Arrow Electronics, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Global Components: The prolonged cyclical correction is yielding to early signs of market recovery. All three operating regions had sales exceeding typical seasonality, with broad strength in Asia, improving industrial/transportation activity globally, healthy aerospace/defense in Western markets, IP&E components growing sequentially and year-over-year, and value-added offerings aiding operating margin stability.
• ECS: Second quarter saw double-digit growth in billings, gross profit, and operating income. Performance was broad-based in EMEA with growth in cloud, infrastructure software, and cybersecurity, and acceleration in North America's cloud portfolio alongside strength in infrastructure software and data storage. Alignment of go-to-market strategy is paying dividends, and backlog growth indicates promising demand trends in areas like hybrid cloud solutions and AI in data centers.
• General: Inventories are down from peak, inventory turns improved, and the company remains committed to productivity initiatives. Managing trade complexity with global supply chain assets and services to help customers navigate associated complexity.

Segment Performance

• Global Components: Sales were $5.3 billion, up 8% sequentially in constant currency. Contributed to by broad strength in Asia, improving industrial and transportation markets globally, and IP&E components growth. Regional breakdown: Americas driven by industrial, aerospace/defense, and transportation; Asia saw broad-based sequential growth; EMEA had sequential sales growth despite macroeconomic and geopolitical headwinds.
• Enterprise Computing Solutions (ECS): Sales were $2.3 billion, up 20% year-over-year in constant currency. Delivered double-digit growth in billings and gross profit, with strength in cloud, infrastructure software, and cybersecurity in both operating regions. Backlog grew over 50% year-over-year, indicating promising demand trends.

Guidance

• Third quarter sales expected between $7.3 billion and $7.9 billion. Global components sales projected between $5.3 billion and $5.7 billion (midpoint up 4% from prior quarter). ECS sales expected between $2 billion and $2.2 billion (midpoint up 12% year-over-year). Non-GAAP diluted EPS between $2.16 and $2.36. Factored in tariff impact, tax rate to return to typical range of 23%-25%, and interest expense expected to increase to ~$65 million from ~$60 million in Q2.

Risks

• Uncertainty around future trade policy, which could lead to order acceleration or deceleration and impact financial results.

Question and Answer

Q: Joe Quatrochi asked about demand dynamics relative to inventory.

A: Sean Kerins said inventories are down from peak, inventory turns improved, still some excess but being worked through, and the company is focused on customer demand and market recovery to invest in working capital to support growth.

Q: William Stein inquired about customer inventory level and margins.

A: Sean Kerins stated customer inventories are normalizing in larger OEMs, but mass market customers still have some destocking, and as mass market returns, margins will benefit.

Q: Ruplu Bhattacharya questioned ECS segment margins and components region.

A: Sean Kerins explained ECS margin adjustment due to prior bad debt reserve release, components EMEA sales, and confidence in components growth due to backlog growth, book-to-bill ratios, and vertical market trends.