Q4 2020 Arrow Electronics Inc Earnings Call
[music].
Okay.
Sure.
Ladies and gentlemen, thank you for standing by and welcome to the Arrow electronics fourth quarter and full year 'twenty 'twenty earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to turn the call over.
What's your speaker today, Steve O'brien, Vice President and Investor Relations. Please go ahead.
Thanks, Denise good day, and welcome to Arrow Electronics fourth quarter and year end 2020 earnings conference call with US on the call today are Mike long, Chairman, President and Chief Executive Officer, Sean Kerins, Chief operating Officer, and Chris Stansbury, Senior Vice President and Chief Financial Officer.
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 risks.
Factors in our most recent 10-K and 10-Q filings with the SEC, 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 today's call are non-GAAP, we have reconciled those to the most directly comparable GAAP financial measures in our earning.
For leaf. These non-GAAP measures are not intended to be a substitute for our GAAP results you can access our earnings release at Investor Day at Arrow Com, along with the CFO commentary for non-GAAP earnings reconciliation and a replay of this call.
We'll begin with a few minutes of prepared remarks, which will then be followed by a question and answer period I will now hand, the call to our chairman President and CEO Mike Law.
Thanks, Dane and thanks to all of you for joining us today.
Thanks for you in late April of 2020, right. After our first quarter. There was a much we didn't know about how the coming months would unfold.
Which is why it is incredible to be here to day talking about record quarterly sales and earnings in the fourth quarter of the year not to mention in 2020, we generated record operating cash flow reduced debt by a record amount and returned a record cash to the shareholders for the year.
True Testament of our strength, but not only did we do that but in a very short period of time, we had almost 15000 people that had to go from office work to work from home and this is a true testament of the hard work and dedication of our team.
Every day, our customers have a choice we're proud they continue to choose arrow customers place their trust in Arrow's engineering design and supply chain services. They rely on us to ensure their products are designed to be efficiently manufactured and well received in the marketplace.
Our suppliers are critical to our success they continue to choose arrow to.
Sales market and design their components into some of the most innovative and important products coming to market.
While our reputation speaks for itself our consistency comes from putting our people first once again I'd like to thank our team for continuing to deliver for customers and to move technology forward in a year of extreme challenges.
While some of these.
While some of the same obstacles we had in the past we've seen major device upgrades.
And major upgrade cycle, followed by strong sales.
The foundation of our business has never been stronger while business conditions and our industry are dynamic we're cautiously optimistic that the demand environment for Americas, and Europe can return to growth customers are ramping up the prior production levels across many industries and the inventory correction that occurred.
Prior to the pandemic means that some components are in short supply.
Orders and backlog are up in all regions.
In line with this our Americas customer sentiment survey showed an increase in the percentage of customers that have an inventory shortage and a decrease in customers with an excess of inventory.
Turning to our enterprise computing solutions business.
We're pleased to deliver operating income growth on a year over year basis operating income growth continues to be the truest measurement of performance for this business.
In addition, operating margin reached its highest level since the fourth quarter of 2017.
While we were pleased with our enterprise computing solutions results, we see strong potential for further improvements in 2021.
For the markets. We serve remained challenged by Lockdowns and continued restriction to related to on site work in the meantime, widespread work from home policies continue to drive security and cloud solutions.
In the past we've seen major I've heard.
Followed by strong infrastructure spending to support them.
We see further benefits to enterprise computing from a recovery by specialty bars, and MSP customers, who serve some of the industry that have both mostly been impacted by the pandemic.
Our customers, who service the hospitality retail restaurant and even the medical industries have been hampered by an inability to work on site at their end customers.
We derive value from complexity, so helping these customers design and cell for cure multi site hybrid cloud data solutions should benefit our volumes and profit compared to our business in 2021.
Before closing I thought I'd share a few words of our company's long standing commitment to developing business leaders and per.
Proactive succession planning, we recently announced the appointment of Sean Kerins as <unk>, New Chief operating Officer, Shawn has been a valued member of our team since 2007.
His leadership and proven track record at Arrow make him the ideal executive to now lead both businesses and advance innovation across our global sales marketing and operations.
Confident in his ability to help arrow capture value and growth from the increasing convergence of semiconductor electronic component industries with the information and operational technology industries.
With that I'll now hand, the call over to Chris to provide more details on our fourth quarter results and our expectations for the first quarter.
Thanks, Mike.
Fourth quarter sales were $8 $4 5 billion.
Sales increased 13% year over year on a non.
Non-GAAP basis, the average Euro dollar exchange rate for the quarter was $1 19.
To one euro compared to the rate of $1 16.
We use for forecasting.
Strengthening of the euro relative to the dollar boosted sales by approximately $50 million compared to what we had anticipated in our prior guidance.
Global components sales were $5 92 billion.
Sales were above the high end of our prior guidance and we saw improving demand across regions and most industries.
Global components non-GAAP operating margin for 4% up 40 basis points year over year. This improvement was mainly due to greater operating expense efficiency in all regions as we leveraged higher sales volume, we continue to see substantial opportunity for further operating income leverage all regions can capture an improving mix.
Of higher value components sales and as the Americas and Europe region continued to recover.
Enterprise computing solutions sales of $2 $5 3 billion for.
We're above the midpoint of our prior expected range fourth quarter billings increased year over year adjusted for changes in foreign currencies, and we experienced growth in infrastructure software across the portfolio security storage and industry standard servers.
Global Enterprise computing solutions non-GAAP operating income margin increased by 30 basis points year over year to six 3% the highest level through 2017.
Returning to consolidated results for the quarter the effective tax rate was below our expectation due to timing of certain discrete items for the full year 2020, our effective tax rate was near the low end of our long term range of 23% to 25%, we continue to see 23% to 25% as our appropriate target range going forward.
Non-GAAP diluted earnings per share were $3 17.
<unk> 40 for <unk> above the high end of our prior expectation approximately <unk> of the upside prior guidance was attributable to more favorable exchange rates.
Turning to the balance sheet and cash flow operating cash flow was $200 million.
Despite substantially stronger demand than we anticipated our cash cycle improved by two days compared to the third quarter and 11 days compared to last year. This improvement significantly cash flow generation in the face of working capital demands inventory days were the lowest level since the fourth quarter of 2015.
Ending 2020 debt decreased by $715 million compared to 2019.
Leverage as measured by debt to EBITDA was at the lowest level in over five years, we returned approximately $100 million for shareholders. During the fourth quarter through our share repurchase plan for remaining authorization under our existing plan was approximately $463 million.
Please keep in mind that the information I have share. During this call is 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.
Now turning to guidance mid point sales and EPS guidance.
All time first quarter records for the diversity of the products, we sell and the customers and industries we serve for.
Provide stability for our business for the whole our guidance reflects continued improvement in both global components and global Enterprise computing solutions operating margins on a year over year basis.
Finally, as we discussed last quarter. Please note. The CFO commentary includes information on our fiscal calendar closing dates for 2021.
In 2021, but first second and third quarters closed on April <unk>, So why third.
In October 2nd respectively. Unlike in 2020, where they closed on March 28 June 27, and September 26th. These closing dates have a much greater impact on the enterprise computing solutions and our global components and full year comparisons are not affected as fiscal 2021 ends on December 31.
With that I'll turn the call over to the operator for Q&A.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad.
For just a moment, how the Q&A roster.
Your first question comes from <unk> Hari with Goldman Sachs <unk> Company. Your line is open.
Hi, good afternoon, and thank you so much for for taking the question congrats on the very strong results.
My first one I wanted to ask.
Ask about the shortage situation.
Can you sort of describe how broad and how intense if you will the shortages today, the delta between demand and supply and based on what Youre hearing from I guess, both your suppliers on the supply side.
As well as demand from your customers at what point in the year would you expect supply to catch up to demand. Thank you.
Yes, so the first thing.
Yeah.
We will disconnect sort of automotive for my comments, because a lot of the shortages are hearing about our automotive and specialty type parts and they're not things that.
People in our business typically are in the middle of so when you take that out yes, we still do automotive business, but it typically runs for me.
Tier three accounts for tier one accounts those types of things.
What I would tell you its overall, yes, we are seeing.
Some shortages.
The.
I believe at this point, it's a little overblown.
Probably a good time to talk about the book to Bill two because we have seen an increase in book to Bill.
And what I mean by that.
As customers are placing their orders out longer than they have in the past, but we're getting more visibility past 90 days or percentage of backlog within the quarter sales has not increased so.
It would suggest that it's really non double ordering but customers are doing it for the longer term view. So we can in turn share that with suppliers and help them forecast their manufacturing as things go out.
We're also seeing suppliers asking us to give them greater visibility and I believe the market is reacting well to that and that can minimize a lot of the problems that.
Are being talked about out there short term, we don't see too many restrictions right now on our shipments for the.
The first quarter, there is always going to be a couple of parts that are hard to debt, but we don't expect that there's going to be widespread shutdowns or anything.
Like that so hopefully that helps your question and gives you a little perspective on it.
Yes. It does thanks very much for the context, and then as my follow up.
Just on the profitability of the business you.
You guys did a great job improving margins in the December quarter.
As you look.
And I guess, the middle part of 'twenty, one in the back half of 'twenty one.
Outside a reasonable mix regional mix normalizing.
I guess the U S and.
Europe recovering what are some of the levers that you can pull to improve margins in your business. Thank you.
Well I think you're already seeing some of the margin improvement that have come through.
We certainly are getting more efficient as a business in terms of our cost of sales are off the margin even.
With the investments that we've put into handling components. Our manufacturing facility. Most of that work has been done or close to completed. So we are seeing benefits there, but really you want to get down for the big lever. It spoke to so North America is hugely anemic it's Ben.
By all terms craft for the last couple of years and really and so we can get out of our way and focused on growing this economy that will be a little bit of a rope around our neck.
Europe looks like it's progressing probably a little better than North America in terms of growth again, but the real cameras and north American economy, and that will that will make a difference because youll see volume. There. So you can see our infrastructure in North America get more efficient with those volumes.
And that is the piece of the pie.
Your next question comes from Steven Fox with Fox Advisors. Your line is open.
Hi, good afternoon.
First question, Chris I was just wondering.
Last quarter, you talked about continuing to generate cash flow is why youre growing over 10% you obviously just did that.
But then you guys mentioned that.
Inventories are now at <unk>.
You haven't seen since 2015 and customers are placing longer extended orders. So can you just sort of talk to the level of your confidence to continue to do that as debt.
Supply chain dynamics seem to have changed a lot in the last 90 days and then I had a follow up.
Yes.
Really we're super pleased with the cash generation of the business over the last 12, and 24 months record cash flow.
In $2022 2 billion from around three years.
That's clearly a focus of ours and that will remain in the near term I think that's a little more challenging in the very short run as we obviously look to.
To build working capital to support the growth.
What we will do that diligently as I look forward, though I don't think.
It really changes will be very focused on generating cash flow over the course of 2021.
And I think.
On the cash conversion cycle that we've got now is the right target for us over time it will.
Move around from quarter to quarter, but we like where we are and we're going to do our best to maintain that.
Thanks for that that's helpful. And then Mike just as a follow up in your prepared remarks, you mentioned that you're cautiously optimistic about demand returning to growth in the Americas and Europe Europe can you give us some examples of maybe whats behind that either customer conversations or.
Different industries that you are hopeful about it.
And whether that is going to result in a meaning.
A meaningful shift in some of your sales mix on the components side from Asia over the next couple of quarters that'd be helpful. Thank you Tom.
<unk>.
I think the first thing that gives me.
Sort of that optimism not only for the Americas, but for EMEA two would be the growth and design wins. So we've seen some pretty good growth in design wins in North America up around the 15, 16% range.
And we've seen just under 10.
Europe, So as we're seeing the design wins grow thats, usually a good indicator about business coming.
Down the Pike within the next six months or so.
It should be an increase of what we've seen in the past.
I think the.
My opinion of.
Tariffs I think thats been holding us back.
Quite a bit I think it's I.
I think the whole plan backfired and put the burden non American companies to pay a tariff so.
I haven't seen anything lifting those but.
The demand is there and there is still business out there and I think people are figuring out how to maneuver around that we've seen some uptick in sort of aerospace in.
And defense, we've seen some uptick in consumer you guys are seeing.
Hey, Matt.
And surprisingly, we're seeing a little life in industrial manufacturing at this point. So when you put those together I would say that conditions are in pretty good shape.
For things to come back, but that's where the sort of cautious optimism come then for me as well our politicians work together on the economy to make it better and if they do I don't see any reason it couldnt be better but.
I sort of DUC early and say, what's index curve ball coming so thats why I hate them on that line.
I appreciate that Thats, all very helpful. Congrats on the great results.
Yes.
Your next question comes from Nikolay Todorov with Longbow Research. Your line is open.
Yes, thanks, and congrats guys from a great execution.
Can you remind us.
Operating profit margin Delta to your Asia components business. It seems like you guys have done a great progress Darrin driven by scale, but as you look for can you talk where do you see that delta between Asia components business in North America, and Europe eventually getting.
In the medium term future.
Yes.
Thanks.
While I won't give you the numbers.
Specifically.
I think there's a couple of things that you can just do it by.
How things are operating.
North America, and Europe have had.
Little bit of negative.
Operating margin reduction.
In size and scale.
That's what that's what happens when when the economy shrank in Asia has improved.
Asia has improved more than they have reduced which is good which is why you see the leverage you do and we're really confident that debt. That's a good thing because.
We're really sitting here doing the math and if those two take often end up with their rightful sort of mixed in fact the company.
<unk> be right back, where we think we need to be so we do have a view we do have a line of sight.
The real question.
We have for ourselves is how fast can we get North America, and Europe back up either through share gains or or through general economy gains.
And that's really the that's really the conditions that need to exist.
Okay, Great and then other follow up on the components side can you talk about the pricing environment that you see I think maybe you can do the same and exclude the auto side and talk about what are you seeing and what is your ability to pass through dose and as you think about bad debt in the last quarter. You mentioned that you expect to see the components.
Start approaching debt prior levels of high for a low 5% operating profit do you still believe you can do that in 2021.
Yes, we believe we can get there in 2021.
Obviously, the economy is going to.
Be dependent on Kevin we consistently be there, but we actually believe we can be there that's not.
That's not an issue in terms of the company in terms of the pricing environment.
More and more suppliers are raising prices, we won't hesitate to raise those prices we have to.
We don't have enough margin to absorb price increases like that.
And.
The suppliers are doing two things they are requiring that they see a better visibility of your product.
Theyre demanding a firmer schedules and.
The ones that are really fabulous are doing price increases for us so.
We are seeing it.
I expect it to continue.
Turning to the first half of the year.
The nature of that business, there hasn't been a price increase in a long time. So this is.
Really something new but.
Nobody is going to be immune from it just kind of.
Okay, and just lastly on DSS.
Enterprise computing segment. It seems like the mix of business has shifted quite favorably toward software and security maybe can you give us update on the percentage mix and then.
Any color on what are you expecting for the hardware side of that business in 2021.
Yeah, John why don't you go ahead and take down yes, sure thing and you kind of read it right.
Have been intentionally driving a mix shift.
Things like software and services.
Things that we typically true through agency accounting and so sometimes that creates a little bit of a headwind for reported sales is very favorable for for growth and operating margins that were going to stay that course, we think there's a good future in it.
In terms of the outlook going forward by no means is.
Hardware disappearing.
It sort of ebbs and flows a little bit, but if you look at our overall mix.
Just on a volume basis hardware is still roughly a third of the total.
In fact, we saw our storage business grow a little bit year on year for the full year in 2020 and that tells me that there's still a big on premise business.
We will benefit from in the future.
I believe you can't switch IC assets forever, we do need a broader market to come back in data centers to reopen but that will be ultra.
Ultimately a good thing when it does happen.
And your next question comes from Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon, Mike I, just wanted to start on the component trends and how global demand is above supply right. Now you talked about seeing some supplier price increases and inflation is potentially becoming a theme just wanted you to revisit that idea and cover how inflation impacts component distributors historically.
And what could be different this time during the cycle I'd imagine that there's a benefit to gross margin that's been in decline for a number of years, but could eventually a turnaround here with some inflation, helping western regions coming back just hoping you could maybe double click on that point.
Yes, I think for.
First off.
The pricing decline.
Largely been across the board with efficiency.
Efficiency is largely outrun the pricing declines and Thats, just sort of a basic getting a lot of economics right.
The efficiency eventually does get to the market and that's what you've certainly seen in our business over the years.
I would expect that to flow and clearer.
Clearly in times of a slight inflation youre going to see debt flow.
But it kind of depend on how the inflation hits.
Raw materials for the industry, but then you have one more thing to have most of the my conductor companies used to have their own fab and they didn't have a third party running the fab and other third parties running the fabs. The fabs are needing to make more money too. So that's just another.
Sort of curve ball and.
The equation and I.
I think largely manufacturers have looked at that they've sort of price for that and right now it was there.
Looking for and they are starting to see it go to the market.
The inflation is going to hit the end user product for before it hits the manufacturing products.
So I think that'll be a delayed reaction.
If it happens.
I still think there is some question as to whether or not that will happen, but the price increases are coming now.
<unk>.
I largely think we'll have that price debt by mid year in 2021.
Got it that's helpful and just one follow up for Sean first of all congrats on the new role and just wanted to ask a strategic question on ECS you've had.
Some changes at the competitor level, one splitting their business in other changing from Chinese ownership to now.
<unk> firm ownership.
And each of those.
Competitors it seems determined to continue to consolidate and get bigger in that industry.
Be curious your kind of long term strategic view and the moves that you can make an EC.
Yes to perhaps consolidate as well or does it make sense to kind of stay where youre at.
Does the chessboard look like in three to five years, let's call it.
Sure thing well first of all thank you for the congrats so I appreciate that.
Very aware of the fact that the at least the capital structure or the finance structure for some of our competitors has changed.
In terms of what that means for their go to market strategies.
Public or private probably better for them to answer but you can imagine we've got a healthy respect for all of our competitors, but intentionally we are going to continue to focus on.
What we think is a promising market for.
Hybrid and multi cloud solutions, we're going to stay in the more complex end to be.
The IP spectrum, and we think that debt.
We'll continue to stand us apart.
With regard to consolidation in the industry overall.
We're always sort of keeping our eyes open for <unk>.
Markets and players that we think offer us.
A value based return and so I'll make sure that we continue to look at those by no means.
Would we not do something if it made sense, but we're we like our space in the <unk>.
More complex end of the enterprise.
It environment as I said I think in the near term our intention is.
So largely stay there, although obviously will compete differently over time, if you look at it.
The investments we'll make in.
Our cloud go to market motion among others.
Got it thank you very much.
This is Michael I'll add one thing to that we now have.
Over lap between our computer business in our core components business.
In the range of 1 billion net day at $5 of customers.
So that we've seen that consolidation or not the consolidation, but that sort of movement together over the last couple of years, we knew it was coming and we knew there was a GAAP there, but we're starting to see that now with.
A really big trend in the OEM computing business to start doing these specialized appliances that we had talked about and from the design to the supply for the chip for the build of those.
And we're now seeing that through not only our contract manufacturer customers, but ourselves and also in the designs that are coming in.
So that does give us a synergy debt.
These two businesses working together.
Are playing better in our sandbox and you can see that from the efficiency numbers. Then here. So yes, we don't we don't have any intention of.
Splitting anything selling anything off or changing our strategy. We believe we have a good strategy. We believe it has served us well so far.
And there's no desire to change that.
Thanks for the clarity.
Okay.
Our next question comes from Tim Yang with Citi. Your line is open.
Hi, Thanks for taking the question back in 2017 and 2018, there were a couple of any shortages you benefited from that but in 2019, you experienced some headwinds due to destocking.
Have you learned from that experience and what are you doing differently in this cycle. If you will protect for potential destocking risk.
After this shortage.
Thank you.
In the past.
You would see that book to Bill panning for everybody that there was double ordering and they would talk in both into it.
That's a lot of time golar.
Go around with our customers.
Skin for better visibility in their product and product flow as being the best way to help them and.
That keeps them from sort of doubling up on their current order is asking for all over that one.
The truth is they are not going to get as they never were in a shortage before but.
Certainly helps us.
<unk> orders debt now coincide with the lead times that are out there from the suppliers and that will help with a better flow and hopefully.
Keep inventories at a level that we don't have a big crash at the end of it.
Which is something that you guys have seen before not recently because we haven't had.
<unk> level like this for some time, almost 10 years or something but I think.
The way it's being handled.
Where we're planning on it being a move their ending.
Then the rough ending debt, we typically expected in a downturn. So we will see how much we've learned if the visibility helps us all but I believe it's going to.
Got it that's very helpful. As a follow up on ECS I think America would you say that the revenue was down 10% year over year, and I think thats consistent with the previous two quarters can you maybe just talk about what youre seeing in the end market and we have heard from SMB demand recovery, but it seems like for us not quite reflected in guidance segment.
Yes, sure. So just in terms of some other marketing technology trends that we saw in Q4 is generally true for.
All of our regions, but I think we're still seeing some benefit from the.
Remote work initiative, if you will still has some legs.
And that benefit multiple pieces of.
Our technology portfolio, I think right now all things cloud and cyber security remain.
And good demand.
The good news is we've got good exposure to both of those technologies.
And then I think you heard Mike talk a little bit in his opening remarks.
The reality, where you can't get inside all the data centers, yet and so that tends to slow work that needs to be done on premise with existing application environments. I think we saw a little bit of improvement in that regard in Q4.
And again, depending on when the broader market comes back we should see more debt.
Over time.
Got it thank you.
Your next question comes from Matt Sheerin with Stifel. Your line is open.
Yes, Thank you and Hello, everyone.
Question, Mike regarding your Asia components business, which as you said, we've got a very strong 50% year on year.
How much of that was.
From underlying business versus share gains and typically.
And could you comment on how that transition has been going and are you seeing opportunities for cross selling.
Additional family bankers and other components into that into that customer base that you may not have been serving previously.
Well anytime you get a new customer there is a new opportunity right Matt so the.
The.
The nice thing that we have seen overall and I don't know that the transition business has much play in that but we did see an increase in sales of other components.
Also in Asia Pac.
It was expected even even with some of the transfer business you guys have alluded to before.
We said they were really the first to come out of Covid, So theyre starting to turn back on.
Europe with sort of the second one to come out of this Covid thing, we're starting to see that turn on ahead of North America, and hopefully as North America turns back on.
From Covid will see the increase were all finally, hoping for here.
Yeah.
And.
I think that's really what you're seeing.
These economies are turning on at a different time.
But I believe that has a play in it.
And.
Fully expect.
That agent will continue to grow.
We have added a lot of salespeople in the Asia region.
And that goes part and parcel with the growth you do that naturally.
There is no change in strategy for us in Asia, we still built.
I believe we're operating the way we should there just like we believe we're operating the way we should in Europe, and North America and at this time I think the.
The biggest hindrance, we have Matt has nothing to do with Asia, and really has everything to do with North America, and that's where we're focusing now to figure out is there anything we can do to make North America growth faster and we're going to do it if we can.
Okay. Thanks for that.
Just related to that given the.
Outside exposure to Asia now gross margins have been trending down year on year and credit side, what should we be thinking about gross margin, particularly I mean, you've got some improvements in North America and Europe. The Asia business is still growing.
Pretty fast here, so how should we be modeling gross margin.
Yes.
We look forward, we'll continue to see improvement as.
EMEA and Americas come out of Covid as Mike said I think the other thing Youll see obviously is operating leverage.
And we have talked in the past about continued growth in our value added services and offerings that we can bring customers and ultimately help GP and I think you'll see them in NAV Award.
In terms of kind of predicting that over the course of the year tough to do but I fully expect that as we exited.
For 2021, you're going to see stronger margin then we exited 2020 with as a result of all of those things so.
High level, how to think about it.
In the near term, we're focused on driving the operating leverage mix improves.
Your next question comes from <unk>.
Mario <unk> with Bank of America. Your line is open hi, thanks for taking.
Taking my questions I have.
Two for Chris the first one on ECS margins.
For the fourth quarter is typically strong in this quarter was certainly at six 3% can you help us understand the 190 bps sequential improvement how much of that was higher volumes how much of that was FX. How much of that was mix and then the next part of that is looking into the first quarter.
If I look at the year ago quarter. It was you had a steep decline from flow through to <unk>, but now that the business mix and ECS is improving to higher software and services can you give us your sense of what type of a decline we should expect sequentially in ECS margins.
So.
Really if you look at Q for the key driver was mixed as Sean mentioned earlier, so we see more shift to our software and services portfolio. Those are higher margin as we said that obviously impact sales growth rate, we've talked about that a lot in the past because of the gross to net accounting that takes place, but it is margin accretive and as we look.
For Q1.
Got margin expansion as well year over year, and we expect that trend to continue so the mixed trends.
Product mix turns net business are very positive.
This is Sean.
Mentioned earlier, our focus on hybrid and multi cloud environments.
Or a big reason behind that and that's going to continue.
Okay got it and then maybe for my second question just wanted to delve a little bit deeper into the quarter closing dates comments that you had.
So are we is the net takeaway is that the first quarter is going to be stronger in the fourth quarter should be a little bit weaker because there's one less week in the fourth quarter and one more in the first quarter and if so what.
What kind of dollar impact are we talking about.
Yes, I think so when you're looking at.
Impacts from the.
Change in the calendar year over year.
It's beneficial for the way, we look at EPS, because so much of that business is calendar quarter end dependent so in Q1, we pick up.
The calendar quarter end.
And what happened last year is.
Q4 was really the big quarter. So I think here in Seattle, a Q1 Q4 shift year on year, where Q1 will be relatively stronger in the office that will take place in Q4.
Got it that makes sense, alright, thanks, and congrats for the quarter.
Your next question comes from Joe Quadro true with Wells Fargo. Your line is open.
Yes, thanks for taking the question.
On the component shortages it seems more like debt. This time around it is on the <unk> side versus last time. It was more about path isn't MLP fees, Michael Im just curious how do you think about the supply side the ability to catch up this time.
And how do you think about.
From your approach to your process any differently.
Well.
Basically.
Looking for sales for the fourth quarter of everybody that was out there it was largely a good quarter right. So.
Not at the price.
Yes.
You are seeing some shortages given the uptick.
There's typically been kind of a 10 per center.
Do you want to put a number on it when the business goes up before you start seeing some shortfalls out there and Thats just given the supply chain, but the supply chain has increased.
It still looks as though there.
More increasingly coming on.
If I can say that after COVID-19 things are looking up as we said in Europe already so we're hoping North America does the same.
And the trick here is visibility how much visibility can we get.
For the manufacturers of what we really need during a quarter or so.
In the past is that our book to Bill went into the manufacturer and they would be the big lots of stuff and we'd be advocating for everything right. Now. This time, it's measured we need X amount in January or we need a certain amount of February we need a certain amount of March we're getting to next quarter. We know April may and June and then we can talk to you.
We're about out for that so.
The industry has responded well where we've asked for them to place their orders all of further that's one of the reasons actually that we didn't publish our book to Bill without an explanation for this quarter because you would see a big book to Bill, but Theres a big portion of that that goes into Q2 and start to go into Q3.
So so my view is yes, it could be hand to mouth for a little while but I think things are going to largely make it through the novel and <unk>.
I believe everybody is digging to make that happen and they will.
That's helpful and then on the ECS side and you recently announced an expansion of your partnership with AWS I'm. Just curious if you could talk about that opportunity and then maybe can you remind us how big is your cloud business or maybe what was that from a revenue perspective last year.
Sure thing so what I can tell you is.
We're still growing our overall cloud business and then the recurring revenue piece of it substantially.
I'll work with speed and Chris and at the right time, we'll be able to get.
More specific about <unk>.
Actual numbers, but we continue to invest in that market trend and I think we're lining up to as nicely as for the cloud portfolio. We continue to add supplier solutions to it you called out the <unk>.
Gartner ship with AWS, while we wouldn't talk specifically about the size of any supplier relationship. We are we are pleased to now be working with the five largest cloud hyperscale is in the world.
And the way that we go to market and the value they see in our channel.
That particular relationship to Mike's earlier point is really going to help us.
And sort of the Iot or the <unk> space, we think overtime given the potential associated with our <unk>.
For our full portfolio.
And your last question comes from William Stein with true Securities. Your line is open.
Great. Thanks for taking my question.
Just like to ask about the decrease in inventory that was something that.
We certainly expected given the.
Comments from many of your suppliers about.
The shortages and such.
Sure.
What does the Arrow C from the perspective of the potential to refill that to improve.
Delivery stats for customers is that something you think could.
Get back to more normal levels in a couple of quarters or do you see that as being sort of at this protracted lower level through the whole year and maybe even longer.
I'm not sure it's that protest attracted lower level.
I think we're talking about $50 million.
For demand so it's not a relatively flat basically flat.
Flat inventories and you just saw a big number come out of the inventory level that we finished with as I said I think youre going to be seeing more hand to mouth, we're probably going to be getting more shipments.
Per month now than sort of just a few a quarter from manufacturers.
Sort of the.
For the diligence that has to beyond this at that point and I don't expect that to as I said would be a problem. We gave you a forecast for the first quarter that.
Largely.
I guess, it's better than the fourth quarter for components.
And we believe we can we can do that we don't believe that inventory level that you just brought up there's an obstacle for us to be able to deliver that numbers. So hopefully that answers your question.
Very good that does it for me thanks.
I would now like to turn the call back over to Steve O'brien for closing remarks.
Thanks, everybody for joining us today, if you have any questions about the.
The call or our earnings materials feel free to reach out for 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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