Avnet Inc (AVT) Q4 2025 Earnings Call Transcript

Avnet Inc (NASDAQ: AVT) Q4 2025 Earnings Call dated Aug. 06, 2025

Corporate Participants:

Joe Burke — Vice President, Treasury and Investor Relations

Phil Gallagher — Chief Executive Officer

Ken Jacobson — Chief Financial Officer

Analysts:

Joe Quatrochi — Analyst

Ruplu Bhattacharya

Melissa Fairbanks — Analyst

Presentation:

Operator

Please stand by. Our presentation will now begin. Welcome to the Avnet Fourth Quarter Fiscal Year 2025 Earnings Call.

I would now like to turn the floor over to the Joe Burke, VP, Treasury and Investor Relations for Avnet.

Joe Burke — Vice President, Treasury and Investor Relations

Thank you, operator. I’d like to welcome everyone to Avnet’s fourth quarter fiscal year 2025 earnings conference call. This morning, Avnet released financial results for the fourth quarter and fiscal year 2025 and the release is available on the Investor Relations section of Avnet’s website along with a slide presentation, which you may access at your convenience.

As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumption that are difficult to predict. Such forward-looking statements are not the guarantee of performance and the Company’s actual results could differ materially from from those contained in such statements. Several factors that could cause or contribute to such differences are described in the detail in Avnet’s most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the Company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

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

With that, let me turn the call over to Phil Gallagher. Phil.

Phil Gallagher — Chief Executive Officer

Thank you, Joe, and thank you everyone for joining us on our fourth quarter and fiscal year 2025 earnings call. For the fiscal year we delivered $22.2 billion in revenues and $3.44 of adjusted diluted earnings per share.

Looking back, this was a year of intense focus on managing the things within our control, including competing well in the market, strengthening our supplier and customer relationships by demonstrating the value Avnet brings to the technology supply chain, controlling costs while continuing to make investments that enable our long-term strategy, optimizing our working capital and generating healthy cash flows and continuing to return cash to shareholders through buybacks and a dividend.

We also announced a couple of key executive additions this fiscal year, including the appointment of Dave Youngblood, a 25 year industry veteran, as our Chief Digital Officer and more recently, the promotion of Gilles Beltran, a 23 year veteran of Avnet as the new President of our EMEA region. Congratulations, Gilles. Gilles will be succeeding Slobodan Puljarevic, better known as Puli, and Mario Orlandi, who have co-led the EMEA region with distinction for many years. They will remain with us for the next several quarters to ensure a smooth transition.

Succession planning is critical to any organization and we have a thoughtful, structured process in place at Avnet. Mario and Puli did a great job leading the success of our EMEA region over the years and also developing talent for the next generation of leadership. I want to thank them for their many years of tireless dedication. And I want to express my gratitude to our team for their unwavering commitment and hard work in driving us toward our objectives. In challenging markets like we have faced the past couple of years, our collective efforts truly highlight the critical role we play at the heart of the technology supply chain, reinforcing our value to all stakeholders.

Now, turning to the recent completed fourth quarter. I’m pleased we delivered another quarter of financial results that exceeded our sales and EPS guidance. In the quarter, we achieved sales of $5.6 billion and adjusted operating margins of 2.5%, highlighted by a 4.3% operating margin in our Farnell business. We also generated $139 million of cash flow from operations in the quarter.

Sales were better than expected, led by Asia which delivered 18% year-over-year growth in the quarter. Sequentially, demand increased across most of the markets we serve, on a year-on-year basis demand increased in the compute, transportation and communication end markets globally. Semiconductor and IP&E lead times and pricing remain stable for most technologies. Our book-to-bill ratio improved across all regions and for now last quarter, the improvement was led by our Europe and Asia regions which were both above parity. Bookings also continued to grow in our IP&E business and remain above parity as well.

We continue to coordinate closely with suppliers and customers to effectively manage our backlog, which is growing again. New customer orders within lead times, which we refer to as our turns business, also increased across all regions and it’s a positive sign that customer inventories are normalizing. Order cancellations have remained at normal levels.

I’m pleased with our progress on reducing inventories, although there’s still work to do. Even so, we believe we are well positioned today and remain focused on ensuring we have the right inventory at hand, balancing reductions with investment opportunities. We expect to continue to be disciplined in optimizing our inventory as we move through fiscal year 2026.

Now with that, let me turn to the fourth quarter results. At the topline, our Electronic Components business increased on a sequential basis and year-over-year. All regions were higher sequentially and notably, this was our fourth consecutive quarter of year-over-year growth in Asia.

Sales in Asia were better than expected and demand in most end markets increased both year-over-year and sequentially. Similar to last quarter, we experienced a slight benefit from customers ordering due to the uncertainty of potential regulatory changes in the U.S. In the Americas, demand increased sequentially for the communications end market and compute was strongest on a year-on-year basis. We did not see pull-ins in any magnitude and customer billings for tariffs were not meaningful during the quarter.

In EMEA, the market is still mixed with some signs of improvement in certain end markets. In the quarter, most end markets increased sequentially. The communications market was the only vertical that showed growth year-on-year. With that said, we are optimistic that bookings in EMEA will grow in September, as the Europeans return from their typical summer vacation period. From a demand creation standpoint, revenues increased 7% sequentially as our field application engineers continue to engage with our customers and suppliers on design wins and registrations. This strength of our FAEs and technical teams is a key part of our value proposition.

Now turning to Farnell. The team continued to deliver on the strategy that Rebeca Obregon and her leadership team put in place one year ago. Right sizing the cost structure, reorganizing the management team and leveraging Avnet’s broader relationships and bolstering our digital and e-commerce capabilities. In the quarter, sales were higher both sequentially and year-on-year with improved operating margin. We are pleased that Farnell’s results have stabilized, but we still have work to do to achieve its full margin potential. We are confident, they are well positioned for steady improvement.

To conclude, Avnet has momentum as we enter the new fiscal year despite challenging business conditions over the last two years. And with that, we have a number of reasons to be optimistic about fiscal 2026, beginning with Asia’s double digit growth in fiscal 2025. The region has historically led us out of cycles in the past and this one should be no different. Stabilization at Farnell with the right size, cost structure and synergies from the power of one initiative, Farnell is poised for steady growth.

Book-to-bill is above parity in all regions and in our IP&E business, which is one of our higher margin growth opportunities. We have made significant investments in our digital infrastructure to boost our customer experience and data insights. Demand creation as semiconductors become more pervasive, the value of Avnet’s engineering capabilities will further increase. And finally, lead times have normalized, our backlog and terms business are improving and through it all, gross margins have held up well for each of our EC regions in fiscal 2025 compared to fiscal 2024.

I continue to optimistic about our value proposition and encouraged by the positive signs that market conditions are beginning to turn in the Americas and EMEA. At the center of the technology supply chain, we are well positioned to help solve for the increasing complexity our customers and suppliers face around the world and bring resiliency to the supply chain.

With that, I’ll turn it over to Ken to dive deeper into our fourth quarter results. Ken.

Ken Jacobson — Chief Financial Officer

Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our fourth quarter earnings call. Our sales for the fourth quarter were approximately $5.6 billion above the high end of our guidance range, up 6% sequentially and up slightly year-over-year.

Regionally, on a year-over-year basis, sales increased 18% in Asia, but declined 17% in EMEA and 2% in the Americas. In constant currency, EMEA sales were down 21% year-on-year. From an operating group perspective, electronic component sales improved 1% year-over-year and 6% sequentially. Farnell sales increased 3% year-over-year and 5% sequentially. For the fourth quarter, gross margin of 10.6% was 99 basis points lower year-over-year mainly due to a higher mix of Asia sales and 49 basis points lower sequentially, mainly due to product and customer mix and in addition to some impact from foreign currency exchange rate changes.

The regional mix shift to Asia impacted EC gross margin year-over-year. Sales from the Asia region represented 48% of fourth quarter sales in fiscal 2025, compared to 41% in the year ago quarter. Gross margins for the Americas and Asia regions were lower both sequentially and year-on-year, while gross margins for EMEA increased year-on-year and declined on a sequential basis.

Overall, on a region-by-region basis, we believe gross margins are generally stable, although they can be impacted by product or customer mix within any given quarter. Farnell gross margin declined both sequentially and year-over-year, primarily as a result of a higher mix of off-the-board components and single board computers. Farnell gross margins at the product category level, including on-the-board components continues to be stable.

Turning to operating expenses, we continue to manage expenses well and take costs out where necessary. SG&A expenses were $451 million in the quarter, up $1 million year-over-year and up $16 million sequentially. Foreign currency negatively impacted operating expenses by approximately $14 million sequentially and $10 million year-over-year. Excluding the impact of foreign currency and the prior quarter benefit from the gain on sale and leaseback facility, our operating expenses decreased approximately 2% both year-on-year and sequentially. As a percentage of gross profit dollars, SG&A expenses were slightly higher sequentially at 76%.

Moving into fiscal year 2026, we expect some operating expense headwinds as a result of our decision to invest in our people by providing merit pay increases, which were not awarded in fiscal year 2025. We believe these increases are necessary to reward and retain our employees, especially ahead of the expected market recovery this fiscal year. For the fourth quarter, we reported adjusted operating income of $143 million and our adjusted operating margin was 2.5%. By operating group electronic components, operating income was $157 million and EC operating margin was 3%. The year-over-year decline in EC operating margin was primarily due to the sales mix shift to Asia and the sales decline in EMEA.

For now, operating income was $17 million and operating income margin was 4.3%. Operating margin was up approximately 129 basis points quarter-over-quarter and up 25 basis points year-over-year, reflecting improved sales and the benefits of prior operating expense reduction efforts. It is worth noting that, this is the first year-on-year improvement in Farnell operating margin since Q1 of FY23. Farnell operating expenses were down $7 million year-on-year and down $5 million sequentially on higher sales. There is still a lot of work ahead of us at Farnell, but as expected we are seeing steady improvement, led this quarter by the increase in sales of single board computers and the improvement in the number and size of customer orders.

Turning to expenses below operating income, fourth quarter interest expense of $58 million decreased by $6 million year-over-year and decreased by $3 million sequentially, due to lower average borrowings. This lower interest expense positively impacted adjusted diluted earnings per share by $0.05 year-over-year. We continue to look for ways to further reduce interest expense, including paying down debt with operating cash flows or reducing our average borrowing rates. Our adjusted effective income tax rate was 23% in the quarter as expected. Adjusted diluted earnings per share of $0.81 exceeded the high end of our guidance range for the quarter.

Turning to the balance sheet and liquidity. During the quarter, working capital increased $29 million sequentially and included a $35 million decrease in reported inventories, a $232 million increase in receivables and $168 million increase in payables. Sequential increases in foreign currency exchange rates added $202 million to working capital, including $150 million to reported inventories. Excluding the impact of changes in foreign currency exchange rates, inventories decreased by $185 million or approximately 4%, compared to last quarter.

On a year-over-year basis, in constant currency, inventories are down over $400 million or approximately 8%. We remain focused on reducing inventory levels where elevated, noting that we also want to make investments where needed. Our return on working capital is 9.4% for the quarter. We generated $139 million of cash from operations in the quarter and $725 million for the fiscal year. We expect lower cash flow from operations in Q1, primarily due to certain income tax payments that need to be made.

For the fiscal year, we lowered our debt by $237 million. We ended the quarter with a gross leverage of 3.4 times and we had approximately $1.1 billion of available committed borrowing capacity. During the quarter, net cash used for capital expenditures was $60 million, which included the planned purchase of an office building. We expect capital expenditures to return to normal levels of approximately $25 million to $35 million per quarter in fiscal year 2026.

For the fiscal year, we returned a total of $415 million to shareholders through our share repurchases and dividends. In the fourth quarter, we paid our quarterly dividend of $0.33 per share or $28 million. We also repurchased approximately $50 million worth of our shares. We achieved our goal to reduce shares outstanding by at least 5% this fiscal year, as we repurchased nearly 7% of our outstanding shares. Additionally, we have more than $300 million left on our current share repurchase authorization. Book value per share increased to approximately $59 or a sequential increase of $3 per share, primarily due to the changes in foreign currency exchange rates.

With regard to our capital allocation, we continue to prioritize our existing business needs and investing in areas that can make our overall business better. We also remain focused on ensuring we have a strong balance sheet and making sure our leverage remains at appropriate levels.

Turning to guidance. For the first quarter of fiscal 2026, we are guiding sales in the range of $5.55 billion to $5.85 billion and diluted earnings per share in the range of $0.75 to $0.85. Our first quarter guidance assumes sequential sales growth of approximately 2% at the midpoint and assumes sales growth in all regions. This guidance also assumes similar interest expense compared to the fourth quarter, an effective tax rate of between 22% and 26% and 85 million shares outstanding on a diluted basis.

Our team has made significant effort to adjust our processes for tariffs. We continue to work with our suppliers and customers to mitigate the impact where possible. During the fourth quarter, less than 3% of the Americas sales and less than 1% of global sales were from customer tariff billings.

In summary, our fourth quarter performance is better than expected despite the challenging market conditions. Our team continues to focus on generating operating cash flow and over the past year, we’ve been able to balance the pay down of debt with returning cash to shareholders through our share repurchase and dividend programs. I want to echo Phil’s comments in thanking our team for continuing to focus on the things we can control, our global scale and the diversification of our distribution center locations, the supplier technologies we provide and the vertical markets we serve, gives us the ability to reduce complexities and better serve our customers.

With that, I will turn it back to Phil for one last word before questions. Phil.

Phil Gallagher — Chief Executive Officer

Thanks, Ken, and before we go to questions as some of you may know, Joe Burke will be retiring and leaving Avnet at the end of the year, and I want to thank him for his many contributions over his remarkable 37 year career at Avnet. Joe has been instrumental in setting the foundation of our Finance team, having served as our longtime Treasurer and Head of Investor Relationship. Been grateful for his leadership through the years and I will miss his insights, wisdom, candidates and his dry sense of humor. Joe, I wish you the best in your retirement. Congratulations. You got it.

So with that, I’ll turn it over to the operator and we’ll open it up for questions. Thank you.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Joe Quatrochi from Wells Fargo and Company. Please go ahead with your question.

Joe Quatrochi

Hey. Thanks for taking the questions and congrats to Joe Burke. Thanks for all the help over the last several years. Maybe just to start, it feels like the commentary around EMEA is definitely, maybe a bit more positive than 90 days ago, so can you talk about just kind of what’s changed there and like what end markets, maybe you’re driving.

Phil Gallagher

Yeah, Joe, thanks. Appreciate the question and the comment on Joe. Well, we have more optimism. Okay. As we look at EMEA right now, I would put it that way. I mean, it’s as you know, it’s fallen down and you look at our charts as a percentage of our revenue, it’s come down quite a bit, it’s been soft. So we’re just starting to see — again, we’re not celebrating, I’ll be really clear. But the bookings are coming back modestly. When I look at the backlog build up in the EMEA, it’s starting to increase year-on-year. I’m looking at it as we speak and Q-on-Q. So I would just say it’s modest, but we’re definitely starting to see some movement there and for us that’s a big deal. It’s a critical region for us from the profitability standard point as you know.

Joe Quatrochi

Got it. That’s helpful. And then I guess as a follow up, I appreciate that the FX is kind of making, that the inventory dynamics a bit more difficult to kind of, track quarter-to-quarter for at least just looking, added on the balance sheet at a point in time. But I guess, how should we think about just inventory trends in the September quarter, that you’re thinking about, relative to trying to still work that down maybe in some pockets.

Ken Jacobson

Yeah, Joe, I’d say, we expect the EC business to continue to drive inventory down. So, a modest decline next quarter, and then offset a little bit by Farnell. So I think this quarter was about $186 million. Net FX some of that was coming from Farnell, a lot of it came from Europe, but continued progress in the core, including Asia and the Americas. So still have work to do there on the inventory side, but would expect despite the up sales a little bit to keep bringing inventory down a little bit still.

Phil Gallagher

Yeah. I’ll just add to that, as we talked in the past, Joe, and we put in the script, we’re still making investments in inventory too. So it’s not all a bad thing. Right. So it’s a handful of commodities more that are driving a lot of the upside in inventory. Need to keep working that down, while we continue to make sure, we have the appropriate SKUs and inventory levels to service the balance of the customer base. And we want to get back into the mid-80s if we can, from a days of inventory, that’s still our goal.

Joe Quatrochi

Thank you.

Phil Gallagher

Thanks, Joe.

Operator

[Operator Instructions] Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead with your question.

Ruplu Bhattacharya

My questions. Joe, we’re going to miss you. Stay in touch. You’re retiring too soon. I mean, so really appreciate all the help.

Joe Burke

Thanks, Ruplu. Thank you.

Ruplu Bhattacharya

All right. Phil, I wanted to start by asking on the core business. So Asia remains strong. How do you see that trend continuing over the next couple of quarters? How do you see the mix of regions and how does that impact the core business margins as we go forward?

Phil Gallagher

Yeah, great question. I’ll let Ken jump in on the margins a bit. Yeah, I would make it really clear too. We’re super proud of our team in Asia Pac and they’ve been not only growing and increasing share, but holding their margins as well. So to have four quarters in a row of year-on-year growth is pretty good and again, proud of them and our position there.

As far as the next several quarters, we feel pretty good about Asia. So they’re still cranking along and as you know, Ruplu, typically, and it’s a little delayed this time, it seems, but typically the turn of the market, which is why we’re cautiously optimistic, starts in Asia Pac, then typically swings around to the west and that just hasn’t happened yet.

But we feel confident about our Asia continuing to perform well. And then yes, as we put in the slide, you can see as Asia has grown as a bigger percentage of our business, it’s had a impact on the margin that really is the impact, with Europe coming down and Asia going up, it’s just been the swinging the margin. It’s just a clear math issue. But we have no intention of slowing down in Asia to increase the balance of the other regions. We got to get the other regions to start growing again and increasing the margin profile.

Ken, you want to jump in?

Ken Jacobson

Ruplu, I think Phil mentioned the script, but I want to emphasize, we kind of measure the businesses in terms of their standalone gross margin. Right. We can’t necessarily control the mix, because of the fact of where the different markets are at, but each of the regions really, were flattish year-over-year for the full year. So we feel pretty good about that, that fundamentally the gross margins are holding up, and again, EMEA was down 21% in constant currency, year-over-year this past quarter we can kind of move that tide. You should see normal, margin uplift, so how long it takes to kind of catch up that mix, from what it was before is still to be determined based on how fast the recovery is. But just getting back to growth in Europe has some positive benefits on the margin and the Americas as well. Right.

So we should, as the west begins to grow year-over-year and starts to recover, we should start to see a more favorable mix to the west. But getting back to where it was may take some more time and clearly that would have an impact on the broader operating margin of EC, but you also have Farnell, that’s out there that could help lift that up too if that begins to recover and expand their margin, that helps the overall business uplift their overall operating margins.

Ruplu Bhattacharya

Okay. Well, that’s a great segue into my next question, which is on Farnell. What are some of the things that you guys are doing to improve margins there? One aspect was you’ve hired a Digital Officer — Chief Digital Officer and can you give us like, how much of sales for Farnell is now coming through the online portal and how do you see margins trending? It was at 4.3% this quarter. How should we think about that? How about that going forward?

Ken Jacobson

Yeah, so some of the things we’ve done there, as you know, we changed, we put in the script, we changed leadership at Farnell roughly a year ago and Rebeca has made a lot of changes. We’ve probably turned over roughly 70% of the executive team or a little bit more and have been very assertive on reducing non-value added expenses and getting that out, which is ongoing to drive more efficiency.

As far as the digital side of the equation. Yeah, we brought Dave Youngblood in. He’s got a great background of well respect in the industry and he is hem and hanging if you will, with Rebeca and the Digital team at Farnell and making some real progress on the site and some of the the areas in which we need to improve from a digital customer experience standpoint. So we’re doubling down there, not backing off at all. And the overall activity in Farnell, line item wise, that goes through digital in some way, shape or form, e-commerce or an API whatnot is roughly 70% — 7, 0 from an activity standpoint, probably close to 50 plus percent from the revenues and that will continue to increase.

Ruplu Bhattacharya

Okay.

Phil Gallagher

And Ruplu, also add that we have the, the opportunity we have with, more partnering with Avnet to help drive the topline too. So in addition to, the belief that the market will recover for on the board components which should help their gross margin and their sales overall, there are some things on the revenue side that we have within our control including the efficiency of our e-commerce and proposition there as well as the the partner with Avnet that should continue to give Farnell a lift over the upcoming quarters.

Ken Jacobson

And Ruplu, well on the margin just going back, the message to the Farnell team is continuous improvement.

Phil Gallagher

Okay. Will be a tailwind for Avnet to Ken’s point. So got the 4.3. Now we just need to, quarter-on-quarter, see that, continue to improve and that’s the plan over the next, let’s call it four, eight quarters and to get back into double digit operating margins plus.

Ruplu Bhattacharya

Okay. Thanks for all the details there. If I can just make one quick one and it’s a very top level, high level question. The industry has been going through an inventory correction over the last year, year and a half. Phil, do you think that we’re at the bottom of this? Is excess inventory now out of the channel and how do you see that? Are we now at an inflection point, do you think?

Phil Gallagher

I think we’re getting close, Ruplu. I don’t have a, I don’t have a crystal ball in front of me to give you an exact answer, but when you look at some of, the book-to-bills starting to increase, I’ll call it short interval or turns business, drop in orders from customers are starting to increase, which means they’re short. Right. And they’re coming in and buying. Still would like a little bit more visibility out there from the customers from a forecasting standpoint, they’re still a little conservative on that front, because lead times are kind of settled down. Right. There’s not much change actually look at the lead times, there’s hardly any change at all across the board in semi passives and interconnect other than, high bandwidth memory, things like that.

We track and I’m looking at it as we speak and the inventory, by our top suppliers, which I won’t get into by individual. But there’s no question, if you look at the semi set of suppliers that have reported so far, the inventory days are definitely down in total, roughly 11 to 12 days from a couple quarters ago and IP&E has been pretty well steady. So there’s not been an issue in the IP&E.

When you look at EMS, again, not mentioning any names, their inventories are down, from a year ago, roughly, 20 plus days. So and then there’s some OEMs we tracked and they’re in the 54 day range of inventory, which is also down. So there are some indicators again, that’s not, a statement of fact across the board, because I think there’s still a little bit more inventory than we would like to see out there. But and speaking for ourselves, we brought inventory down. Yeah, we want to bring it down more, but it’s definitely down. And so I — so that’s leads us to some of our optimism. Not overly optimistic, but optimism as our backlog increases and lead times stabilize and you see some of these days of inventory coming down.

Ruplu Bhattacharya

Okay, thanks for all the details. Appreciate it.

Operator

Our next question comes from the line of Melissa Fairbanks with Raymond James. Please proceed with your question.

Melissa Fairbanks

Hey, guys. Thanks so much. I have a few questions to start with though. Joe, I’m hopeful we can still play golf together in the spring. That would be great. You might have more time. Just to follow up on some of Ruplu’s questions on Farnell margins in particular. Phil, I think you kind of hinted at it. Get back to a double digit margin percentage. I’m wondering, what we should think of as being a normalized margin for Farnell. Obviously, we had some pretty extraordinary situations, conditions going on during the supply chain crisis. Just wondering, what kind of the — if you could let us see that spreadsheet, let us know what the internal targets are for margins.

Phil Gallagher

I can’t do that, Melissa.

Melissa Fairbanks

So, I would love, I would love to see whatever spreadsheet you’re looking at right now with all the lead times and inventory levels. I would love to see that.

Phil Gallagher

There’s about 20 of them on the table you want to pop over. But anyway, so thanks, Melissa. Yeah, so we do have, you’re right. We went to that. We swung way up in that, what’s called the false market several years ago with the shortage of supply and got into the 14% operating margin. That’s all public data, as you know. And then, when the tide went down and all the stuff showed up at the bottom of the harbor, we went down to damn near, a break even to 1%. We can’t let that happen again.

So we are modeling a, I don’t want to say a peak, but they’re definitely getting into double digit 10%, 11%, 12%, 13% operating margin over the next couple years. And if there’s a correction like we saw, which will come, as the market goes up, it’ll come down again someday. But to not let it get down to like below mid, like a five or something like that. So that’s kind of the range, but we definitely want to get to an average of greater than 10% operating margin is where we want to get to.

Melissa Fairbanks

Okay, great.

Phil Gallagher

That makes sense.

Melissa Fairbanks

Maybe. Yeah. Yeah. Any follow ups, guys? Sorry. I had a couple of questions for Ken. You mentioned that, you would restart the merit increases that we didn’t see in fiscal ’25. Just wondering, how we should model OpEx going forward. If it’s the September quarter outlook that kind of contemplates that entire uplift or if it’s going to be kind of like a rolling. I don’t know if it’s on a calendar year or fiscal year for those merit increases.

Ken Jacobson

Yeah, the full impacts in the guidance in the first quarter. So, how I think about it is, there’s been some currency impact on the Q4 number, but really the impact here is really, the merits. So think about it being, $8 million to $10 million for those and it’s already in the run rate. Now, with that being said, there’s a few things we’re looking at to help curb, potentially other inflationary things that come with the new fiscal year.

So I wouldn’t expect expense to go down a lot, but there could be a little bit of movement there down. But, that was probably a good point for your model is the number modeling for Q1 extrapolating out to the year, assuming there’s no massive volume increases, we’ll always have some OpEx tied to volumes up or down, but it’s a pretty good run rate now getting into the Q1.

Melissa Fairbanks

Okay. And maybe as a last question asking you guys to pull out your crystal ball forecasting, it was nice to see interest expense come down a little bit in the June quarter. I see that you’re guiding for flattish during the September quarter. Assuming that we are starting to see some stabilization, and maybe even an inflection point in some of the broader demand, what should we be assuming in terms of inventory investment and then potentially, what that means for the interest expense going forward?

Ken Jacobson

Yeah, I think, Melissa, how we look at it is we have enough dollars of inventory right for the current level of sales, even for some growth, it’s really about continuing to get a higher quality mix. There’s some pockets where we need to continue to work it down. So I would say, we expect it still to come down again modestly, but at the same time, we wouldn’t expect to utilize a lot of cash to grow the business here. So there’s still some work to do internally in terms of the inventory, but we expect it to go down a little bit still, all things being equal, but even with more aggressive recovery, we think we’ve got enough dollars and we’ll begin to turn it faster.

Melissa Fairbanks

Great. Thanks very much, guys. I appreciate all the detail.

Ken Jacobson

Thanks, Melissa.

Operator

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

Phil Gallagher

Thank you, operator. And let me thank everyone for attending today’s earnings call and look forward to speaking to you again at our first quarter fiscal year 2026 earnings report in October. Have a great rest of the summer.

Operator

[Operator Closing Remarks]