Good afternoon. My name is Brad, and I will be the conference operator today. At this time, I would like to welcome everyone to the SYNNEX 2012 First Quarter Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect. Thank you. And at this time, I would like to pass the call over to Lori Barker, Investor Relations at SYNNEX Corp. Ms. Lori Barker, you may begin your conference.

Thank you, Brad. Good afternoon, and welcome to SYNNEX Corporation's Fiscal 2012 First Quarter Conference Call for the period ended February 29, 2012. Joining us on today's call are Kevin Murai, President and Chief Executive Officer; Dennis Polk, Chief Operating Officer; Thomas Alsborg, Chief Financial Officer; and Chris Caldwell, Senior Vice President and General Manager, Global Business Services. Before we begin, I would like to note that statements on today's call, which are not historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements include, but are not limited to, statements regarding our strategy, including growth, market share, profitability and return; our leadership position; expectations of our revenues, net income and diluted earnings per share for the second quarter of fiscal 2012; our performance; general economic recovery; benefits of our business model; our product mix; anticipated benefits of our CLOUDSolv and other platforms and performance in our GBS segment; the transition of certain customer revenue to fee-for-service; IT demand expectations; market conditions; operating expenses; revenue gross margin and operating margins. These are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Please refer to today's press release and documents filed with the Securities and Exchange Commission, specifically our most recent Form 10-K, for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements. Additionally, this conference call is the property of SYNNEX Corporation and may not be recorded or rebroadcast without any specific information from the company. Now I'd like to turn the call over to Thomas Alsborg for an update on our financial performance. Thomas?

Thank you, Lori. Good afternoon, everyone, and thank you for joining our call today. I'll begin with a few highlights and by summarizing our results of operations and key financial metrics, then I'll conclude with guidance for the second quarter of fiscal 2012. I'm pleased to report that our first quarter earnings grew an even better than expected 28% year-over-year to $1.02 per diluted share. This marks SYNNEX' 99th consecutive quarter of profitability. We drove exceptional margin expansion and achieved our 18th consecutive quarter of year-over-year growth in annualized return on invested capital. Let me share some of the details behind our Q1 performance starting with revenue. In our first quarter, total consolidated revenue was $2.46 billion, down 1.6% over Q1 of 2011, and down 13.4% sequentially in this traditionally slower first quarter of the year. While our commercial lines performed very well during the quarter, our quarterly results included the continued transition of certain customers' gross revenue business to a fee-for-service logistics relationship, which resulted in a decline in our revenue run rate, expansion of gross margins and operating margins and reduced working capital. The transition began in our fiscal 2011 fourth quarter and was completed in our fiscal 2012 first quarter, which was earlier than expected and contributed to the lower than forecast revenue. The expedition of this transition was driven by customer conversions of revenue flows and resulted in approximately $30 million of additional revenue transitioning to fee-for-service than had been originally forecast. Going forward, this transition is now complete and future quarters will reflect the steady-state changes. At the segment level, in the first quarter, revenue from the Distribution segment was $2.42 billion, a decrease of 1.8% year-over-year net of the aforementioned transition of certain customer revenues to fee-for-service basis. Adjusting for approximately $150 million in…

Thank you, Thomas. Good afternoon, everyone, and thank you for joining our call today. Our year is off to a good start with continued growth in our profitability and good performance in sales. Today, I'll share with you some of our first quarter highlights, including discussion of our key initiatives and our views on the demand environment. Within our Distribution segment, we continue to grow at/or above market rates in the geographies we do business. As Thomas mentioned, our Q1 revenue reflects the transition of certain customer contracts from gross revenue to a fee-for-service arrangement. So after factoring this in on an apples-to-apples basis, we saw good organic growth that was in line with industry trends. The most notable highlight in our Distribution business for the quarter was our margin expansion. Once again we hit an all-time record in gross margins helped in part by continued excellence in execution around certain supply, demand and balances, vendor incentives, as well as continued margin expansion in our Japanese operations. In the U.S., demand for commercial IT products was stable and we saw excellent growth in our technical services division with many of our key focus areas such as enterprise server and storage, emerging networking vendors and wide-format print, posting very strong year-on-year growth. Cloud-related products and services, including our Hyve division, continued to gain solid traction. The consumer market started to show signs of increasing strength. However, sales of certain consumer peripheral products was less than anticipated. Although retail sales early in the quarter were strong, as the quarter progressed, they were slightly hampered by holiday inventory sell-through as well as some product shortages caused by the flooding in Thailand. In Canada, first quarter industry-wide channel sales declined year-over-year. However, SYNNEX performed well relative to the market, capturing strategic market share gains…

Thank you, Brad. We're ready for questions.

[Operator Instructions] And our first question of the day will come from Scott Craig of Bank of America Merrill Lynch.

Kevin and Thomas, can you talk a little bit about the outlook here. At roughly the same revenue levels for next quarter, your EPS is going down, so if you could maybe frame some of the margin discussion by group that would be very helpful. And then just secondly, with regards to the GBS margins, we've talked about north of 10% there. What's the timing for that? Because it was a little bit on the disappointing side this quarter I think and so would like to get some flavor around that.

Sure, this is Thomas. I'll start off and then invite Kevin to add his perspective. First of all, if you look at our Q2 guidance, it involves a nice, healthy year-over-year growth rate for overall business so our top line looks very good. If you look at the 2 segments of our business, you would see that our Distribution segment continues to perform very well with good margins, good demand, all the trends that we've been talking about in terms of margin expansion and ROIC still in place. And of course, Q1 as well as Q4 did benefit from some temporary market disruption primarily related to supply demand imbalances. We call that out in Q4 and Q1 as well. If you were to look at that, as well as some of the impact of the transition of our certain revenue going from a gross to a fee-for-service basis, between the 2 of those, there's close to a 85- to 95-basis point impact in our Q1 numbers. Now the larger part of that is related to the supply demand imbalance which will not continue on a go-forward basis. So when you start to look at Q2, you have to normalize, take away some of the impact from the imbalances there, which again is a larger part of the number I just gave you. We will continue to see some benefit going forward from the margin impact from the transition of our revenue, but the revenue that we're transitioning in Q2 is notably less than we did in Q1. So you'll see a smaller impact in the second quarter. So those are 2 key considerations for the distribution side of the business. On the GBS side of the business, indeed, we are in the mid-single, without giving guidance here but performing just -- or talking based on Q1 numbers, we're in the mid-single digit numbers for operating margins, and we have indicated that our expectations are for those numbers to grow into the low to mid-double digits as that business ramps and the investments that we've made both in the acquisitions and subsequently to that take place. We're making some very important investments, Kevin is going to cover off a little bit of that. But I will tell you that once that transition does take place in the future quarters, that will be impacting not only the overall margins for the company but of course EPS by upwards of $0.05 a quarter based on the current run rate that we have, which is now coming up close to $200 million for the segment.

And Scott, I'll just add, in particular on the GBS side of the business, as you know, we have made a number of investments in that space predominantly over the past 14 months through specific acquisitions and bringing on new capabilities. But we've also been making significant investments in our sales organization and our go-to-market. As I mentioned in my prepared remarks, those investments are really starting to pay off now and we did have a record quarter in signing on new contracts this past quarter. We do expect to see the benefits of those new contracts when ramped both in terms of sales as well as in terms of margin improvement and income within our GBS segment. And keep in mind that although we may be a bit behind in terms of our original trajectory on seeing the benefit of the acquisitions that we made over a year ago, we're investing in this business for the long term. It's a great solid business with an excellent portfolio of services that we're taking to market, and we're optimistic about the future growth of this business.

Our next question will come from Craig Hettenbach of Goldman Sachs.

Thanks, Kevin, for the color on North American IT market. Can you touch on what you're seeing in Japan from a revenue growth perspective. And then also as it relates to MIT, from here, some of the margin improvement that you've seen as you go forward, can you talk about whether it's mix or scale that would allow you to further enhance margins there?

Sure. I'll cover off the overall market and maybe, Dennis, you can add some color on some of the process improvements we're making as well. Japan overall, over the past quarter, demand for IT as well as consumer products were slightly negative in the marketplace, down in the low single double-digit range. Our own performance though was much better than that. In fact, even with a pretty significant conversion of our IT systems, we grew our business in local currency almost 4% in Q1. So I think that's a -- I think it's a great statement in terms of our ability to continue to manage that business and, in particular, have a successful transition.

And then looking forward to improve the business, to continue to improve the business, because as Kevin said, we did quite well in Q1, we're going to focus on several things. Number one, focus on profitable market share growth. And the full system conversion that we did last quarter will help on this point, along with continued solid execution. Number two, we'll continue to add and ramp new vendors. We've done that over the past year, we expect to add many more in the coming years. Number three, we'll continue to refine the cost structure of the business. Again, the system conversion will help on this point as well. And then lastly, we'll add additional programs and services. Similar to our integration, technical support, PRINTSolv, RenewSolv and others in North America, ultimately, those services may not be exactly like North America, but the key point is that we want ever to add margin-enhancing services to that business.

Okay. And as a follow-up, Kevin, you mentioned some of the weakness in the consumer retail and peripherals. Any update there in terms of the inventory situation that you commented on, in terms of do you think it's in balance now or there's still some to be worked through?

For the most part, as we speak today, those inventories are good and balanced and the comment that you're referring to is just some inventory hangover from the holidays that had to sell-through at the retailers. So as that happens and as that sell through, of course, our ability to sell in new product is not as great. In terms of the other softness that I spoke to on the retail side, it was really in the printer category. I think it's probably well understood through some public reports from some large OEMs that the printer market has been relatively soft, both on the hardware side as well as on the consumable side. And that did have some level of impact on our consumer business as well.

Our next question will come from Brian Alexander of Raymond James.

So excluding the drive benefit in the February quarter, Thomas, on margins, which sounds like maybe 60 basis points or so, your May outlook would actually have operating margins up sequentially, kind of in line with what you've seen historically? Just trying to understand the progression.

Yes, again without giving specific margin guidance, Brian, what I would tell you, again if you look on a year-over-year basis, we're -- if you take somewhere the midpoint of our guidance, you're pretty close to 3.5% to 4.5% growth. And yet if you look at our earnings per share guidance and again factoring in also the fact that last year in Q2, I may have said Q1 before, in Q2 last year, we had the benefit of $1.3 million in our SG&A that was not recurring this year. You would see, comparing to EPS on a year-over-year basis, a double-digit growth rate. So I think the important takeaway from our guidance is that our margin expansion story relative to healthy growth continues to be intact.

Yes, so following up on that, so would you expect to see kind of a normal margin expansion, operating margins obviously, in Q3 and Q4 of this year? Or should we see more leverage than we have historically, given the level of investments that you've been making seem to be a bit elevated?

Sure. So first of all, you're exactly right that you should expect SYNNEX to continue on its overall trend of margin expansion that you've seen now for 4-plus years, and that will carry on throughout the year. As far as the investments that we've made, this is true as well, we're making these investments for the very purpose of being able to expand our margins. I can't get specific into which quarters that they lay. We've tried to give some color in our prepared remarks with regards to that. And frankly, it's more important to be making investments that are going to drive the business over the long run. We're not thinking of this business as a $200 million business. We're thinking of this business as potentially becoming twice that size and larger, and we're making appropriate investments in the meantime to get there. So in some number of quarters, we'll be able to -- over that is some number of quarters, be able to leverage the investments that we've talked about here both in sales and infrastructure and so forth, leverage the record wins that we are now chalking up in the GBS segment and realize the low- to mid-double-digit operating margins in the GBS segment that we have told you we expect to incur.

So on that point, how much of visibility do you guys have into the margin profile of GBS given some of these are newer businesses to SYNNEX, they've very headcount-intensive, perhaps they may be more complex to run than you anticipated. I'm just trying to get a sense for your confidence in that statement. And then on the new wins, can you share any metrics on new signings, wins, contract value, anything that you think is relevant to help us kind of track the progress of the GBS business?

Brian, it's Chris. So a few things, to answer your first question in regards to the visibility of the margin profile, the business that we run and the business that we start is very similar to the types of businesses that we're buying outside and some of the technology platforms, but we have experience with that, and we understand not only through the run-rate margin but also the margin expansion capability of it. But I think what we've talked about last time is that one of the things we've been doing is sort of upgrading our business as we've been going. And some of the customers that we've acquired with lower margin is moving the mountain, replacing them with higher margin business. And we've been successful of that and seen our gross margin grow in line with what our expectations were and what our targets were and that's continued the focus. In terms of the new customers, there are coming on. I think some will be frankly public in the next coming little while as we announced the wins. We had a very good quarter for the types of deals. It was significantly higher than what we've done in the past quarters in terms of signing new business. And important part is that they're multiyear contracts. They're in the segments that we wanted to grow, which is more margin-rich segment business, and they take advantage of our global footprint, which is also one of the key initiatives that we did. So we're very happy from that standpoint. And with that, we made additional investments in our sales and marketing to really kind of drive the momentum that we're seeing right now in the marketplace, which we're a little harder on the SG&A this quarter than we originally looked at, but want to be opportunistic with the investments to get the rewards.

Would you guys care to provide any quantification of bookings or anything that's a maybe little bit more forward-looking to help kind of quantify the momentum that you're seeing?

Brian, at this time, we're not comfortable with doing that. But as Chris said, some of these new deals may well become public in the coming weeks or shortly thereafter. So at the appropriate time, we'll do so.

[Operator Instructions] Our next question will come from Matt Sheerin of Stifel, Nicolaus.

Just a question or a follow-up regarding the revenue recognition shift in that business that you've been shifting over, can you talk about the gross margin impact? It also sounds like that business is fairly lumpy. I'm trying to figure out, is there a kind of seasonality that we should think about because -- and you've got gross margins and forgetting the disk drive benefits over the last couple of quarters, but you still have margins jumping around here. I know there's a lot of mix involved, but I'm trying to figure out, is there seasonality in this kind of -- this business where we should be modeling either a sequential decrease or increase on any specific quarters? And I'm also thinking that this is in the government business, so is that tied to any kind of spending patterns whether it be federal fiscal year or things like that?

Matt, this is Thomas. The primary largest customer within this discussion is tied to the federal government. And so generally, you will see seasonal trends in line with that. Our experience with this line of business that we have a very strong Q4, which is why the adjustment was larger in Q4, and then it tapers off rather quickly in Q1 and throughout the year and again starting to ramp in the third quarter. So it follows, if you will, a trend closer to our traditional consumer business than your typical IT business. Again, because of federal budget spending, this is primarily a U.S. customer.

Okay. So this is September is a big quarter and -- sorry, that your November quarter is a big quarter because of the September close and then there's some spill over into the next quarter, is that right? Is that how to think about it?

That's right. That's the way to think about it. Again, the phenomenon that we described in Q1 is a little bit -- was a little bit harder to predict only because we were in the middle of that transition, going from certain revenues being traditionally on a gross basis to certain revenues going to a fee-for-service basis, and it's hard to predict the rate at which that transition was going to occur. But as I shared in my prepared remarks, that transition occurred more rapidly than we thought. Consequently, we thought approximately $30 million of revenue would still be on a gross basis but ended up being on a net basis in Q1. Now as we get into Q2 and beyond from now on, that entire transition has taken place, we know which revenue now is gross and which is net. And so when we talk about our guidance for Q2, incorporating approximately $80 million to $100 million of that kind of revenue, we're more confident that we're actually going to be within that range.

Okay, that's helpful. And then on the SG&A, you explained why that was up sequentially. Looking to the May quarter, is that -- are we going to be in that sort of ballpark, that $105 million ballpark, or are there more investments that you're investing into the global businesses and the value-added business and distribution?

There will be more investments. But directionally, our SG&A will be down both in terms of dollars and in terms of percentage of revenue.

And why is that? Because of seasonality or cost-cutting?

Yes, we won't be making the same amounts of investments. Seasonally speaking, Q1 and Q2 are generally pretty similar. So it's just a matter of, really the levels of investments we're making and then continue to drive more efficiencies into our business.

Okay. And then just lastly, Thomas, on the share count, is that expected to be sort of flattish? Is that embedded into your guidance, the share count being flat? Or...

Our share count is in part, of course, dictated in terms of the earnings per share calculation that is the fully -- I'm sorry, the diluted earnings per share calculation dictated in part by what our stock does during the quarter as you know, given where our stock has been recently. We are expecting the share count to be up from an EPS perspective. Is that the nature of your question, or you're actually just asking about...

Yes, no, yes. So I'm just -- I mean, are you expecting -- yes, I'm just trying to figure out what share count amount, that's all, yes.

Yes, I think using a share count, that's upwards of 38 million shares would be in line with what we're thinking.

Our next question will come from Osten Bernardez of Cross Research.

My first question pertains to Japan and your operating margins there. I just wanted to get a feel for whether -- obviously, it was up on a quarter-on-quarter basis, but are we talking north of 1% or approaching 1% debt there, even though the target is to be closer to 2%?

Osten, this is Dennis, thanks for the question. While we're not specifically giving operating margin guidance in our Distribution segment, I can tell you that we were close to 1% in Japan for operating margins in Q1.

Okay. And with respect to the comments made earlier regarding some product constraint that you had in the quarter within your overall distribution business, I think you qualified it towards your consumer business, on a go-forward basis, do you still anticipate any sort of shortage in products for the next -- for the quarter, current quarter that we're in?

So the product shortage I was referring to really as a result of hard drive shortages, so that would be PCs. As of right now, we haven't seen any further shortages that way and we don't anticipate there will be.

And then lastly, just from a modeling perspective, could you explain sort of the difference in your -- well, I was modeling something -- difference in your other income line. And sort of that on a year-over-year basis, how should I be thinking about, a, what took place in first quarter? And how I should look at that from a full year perspective?

Sure. So our other income expense line includes a few key areas. The largest areas tend to be foreign exchange, whether we have gains or losses there, as well as our deferred compensation program. Osten, since you picked up coverage more recently, we have a deferred comp program that applies to certain of our executives, and the way that that program works is that the company takes the deferred compensation of those executives and invests it. And as those investments make money, our liability to those executives goes up, therefore, within SG&A, you would see an increase in expense but you'd see it offset, in large part, by an increase in other income. So typically it does not have any impact on the bottom line.

Our next question will come from Richard Gardner of Citigroup.

I have a clarification and then a question. On the clarification, I just wanted to clarify, would it be fair to say that most of the revenue shortfall in the quarter was the $30 million impact from transition to fee-for-service incremental that you talked about and then that the remainder was the retail channel inventory correction and the printer weakness that you've referred to? Is that a fair statement?

Yes, Richard, that's a fair characterization.

Okay. And then, I guess, I still don't quite understand the setback in GBS margins in the quarter. I understand your desire to invest in the business for the longer term, but you did refer to you're taking longer to realize the margin benefits of last year's acquisitions. And so I'd love to understand how much was that and then also understand the timing of the decision to ramp investments in the current quarter. Are you just seeing opportunities out there that you really want to pursue now? I guess, why exactly did you decide to ramp up those investments now? And then, yes, maybe get back to -- I know you said that there should be margin expansion going forward, but can we expect to be back at the double-digit range by the end of the fiscal year?

Rich, it's Chris. Let me break down your question to 3 parts. I think from the first part in terms of the comment in regards to getting the synergies out of the acquisitions from last year into from a investment standpoint, we're seeing the benefits from the acquisitions from last year both in terms of customer coverage and getting new services into the customers that we are already servicing. And I think with the platforms, as we've talked about in the past, you generally will do a pilot, you'll invest in the pilot, you'll work along with the customer because you're taking over a fairly significant piece of their infrastructure, and then you'll start to see some growth from that, and we're starting to see that. As fast as we originally would have liked last year, no, but we're starting to see that and the benefits are coming through from that. In terms from an investment, there's 2 types of investments that are categorized. One is in terms of the investment in our platforms, in our development resources, and that has been on a fairly steady-state higher than what you historically seen in the GBS segment but because of these platform acquisitions certainly ongoing. And I think the comment of seeing leverage off of that, we're not at the critical scale that we need to see as much leverage as -- we know there is there in the business over the next coming quarters as you see the expansion. In terms of the investment in the sales and marketing side which we talked about specifically in Q1, to give you an indication, when we go after some of these larger opportunities is a significant sales expense in order to capture them. It's a lot of site visits, it's a lot…

Chris, if I could just follow up, the investments that you're making currently in platforms, how much longer do you expect those to continue to be at an elevated rate? And will they decline significantly at some point over the next several quarters?

So Rich, we don't see the investment declining. We see it in more of a steady-state. But what happens is that as you layer on more and more revenue on the top, that spend becomes less significant as part of the SG&A. So frankly, we're at that tipping point, and our expectation is not to cut back on our development, but keep it at the level it is right now and see the revenue go onto the top line.

Our next question will come from Ananda Baruah of Brean Murray.

Just a couple of things if I could. I guess, just to sort of take you back off of that last topic, are you far enough through, I'd guess with the lessons learned, of going after bigger deals or winning bigger deals? Standing them up is really what I'm thinking about that. Do you feel like you have your arms more broadly enough around standing up larger deals to be able to get to the visibility towards sort of margin ramp from this point forward? Or could there be other lessons learned as we move forward?

So I think, Ananda, it's Chris again, we go into these deals with our eyes open, right? We've been in the business for a while. We've done global deals while it's been less in size in terms of what we're winning now. But with our larger footprint, these are the opportunities that we invested to be in front of and are subsequently making headway. And so from our perspective, there's not anything that we're not -- or being caught off guard or being surprised of that. We're making investments to make it happen. As we continue to grow, obviously, these deals have less and less of a overall impact to our business because the business is growing and therefore the startup expenses and the investments needed to secure these deals become less noticeable within our SG&A. When you look at the sheer dollars of SG&A and sheer dollars of operating income we're talking about, the larger deals will have a bigger impact as we go forward.

On this, because I guess the implication is that you guys weren't really surprised by the gross -- the operating margin dynamics in your internal planning. This is sort of what you guys are expecting.

So I think, Ananda, to answer that, at the beginning of the quarter, we talked about, we didn't necessarily see some of the opportunities moving as fast as they did into Q1 and Q2. And frankly, we're expecting a higher operating income level if we didn't have to make these investments. But these are not investments to sort of solidify the business, these are investments that are bringing in new wins, which I think as some of the announcements go out, you'll see the benefits of these investments and why we've made them.

Got it, got it. That's clear. And then just I guess, Kevin or Thomas, just a follow-up on the comments about PCs and sort of the removal of -- I guess you have -- your expectation is now that you won't have shortages, can you talk about, I guess, the mix of PCs that you've been getting? Is it sort of optimal to what the customers want? And I guess, where is sort of the -- with the dynamics there, what implications it might have on your ability to upsell services or software anything like that?

Yes, I mean, Ananda, so just to clarify though because you made a comment that from a product perspective, we don't foresee any shortages, I should just make the comment that even though it does appear that most of that supply chain shortage issue, constraint issue, has been resolved, there are still some level of constraints in the enterprise drive space, okay? That being said though and now taking it back down to more of the finished goods product in particular on PCs, we feel good about the mix of inventory that we have in terms of the demand that we're seeing out there, we don't see any challenges that way.

Okay, got it. Is that something you saw normalized as you move through the quarter?

Yes. That's correct.

Okay, great. And then just last one for me, Kevin. I think you comment earlier about market demand was low single digits this year in North America, and your expectation that you outgrow the market again. So anecdotally, should we think of SYNNEX growth this year being low to mid-single digits?

Yes, actually my comment was that we expect the North American markets to be low to mid-single digits, and that we would do better than that, Ananda.

Our next question will come from Shaw Wu of Sterne Agee.

Just a clarification on your Japan business, I think you said on the call it's around 1%, and just want to clarify if you feel comfortable driving that closer to the corporate average? And then to get there, is it more about driving volume, or is there more cost cutting?

Yes, so as Dennis noted, last quarter was around the 1% range. So, Shaw, on a like-for-like business, obviously, even within the distribution business itself, there's a good variety of different types of business that we do on a like-for-like basis. We were optimistic that we'll get up to those North American operating profit levels in a given period of time. That being said and what Dennis commented on was as we continue to enrich the business really in the -- along the 3 different levers that he talked about, that's how we're going to continue to improve our operating margins. But they really have to do with investing in more services and service-rich components in that business like we have done in the United States, continuing to enhance our product line card and what goes with that is leveraging some of the strong relationships that we have here back in North America. And then the third piece is just by continuing to focus on profitability, there's going to continue to be some level of rationalization of the business. There's some business that's part of the Japanese mix that we will likely shed, but in addition to that, we intend to grow the overall business too by replacing it with more profitable business. But cost-cutting is really not one of those 3 key drivers.

Our final question will come from Brian Alexander of Raymond James.

Yes, Couple of follow-ups. Kevin, did you see operating margin expansion year-over-year in your core North American distribution business? So excluding Japan, excluding the change to net revenue -- because there's a lot of moving parts here and excluding benefits from HDDs, if I factor all of those out, I come up with about 2.2%, which is still very good performance, but versus a year ago it's about flat if I take out Japan from last year, and it sounds different than what you're articulating so I just wanted to check that.

So Brian, an excellent question. If you actually look at all of the different puts and take and some of the things that are more exceptional, the answer is yes, we believe that we expanded our margins in our North American distribution business.

Okay, and you expect that to continue going forward?

Yes. And again, driven by what we have talked about over the past number of quarters which is we're driving a much richer mix of products that are in the higher margin categories as well as more and more services as well.

Okay. And then the final one, any thoughts on your largest vendor, HP, combining the PC and printing divisions, how do you think that will affect your business near term, long term? Do you expect any change in channel strategy or structure, terms of conditions? Or does anything you can tell us in your conversations with that?

Sure. Well, I mean, overall I think it's a positive move for HP. Inherent in the combination, there should be some efficiencies that they're able to drive in their business. I think what it'll do is it will start to drive the efficiencies and also consistency in channel partner relationships in particular with distributors as well. Just in terms of some of the individuals, Todd Bradley, obviously a very strong leader of the organization, I think very well equipped with his experience and knowledge to drive the total organization. And we've had an excellent relationship with HP historically. We certainly expect that to continue. So if anything, we do expect HP to continue to embrace channel partners and, if anything, drive more efficiency and enhancement in the go-to market with them.

Okay, that was our last caller.

All right, thank you, Lori. I'm pleased with our first quarter growth and profit and continued expansion in margins, and we're looking forward to further speaking with you in upcoming investor conferences. Thank you for your time.

Thank you.

Thank you for your participation on the conference call today. At this time, all parties may disconnect.