold that to the highest standard. We provide technology solutions as well as just being able to ship components to our customers. When we actually give a completed solution to a customer, we can actually do the design, the early build, the manufacturing and the shipments to their end customers. Our model has been very resilient. I mean if you think about it, we've been a 100-year-old company. We've been around a long time. We've seen a lot of technology cycles, and we'll -- we've been able to weather those cycles. And one of the things that's great about our business model, it's countercyclical, which means that in a downturn, we will not buy inventory and collect receivables, so we generate a lot of cash. And we've seen that model through all the down cycles, and we're seeing it, in fact, on this down cycle, where we almost generated a -- almost $1 billion of cash in the past 12 months. We ensure that we have liquidity and financial flexibility no matter what the economic situation is. And we have a strict, disciplined focus on working capital to ensure that we maintain our positive operating cash flow. And when you think about COVID-19 and what's happened with respect to that around the world, we've been right in the center of that, helping produce life-saving equipment for our customers, whether they're being part of the supply chain, from ventilators, respirators and personal protection gear, Avnet was there. Additionally, we've kept running all of our warehouse facilities across the world, and we implemented the latest and greatest and best practices that are out there for personal protection as well as sanitation as well as remote temperature monitoring. All of that has been installed in our facilities. And we're happy to say that we've been able to keep our people very safe during this pandemic in order to be able to keep the supply chain flowing throughout the time frame. And we have a culture of diversity, inclusion and innovation in everything that we do. If you could switch now to Slide 4, please. This gives a good snapshot of who we are, 15,000 employees worldwide, 3,000 engineers. Of that 3,000, about 600 are software capable, and I'll talk a little bit about that towards the end of the presentation when we speak about what we're doing -- trying to do with IoT. We also have 2.2 million engineers and makers in our communities which means that that's a great body to be able to get lots of information from. Our suppliers love these communities because they're able to launch into the communities' various contests to see how their new products will be -- use cases where new products can be used for, and they've gotten some really super ideas associated with that. Our customers like the communities because they can cut down their research time by asking qualified questions into the community and getting a very robust answer to their question. We literally have over 2 million customers in 140 countries, I mentioned earlier. And we have -- on our line card, we have over 1,400 suppliers, although the top 20 represents something like 60%, 65% of our revenue. And we ship $122 billion annually. If you move to the next, Slide 5, this describes kind of what we've built over the last several years. And it's an ecosystem that allows us to be able to take an idea off a back of an envelope and go into early production, then full-scale production and end of life. So we provide those services throughout the life cycle of a product for our customers. Some of the solutions that we provide are the Internet of Things, and I'll talk a little bit more about that in a moment. Artificial intelligence at the edge as well as in the cloud. We have hardware and software solutions that we provide. We provide components and devices to our customers as well as the full integration of a particular product. So we can do server storage, networking solutions and a software stack and deliver that product to our OEM customers as an example. We can do -- display this solution. So plenty of the consumer electronics that you see today that have a display on it, some of those displays come from Avnet. Additionally, we do embedded boards and cards for our customers, and we put sophisticated technology on cards and boards that we manufacture and we ship them into our customers' OEM solutions. If you move to Slide 6, this is our 5-point strategy. Heading the list is amplifying our distribution opportunities, meaning that that's our core business, the biggest part of who we are, and we want to continue to make that business stronger and stronger, and we work diligently to do that. And then scaling some of our newer high-profit margin businesses, which include our Avnet Integrated businesses, which I described a little bit about earlier, which was the display business, the embedded card business and our data storage, data business. And additionally, on top of that, we have our IoT business, which is a brand-new business that's ramping up right now. We put in place an IoT practice that allows us to deliver devices, the gateway, the network, the cloud, the applications in the cloud as well as the insights we can give to a customer on the deployment they have on their particular IoT solution. And we're seeing that ramp with more key customers today. Additionally, to -- on top of the IoT practice, we actually built a platform called IoTConnect, that's a marketplace for systems integrators to be able to enable their IoT practice because they don't have to [ wet rate ] that middle where we've already written it, and we have already provided them opportunities to use existing applications and new applications that will be written to that platform by app developers as well as devices that are plug-and-play, which means with one click, they're able to connect to the cloud, connect to the artificial intelligence applications and be able to get immediate insights for their customers. We're extending our digital capabilities, which helps improve that -- our core efficiency with tools like Salesforce.com; Marketo, which is a lead management tool; as well as Vendavo, which is an artificial intelligence pricing tool. All of that helps us fortify our ability to be able to deliver the value from our distribution capabilities. We built out an ecosystem that I'll talk about in a few moments and share what that looks like, and I mentioned it a bit earlier, which essentially allows us to be able to handle customers' desires everywhere through their product life cycle, from early life all the way through end of life. And then we're driving always continuous improvement. And we announced several quarters ago, a $245 million OpEx reduction plan, and we're well on our way to achieving that. We have $50 million left in that, and we're continuing to stretch to look for more opportunities. If you go to Slide 7, with respect to Premier Farnell, that's what PF stands for, this is our road map to make sure that we are well positioned for the next upturn that occurs in the marketplace. The catalog businesses, which are a little different than our core distribution business, tend to have a -- higher growth rates when lead times start extending and things get tight out in the marketplace. In the last cycle, we participated well in that, but we could have even had more growth if we had these 5 things in place. And I'm happy to say that these 5 areas now, we're well on the way to have them completed. And as the market starts to turn around, these things will allow us to be able to capture more of the share of the growth that happens in the next up cycle. Specifically, what we're doing is we're improving our inventory breadth by increasing the number of SKU comps. As you can imagine, when you go to a website to buy 1 or 2 parts, if the part's there, you buy it, if the part's not there, you go to your competitor. That's why it's so important to have a great inventory breadth. We're improving our pricing and quoting tools, and we're using various different techniques in order for us to get highly efficient there. And we measure ourselves against all of our key competitors to make sure that we're either best-in-class or very close to best-in-class. Well, we -- also, from a marketing point of view, we're making sure that the marketing dollars that we spend on pay-per-click is the most efficient and effective as it possibly can be. Under operational efficiency, we continue to get -- improve our capabilities and our efficiencies in all of our factories. We're, in fact, building a new facility that's in the process of getting ramped up in Leeds, England, and it will be fully online later in this year, and it's now at about 15%, 20% of ramp up rate, and it will deliver us lower cost and better abilities to deliver quicker to our customers. And finally, Web UX is the user interface and the speed associated with the web performance. And self-serve tools are a key part of that as well as the journey that you take as a customer when you go online first to do a little research, eventually to buy something, go into the -- put your purchases in your cart and get to checkout, we want that to be as efficient and effective as possible, so we don't lose anybody in that journey. And we, in fact, can make them essentially buy what they need to buy. If you move to Slide 8, this is Avnet's end-to-end ecosystem capability. I mentioned the idea that we have -- we had essentially built out a strategy in IoT to be a one-stop shop for our customer, meaning that we can provide the device, we can provide the gateway, the network, the cloud, the applications and therefore, give you the insights that you need. This is the things that we've built out, some of which we've acquired and some of which we're partnering with. For example, Softweb and Witekio are 2 acquisitions that we've made that are really critical for us to build out our IoT practice. Softweb has been an integral part of us helping build out our IoT platform that I mentioned earlier, that allows us to be a force multiplier from a revenue point of view because it enables systems integrators to also use some of our particular tried-and-true tools that we've built. If you move to Slide 9 and my final slide, look, we've been around almost 100 years, and we're going to continue to build on Avnet's core foundation. As I mentioned previously, we've adapted to technology, change after change that occurred in the world, we've been able to get stronger because of it. And we sustained decades of trusted partnership with all of our suppliers. I mean we have some relationships that go back 50 years and 60 years with some of our suppliers. It's truly remarkable, the long-term relationships we've had with our suppliers. And we're always there to support our customers' business needs, no matter what they need. So with that, we can open up to Q&As now.

Thanks, Bill. That was a great overview. So let me just dive right in. Maybe, Bill, to start off with, can you talk about supply-and-demand trends you're seeing by region?

Sure. I'll say a few words on that, and I'll get Phil to jump in as well. Look, we're seeing a rebound now in Asia because it's clear that Asia got first hit with COVID, but they've responded well and coming back. Although you'll see some countries that they actually had a reoccurrence of the virus, namely, Philippines, Malaysia, Japan and India, but some of the bigger countries, China and Taiwan are humming along, which is really nice. So we're seeing a stabilization, and they've moved the growth in Asia. Europe is showing some signs of stabilization, but I'd say that's still a jump ball and still very concerning for all of us as we watched automotive turn back on and then, of course, turn back off again. And I'd say that in Americas, it's more of a wait and see because we've been pleasantly surprised that it's holding up, but we're concerned that, in fact, the demand could fall off on us. But at this juncture, it looks like we're in a decent position. And most of our customers are tied to the automotive supply chain, as you know. With that, Phil, do you want a couple comments as well?

No, I -- yes, Bill, thanks, and thanks, everyone, for being on the call. I'd just confirm what you said, I think the big question mark is Europe. I mean it's a great region for us. They're all great regions. That's particularly one of our strongest regions. And the automotive, as Bill pointed out, is a big play for Avnet as well as the industry in general. So -- and then that leaks into industrial. So that's probably the biggest wildcard, Bill, that -- and I agree with you, Asia -- I just hung up with the Asia team this morning, things are looking good and rebounding in Asia Pac. And Americas seems to be holding on okay so far. So again, no one has that real crystal ball right now, but the Americas right now is okay. We play a little bit less in the Americas in the automotive than we do in Europe. But I think you summarized it well, Bill.

Okay. So given this environment, both Bill and Tom, can each of you maybe talk about your top 2 to 3 priorities for the next 12 months?

Go ahead, Tom, you start, I'll be back to clean up.

Sure. Thank you, Ruplu. Well, mine are -- first would be cash generation, which is continue to bring in cash. We want to ensure a strong balance sheet. I think the activities of the last 12 to 18 months serve us well. Calendar year '19, we generated $950 million of cash from operations, which was 5% of revenue, seems like that would be best-in-class. March was another $100 million. We're really proud of the teams in each of the regions, meaning the asset management teams and finance who are doing that. The second thing would be more on ensuring that we get good operating leverage as we get a recovery. We made a conscious decision to keep our cost structure in place, meaning our engineers or FAEs will need these resources when things pick up. And that means when things pick up, we will not need to be adding cost. So we feel good about the operating leverage on the upside. But those are the 2 things that we in finance, myself, work on every day. Go ahead, Bill.

If I think operationally for a moment, what are needle movers with respect to improving our performance dramatically, the 2 that pop in my mind first is getting Americas back to our OI percent that we had pre-ERP days. And we're making progress there, and that's a big area for us as well as, as we implement the 5-pronged strategy I showed you just previously on Farnell to see when we can get to the up cycle to watch Farnell's operating margins get back into double digit again. So those 2 are real needle movers for us. The second one would be scaling the high-margin businesses, which include our demand creation activities, which includes Avnet Integrated, which is a higher-margin business and our IoT activities that I talked about in my remarks. And the third thing would be e-commerce growth out of Farnell as well as our Avnet core business, and that's typically a higher-margin opportunity for us, and we're growing that nicely, and we have some key initiatives there to even help turbocharge that particular growth. And then finally, I'd say, improving operational performance and which allows us to scale OpEx using various different digital tools. Some of which I mentioned, like Salesforce, Marketo, Vendavo, but also robotic process automation tools that are springing up across the company and improving our productivity pretty dramatically. And I'll make one final point of one of the things that we're doing to help our suppliers out dramatically is the work that we're doing with asset management. We've got some new tools in place and some new rigor and cadence that Phil's team has put in place to look really carefully at every one of our customers and analyze when we think they're potential panic buying or double ordering. And we have tools now that can call out some outliers that allow us to go in there, interrogate the customer and ensure that if they are, in fact -- when we believe they are putting double orders in place, we can change the terms to noncancelable, nonreturnable or other terms to make sure that there are real orders because when our suppliers aren't running at full capacity, they want to make sure that what they do build actually gets shipped to an end customer and not just put on the shelf.

Got it. That makes sense. Maybe Bill or Phil, if you can comment on the competitive landscape. I mean how are you seeing things like pricing? Do you think Avnet can gain share in this market?

Yes, Phil, you want to take that? And I'll like clean up. Go ahead.

Sure, sure. Well, on the pricing front, not a whole lot of change out there, frankly, it's pretty much steady as she goes. And a lot of that, as you know, will be tied to lead times, right? So right now, lead times, other than memory, and obviously, sensors because of all the new devices being built, lead times are pretty steady, some up, some down, but nothing dramatic. As you see as the market recovers and depending how fast it recovers, you could see some differences in lead time. And then generally, that would impact pricing. So pricing, pretty steady as she goes. So as far as competitive in the landscape, absolutely. We feel really good about our position in the marketplace in all regions of the world. We're #1 or 2 with all the top suppliers we have. And we have lines like Broadcom, the top semiconductor, a big chip company that we're not only #1 with, we're exclusive. Xilinx, the big chip on the board as well. We're exclusive with them and continue to grow extremely well in the partnership with Xilinx. Marvell, exclusive with them. Then we got ON Semi, Infineon, #1. We got the Global Distributor of the Year Award for ON Semi, 2 years in a row. Then you round it out with Renesas, Nexperia, NXP. We're #1 with NXP. So we -- yes, we feel very confident, never comfortable but confident in our competitiveness in the marketplace, for sure. Bill, you want to add anything?

Yes, sure. I'd say another key competitive advantage we have over everybody in the industry is we're the only one that's tied together a catalog business called Farnell and our core business that was typically our history in Avnet. And with our ecosystem that I talked a little bit about in my remarks, that allows us to do some really unique things like create a IoT practice and an IoT platform. We can service customer anywhere in world and anywhere in their design life cycle. Additionally, when you think about Farnell, the things that we're trying to do is ensure that we can get time to customer delivery in world class levels, and we're working diligently to do that. And as I pointed out earlier, our 5-point pronged plan there will get us well positioned to when we're able to see the uptick in the market.

Got it.

Can I make one more comment? Can I just add one more, Bill? If you'd -- if you -- thank you. Sorry. Another thing that, as Bill pointed out earlier, one of the biggest -- and we'd used that term internally, the needle movers is the Americas and Farnell. And the Americas, as you know, we had some issues a few years ago in ERP, that's behind us. And now we're back in the growth mode in the Americas. I think that's really important. We've actually -- based on public records between us and the other public distributor we compete head-to-head with, we've actually gained share for 6 quarters in a row. So while we gain momentum on the top line, now we're going to work to maximize, to Bill's point, the profitability in OI on the bottom line. So I just wanted to add that point, it was in 6 quarters in a row, we've actually had that grown in the Americas.

Great. That makes sense. I want to ask you a question that we get from investors quite often. How do you think this economic downturn is different from the '08, '09 downturn? And how do you think Avnet is better prepared to face this downturn?

I'll take a shot at that first, and then my colleagues can jump in. Look, we've kept our cost down significantly. I think we've been well recognized over the course of the last few years of how we've been able to manage OpEx really efficiently and effectively. We've survived many downturns beyond -- when you think about the 2008, 2009 crisis, we got through that. We've been around 99 years. We saw the Great Depression. We saw the dot-com bubble. This downturn, however, is different in many ways. It was caused by a health crisis, which we hadn't seen previously. And it came on the heels of an industry correction that had persisted for over a year with the semi cycle being down. Our business is different now than it was in '08 and '09 because we sold off Tech Data, we acquired Farnell, and we built out an ecosystem. However, I will tell you this, we're controlling all the things that we can control, and we're encouraged by the resiliency of our business model and the strength of our countercyclical balance sheet. So those are some of the things I think are real highlights of the company.

Got it. Tom, I want to turn to you now, and I want to ask you a question again that -- that's been coming up quite often over the last couple of months as investors are focused on company balance sheets and liquidity positions. So maybe can you give us your thoughts on how you think about your liquidity, your -- the strength of your balance sheet and cash flows? I mean this is a countercyclical kind of balance sheet. So how should we think about cash flows in a downturn?

Sure. Thanks, Ruplu. First of all, we have a very healthy balance sheet, a good amount of cash, reasonable levels of debt, modest levels of debt, and we're generating cash flow. So we've had 6 quarters in a row of positive cash flow from operations. We're on track to have seventh quarter in a row this quarter. On top of that, we have $2 billion of cash and available credit lines to fund our business going forward. So we feel we're in a very, very healthy position financially. And that's important as a distributor because we are providing financing to the -- to our customers to the market. For everybody's knowledge, Ruplu indicated we have a countercyclical balance sheet, which simply means that as a distributor, during a downturn, we lower our inventory purchases, but we continue to collect receivables. So we typically or historically have generated fairly strong cash flows during a downturn. So Ruplu, we feel very good about our -- the better balance sheet and liquidity position going forward.

Okay. Thanks for that, Tom. Bill, I want to come back to you. You mentioned in your presentation the Farnell business. Maybe talk to us about some of the trends that you're seeing in that business. How is that business different from the component side? And under what circumstances do you think Farnell typically outperforms? And how should we -- given the current environment, how should we think about revenues and margins maybe over the medium term?

I'll let Phil comment first and I'll finish up. Phil?

Sure, Bill. Thanks. Yes, great question. First of all, we're very excited about the Farnell acquisition, now it's several years ago, and excited about the progress we're making. It really differentiates us in the marketplace, and we're really starting to see some leverage on that. We're the only distributor, and I call it the front end. We're going to keep that front end of Farnell, e-commerce, low touch, high service, high margin separate from the core, as we call the core business, the core distribution business. However, it gives us leverage between the 2. What do I mean by that? Well, Farnell is getting a great look at hundreds of thousands of customers that are more than an NPI, in many cases NPI or MRO, new products introduction for those who don't know the acronym, that we now pass leads, okay, through our Marketo marketing system to the core to go follow up for the volume piece and vice versa, where we have this strong -- and we have extremely strong relationships with customers. If Farnell is a little underpenetrated there, we're now doing joint selling calls with Farnell to help them continue to grow where we're already kind of a land-and-expand scenario. So I'm very excited about that. As far as the -- it allows us from a supplier reach standpoint. We've been actually adding suppliers to Farnell's line card. We just announced last month we've added Micron semiconductor. We've added Renesas. So their line card is getting stronger in the semiconductor component side of the equation as well, which is great. And we're very confident, okay, that we can get to the 10% operating margin. We were there last year. We actually got north of 12%, okay, then the market correction came. And with the high-margin businesses, you get off just a few points of revenue and it can -- the negative drop-through is there, while we see the positive drop-through coming back in the next 6 months to 9 months. As far as investments, Bill kind of touched on this in the opening comments, I won't spend a lot of time and I'll turn it over to Bill, but we are in a down market, expanding our SKU counts quite substantially. We are investing in the e-commerce, the digital side of the equation, working on the click, et cetera, and the speed of the response from the e-commerce site adding additional marketing resources, and as -- that Bill touched on, we've got a new logistics center that's within a month or 2, okay, of opening up that's going to allow us to further expand and invest. So we're really, really pleased with the progress we're making. Always work to do, and that's fine, that's what we're here for. But we think it's going to continue to have a positive impact on our position in the market and our position of financials. Bill?

Thanks, Phil. I'd add a couple of things. One of the things that we've been able to do that's pretty unique is by hooking together a catalog business and a broadline business, we're now able to seamlessly move a customer that's ramping up from pilot production into full-scale production, and move it from Farnell over to core Avnet. Additionally, one of the things that Phil's been dwelling on with his team is the ability that in core accounts, in core Avnet accounts where we have a great position and they're not using Farnell, why not bring in the Farnell team in there and do some joint selling? And that's been going extremely well. So those 2 things have added some unique synergies that we hadn't expected to be as forceful as they are in the marketplace for us. And as Phil said, that gives us great confidence to be able to get our operating margins into the double-digit space.

Got it. One of the things that I want to touch on that investors ask us a lot about is the trend in IoT. And so I want to ask you, do you think IoT is a real meaningful demand driver for the semi cycle and hence, for distribution as well? How big an opportunity do you think IoT is for Avnet? And would you say you have a competitive advantage in this space?

Well, the best way to look at IoT is to say, how many connected devices are out there. By the end of this year, there's projections there'll be 20 billion connected devices. And by 2025, that number grows to 50 billion. So it's a spot that is being talked about in every boardroom and every major company across the world, people talking about what do you need to do to have a solid IoT strategy and how are you participating in this area. We believe we've put in place a really differentiated end-to-end solution where we go from the device, the gateway, the cloud, the applications, the network and be able to hook that altogether seamlessly and provide insights to our customers on whatever application they want. Applications like predictive maintenance, asset monitoring, smart worker, smart factory, smart city. And it's truly remarkable, all the different proof of concepts that we're in. And we're in the process of ramping up or scaling several of those and rolling those out across our core customers. Additionally, we built out the platform that I mentioned earlier called IoTConnect platform that's allowed us to be able to act as a force multiplier from the standpoint of getting other systems integrators with their IoT practices enabled quickly to be able to deliver their customized IoT solutions to their customers in a cost-effective, lead time optimized and least complexity way. So that's what we think the 2 areas are that we have some level of differentiation. This is a potential business that can grow double -- high double digits potentially as we start to see us hit the tipping point, which means where customers understand the return on investment associated with their proof of value or proof of concept they have on their particular IoT deployment. And once they see that and they start rolling it out in that scale across their company, that we can then take that same use case and replicate it across the industry or other industries. And all of a sudden, we start to see some real scale develop in this marketplace. The pipeline is rich, we just now got to convert more of that into revenue. So we're pretty excited about this opportunity. And as I said, I think it's going to be a growth engine for the company, and it's going to yield operating margins in the 15-plus percent range. So it's a real big value driver and a chance for us to turn our operating income percentage up in the company.

Bill, can I add something to that?

Sure.

Just maybe reemphasize. So we've got the nontraditional customers and people like IoT and where we're seeing some terrific new opportunities, okay, and it's around solutions. And anything you can get more into a solution with a customer, that will drive higher margin, and our suppliers is right smack in the middle of the quarter. We talked earlier about whether be it industrial, consumer, I mean many of the opportunities are coming out of the industrial space, and that's our strength. We're right there already. And with this solution, it's something that none of our peers, traditional peers have as a total solution. Medical. Medical is a nice industry for us [ built on better ] early with all the things we're doing in COVID and whatnot. Again, right smack in the middle of our core. And believe it or not, consumer. We've got some -- you'd be surprised at some of the coffee manufacturers, machines and whatnot that we're calling on already that now, all of a sudden, there's an IoT solution in addition to the designs we're already doing for them. So I just want to reemphasize, it's something different, something new. It's -- the sales cycle is a little bit longer as is typical with more complex solutions, but the pipeline, as Phil pointed out, is really rich. So I just wanted to add that in there, Bill.

Got it. We're out of time, but I'm going to go a little bit over because I see we have questions in the pipeline. Texas Instruments has decided, as you know, to consolidate its suppliers. Can you give us your thoughts on this? Is it progressing as you had expected? And maybe talk to investors about the plan of action you have in order to make up the revenue that would go away.

Sure. I'll start and then Phil can fill in some of the blanks. Well, Texas Instruments, for all of those on the phone, made a decision years ago to start transitioning to a total direct model. They first cut off demand creation, they went fulfillment only. And now this is the next logical step for them, to consolidate into one distributor and take a lot of that business already direct to TI. So that was not a major surprise to us. The timing, of course, always is a surprise. Where their stated objective is, is that they will be out of business by December 31. We have not seen much of it tail off yet, if you look quarter-to-quarter. Year-to-year, there's been some changes. But quarter-to-quarter, it's essentially not moved as fast as we thought it was. But we're still planning for it to leave us by the end of the calendar year. However, most likely is that there is a probability that could extend beyond that. We've done a really nice job of replacing the TI business, the TI fulfillment business with higher-margin opportunities. And there's 3 areas that we focus on. One is where there's a pin -- the pin compatible part with one of our other suppliers that we can quickly switch the customer to. Two is a lot of customers want to make sure they have a balance between their distributors, so they will share shift other suppliers volumes towards us. And the third thing is demand creation, which gives us a long-term sticky foothold with our customers as we design in other technology partners' solutions into that design. And we've seen a rich funnel in place, and we're converting that funnel very rapidly. And it's at a higher margin than the business that was leaving us. So if we work this well, this will become a speed bump, not a hole for us as we work through into fiscal '21 and fiscal '22. Phil?

Yes. Thanks, Bill. Just a couple of additional comments. You really outlined it well. We have a real rigorous process around those 3 areas: pin-for-pin replacement, demand creation, designing them out for the next generation of share shift. I would just add that we actually have held share, believe it or not, in the West with TI, the West being Europe and the Americas, and we're obviously pleased with that. But I think the message it's really sending is that customers like Avnet. Our service levels are high, their loyalties are high, and the customers really are not wanting to shift this business. Is it going to shift? Yes. Are we prepared for it? Absolutely. But those customers are going to want to balance, they typically like to balance the competitive landscape inside their own shop and they don't want anyone having too much or too little, okay? So -- and they got to balance out the receivables or in their case, the payables. So we're very confident. Again, a lot of work. This is boots on the ground, account by account, but we've got a tracking system by region, country, city, account manager and GP dollars and what we need to do is go and replace that business and that's the marching orders for the team. So I just want -- and let me -- just a last comment, [ the settling of the balance to ] the suppliers, they're not too sad about this, okay? So they're actually quite pleased. And they're doing some things for us to help us define this business and work with us from the technical side as well.

Great. I think we covered a lot of different things. So I wanted to thank the whole team. I want to thank Bill, Tom, Phil, thank you all for joining us today. I know we've got lots of questions that the investors have asked, and we were not able to cover. So if you have questions, please e-mail them to me. Thanks, everyone, for attending the webcast today. We'll make sure we get the -- give your questions to management, and we'll try and get them answered as soon as possible. So thanks, everyone, for joining today. Thanks again, the team from Avnet. And thanks, everyone. Have a good day.

Bye-bye.

Thank you.

Thank you, Ruplu.

Bye-bye now.

Bye.