Q3 2020 Arrow Electronics Inc Earnings Call
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Ladies and gentlemen, Steve Conference is scheduled to begin momentarily until that time. Your line will again be placed on music hold thank you for your patience.
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[noise], ladies and gentlemen, thank you for standing by and welcome to the error was kinda third quarter 2020 earnings conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session. My question during the session you'll need to press star one.
And your telephone please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like turn the call over to even O'brien, Vice President Investor Relations. Please go ahead.
Thanks, Denise Good day, and welcome to Arrow Electronics third quarter 2020 earnings conference call with US on the call today are Mike long, Chairman, President and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, Andy King President Global components, and Sean Kerins, President Global Enterprise Computing solutions.
During this call we will make forward looking statements, including statements about our business outlook strategies and future financial results, which are based on our predictions and expectations as of today.
Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-K and 10-Q filings with the FTC, we undertake no obligation to update publicly or revise any of the forward looking statements.
As a reminder, some of the figures we will discuss on todays call are non-GAAP, we reconcile those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results you can access our earnings release that Investor Dod Arrow Dot com along with the CFO Carl.
Commentary the non-GAAP earnings reconciliation and a replay of today's call. We will begin with a few minutes of prepared remarks, which will then be followed with a question and answer period I'll now hand, the call to our chairman President and CEO, Mike long.
Thanks, Steve Thanks to all of you for joining US today I'm pleased to report that our hardworking and dedicated team delivered strong financial results and third quarter are.
Our reputation for reliability and consistency or the hallmarks that have allowed our customers and suppliers to.
To place their trust in Aero for critical engineering design and supply chain services.
To maintain that consistency, we continue to put the health of our people first and I want to thank our employees for keeping our distribution facilities and offices running safely and smoothly and continuing to move our business forward.
As I mentioned on our prior quarterly earnings calls this year Arrowhead faced adverse condition many times in the past and as always emerged stronger than before.
This model is resilient and unique.
Even during periods of decreased demand our ability to generate substantial cash flow allows us to invest in areas that represent the best long term opportunity.
Our foundation will be even stronger exiting the pandemic.
We're already and already were seeing concrete proof of that.
Global components sales returned to year over year growth driven by record third quarter sales in Asia.
And we've only just started to see the demand stabilize and recover in the Americas and Europe. Additionally earnings per share increased 12% year over year and arrow is delivering differentiated performance. Thanks.
Thanks to our customers and suppliers, who recognize the value added products and services we provide.
Another way, we build confidence in the marketplace is to keep our balance sheet strong.
Our results this quarter show just that.
Cash flow from operations totaled $275 million in the third quarter.
And that's 1.7 billion over the last 12 months and we have reduced our debt by nearly 1.5 billion.
Since the first quarter of 2019, when the semiconductor market correction began additionally, we remain committed to returning excess cash to shareholders and the third quarter with no different we repurchased another $150 million worth of shares this quarter for a total of 300.
75 million this year.
Turning to current business conditions as I mentioned strong third quarter sales in global components were driven by tremendous growth in the Asia region.
We see further opportunities for strengthening future performance.
Once the Americas and Europe start to recover.
We previously mentioned that regional inventories had been destocked prior to the onset of the pandemic.
Starting from those billing levels global components components sales increased sequentially in each region for the first time since the third quarter of 2017.
Demand in Asia has been robust across all the key verticals.
And the third quarter is typically the strongest quarter for that region. All regions benefited from a strong turnaround and transportation related demand compared to the second quarter.
Design activity again reached an all time record for any quarter in our history.
And design activity increased year over year for the fourth quarter in a row.
This is a positive leading indicator aero will continue to increase our debt engineering and design efforts as we believe this is the best way to position our business for the long term.
Other indicators are consistent with improving trends.
Third quarter backlog increased year over year for the second quarter in a row.
Lead times increased slightly compared to last year global components book to Bill was 1.03 exiting the second quarter, but.
Book to Bill was again, the highest in the Asia region, where business has normalized quicker than the other two regions.
Our Americas customer sentiment survey.
Shows that further improvement the percentage of customers, saying they had too little inventory was slightly above the long term average the percentage of customers thing may had too much inventory returned to the long term average.
Turning to enterprise computing solutions, we're pleased to deliver sales that were near the high end of our prior expectation and above second quarter's level.
We also achieved operating profit leverage on that sequential growth.
In terms of ITC spending we continue to see purchases directed towards the tactical areas of employees and devices rather than transformational areas.
We participate in work from home spending through security and cloud based solutions.
But some more complex projects remain delayed as companies limit outside workers. However, we continue to believe some of those delayed investment in mission critical technologies could not be pushed out indefinitely.
Looking at the mix demand from larger better capitalized buyers and as MSP, who rely on fewer of our capabilities and services remained resilient demand.
Demand from the smaller customers, who rely on more of our capabilities have been weaker in this environment.
Even with a less favorable margin mix, we are still able to generate strong economic returns from this business.
You can see this in our third quarter return on working capital return on invested capital and cash to cash cycle in the third quarter.
Looking ahead, we will continue to support our stakeholders in communities.
And are committed to providing our customers with products and solutions they need when they need them.
I'll now turn the call over to Chris to provide more details on third quarter results and our expectations for the fourth quarter.
Thanks, Mike.
Third quarter sales were $7.23 billion sales increased 2% quarter over quarter.
The average Euro dollar exchange rate for the quarter was $1.17 cents to one euro compared to the rate of 112, we'd use for forecasting.
Favorable margin favorable foreign exchange increased sales growth by approximately $97 million.
Global components sales were $5.31 billion sales were above the high end of our prior guidance and increased 5% year over year on a non-GAAP basis.
Global components non-GAAP operating margin was 3.9% down 50 basis points year over year. This.
This was mainly due to regional mix with Asia contributing 49% of global component sales up from 45% in the second quarter and 40% last year. In addition, despite significant improvement in the Americas and Europe region as compared to the second quarter. There remains substantial opportunity for further sales recovery.
It should also drive future operating income leverage.
Enterprise computing solutions sales of $1.92 billion.
Decreased 7% year over year on a non-GAAP basis, but were near the high end of our prior expected range third.
Third quarter billings increased year over year after having been approximately flat year over year in the first and second quarters.
We experienced strong demand for security solutions and also grew sales of services demand for storage and networking were weaker year over year.
Global Enterprise computing solutions non-GAAP operating income margin decreased by approximately 30 basis points year over year to 4.4% due to both product and customer mix.
Returning to consolidated results for the quarter interest and other expense of $30 million was below our prior expectation due to lower interest rate and lower borrowings.
The non-GAAP effective tax rate of 23.6% was approximately in line with our expectation and was within our long term range of 23% to 25%.
Non-GAAP diluted earnings per share were $2, an eight cents 38 cents above the high end of our prior expectations.
Approximately six cents of the upside to both prior guidance and year over year growth were attributable to more favorable exchange rates.
Turning to the balance sheet and cash flow, we reported strong operating cash flow of $275 million.
During the quarter, we reduced debt by approximately $79 million through lower short term borrowings our balance sheets in great shape and our liquidity position remains strong current committed and undrawn liquidity stands at over $3.4 billion, including our 220 sites $7 million cash balance.
We are closely monitoring credit and receivables collections remain healthy and then percent current at near all time highs dsos decreased by more than DPL inventory days were the lowest level since the fourth quarter of 2017.
And as we said in the past, it's fair to measure our performance by the cash conversion cycle not by any one metric in isolation, but third quarter cash conversion cycle was 15 days shorter than last year.
We returned approximately $150 million to shareholders during the quarter through our share repurchase plan the remaining authorization under our existing plan is approximately $563 million.
Please keep in mind that the information I have shared during this call as a high level summary of our financial results for more detail regarding the business segment results. Please refer to the CFO commentary published on our website. This morning.
Turning to guidance mid 0.4th quarter, non-GAAP EPS of $2.65 per share would be an all time quarterly record, while we recognize heightened risks from a potential future return to buyers related restrictions right now we continue to see improving trends for both businesses our guidance reflects global components.
It's delivering profit leverage on accelerating sales growth. It also reflects a continued recovery in enterprise computing solutions margins back to prior levels.
Lastly, please note the CFO commentary includes information on our fiscal calendar closing days for 2021 and.
In 2021, the first second and third quarters close on April 3rd July 3rd in October 2nd. Unlike in 2020, where they closed on March 28 June 27th and September 26 full year comparisons are not affected as our year ends on December 30, Onest as always.
The first quarter of 2021 will benefit from the extra quarter close compared to the first quarter of 2020, while the fourth quarter of 2021 will be negatively impacted by only capturing one calendar close instead of two.
We believe the second and third quarters are still comparable as each will capture one calendar close.
We also believe there are few impacts for the global components business in any quarter as sales for that business tend to be more linear rather than backend loaded like the enterprise computing solutions business.
As we sit here in late October it's difficult for us to estimate a dollar figure for this calendar shift for modeling purposes, we would recommend starting with an expectation for full year 21 enterprise computing solutions growth and attributing one to two percentage points of greater contribution from the first quarter and one to two percentage points less contribution from the fourth quarter.
With that I will turn the call over to the operator for QNX.
Yes would you please queue in a construction.
Certainly ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from Matt Sheerin with Stifel. Your line is open.
Yes, thanks very much for taking the question.
That's a question just regarding.
How we should be thinking about gross margin and opex.
The December quarter, I know, there's some moving parts it looks like the Asia business and components.
You may be lower sequentially seasonally I'm wondering if that has a positive impact on gross margin.
Same thing for the.
Business.
And in terms of what we should be thinking about kind of heading into next year in terms of that mix because the mix seems to be working against you in terms of margins, but theres drop through there. Thanks.
Yes, Matt this is Mike.
Clearly.
The company's operating it at a pretty good pace right now with Asia being 50% of the global components sales. So I know there was a time that nobody thought the company could still have the leverage in the cash flows and everything that we have with Asia being that much but it then.
Good year and day return certainly we would expect that mix to improve in the fourth quarter because the third quarter is typically the ages.
Typically ages biggest quarter due to.
The holiday builds and and the thing going in.
To Q4, so we would expect things to firm up.
The real question there is when will the Americas and Europe, you know take off we are seeing signs now that those markets are getting better, but I wouldn't expect them to get overly better you know until we get into next year.
Of course, the computer products for past their biggest quarter.
We are excited to see that come as you can see from what we've seen in that business with the work from home those types of things it's been good for us.
And we do expect a bit of an acceleration of that business going in.
To the first quarter also.
All in all Mascus, it's really.
Good news because as you know North America, and Europe or are typically more profitable regions in Asia. So it's sort of at this point when the volumes start to come back there were expecting you know.
Another uptick in what we see.
Okay got it and just in terms of follow up it just seems like gross margin.
Yes, we'll be sort of flattish to perhaps down sequentially due to that mix issue, but you also should get really strong opex leverage I know you were kind of flat to down.
Lately year on year, so should we expect sort of a similar.
A year comparison in terms of Opex this quarter.
I think what you're going to see is.
Opex go up a little bit.
Because of the change of mix all have.
Chris sort of highlight that yes, so so Matt just to make sure we're aligned because we talked about sequential and we also talked about year over year. So sequentially, we would expect gross margins to be up a little bit.
We would expect that operating expense as a percentage of sales will come down and dollars will be up a bit because of the sales growth, but we expect margin or operating expense as a percent of sales to come down as we drive operating leverage so all in we're guiding to improved operating income Mark.
Again sequentially in the quarter and actually we'll see how it sorts itself out but that could actually mean were up a little bit year on year and Hawaiian margin.
Okay. Thank you and just lastly, im just your guidance for the component segment include incremental share gains from Ti or other suppliers.
Our guidance assumes everything that we see coming our way in Q4.
Okay, alright, thanks, a lot.
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Your next question comes from William Stein with Suntrust.
Curious your line is open.
Great. Thanks for taking my question I think in the prepared remarks, you referred to the significant recovery and sort of.
All time record outlook and.
Sort of makes me consider perhaps with the recovery being strong in your business as it's been some my question sort of the sustainability in phone through through the rest of let's say next.
Into next year, let's say.
Perhaps customers are over shooting and over ordering a little bit and building a bit of inventory.
I'm wondering if you have any judgment on that do you think.
That could potentially explain what's going on or do you have confidence that you're shipping 10 demand customers aren't building inventory.
Thanks.
Yes, let me, let me bring it back a little bit remember, we started going into a downturn the prior.
December I think it was it did showed earlier in the year, but there was an economic downturn that we were starting to go through and then cobot hit so cold.
Cobot hit that pretty much put the brakes on a lot. We had to put 20000 people that were from home in a matter of a couple of weeks and we are able to accomplish that so that showed some resiliency and could start building back with our art.
Our customers at that point.
I see.
With say that one of the reasons you're seeing.
The suppliers and that's sort of go up at the same time is that.
We've been through sort of the timeframe that it would take for us to catch up with the suppliers and cold and we've just started that Paul.
Paul said economic downturn as it came up we are seeing.
Steady growth, we are seeing steady growth book to bills. We are not seeing crazy book to bills that would suggest inventory build at this point and we're seeing consistent order patterns from our customers were more consistency in the order pattern.
And as I said to you right now.
Slightly the number of customers that are lightly.
Don't have enough inventory is slightly bigger than normal, but the average number of customers that have the right inventory are within normal trends.
So we.
We don't I don't see.
Gravy supply chain, we do see consistent growth our backlogs are up the backlog there look solid.
And the ship within the window nothing is tail end loaded so we're feeling pretty good about.
Going through December and into the new year at this point.
That's really helpful. Maybe a follow up if I can.
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Okay.
Mike you mentioned that.
You expect to merge the two emerge from this downturn stronger.
Previously it seems to an earlier.
Question that.
Hi.
Being available.
Actively only through narrow is that is a major advantage.
Let's put that aside for a minute what metrics can we look at.
Or will you talk about to make a judgment as to a stronger business is it.
Expected operating margin what you achieve what you can target or some some other metric grants growth rate.
I think if you.
Look at the growth rate within.
The industry is clearly one we've emerged stronger obviously $1.5 billion less than debt.
I think you're seeing at the cash flow.
Better now for a couple of quarters, we expect cash flow to get better going forward.
Despite some of the questions on the efficiency I think the company is going to get even more efficiency. We still have plenty of places to go we have been investing that.
Over the next year has increased our capacity significantly to be able to ship more product.
Our clearly the number of design wins that we have going on in the business.
I would tell you right there that there is a.
Nice increase coming down the road so where.
I would say virtually every metric right now.
Seems to be operating in a good way of.
You are looking at it right now that a lot of the suppliers also had strong Q3 performance so I.
I think what was notable what I can tell you is while I will never talk about one supplier no matter how many times you guys have.
Or the or one individual supplier no matter, where it is whether you guys want to get into the.
Xilinx VNB deal the 80 IMAX of deal a g. I'll never do it but what I can tell you is we had very strong quarter, we had a very strong quarter with many of our suppliers on the line card. It was a good solid quarter across the board.
Well, that's clear Hey, Mike Thanks for the comments appreciate it you bet you bet.
Your next question comes from Shawn Harrison with group your line is open.
Hi, all and congrats on the strong results.
What do you get back with the profitability question.
I, just want a little bit more but.
Last time the component.
5% or greater.
Operating margin Asia sales were seven $800 million in the quarter lower so I Wonder is Europe, and European and North American demand comes back what does that mean for kind of feature normalized margins in the business given the performance right moral obligation so much stronger.
Well I think you could expect it to be right back up where it was before.
No I mean, it's.
It's really a testament to the organization that the efficiency has got into a place that has.
And the mix being at the percentages that it is for Asia right now says a lot a for our Asia business. It says a lot for the other businesses to remain.
Profitable as those businesses are down but it's.
As far as the long term numbers.
We actually see.
With the situation, we're in now and how we could come out of this greater longer term profitability than what you've seen in the past.
And we'll take our engineering business is operating very strongly right now as you can tell by the design wins.
And.
We fully expect that to continue and we continue to invest in that business and that business is even getting more efficient.
Which was not the expectation.
Great.
Then on EPS I guess the worry out there is that 2021, we don't see spending come back on the on Prem side I know you guys lost.
While opponents of hybrid cloud, but even at that and give us a little bit what does that do to kind of the growth profile and maybe the profitability of the business.
C block.
Boxes sold anymore I know, it's been a declining business for a while it maybe that that deceleration.
Accelerates into guidance. Thanks 2021.
Yes, I don't see that gloom and Doom that you see.
I don't think Thats.
Yeah.
A big legitimate concern I think Gil.
You'll continue to see if these band in software you'll continue to see us expand the line hard into.
More items that that the customers are buying you'll continue to see.
Mansion in.
Networking cloud arrows fair, which are all doing very well for us right now.
Sean you want to you want to add a little to this because the the outlook is really not bad.
Yes, Sean I understand your your sentiment, but I am certainly more optimistic than that as well I mean, if you look at.
Our hardware business in total remember, it's still at any given time its roughly a third of our mix.
And we do have a great big installed base and I think when the broader market comes back we're going to see.
More than on Prem business in mission critical application environments return just as a proof point for that both our storage and compute businesses improved their their year over year performance in Q3 compared to the first half.
Quite significantly and I think it speaks to the fact that there's still pent up demand out there in mission critical environments that customers can't sit on.
Indefinitely and I think it's a good sign again that when the broader market returns.
Our installed base is going to be a benefit to us.
Very helpful. Thanks, Sean Thanks, Mike.
Mhm.
Your next question comes from Joe.
Cushy with Wells Fargo. Your line is open.
Yes, thanks for taking the question and congrats on the results.
I was wondering if you could talk about as we see improved demand for the other regions.
Maybe we start to think about some investments more in your working capital can you talk about what level of I guess components growth.
You think about where you can still generate positive.
Cash flows and then maybe.
Falling in that.
Is there any difference that we should think about relative historic just given the mix of the revenue now.
Yes, I think.
One thing, you'll see and I'll, let Chris highlighted but as you know we've been.
Working very hard on the cash side of our business for.
Some time and it used to be we would start using cash as you know 10% to 15% growth.
We are in a position, where we think we'll continue to throw off cash now well past that.
Going into the.
Next year so.
The dynamics have changed our cash cash days come in.
We're not seeing big credit risks, we're not seeing craziness ending inventory in fact, I mean I understand you guys couple times have mentioned I've heard even on other calls us double ordering phenomena, but our inventory was down I think $200 million roughly quarter on quarter.
And the book to bills up so.
So we're not we're not seeing the dynamics that weve used cash and again remember the growth rate could be there, but is the rate and pace of that growth rate.
So all of that growth came immediately tomorrow, you might see a little cash usage.
For the most part that's not how we're seeing ourselves to come out of this I think your.
Going to see a pretty good cash benefit this year, Chris you want to ask I might answer did really well I mean, we have shared with you guys in the past that kind of above that 10% growth level in components operating cash flow gets a little lean but to Mike's point, we've been very focused on getting the cash conversion cycle back.
Down into the high 40 day range, we're going to be very focused on maintaining that.
Personally I like that.
Reduce credit risk exposure, one more thing as current as we are in our receivables and thats not something were to let go of easily so.
And aside from that just our continued focus on services within our business said that allow us to drive more margin EBITDA and cash flow with less working capital investment are things, we're going to continue to focus on.
That's super helpful. And then just following up on that I mean that the pace of share repo. Obviously, you stepped it up this quarter sequentially should we think about that kind of pace going forward I guess then.
Yes. This is Mike I think you know we said what our use of capital is and is going to be and I would expect that pace for the near term here.
Thank you.
Your next question comes from Adam Tindle with Raymond James Your line is open.
Thanks, Good afternoon, Mike I just wanted to start.
Trying to understand.
You sound like you have a very positive tone.
But the Q4 revenue outlook is just seasonal.
Overall in components, the seasonal environment sleuth better suppliers are upbeat whatever share shifts is left to come Q4, we're going to EPS, yes, you've got the timing benefit will be backed that out it would be below seasonal in that but the hardware suppliers are talking about sequential improvement. It seems like things are up upticking. So im just want.
During if there's anything maybe I'm missing there headwinds that I'm not considering trying to put the positive tone with the Q4 revenue outlook.
Well.
It's a it's an interesting thing you would say that if its seasonal but the Q3 numbers were pretty high weren't they as far as sales go so.
While you take that account is only seasonal it was a pretty good uptick in that.
In the third quarter, and then because of the updated for the industry.
So it was an uptick for only us.
And others Didnt feel it I guess I would it be a bullish but as I said before we saw a nice uptick.
Several of our suppliers if it was broad based we saw a nice uptick in design wins that was broad based we've seen a increase in our book to Bill that has been broad based so.
That's what I would I would tell you right now and.
As seasonal outlook off of what we've come off of I would say yes.
You've got the seasonality numbers correct would be pretty good but I think we see continued growth going in and through next year at this point with with all of our metrics.
Okay, That's fair Clinton helpful.
Maybe just as a follow up bigger picture on the components competitive environment supplier M&A is obviously heating up again, you alluded to earlier last time that led to exclusive deals there were largely with beneficiary.
We will get into individual suppliers, but maybe just reflect on what might be similar or different about this cycle of supplier consolidation from a share shift perspective, and any thoughts on distributor gross margin as that unfolds.
Mergers are inevitable.
I know.
Guidance they seem like massive just three deals one at a time and.
I think that.
You know I don't.
I think the industry first off is going into a growth mode.
And I think that some of these mergers are for efficiency.
And I think some of these mergers have a natural home and some of these mergers.
Don't.
As I've said and as you guys have said we have.
I had a good run at it but there were times over the last 12 years that we didnt have such a good run at it either.
But the overall profitability of the business has been strong and I think we'll continue to be strong.
And I think the engineering piece does have a.
Play in it.
The ability to have the number of engineers that we have all over the world is.
As a plus but I'm not expecting anything.
To seriously hurt us going into the new year, I mean, I think we could be aided by some of these.
And.
It's.
It's an interesting I mean.
One of them sold off portions of their business the private equity so what would that be they typically want as many sales as they asked though.
That figure.
Jeff channel reduction or not.
I would say no.
And some of them are just natural mergers and just stay right, where they said that others will you know haven't changed but as far as thinking everything that is out there is going to have a wholesale change I just don't see it.
Understood. Thanks for the details.
Your next question comes from Monotaro with Bank of America. Your line is open.
Hey, Thanks for taking my questions.
Is there a way to quantify what the mix of recurring revenue was in in EPS in the quarter and has that recurring revenue mix grows how should we think about the impact of that on on your operating margins.
Yes, I don't think Weve.
Put a number out on.
Recurring revenue.
I'm not sure how much of that we would share for competitive reasons I think what we do is good at once a year, we update you on the site.
Sort of our cloud and our hybrid business and that would be scheduled to happen in fourth quarter.
Okay, alright, thanks for that and.
Just wanted to clarify with respect to the quarter ending dates I think beginning of the year you had.
Suggested a number of $225 million as we look to fiscal 21 to the next year.
With that same number apply I mean are we talking about that kind of a revenue shift $225 million or was that only for this year.
Yes, no guidance, so as I was trying to recover in the guidance what I would do is take.
Your estimates for next year for the full year and assume about a 1% to 2% shift from.
Fourth quarter to first quarter, because we got two calendar quarter end in Q4 20 and next year, we have one in every quarter.
Okay. Okay. Thanks for that I appreciate the clarification. Thank you.
Your next question comes from Nicole line Tomorrow with Longbow Research. Your line is open.
Yes. Thanks.
Hello, guys I.
I think you mentioned that on the component side Asia Billings remain strong and it appears that the region is coping better than North America, and Europe with the cold anyway. So.
So I just wondering if you expect Asia as a percent of mix to remain elevated peer maybe into next year relative to historical patterns and if that is the case, how should we think about incremental margins in the component business and when can we expect that you're going to achieve back that 5% component targets on the EBIT margin.
Well, it's pretty.
Simple I think you guys have your model to do the math you guys have this thing pretty nailed.
I think the Asia.
Levels will.
Not have as robust growth going into next year as you saw this year their ability to cope.
With the virus was clearly better than the other two regions saw their ability to keep manufacturing going was better than we saw in the other two regions.
It doesn't take much of an uptick I mean, if you took north America and Europe and.
You don't went up 10% or so which would not be on herd out going into next year, you're you're going to be right. There.
You mean, you next year, 5% component margin is pretty achievable.
Yes, I think youre going to work into it it isn't going to happen in the January quarter, but if you see the growth rates over the course of the year, it's totally dependent upon.
The other region.
This performance right now is interesting because two regions are dragging which is Europe and North America, you know, they're not back to growth.
And right now the book to Bill suggest for US that Europe is coming back before in North America.
Good news, but it.
It all depends when those volumes in those two regions come back and.
Hi, I'm.
Fairly bullish that they will come back and we will continue to see improvement, but as far as to when that will come back fully I don't have that answer for you I don't I don't know.
Yeah, well you can tell me.
Yeah, I wish I can.
Just as a quick follow up on the component guys. I think you mentioned that lead times have started to pickup I Wonder if you can give us any more color maybe by product line or specific end market. What are you seeing for that.
Yes, we've seen a minor tick up Andy you want to add a little color to that.
Sure Mike.
As Mike mentioned, we've seen a minor tick up its been fairly.
Specific in certain kind of large scale MC used 32 bit empty use and analog products, but heavily driven by consumer.
Consumer and by automotive growth is where we see most of the of the impact decline.
Okay, Great and then Thats, what you will add one question on Nike business.
I'm proud of my two suppliers have all announced.
Opex model or on Prem as a service I just wonder.
If that shift starts to gain momentum as customers look to consume more on prem hardware on the Opex model, we don't have any impact on your ability to continue to participate.
And that business anyway.
Sharp.
Yes, sure Nikolai you're exactly right a number of our our hardware suppliers are looking at deploying models that give their customers a cloud like experience, but in a way that's still keeps the infrastructure.
Largely on premise and.
I don't think that theres any any downside to that for us because they we already have the relationships.
And be in fact, we're helping them. We can have we can certainly help them with all of our configuration tools and expertise.
And then all of our financial programs.
Which are so essential to as a service business. So I expect that as they go down that path. We will continue to partner with them to help them complete that journey, it's not unlike the the software journey from perpetual to term ultimately to fast.
And so this doesn't just doesn't worry me.
One bit quite frankly.
Okay got it thanks very insightful good luck guys.
Your next question comes from Steven Fox with Hawk Advisors. Your line is open.
Thanks, Good afternoon, Chris I'm still trying to get my head around the idea that when you guys grow more than 10% that you are still going to be able to throw cash off.
If you're able to do that Thats fantastic I mean has big implications for probably your equity.
But can you sort of put some parameters around that you mentioned services in the mix helping.
How do you sort to maintain service levels and grow at that rate what else are you doing to tactically.
And then I had a follow up.
Yes, I mean, it is a few things one is we had gotten.
As I said I think much more efficient on collections were going to maintain that but also let's not forget that the way suppliers go to market has has changed in park right. In some cases, we've got inventory thats consign versus inventory thats own. So theres theres a lot of dynamics that come into play on that but.
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Really when you got above 10% in the past there was very little to no cash flow and we're saying that that that line now creep up a bit as that as we go forward. So our Q4.
Hi is up 11% and I think we're going to have decent cash flow performance in the quarter and I think thats just an early proof point, but I can't excuse me give you yet is.
New guidance on what we think are good parameters, because we're evolving through this as well, but when we get it.
A little more clear on that will definitely provide some more structure around that thinking.
Thanks for that that's very helpful. And then just secondly.
Any color, obviously, you talk through the mix issues on the margins, but what about if we just sort of outlook.
Within each of the component regions, how are your margins trending within region sort of like for like in.
Yes.
Where the headroom is going forward. Thanks.
Yes, Steve we see him firming.
I think the.
The situation as we as we told you.
In the early days people go down and they bring in their their commodities because nobody wants to have their line go down over commodity sales which are.
Basically the lower profit sales for us and they managed what I would call the design win type products.
We're seeing volumes pick up were seeing more of the demand.
Generation type products going out the door.
So that is good news. We're also seeing the same in Asia as the design win products are starting to pick up there that's really the piece that we've always told you.
Matters in the end the firming of the margin and.
The trick is a firming of the margins and then there's the.
Growth that is going to take place, which will will be those higher end products as we move forward and people start to get their inventories organized the way they want to but we do expect things to firm going into next year.
Thank you for that.
Your next question comes from Toshiya Hari with Goldman Sachs. Your line is open.
Hi, Thank you so much for taking the question and congrats on the results I just had one question, which is a follow up to the prior one.
Obviously, you guys have done really really well in the Asia Pac.
Asia Pac region, I think you guys talked about doubling your business over the past five years into.
In terms of the go forward strategy in the region.
How do you go about striking.
The balance between revenue share and profitability obvious.
Obviously, you want to go after both but to the extent you are sort of cornered into to choosing one over the other with specific customer specific deals.
Which one would you prioritize over the next couple of years. Thank you.
Well I think.
You know the truth is both.
Our margins have been going up in Asia. So we've seen a consistent uptick in margins and we've seen a consistent uptick in growth. So.
You know.
We're not going to book orders here that we don't make money at that that's really.
The overwriting.
Rule I guess within the business.
No.
Our job is to design products for our suppliers our job is to manage the supply chain for them and if you're going to grow you obviously have to generate money and you have to generate cash to grow.
We are not.
Using the cash in Asia like the old days.
Because it's moving to a more traditional tight supply chain as we have seen.
Ourselves over the last so three quarters or so.
It's a business that's starting to add a little more like the other two regions and I don't I don't expect to have to make that trade off but that is a trade off sales for no profit well then we're not going to do it out of that.
Okay, maybe as a quick follow up.
I mean, given the evolution in profitability for the reason that you see internally and I guess the growth in demand generation.
The business in Asia, I mean is there a point in time and maybe three years five years, where profitability in the region could could converge towards the us and Europe or would that be a stretch.
Yes, let me maybe.
Talk to you a little bit about how Asia itself has evolved maybe take it up.
Asia, you used to be a pure supply chain marketplace. All we did was get back to back orders and ship those orders.
You only service agent use was really our supply chain are they shipping portion of what we had.
We did work on the basis of each individual supplier at the time and yes, you could say there was some.
Design work, but I would call it engineering help more than I would call design. The other thing that you're seeing is more and more design themselves are actually moving to Asia. So our design activity in Asia.
Is up significantly and in fact is now the largest design activity region that we have so with that that rate. There will tell you you know the profitability and the Asians are more apt to use our services now engineering services than they used in the past you were also say.
Seeing an uptick in profitability as a result of that and I would expect as they become more and more self sufficient in their own economy. It will be better for us long term.
Thank you for the context good luck.
Do you have something you want to add to that the only thing I'd add to that is you've got to think about Asia margins beyond a why because there are also a lower tax rate.
And it's also inventory that turns more quickly. So we really look at globally across regions is the return on capital we can earn region to region and I would say absolutely when it comes to return on capital.
The opportunities for continued improvement and a narrowing of the performance across those regions definitely exists.
Very helpful. Thank you.
Your last question comes from Tim Yang with Citi. Your line is open.
Hi, Thanks for taking the question.
Q4 guidance I think you have three extra selling days in the Q4 guidance can you maybe just quantify what the impact from those extra selling days for component you see us sales guidance a follow up.
Yes, it's two days we havent.
We're not providing the math on that but I will kind of point back to the comments earlier in the script, which is that for components that has very little impact those are usually scheduled orders in two days.
Don't make a difference if anything we've got.
Opex dollars that are real that we have to incur during the quarter on EPS, it's more so and again I would use my comments that I use as it relates to next year and the shift in that 1% to 2% range of the full year.
Got it okay. That's helpful.
Let me just share your backlog and the bookings you'll be a basis for you see US business. I think you mentioned the project push out but many investors exit costs are in about doing that vanished rather that delay. So wondering if you could just provide some color on that front.
Well, it's the same thing you're seeing with the suppliers you know as a supplier to start to.
Tick up and show more opportunity.
So we'll wait but that business is tracking very close to what's happening in the overall marketplace with your suppliers and.
You know, we are seeing more and more activity and we do expect some things to happen over the the fourth quarter, but I think as you get into next year, you'll probably see some of these memphis structure investment path to happen.
I have to ultimately come.
Come back to implant to play.
You know what what holds them up is really the strategy of where these businesses are going to go up how much is going to be continued work for home is their strategy to do that ongoing now as a strategy to get everybody back in the office I think you have that uncertainty.
So therefore computing the change is the result of that.
But the truth is either one is not bad for us.
So.
However, the companies decide.
To move in that direction.
It's going to be okay. When it comes to our business.
On the bookings on a year over year.
This order trend can you maybe just talk about that.
You bet.
Going demand and project focused management forecasting and I don't I don't have hard bookings for you to.
So take care to answer that question.
Got you. Thank you.
There are no further questions from the call back over to Steve and Brian for closing remarks.
Thanks, Nick if you have any questions about the information presented on the call today feel free to reach out to me. Thanks for your interest in Arrow electronics and have a nice day.
This concludes today's conference call you may now disconnect.
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