Q2 2020 Arrow Electronics Inc Earnings Call
[music].
Ladies and gentlemen, thank you for funding body and welcome to the electronics second quarter 2020 earnings Conference call.
Time, all participants will.
Well the move.
I thought this becomes to present piszel there maybe a question on suspicion.
Yes, good question drink, especially you would need to press star one on your telephone.
If you require any thought there was some please press star Zero Oh, no like 200 conference over to your mostly seasonal Brian. Thank you. Please go ahead Sir.
Thank you to Kim this is the people, Brian that Arrow electronics and welcome to our second quarter 2020 earnings conference call with Us on the call today or Mike Long, Chairman, President and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, indicating President global components and Sean Karen.
President Global Enterprise Computing solutions as a reminder, some of the figures discussed on todays call or non-GAAP you can access our earnings release at Investor Day at Arrow Dot Com, along with the CFO commentary the non-GAAP earnings reconciliation and a webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by question.
To answer Peter I'll, now hand, the call to our chairman President and CEO Michael.
Keith and thanks, all of you for your joining us today.
I'd like to thank our global employees for their commitment professionalism and teamwork during these extraordinary time.
The critical engineering design and supply chain services, they provided to our customers our suppliers and partners.
Great technology to protect and improve their way away the health of our people always come first and things to their thoughtful and diligent work our offices our facilities have been kept saying and our businesses moving forward over the course of a few months, we've learned a lot about the practice as necessary to keep the business is going.
While protecting our people.
We remain diligent.
We're increasingly optimistic that we have found a sustainable way to do business and actually ride in the coming quarters.
On April Thirtyth, we provided an outlook for the second quarter.
We recognize then and now that the guide innovation forward, we maintain our reputation for transparency. In addition, we have a long held belief in the power of data up from the billions of transactions, we do with thousands of customers across dozens of industry.
As a result, I'm pleased to report that we exceeded our quarterly earnings guidance for the quarter. In fact, we met or exceeded our guidance 46 time and the last few quarters.
We reflect on what we can do to achieve long term success. It's important to recognize both the items that are in our control and those that are not we can't control the demand for cars datacenter equipment or electronic devices. However, we can continue to position our business for rapid sales itself.
Aeration and mix shift to higher margin engineered components and solutions.
One way, we're doing that is by adding to our engineering and our sales teams today, we've seen great opportunity to drive leverage from design engineering, and marketing that will benefit our customers and suppliers.
Another way for Aero position for the eventual improvement in demand is to execute on the business model.
And to strengthen the balance sheet. Our results. This quarter showed just that cash flow from our operation totaled $418 million.
1.7 billion over the last 12 months and we have also reduced debt by 1.1 billion over the last year.
We remain confident in our long term strategy and execution. Therefore, we increased our commitment to returning excess cash to our shareholders with an additional $600 million of share repurchases.
Aero remains focused on maximizing our near term opportunities while positioning our business for the long term.
Design activity reached an all time record for any quarter in our history and our design activity has actually increased year over year for the third quarter in a row.
Typically this is a good leading indicator of an improving market and this is why we keep investing in our engineering capabilities.
Other indicators are consistent with short run stability second quarter backlog increased from the first quarter.
The third quarter in a row of sequential improvement.
Lead times were consistent with the first quarter and with last year.
Global component book to Bill was 1.07 exiting the second quarter book to Bill was highest in the Asia region, where the pandemic recovery is happening sooner.
Our Americas customer sentiment survey showed some improvement.
The percentage of customary thing they had to little inventory increase compared to last year and the percentage of customary saying they had too much inventory decreased compared to last year, but also remain higher than normal to date, we've not face significant challenges securing the part.
Their customers need.
Turning to enterprise computing in the second quarter sales were slightly above our midpoint expectation.
Like last quarter, we experienced strong demand for the solutions that enable the work from home and the business continuity.
Security software sales were strong and storage sales increased compared to last year, we remain confident in the consistent growth from data from connected devices and objects and we believe that that will be a long term tailwind for our business.
Taking a step back I want to emphasize that as a company we have a long history on capitalizing on downturns and disruptions and despite the current environment. We continue to improve our team leading design in demand creation for global components.
Hybrid cloud for enterprise computing solutions, and we can fund these investments with efficiency that we gained from our superior operational platform.
And we expect these investments to drive exceptional Crawford leverage in the long term.
In closing, we're continuing to support stakeholders in communities, we're committing to providing our customers with the product and solutions they need when they need them, we remain disciplined and focused as we operate our facilities and businesses through these uncertain time.
Over the last several months, we've worked diligently to avoid disruption and are confident we'll continue to do so as we operated with critical provider to the global technology and industrial ecosystem.
We will not stop looking for opportunities to expand our business drive innovation and improve the performance of our end customers everywhere I'll now hand, the call over to Chris to provide more details on the second quarter results and our expectations for the third quarter.
Thanks, Mike.
As I did last quarter I'm going to keep my review of our results relatively brief to allow more time for questions.
Second quarter sales were $6.61 billion sales increased 4% quarter over quarter.
And decreased 8% year over year as adjusted the average Euro dollar exchange rate for the quarter was exactly in line with our expectation.
Mobile component sales of $4.72 billion. This was above the high end of our prior guidance and represents an 8% year over year decrease as adjusted.
I mentioned last quarter that industry Destocking has been going on for more than one year.
This quarter global components sales increased sequentially for the first time since the second quarter of 2019.
Demand in Asia has been resilient and as we expected the Americas in Europe were hard hit by the aerospace and transportation industries.
Global components operating margin was 3.8% down 10 basis points year over year. This was mainly due to regional mix with Asia contributing 45% of global components sales up from 37% in the first quarter and 38% last year.
Enterprise computing solutions sales of $1.89 billion decreased 8% year over year as adjusted and we'll go above the midpoint of our prior expected range as we said in the past uncertainty is bad for IC spending and enterprise computing solutions is likely a later cycle business in global components that said we.
We believe some of the delayed investments in mission critical technologies cannot be pushed out indefinitely.
Billings were approximately flat year over year adjusting for changes in foreign currencies.
We experienced strong demand for security in storage solutions, while demand for servers and networking declined meaningfully year over year.
Global Enterprise computing solutions operating income margin decreased by approximately 60 basis points year over year to 4.3%.
Similar to what we saw in the global components business last year demand from smaller customers, who rely on more of our capabilities has been weaker in this downturn demand from larger better capitalized customers has been more resilient.
Returning to consolidated results for the quarter interest and other expense of $32 million was below our prior expectations due to lower borrowing and lower interest rates.
The tax rate of 24.1% was in line with our expectations.
Earnings per share were $1.59 cents on the diluted basis exceeding the high end of our prior expectation.
Turning to the balance sheet and cash flow, we reported strong operating cash flow of $418 million during the second quarter, we reduced borrowings by approximately 257 million principally through the maturity of a $209 million, 6% note retirement, our balance sheet is in great shape and our liquidity position remain.
Strong.
Current committed an undrawn liquidity stands at over $3.2 billion, excluding the $206 million cash balance that we have on hand.
We're closely monitoring credit and receivables.
Collections remain healthy.
And Dsos increased but in line with DPL. This was due to the further expansion of customer engagements during the quarter that are neutral to working capital as.
As we've said in the past, it's fair to measure our performance by the cash conversion cycle not by any one metric in isolation.
The second quarter cash conversion cycle was four days shorter than last year.
We returned approximately $75 million to shareholders during the quarter through our share repurchase plan to remaining authorization under our existing plans approximately $113 million.
The new 600 million dollar authorization increases the total to $713 million.
Please keep in mind that the information our shared during this call is a high level summary of our financial results and for more detail regarding the business segment results. Please refer to the CFO commentary published on our website. This morning.
Now turning to guidance again this quarter, we're providing wider than normal ranges to account for increased volatility given the current environment.
With that said, we're forecasting consolidated sales to be approximately flat compared to the second quarter with higher global components sales and lower enterprise computing solutions sales, which is typical for the third quarter.
We expect a slight increase in earnings per share compared to the second quarter. However, the percentage decline in earnings per share looks unfavorable on a year on year basis compared to the third quarter of 2019 current demand conditions in the Americas and in Europe remained significantly depressed for both businesses.
With that I'll turn the call over to the operator for today.
As a reminder, so ask a question you managed to press Star one.
So we draw your question please press the pound.
Please standby why we compile the Q1.
Your first question comes home Shawn Harrison of looks capital your line is open.
Hi, Good morning, everybody wanted to dig in on the on the free cash flow and just the expectations for back half of the you've generated a heck of a lot as you said over the past 12 months and substantial amount here in the first half but.
Do you anticipate generating.
Free cash flow or cash flow from operations in back half of the year, but maybe at a slightly lower level any any details on that would be helpful.
Yeah, I'm going to have Chris steak that when we have a pretty good forecast for the back half as Sean we do think that cash flow will remain strong and keep in mind that.
In the first half we did have favorability from the EMEA securitization of about 350 million or so.
So if you if you normalize that out.
That.
So that kind of rate I think is something that's not unreasonable for the back half certainly what we are targeting.
Okay, and then as a follow up.
Wanted to get in Vegas to two dynamics.
Within the guidance are you seeing any suppliers share shifts begin to ramp and then you could talk about in the big industry consolidation that that was announced intra quarter and and whether you think you could be a potential beneficiary is that closes in 2021.
That's a great question, Sean I appreciate you asking if we did.
Absolutely.
So far or anything that we've seen from any supplier program and not material in fact study.
Growth rates, we've seen our book to bill being positive the backlog increasing quarter to quarter.
Has been more broad based growth for US right now and we really really are expecting a windfall from anything can be honest with you at if anything happens in 2021 that would be great. We welcome as we don't at that at any cost were prepared.
Can't handle anything would come our way, but the you know I want to be clear that what we've seen in booking backlog. The inventory increases has really been broad based with Asia Pac leading the way and then obviously the business in North America, and Europe, not being as healthy as it has.
As higher as as we've seen in the past, but things could have been a lot worse in both of those locations too. So we're we're pretty comfortable that we're going to be looking at some progress in second half.
Your next question comes from Adam Tindle off Raymond James Your line is open.
Okay. Thanks, Good afternoon, I just wanted to maybe first touch at either end year, Mike obviously western regions in components are challenged. This was initially the case in Asia, but that seem to bounce back very quickly and this is a million dollar question, but if you could just touch on the timeline to recovery in EMEA and Americas, and how that might be Sim.
Similar or different than Asia doesn't look like it's going to be September based on guidance could you see year over year growth in the December quarter in those regions is any color commentary would be helpful.
Yes, so what we've seen so far and is.
A steady increase in bookings.
We've seen a steady increase in backlog. So we don't believe there's any double ordering going on or anything like that.
At this point in time.
Being resilient.
And what I mean by that is typically in a downturn. Once you see the design activity really start to pick up. That's started has been that we've never had co bid on top.
No of an economic decline and I want to be clear. If you go back and look at this the economic decline started before coveted uncovered weve laid on top of that.
So you know if.
People can stay open I would think we would see a steady increase in performance from here and you know there's just so many things that start and stop it with geopolitical tariff.
Some of the.
Over bullet that the U.S. did to themselves for manufacturing, but all in all we're feeling pretty positive about second half outlook, we would be expecting something a little more in the December and get.
January quarters.
Yes that would that would fall in line with a normal decline and a normal return out, but we're not expecting as Q V shaped thing right now we're seeing it builds Betty and we actually believe that that's how it can work.
Got it that's helpful. Mike maybe you could just as a follow up touch on.
Operationally, how you're thinking about reaching a turning point for the declines in operating margin in operating profit dollars. We know arrow as a best in class operators with the metrics are off right now and if I heard you are right in the commentary that you are committed to keeping investments versus.
Cutting costs, which seems to make sense based on what you're talking about so maybe just in the timing to see the turning point in operating margin operating profit dollar decline. Thanks, well if you take the is the.
Of the company right now.
And compare it considering where donna.
Oh, it as rates year on year here.
Sure.
It's how quick Thats up lay the $700 million on top of our cost and what you see today I think you'd see it.
Now to the downturn and I think thats really a positive we've really been able to take.
Back office efficiencies and move them towards the front office. So if you look at our costs and investment is really not an investment its of transferring of funds that we already have so so I think the important thing to note is.
We've made the company much more efficient then it was prior to going into the downturn and we've added revenue generating resources they get paid on additional revenue.
So that has become a variable cost for us versus all those fixed costs, we had before and we were really able to do that because of that platforms that computer platform change that we as you know finished.
You know a year and a half ago. So we're now starting to get the benefit from that investment and we think it's going to be even more efficient when we get back to the same level, what we'd be back to that in January I don't know idle and all I can I can't call. It it's really going to be based on a year.
And North America, but the real positives that I can tell you hear is look at how much the mix of Asia was this quarter.
And then think about the mix of adding those other two and bringing them back it's going to be a pretty positive story.
That's helpful. Thanks, Mike.
Mhm.
Your next question comes from real too, but the carry out of bank of America from Merrill Lynch 90. So.
Thanks for taking my questions, Chris I wanted to touch on on your thoughts on business mix within Dcs looks like over the last couple of quarters, you've been having good growth in services and software. So so when you think about recurring revenues within as you think that that can grow over time as a percent of total revenue.
And can that add a in a help the margins and the stability of the revenues.
Yeah, I think we're gonna have Sean answer that when you even been he's been tracking that particular business for us pretty close.
Yeah. Thanks for the question and by all means our.
Our recurring revenue is absolutely grow and keep in mind, we're going after two really important future growth opportunities both of which we believe.
Represent better return opportunities for US one is all about the market for hybrid in multi cloud and we're going after that through our platform called AEROSURF here.
We think it'll be a b piece of our selling motion.
And in the future and the other is all about continuing to add line card with software suppliers that are very relevant when it comes to you as a management to support and the security of these deployments the book and then investment strategy.
Yes that in fact.
More and more of that business will be recurring in nature and as we did just as we will experience. We we do expect the contribution margins will improve over time, so our recurring revenue in the second quarter.
Uhhuh by North of 40%.
As delivers true up.
Our erol's for your platform and we think Thats a good sign of our.
Continued participation in the cloud marketplace.
Great. Thanks, Thanks for the details on that I appreciate it.
Maybe Chris another question for you is free cash flow, which was strong.
Given that your liquidity position is also strong.
At this point in the business cycle would it make sense to look at in Oregon, and you just had a 600 million repurchase authorizations, maybe just give us your thoughts over the next 12 months on on uses of cash how you think about buybacks versus M&A versus a.
Reinvestment in the business. Thanks.
Yeah. This is Michael I'll start with us and.
Yes, Chris AD.
First off yes, we could do something however.
You know.
We don't see anything out there over the five or a scale.
That would largely change the complexity of arrow at this point.
Secondly.
You know as you know our uses of cash we've been very Claire.
Internal.
Growth was another investment of.
But in all the investments we need to operationally to.
To grow in the future, which really leaves us with additional sales and engineering people down the road as the customer base would expand and as as the sale would expand and then third was I returned to shareholders well as you know going into the downturn, we had accomplished the for too.
We really didnt give our return to the shareholders.
And the cycle with the pandemic with our balance sheet the right now.
That's really the perfect time doing share repurchase and so we're really going to pursue that Avenue.
At this point, Chris is like that anymore, Yeah I just.
Got it might just said obviously the focus.
Over the last year has been making sure that our debt was rightsized to the EBITDA that we're generating.
And we think we've effectively done that and largely done that so.
You know as we as we go forward with no real.
M&A opportunities on the horizon.
Sure repurchases will be the focus.
Okay, great. Thanks for all the details appreciate it.
Mhm.
Your next question.
Yeah.
[laughter].
Hi, Thanks for taking.
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Your next question comes from Nikolai Cold.
Well from Longbow Research your line is open.
Nick can you hear us.
Oh.
Hello can you hear me.
Yes.
Hey, [laughter], okay. Okay, all right I don't know what happened.
All right sorry, Thanks for taking my question guys and good morning, I wanted to impact a little bit Dcs business. So if you can talk a little bit strong what are you seeing from a pipeline prospectus into hardware side for the second half and related to debt how should we think about the ER.
Operating margin, it's hard to business I know you commented last quarter that we wouldn't see an improvement and we should have because of the higher mix of software recurring revenue, but how should we think about bad into second half a year double digits incremental marketing into the fourth quarter was related to the budget flushes any comments around bad will be helpful.
Sure John.
Sure. So ill start with just suggesting Q4 is a little bit tough to call you're right. Good seasonally the biggest quarter over a year. So we would normally expect.
I'm pretty good operating leverage in the quarter right now, it's tough to see too far past.
Q3, or whatever would say for Q3 is that we're looking at similar mix of demand trends as compared to what we saw in Q2, you know there's still some tailwinds associated with work and learn from home.
We think that our security pipeline looks fairly healthy lots of customers need to secure their virtual and remote working environments hardware is a little bit of a mixed bag. Obviously you know the overall I see spending environment on premises is down for lots of good reasons.
But we're actually doing okay from a data stored perspective and that has a lot to do with and frankly, the the adoption of the new architectures, specifically Hyperconverged you, we really have a good representation and good exposure to to that more.
Market I think if you look at the more business, we do in the large right into the market you know the or challenging that guests from a gross margin perspective, as Chris pointed out.
The mid market in the partners have served that tend to be in other places that.
Or fully appreciate our value.
That will come back your guess is as good as mine as to when it does but we're fairly confident in our strategy.
We're going to stay on the path I just outlined a few minutes ago, and I think that will that will bode well for operating margin the future.
Okay, Okay, great and as a follow up.
And the component business.
Can you are the first talk a little both about bookings linearity in the second quarter globally, maybe what are you seeing so far in July and Chris in your CFO commentary presentation, you mentioned that European margins in the component business decreased in the second.
Called correctly. This is one of your more profitable areas and the component business can you talk about the reasons behind that and.
So what's the outlook for that reversing in a second half thanks.
It is designed to I'll take a swing at this long so from a a booking standpoint.
But as Mike mentioned in his commentary is very much Asia led.
And that started off pretty much through the April may timeframe.
And continues into June and beyond so it was it was a slow and steady ramp through the quarters. They get by the way I would actually.
Related to June being high point, yeah pretty normal in terms of the way that we see the July bookings rate continue so that gives us some confidence in the outlook.
You know going forward.
In terms of your your second question I think what Chris said.
Diluted by mix, rather than any specific business, having any individual dilution effect and that was because.
Asia jumped from 37.
Which had the dilution effect it wasn't about individual businesses, having any quarter on quarter declines if that answers your question Nick.
Yes, okay, great. Thanks, guys. Good luck.
Welcome.
Your next question comes from Tim Young of Citi. Your line is open.
Hello can you hear me.
Yeah Yeah.
Greg I think for Adam you back onto the question. So Youre Asian business component business grew roughly 7% year over year, which is much better than the American Europe can you maybe just elaborate how much of that is due to share gains given you highlighted power management stress and how much of that is due to the market demand stretching Asia.
Actually we started indicated before that the agent growth was broad based.
It was across every line so it's an economic rebound for us from.
What we saw before and just.
You know sort of Oh bounced back after co, but hopefully it will it will continue on.
Through the year.
But as you know we've been increasing our engineering and sales capability in Asia and that has paid off very well for us over the last a couple of years and we're seeing that really take effect as far as market share I don't have market.
Sure vineyards and yet it's way too early after the end of quarter.
But I'm not even assuming any major a share change quarter on quarter I think it's just pure economic there.
Great.
So if I look at your guidance components sales will be above a normal seasonality, but the margins must still be done a year over year basis. So would you will cover the vendor and customer exposure and.
Potential share shifting the future how should we think about your margins for components segment post kobin like team. Thank you.
Well I would expect them to go up remember the first thing it gets cut and it's not just coated. So you know all of these comments are tempered by cope with Covance and what we've been economic decline before typically in an economic decline the high engineering.
And products are the ones that customers stopped buying first so they're trying to control their inventory because that's where the vast majority of the dollars are.
Then you go in here your decline and you start seeing customers start to redesign products for the future and I think we just said that.
We had a record design quarter.
For new customers, new products, which is good so the expectation is clearly for the margin to go out for the operating ends up come get go up as demand starts to return.
Because we think it'll inordinately impact the engineered products.
As the demand starts to come back so hopefully that answers the question as to why and what.
Yeah. Thank you.
Uh huh.
Your next question comes from Stephens folks Oh Advisors. Your line is open.
Thanks, Good afternoon, Mike just following up on that question. So if we tried to think about margins by region for components. You know, obviously volumes help in North American Europe.
What do you say, there's any other layer on that you mentioned investments.
That are kicking in.
Different designs et cetera, I'm, just trying to understand like if you looked region by region, what the relative operating leverage looks like from what you just posted and then I had a follow up.
Yes, well the leverage in North America will go up.
The leverage in Europe will go up and it's interesting because the leverage in Asia is going up as we speak.
Given the additional engineering resources, we put out there the design wins sales in all regions.
Going up also and if you really look at the mix.
And sort of how they you know the operating income came and everything else.
You know if you're just went back to traditional and as I argued before but put the other two regions. The normal run rate back on top of it has been you'll see a very very interesting story.
Okay. Thanks for that and then.
From from just the broad set of Smbs you guys are dealing with on that on the easiest business any any sense of where we are in that and that spends like I know you mentioned that you can't these companies can't afford not to spend on technology, but obviously, there's severe economic pressures on your smaller customers, So where would you put this.
In the cycle and maybe how does their spending change under way out of the cycle. Thanks.
Yeah, I was hoping you could tell me they have to give out there [laughter].
[laughter] actually went I'll tell you is where you know we know customers, they're not afraid to spend so I'll start with bad.
But their priorities.
For the last quarter or sense.
Co became where to keep their workforces deployed right. So everybody fans and wet and had to create work from home opportunities for their employees or frankly, you were shut down so when you think.
With millions of the companies out there to be able to.
Do that because we know about every company with ready for this.
You know they had to take.
Sort of any data center type purchasing and and.
Back that off so all of those projects that were sitting in the big data center, yet our service pent up demand now.
I don't think they go away because I know here are issues, we haven't I see didnt go away, but they did they were the highest priority our highest priority was to get all of our people to be able to work from home and when you think about being able to get 20000 people that work from home.
You know and then effectively improve that over the corridor. So we could do it as you noted the by product was that was a big speech.
So if you if you think about just even our own spending here I'm expecting that you know the the fourth quarter going into the first quarter, we'll start to see some change in the marketplace I really don't know about the third quarter, because I can't give her up just yes.
How much is told at how much is market.
So I think we have a pretty conservative view of our guidance going out there, but I do know that these projects are not going to go away.
Thanks for that I'll, let you know I figured out.
[laughter] not AMR [laughter].
Your next question comes from all the things that Oh Stifel. Your line is open.
Yeah, Hi, Thank you for I think Nicholas.
Just calling on behalf of match sharing I, just one follow up on that sentiment serving and inventory levels. Obviously 2019 was a de stocking period I. The sentiment stated that hot and cold number of customers that too little inventory went up but the customers that still had too much inventory was lower year.
Every year, but still elevated compared to historic comment on how you view your current inventory levels, right now and coming into the future and how the dynamics might be at play is the situation gets better with the pandemic, where it gets worse that the pandemic in house on how you guys are positioned to counteract.
Matt and fully benefit and react.
Yeah, So oh for sure we have orders on factories.
And Ah, we do that to give our manufacturers guidance of what they should produce so we believe we will get enough inventory.
Thoughtful of whatever the market does now you know and I know if the market is going to increase more than 10% in a quarter, you're going to run into bottlenecks, you know somewhere somewhere in the supply chain, but.
I have large i. I think were covered the the book to bills have been.
Relatively solid so they're not overly fluctuating.
And the backlog is growing at a reasonable rate. So yes, we think the inventory is about where it should be right now that little bit of increase you saw was sort of.
Late in the quarter inventory coming in for shipments that went right back out in July. So it's a minor part I remember sales were up 4% I think inventory was up 3% terms increase then got more efficient.
August things as far as ratio go but in general we're in we're in pretty good shape given the backlog.
As the business increases we will increase their orders, but the worst thing we can do for anybody.
As to you know dramatically increased orders on inventory and and try to corn or any market could you get burned in a hurry.
I think we're we're where we want to be.
Mr. Thank you and it's a follow up I just want to.
Uh huh.
Asked for some more color on your statement about how your demand for better capitalized larger of value added reseller customers greater resilience versus your smaller customers. I think we know we're not with a customer exposure or is it the well capitalized balance sheet allowed them to offer more financing opportunities just some more color as to why that.
That kind of me incurred from your compute business customers.
Yeah.
Got to OLED, Chris and Sean, but what I would tell you will be.
The.
Resellers that are out there each working out projects and those projects.
Our adjusted is important really no matter, where they're coming from to a particular supplier.
So many times when we're helping a reseller.
Financially, we're also getting some benefit from a supplier to help that Reis dollar therefore, we sort of stay neutral in that.
Piece of it and so the desire is to help anybody get a deal done you know that's what we built the company on and that's how we we operate the company. So there is no distinguishing factor about who we would help in who we wouldn't help well literally hope everybody as long as they are the premise.
Hey.
That I'll, let I'll, let Chris them and Sean way in a little more yes. The only thing I really at is that a you know when we look at the makeup of you know who were selling two we look obviously at our collection rates. Those are very very strong we're actually well above last year in terms of our ability to collect but but there has been a mix shift as to where.
For the product is flowing you know until the point that we made about better capitalize it's exactly what we saw in components right smaller customers.
Who are higher margin customers, who require more from us.
Our buying less in the near term environment, then the customers that are bigger better capitalized and don't need as much from us and therefore lower margins, we don't think that the permanent trends.
Certainly the near term environment Ciaran No I think you nailed it that's the only thing I would add is that Mike's right. We serve all commerce.
You know any larger partners tend to be resellers to serve the larger companies and so they're benefiting from.
The resilience in the high end of the demand market, but the the smaller piece of the market is going to come back and just a question of when we're going to be there for them you know into future just as we are today and we've got as Chris pointed out really rigorous process in place you know if your question is about risk to make sure that were.
We are managing or a our portfolio a very carefully.
Thank you very much.
Your next question comes from Whelan, William Stein of Suntrust. Your line is open.
Great. Thanks for taking my question, Mike in the past.
Arrow has been a net beneficiary of some of the supplier consolidation we've seen in semi there's been quite a bit over the last few years. There's Ah you know that was on pause for a while than we saw big deal announced recently I'm, hoping you can talk to us about your anticipation of potentially more.
Or a.
Gains from supplier consolidation and then if you could also comment on.
What we should expect.
How we should it how we might expect customers to respond to that is it a sort of gravity situation, where as you get more suppliers more customers decide you know they might not need two or three distributors still just concentrate all with arrow or does it go somewhat the other way where custom.
I just want to keep multiple suppliers a healthy thank you.
Outside of the.
Yeah way of efficiency.
Versus Florida, the old competitive nature.
Customers not wanting to go to one of wire.
Is changing the dynamics. The first thing is we're having at I'm going to use the term no I'm sure there might be one or two customers out there.
But with with our increases with suppliers, we've seen no customer pushed back on doing business with us or doing more business. Yeah. This is a day and age where prices are what they are there's no real competitive nature of just buying on price.
The competitive nature is in the pool other products and helping with cash flow, helping wouldnt designs and things like that the attractiveness of what we built over the years with our engineering.
Capability puts us more than double the engineers have anybody else in the marketplace today.
As it were competing with in fact, it could be up to three times. The amount now the velocity is there the ability to handle these customer designs is there.
And I don't see pushback from the customer level at all and our goal is to support our customers. So the up most of our capability and our supplier.
The same thing and a you know we're going to work with each of and to expand and I don't see any particular reason why we wouldn't expand with anybody.
At that help there was the first part of the question as to your anticipation of further supplier consolidation.
Oh well.
Every single time of supply or buying somebody you know you have that consolidation, but as you look at it.
You know now you have what I would say medium sized semi companies out there that.
Could likely get bought over the next couple of years.
Consolidation is inevitable.
Customers do not like the math numbers of products that they are dealing with.
So that is is one thing here is the ironic thing you know sort of a double legs question you asked before customers want to put more of their business with me. The funny thing is what happens when a semi suppliers consolidate the customers have to put.
More business with them too.
So I don't see either trend slowing down.
And it really comes down to how the supply chain works now what expert services you can offer that customer that is the biggest part of the conversation you know not price anymore.
Thank you.
Yes.
Your next question comes from Joel comfortable Chief of Wells Fargo 90, so.
Yeah. Thanks for taking the question.
I was wondering if you could kind of walk through some of the puts and takes for what's implied in the gross margin guidance. After the September quarter, I know, obviously mix in Asia being a strong mix continuing and components on these negative for gross margin, but maybe just walk through what is normally kind of seasonal.
Sequential decline in September is at the same magnitude this year.
I'm going to let Chris do it because he's kind of rolling advise the not knowing how to [laughter] I really want to see if you can pull it off [laughter] I would just echo what what Mike said last quarter, which is pretty much steady as she goes right now we're not seeing big changes in underlying margins at that.
Regional level I mean, we continue to be focused on the thing.
That we can do near term operationally and therefore, the biggest ship really is the mix piece that we talked about I think longer term as we touched on on the call just given the level that design activity.
You know well how the leverage in the piano works.
That a as we see volume growth recovery, we think we should see some.
Fairly notable improvements in in margins so.
How do they do [laughter].
Yeah, that's perfect.
And on like the component design activity that you talked about the record growth this quarter.
Can you remind us how fast is that revenue growth I guess follow those design wins.
Yeah, that's where usually three to six months and.
I used the sort of the Threed is the the free as an upgrade of a typical system out there. The six month is more of a redesign.
We'd be launched a new products something like that and I don't have that mix for you wouldn't be something interesting for us and try to figure out what we could track down the road, but that's what we typically see you know other good news as we've seen some of the semi guide.
Start to increase a little bit you have automotive and automotive is a good site piece for US too. So you know and automotive increase would be a positive fiveg increase is going to be a positive.
But we do see some some good things on the horizon.
It's just how fast.
Well the rest of the industrial base catch up to.
And that's what we need I mean, the sales or the company is in good shape right now there the ratios are in good shape together, but we're still down 700 million and sales for the nine 700 comes back I'm sure. It's going to look a lot different it's going to be a lot better for us.
Thank you.
There are no further questions at this time.
Thank you and closing.
I will review Arrow's Safe Harbor statement some of the commencement on today's call May have included forward looking statements concluding statements addressing future financial results.
Statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons and the company undertakes no obligation to update publicly or revise any of the forward looking statements detailed information about these risks is included in arrows FCC filings.
If you have any questions about the information presented today. Please feel free to contact me. Thank you for your interest in Arrow electronics and have a nice thing.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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