ARROW ELECTRONICS, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• First Quarter Performance: Consolidated and segment sales, as well as earnings per share, exceeded the high end of guidance ranges. Factors included improving trends in global components across regions and year-over-year billings growth in ECS with operating leverage.
• Global Components Details: Stronger sales than anticipated with all three regions performing ahead of seasonality, sequential improvement in industrial markets globally, resilience in transportation, sequential growth in IP&E market, and value-added offerings being accretive to operating results.
• Regional Color: Americas saw return to sequential growth in industrial and transportation segments. Asia had improving momentum in multiple verticals. EMEA had strong sales activity in industrial, transportation, and aerospace/defense verticals.
• Market Indicators: Book-to-bill ratios improved throughout the quarter and sit at or above parity in all regions. Backlog is growing again, and customer inventory levels are trending for replenishment.
• ECS Business: Continued strength in cloud and infrastructure software, hybrid cloud technologies. Backlog grew by more than 50% year-over-year in the first quarter, with recurring revenue approaching 1/3 of total billings mix.

Segment Performance

• Global Components: First quarter sales were $4.8 billion, above the guidance range and down 1% versus prior quarter in constant currency terms. This segment had stronger sales than anticipated with all regions performing ahead of seasonality, including momentum in EMEA, improvement in industrial markets globally, resilience in transportation, and sequential growth in IP&E market. It contributes a significant portion of Arrow's overall mix.
• Enterprise Computing Solutions (ECS): Sales were $2 billion, above the guidance range and 18% higher versus prior year in constant currency. ECS billings grew 5% in the quarter compared to the same period last year. Recurring revenue volumes approach 1/3 of the total billings mix.

Guidance

• Q2 2025 Sales: Expect sales to be between $6.7 billion and $7.3 billion. Global components sales expected to be between $4.8 billion and $5.2 billion (midpoint up 4.6% QoQ). ECS sales expected to be between $1.9 billion and $2.1 billion (midpoint up 7.5% YoY).
• Tariffs Impact: Incremental tariffs could increase global components sales by 2 to 4 percentage points sequentially, with minimal impact on ECS sales. Tax rate expected in range of 23% to 25%, interest expense ~$60 million. Non-GAAP diluted EPS expected between $1.90 and $2.10.
• Foreign Currency: Recent weakness in the U.S. dollar is a tailwind, increasing reported sales by approximately 80 basis points or $60 million compared to Q2 2024.

Risks

• Tariffs: Uncertainty surrounding trade policies, complexity in managing impacts. Need to mitigate margin risk through intelligent sourcing, routing, foreign trade zone capabilities, and process changes.

Question and Answer

Q: Please help understand the 2% to 4% increase in component sales not included in the guide.

A: Represents surcharges or price uplifts for tariffs that can't be mitigated otherwise, with mechanisms in place to mitigate margin risk like intelligent sourcing and routing.

Q: How to think about customer inventories trending towards replenishment relative to Arrow's inventory?

A: Inventories down ~$1 billion from peak, aging profile improving, turns in line with sales, normalizing with demand. Pockets of excess still exist but improving.

Q: Thoughts on tariff pull-ins in the systems business?

A: No material order acceleration seen, ECS business on steady growth path with strong momentum, reported sales number varies but underlying business is strong.

Q: Any pull forward in the quarter?

A: No material impacts seen in Q1 or Q2 outlook, visibility improving with book-to-bill, backlog growth, and supplier guides improving.