Q4 2023 Arrow Electronics Inc Earnings Call
Operator: Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines again will be placed on music hold thank you for your patience.
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Operator: Thank you for your patience. Please wait; the conference will begin shortly. Thank you for watching. Good day and welcome to Arrow Electronics' fourth quarter and full year 2023 earnings call. Today's call is being recorded. And at this time, I would like to turn the conference over to Anthony Bencivenga, Vice President of Investor Relations. Please go ahead, sir.
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Speaker Change: Good day, and welcome to Arrow electronics fourth quarter and full year 2023 earnings call today's call is being recorded.
Speaker Change: And at this time I would like to turn the conference over to Anthony Bencivenga, Vice President of Investor Relations. Please go ahead Sir.
Anthony Bencivenga: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics fourth quarter and full year 2023 earnings conference call. Joining me on the call today is our President and Chief Executive Officer, Sean Kerins, our Chief Financial Officer, Raj Agrawal, our President of Global Components, Rick Morano, and our President of Global Enterprise Computing Solutions, Kristen Russell. During this call, we'll 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 described in our most recent filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events.
Anthony Bencivenga: Thank you operator, I'd like to welcome everyone to the Arrow electronics fourth quarter and full year 2023 earnings conference call.
Anthony Bencivenga: Joining me on the call today is our president and Chief Executive Officer.
Anthony Bencivenga: Sean Kerins, our Chief Financial Officer, Raj Adderall, our president of global components, Rick Marano, and our President of Global Enterprise Computing solutions Christian Russell.
Anthony Bencivenga: 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 described in our most recent filings with the SEC.
Anthony Bencivenga: We undertake no obligation to update publicly or revise any of the forward looking statements as a result of new information or future events.
Anthony Bencivenga: As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release or Form 10-K. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference these slides during the webcast. Following our prepared remarks today, we'll be able to take your questions. And I'll now hand the call over to our president and CEO, Sean Kerins. Thanks, Anthony.
Anthony Bencivenga: As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We have reconciled. These non-GAAP measures to the most directly comparable GAAP financial measures in this quarters associated earnings release or Form 10-K, you can access our earnings release at Investor Arrow Dock.
Anthony Bencivenga: Com along with a replay of this call. We've also posted a slide presentation to accompany our prepared remarks and encourage you to reference the slides during the webcast.
Anthony Bencivenga: Following our prepared remarks today will be able to take your questions and I'll now hand, the call over to our president and CEO Sean Kerins.
Sean J. Kerins: Thanks, Anthony and thank you all for joining US we appreciate your interest in Arrow electronics.
Sean J. Kerins: And thank you all for joining us. We appreciate your interest in Arrow Electronics. For some context, I'd like to first review our 2023 full-year financial results before commenting on our fourth quarter performance and the overall state of the market. I'll then turn things over to Raj for more detail on our financials as well as our outlook for the first quarter. As I reflect on our performance over the past year, I want to start by thanking our global team for their persistence, resilience, and dedication to our suppliers and customers.
Sean J. Kerins: For some context I'd like to first review, our 2023 full year financial results before commenting on our fourth quarter performance and the overall state of the market.
Sean J. Kerins: I'll, then turn things over to Raj for more detail on our financials as well as our outlook for the first quarter.
Sean J. Kerins: As I reflect on our performance over the past year I wanted to start by thanking our global team for their persistence resilience and dedication to our suppliers and customers through their efforts, we were able to deliver solid financial performance given the market backdrop.
Sean J. Kerins: Through their efforts, we were able to deliver solid financial performance given the market backdrop. Despite excess inventory throughout the supply chain, leading to softer demand in our components business and a mixed IT spending environment for our enterprise computing solutions business, we executed well in a challenging environment. Arrow posted $33.1 billion in full year 2023 revenue and achieved an operating margin of 4.8% on a non-gap basis.
Param Singh: Despite excess inventory throughout the supply chain, leading to softer demand in our components business.
Param Singh: Mixed spending environment for our enterprise computing solutions business, we executed well in a challenging environment.
Param Singh: <unk> posted $33 1 billion and full year 2023 revenue and achieved an operating margin of four 8% on a non-GAAP basis. In addition, we generated healthy cash flow from operations, which enabled us to repurchase approximately $750 million in shares throughout the year.
Sean J. Kerins: In addition, we generated healthy cash flow from operations, which enabled us to repurchase approximately $750 million in shares throughout the year. Now, moving to our fourth quarter results. To close out the year, we delivered sales of $7.8 billion in the fourth quarter, just better than the midpoint of our guidance. Based on healthy operating margins in each of our segments, we generated non-gap earnings per share of $3.98, comfortably above the high end of our guided range.
Param Singh: Now moving to our fourth quarter results.
Param Singh: To close out the year, we delivered sales of $7 8 billion in the fourth quarter, just better than the midpoint of our guidance based on healthy operating margins in each of our segments. We generated non-GAAP earnings per share of $3 98.
Param Singh: Comfortably above the high end of our guided range.
Sean J. Kerins: Taking a closer look at our components business, the industry-wide inventory correction appears to be taking longer than anticipated when compared to the prior cycle. This is likely due to the breadth and magnitude of the shortages that precipitated the inventory buildup along with continued softness for components in many industrial markets. However, we do believe markets will eventually improve and see gradual signs of normalizing trends. Our book-to-bill ratios have stabilized overall, with our IP&E portfolio trending closer to parity. Pricing is generally holding up, as reflected in our fourth quarter gross margins, which were sequentially better than in the prior quarter. Our demand creation pipeline is growing as customers continue to develop new products. And while order rescheduling activity persisted, we focused on backlog conversion during the quarter and reduced inventory by over $600 million sequentially.
Param Singh: Taking a closer look at our components business the industry wide inventory correction appears to be taking longer than anticipated when compared to prior cycles.
Param Singh: This is likely due to the breadth and magnitude of the shortages that precipitated the inventory buildup.
Param Singh: Along with continued softness for components and many industrial markets.
Param Singh: However, we do believe markets will eventually improve and see gradual signs of normalizing trends our book to bill ratios have stabilized overall with our IP portfolio trending closer to parity.
Param Singh: Pricing is generally holding up as reflected in our fourth quarter gross margins, which were sequentially better than in the prior quarter.
Param Singh: Our demand creation pipeline is growing as customers continue to develop new products and while order rescheduling activity persisted, we focused on backlog conversion during the quarter.
Param Singh: And reduced inventory by over $600 million sequentially.
Sean J. Kerins: From a regional perspective, in Europe and the Americas, customers continue to moderate their supply, as reflected by their reluctance to place new orders. While we expect sub-seasonal performance in the near term and continued softness in industrial markets, we were encouraged by robust design activity and relative strength in verticals, such as aerospace and defense and medical devices. And in Asia, we expect results to normalize somewhat with respect to typical seasonality when compared to the West.
Param Singh: From a regional perspective in Europe, and the Americas customers continued to moderate their supply as reflected by their reluctance to place new orders.
Param Singh: While we expect sub seasonal performance in the near term and continued softness in industrial markets. We were encouraged by robust design activity and relative strength in verticals, such as aerospace and defense and medical devices.
Param Singh: And in Asia, We expect results to normalize somewhat with respect to typical seasonality when compared to the west and while we can't predict the timing of a broader macroeconomic recovery. We were pleased by sequential growth in segments, such as data center compute and to a lesser extent transportation.
Sean J. Kerins: And while we can't predict the timing of a broader macroeconomic recovery, we were pleased by sequential growth in segments such as data center compute and, to a lesser extent, transportation, shifting to our global ECS business. During the quarter, we continued to execute on all things IT as a service, which led to a higher mix of infrastructure software, cloud solutions, and related services when compared to the prior year. Over time, this mix drives a growing portfolio of recurring revenue volumes, as well as better contribution margins for the business overall.
Param Singh: Shifting to our global ECS business.
Param Singh: During the quarter, we continued to execute on all things.
Param Singh: As a service.
Param Singh: Which led to a higher mix of infrastructure software cloud solutions and related services when compared to the prior year over.
Param Singh: Over time this makes drives a growing portfolio of recurring revenue volumes as well as better contribution margins for the business overall.
Sean J. Kerins: And given the annual nature of this business model, fourth quarter results were up sequentially as expected. From a regional perspective in Europe, we delivered year over year billings and gross profit dollar growth amidst the mixed IT spending environment.
Param Singh: And given the annual nature of this business model fourth quarter results were up sequentially as expected.
Param Singh: From a regional perspective in Europe, we delivered year over year billings and gross profit dollar growth amidst the mixed.
Sean J. Kerins: While storage and compute were down, they were more than offset by strength in infrastructure software and networking products. In North America, our results for the fourth quarter reflect a muted IT spending environment with softness in storage, compute, and cybersecurity, partially offset by strength in infrastructure software and networking. As we've stated in the past, we're in the process of optimizing our customer mix and supplier line card in the region to better serve the mid-market. We've made progress in this area and are optimistic about improving our results in the region this year. Before I hand things over to Raj, I do want to reflect a little bit on the future.
Param Singh: Spending environment.
Param Singh: While storage and compute were down they were more than offset by strength in infrastructure software and networking products.
Param Singh: And in North America, our results for the fourth quarter reflect a muted at spur.
Spending environment with softness in storage and compute and cyber security, partially offset by strength in infrastructure software and networking.
Param Singh: As we stated in the past we're in the process of optimizing our customer mix and supplier line card in the region to better serve the mid market. We made progress in this area and are optimistic about improving our results in the region. This year.
Speaker Change: Before I hand things over to Raj I do want to reflect a little bit on the future.
Sean J. Kerins: Despite the ongoing cyclical correction in a weaker macro-demand environment, we remain optimistic regarding the overall industry backdrop and believe longer-term technological trends will benefit Arrow. We're at the center of large and growing markets, driven by the electrification of everything, renewable energy, autonomous vehicles, and artificial intelligence, just to name a few. Given a longer horizon, we remain committed to the growth initiatives we've previously shared with you, where our differentiation provides value to both our suppliers and customers. First, in demand creation, we added engineering resources throughout 2023, which helped demand creation revenue outpace the rest of the portfolio. Second, our engineering services have been gaining traction across attractive verticals such as renewable energy, automotive, and medical devices. As a result, full-year engineering services revenue grew meaningfully.
Speaker Change: Despite the ongoing cyclical correction and a weaker macro demand environment, we remain optimistic regarding the overall industry backdrop and believe longer term technology trends will benefit arrow.
Speaker Change: We're at the center of large and growing markets driven by the electrification of everything renewable energy autonomous vehicles and artificial intelligence just to name a few.
Speaker Change: Given the longer horizon, we remain committed to the growth initiatives. We've previously shared with you where our differentiation provides value to both our suppliers and customers.
Speaker Change: First and demand creation, we added engineering resources throughout 2023, which helped demand creation revenue outpaced the rest of the portfolio.
Speaker Change: Our engineering services have been gaining traction across attractive verticals, such as renewable energy automotive and medical devices. As a result full year engineering services revenue grew meaningfully.
Rajesh K. Agrawal: Third, in supply chain services, we expanded our customer base in 2023 with further penetration in the data center and automotive verticals. And looking ahead, we see additional opportunities to extend this offering to other verticals in OEM. Next, we've maintained our differentiated focus on interconnects, passives, and electromechanical components, a margin of creative growth within our components business. And finally, in our ECS business, over the course of the year, we enhanced our digital distribution platform Aerosphere, while onboarding new channel partners and supplier lines, demonstrating our commitment to the market's transition to IT as a service. In the meantime, as we navigate a challenging near term, we will continue to prudently manage our cost structure and working capital portfolio with an eye towards emerging even stronger as market conditions improve. And with that, I'll hand things over to Raj.
Speaker Change: Third in supply chain services, we expanded our customer base in 2023 with further penetration in the data center and automotive verticals and looking ahead, we see additional opportunities to extend this offering to other verticals and Oems.
Speaker Change: Next we have maintained our differentiated focus on interconnect passive and electromechanical components of <unk>.
Speaker Change: Margin accretive growth area within our components business and finally in our ECS business over the course of the year, we enhanced our digital distribution platform <unk>, while Onboarding, new channel partners and supplier lines, demonstrating our commitment to the markets transition to it as a service.
In the meantime, as we navigate a challenging near term we will continue to prudently manage our cost structure and working capital portfolio with an eye towards emerging even stronger as market conditions improve and with that I'll hand things over to Raj.
Rajesh K. Agrawal: Thanks, Shawn. I'll be speaking to our financials on an as reported and gap basis unless otherwise specified. Consolidated revenue for the full year 2023 was $33.1 billion, which was down 11% versus the prior year. Global component sales were $25.4 billion, which was down 12% from the prior year, driven primarily by softness in the Asia market and reduced shortage market activity in the Americas, partially offset by growth in our European market. Enterprise Computing Solutions sales were $7.7 billion, which was down 8% versus the prior year.
Thanks, Sean I'll be speaking to our financials on an as reported and GAAP basis, unless otherwise specified.
Param Singh: Consolidated revenue for the full year 2023 was $33 $1 billion, which was down 11% versus prior year global components sales were $25 4 billion, which was down 12% from the prior year driven primarily by softness in the Asia market and reduced short as market activity in the Americas, partially.
Param Singh: Offset by growth in our European market.
Param Singh: Enterprise computing solutions sales were $7 $7 billion, which was down 8% versus prior year.
Rajesh K. Agrawal: Importantly, our full-year global ECS earnings were flat from the prior year, reflecting growth in Europe offset by a decline in North America due to a softer IT spending market in that region. Moving to other financial metrics for the full year, consolidated gross margin of 12.5% for the full year was down 50 basis points from the prior year. Non-GAAP operating expenses were down $157 million from the prior year to $2.6 billion.
Param Singh: Importantly, our full year global ECS bearings were flat from prior year, reflecting growth in Europe offset by a decline in North America due to a softer it spending market in that region.
Param Singh: Moving to other financial metrics for the full year consolidated gross margin of 12, 5% for the full year was down 50 basis points from prior year.
Param Singh: non-GAAP operating expenses were down $157 million from prior year to $2 $6 billion. The Opex decline came from a favorable legal settlement in the third quarter reduced variable expenses and our continued efforts to control spending.
Rajesh K. Agrawal: The OPEX decline came from a favorable legal settlement in the third quarter, reduced variable expenses, and our continued efforts to control spending. Non-gap operating income was $1.6 billion, or 4.8% of sales, with global components operating margin coming in at 5.8% and enterprise computing solutions coming in at 4.8%. Non-gap diluted EPS for the full year was $17.12, based on an average outstanding share count of 57 million shares. Now, I'm turning to our fourth quarter results. Consolidated revenue for the fourth quarter was $7.8 billion, within our guidance range and down 16% versus the prior year. Global component sales were $5.6 billion, meeting the midpoint of our guidance and down 10% versus the prior quarter or 17% versus the prior year due to the ongoing semiconductor inventory correction. Enterprise Computing Solutions sales were $2.2 billion, also in line with guidance and down 11% versus the prior year.
Param Singh: non-GAAP operating income was $1 $6 billion or four 8% of sales with global components operating margin coming in at five 8% and enterprise computing solutions coming in at four 8% non.
Param Singh: non-GAAP diluted EPS for the full year was $17 12 based on an average outstanding share count of 57 million shares.
Param Singh: Now turning to our fourth quarter results.
Param Singh: Consolidated revenue for the fourth quarter was $7 $8 billion within our guidance range and down 16% versus prior year.
Param Singh: Global components sales were $5 $6 billion.
Param Singh: Meeting, the midpoint of our guidance and down 10% versus prior quarter or 17% versus prior year due to the ongoing semiconductor inventory correction.
Param Singh: Enterprise Computing solutions sales were $2 2 billion also in line with guidance and down 11% versus prior year. This was partly a function of product mix and probably a function of lower discretionary it spending in North America.
Rajesh K. Agrawal: This was partly a function of product mix and probably a function of lower discretionary IT spending in North America. Moving to other financial metrics for the quarter, fourth quarter consolidated gross margin of 12.6% was down 30 basis points versus the prior year, driven primarily by overall mix and global components.
Param Singh: Moving to other financial metrics for the quarter.
Param Singh: Fourth quarter consolidated gross margin of 12, 6% was down 30 basis points versus prior year, driven primarily by overall mix in global components sequentially.
Rajesh K. Agrawal: sequentially, our gross margin was higher by 40 basis points due to the typical seasonality within the ECS business, as well as favorable mix and components business in the West. Our fourth quarter non-GAAP operating expenses declined sequentially when normalized for certain previously announced third quarter items. Our Q4 GAAP operating expenses included restructuring, integration, and other charges of $40 million related to facility consolidation and other operating expense reductions. We generated non-gap operating income of $364 million in Q4, which was 4.6% of sales, with global components operating margin coming in at 5.1% and enterprise computing solutions coming in at 6.6%. Interest and other expense was $82 million in the fourth quarter, which was flat quarter over quarter and better than guided due to lower than expected average daily borrowing. Our non-GAAP-affected tax rate was also favorable to our guide at 21.8%, resulting from certain domestic and foreign tax credits.
Param Singh: Sequentially, our gross margin was higher by 40 basis points due to the typical seasonality within the ECS business as well as favorable mix and components business in the west.
Param Singh: Our fourth quarter non-GAAP operating expenses declined sequentially when normalized for certain previously announced third quarter items.
Param Singh: Our Q4 GAAP operating expenses included restructuring integration and other charges of $40 million related to facility consolidation and other operating expense reductions.
Param Singh: We generated non-GAAP operating income.
Param Singh: $364 million in Q4, which was four 6% of sales with global components operating margin coming in at five 1% and enterprise computing solutions coming in at six 6% interest and other expense was $82 million in the fourth quarter, which was flat quarter over quarter and better than guided due.
Param Singh: Lower than expected average dairy borrowings.
Param Singh: Our non-GAAP effective tax rate was also favorable to our guide at 21, 8%, resulting from certain domestic and foreign tax credits.
Rajesh K. Agrawal: And finally, non-GAAP diluted EPS for the fourth quarter was $3.98, which is above the high end of our guidance range and based on a 55 million share count. Turning our attention to working capital, networking capital for Q4 was flat from Q3 at $7.4 billion.
Param Singh: And finally non-GAAP diluted EPS for the fourth quarter was $3 98.
Param Singh: Which is above the high end of our guidance range and based on a 55 million share count.
Param Singh: Turning our attention to working capital.
Param Singh: Working capital for Q4 was flat from Q3 at seven 4 billion accounts receivable and accounts payable both increased in the fourth quarter due to normal seasonality in the ECS business, along with activity in our supply chain services offering <unk>.
Rajesh K. Agrawal: Accounts receivable and accounts payable both increased in the fourth quarter due to normal seasonality in the ECS business along with activity in our supply chain services offering. Inventory at the end of the fourth quarter was $5.2 billion, decreasing more than $600 million from Q3, with inventory days declining to 69. The combination of ECS seasonality along with the decline in inventory drove a reduction in our cash conversion cycle. Our cash flow from operations was $287 million in the fourth quarter and $705 million for the full year. Net debt at the end of the fourth quarter was lower compared to Q3, at $3.6 billion.
Param Singh: Inventory at the end of the fourth quarter was $5 2 billion decreasing more than $600 million from Q3 with inventory days declining to 69.
Param Singh: The combination of ECS seasonality, along with a decline in inventory drove a reduction in our cash conversion cycle.
Param Singh: Our cash flow from operations was $287 million in the fourth quarter and $705 million for the full year.
Param Singh: Net debt at the end of the fourth quarter was lower compared to Q3 at $3 6 billion.
Rajesh K. Agrawal: Arrow's total liquidity at the end of the fourth quarter was $2.4 billion, including our cash balance of $218 million. We remain confident in the strength of our balance sheet, which gives us the financial flexibility to effectively manage our working capital needs. We repurchased shares in the amount of approximately $50 million in the fourth quarter and approximately $750 million for the next four years. At the end of the fourth quarter, our remaining stock repurchase authorization stands at approximately $580 million. Please keep in mind that the information I've shared during this call is a high-level summary of our financial results. For more details regarding the business segment results, please refer to the press release and earnings presentation published on our website this morning.
Param Singh: Era's total liquidity at the end of the fourth quarter stands at $2 $4 billion, including a cash balance of $218 million.
Param Singh: We remain confident in the strength of our balance sheet, which gives us the financial flexibility to effectively manage our working capital needs.
Param Singh: We repurchased shares in the amount of approximately $50 million in the fourth quarter and approximately $750 million for the four year.
Param Singh: At the end of the fourth quarter, our remaining stock repurchase authorization stands at approximately $580 million.
Param Singh: Please keep in mind that the information is shared during this call at the high level summary of our financial results.
Param Singh: For more details regarding the business segment results. Please refer to the press release and earnings presentation published on our website. This morning.
Rajesh K. Agrawal: Now turning to Q1 guidance, we expect sales for the first quarter to be between $6.7 billion and $7.3 billion. We expect global component sales to be between $5 billion and $5.4 billion, which at the midpoint is down 8% from the prior quarter. We expect enterprise computing solutions sales to be between $1.7 billion and $1.9 billion, which at the midpoint represents a 4% decrease year on year. We're assuming a tax rate in the range of approximately 23 to 25% and interest expense of approximately $80 million.
Param Singh: Now turning to Q1 guidance.
Param Singh: We expect sales for the first quarter to be between $6 7 billion seven 3 billion.
Param Singh: We expect global components sales to be between 5 billion and $5 4 billion, which at the midpoint is down 8% from prior quarter.
Param Singh: We expect enterprise computing solutions sales to be between $1 7 billion and $1 9 billion.
Param Singh: Which at the midpoint represents a 4% decrease year on year.
Param Singh: We're assuming a tax rate in the range of approximately 23% to 25% and interest expense of approximately $80 million.
Operator: And our non-GAAP diluted earnings per share is expected to be between $2.20 and $2.40, which reflects unfavorable leverage in the business due to current market dynamics. And finally, we estimate changes in foreign currencies to have an immaterial effect on our Q1 guidance. The details of the foreign currency impact can be found in our press release. With that, Shawn and I are now ready to take your questions. Operator, please open the line.
Param Singh: And our non-GAAP diluted earnings per share is expected to be between $2 20, and $2 40, which reflects unfavorable leverage in the business due to current market dynamics.
Param Singh: And finally, we estimate changes in foreign currencies to have an immaterial effect on our Q1 guidance. The details of the foreign currency impact can be found in our press release.
Speaker Change: With that Sean and I are now ready to take your questions. Operator, Please open the line.
Matthew John Sheerin: At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one. Your first question comes from the line of Matt Sheerin from CFL. Please go ahead.
Speaker Change: At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star one.
Speaker Change: Your first question comes from the line of Matt Sheerin from Stifel. Please go ahead.
Sean J. Kerins: Yes, thank you very much. The first question concerns the inventory reduction in the quarter, which was nice to see. But on a day-to-day basis, particularly year over year, you're still up. So the question is, A, looking at your customers' inventory, how long do you think this is going to take to wash out? And B, in terms of your own inventory target over the next couple of quarters, what should we be thinking about? Sure, man.
Matthew John Sheerin: Yes, thank you very much.
Matthew John Sheerin: First question just regarding on the inventory reduction in the quarter, which was nice to see.
Matthew John Sheerin: But on a days basis, particularly year over year, Youre still you'll still up.
Speaker Change: So the question is.
Speaker Change: Looking at your customers' inventory.
Speaker Change: How long do you think this is going to take to wash out and B in terms of your own inventory target over the next couple of quarters, what should we be thinking about.
Speaker Change: Sure Matt.
Sean J. Kerins: Welcome. So you're right, we focused pretty intently on backlog conversion in the quarter, and that helped us drive the reduction that you saw. I think part of this comes from our focus on the mass market, which is really a sweet spot for us, where we're seeing a little better sell-through velocity than we are in the higher end of the market. The other thing to point out about inventories is that our units were down in the quarter, both sequentially and year over year, so part of the excess you're still seeing is really a function of price versus a lot of inbound The rate of inbound has certainly slowed for us as lead times have normalized. The other thing I would tell you is that if you look at it, region by region. You know, we exited the quarter within a turn or less as compared to our historical norms, so we think the right things are happening by way of normalization.
Matthew John Sheerin: Welcome so.
Speaker Change: Youre right we focused.
Pretty intently on backlog conversion in the quarter and that helped us drive.
Speaker Change: The reduction that you saw I think part of this comes from our focus on the mass market, which is really a sweet spot for us where we're seeing a little better sell through velocity than we are in the higher end of the market.
Speaker Change: The other thing to point out about inventories is that our units were down.
Speaker Change: In the quarter, both sequentially and year over year. So part of the excess you are still seeing is really a function of price versus.
Speaker Change: A lot of inbound volumes the rate of inbound has certainly slowed through us as lead times have abnormalize. The other thing I would tell you is that if you look at it.
Region by region, we exited the quarter within a turn or less.
Speaker Change: Compared to our historical norms. So we think the right things are happening.
Sean J. Kerins: There is still a piece of the excess inventory that's really a function of, you know, some of the long-term supply agreements that were in place. Most of those have wound down or are winding down, and the impact of that is abating for us over time. So yeah, hard to say exactly when things fully normalize. Suppliers are now, you know, behaving much like they would have been in pre-pandemic days, you know, with lead times much more normal. They're certainly flexible with regard to rescheduling and canceling activity.
Speaker Change: The way of normalization there is still a piece of the excess inventory that's really a function of.
Speaker Change: So over the long term supply agreements that were in play.
Speaker Change: Most of those have wound down or are winding down and the impact of that is abating for us over time.
Speaker Change: Yes, it's hard to say exactly.
Speaker Change: When things fully normalize suppliers are now behaving much like they would have been in prepayment as delek days.
Speaker Change: With lead times much more normal there are certainly flexible with regard to reschedule and cancel cancellation activity for us that's been a little more rescheduled and cancellation for sure but it doesn't mean the time it takes to.
Sean J. Kerins: For us, that's meant a little more rescheduled and cancellations, for sure, but it does mean the time it takes to, you know, work your way through the backlog is lengthening. But the right things are happening, and as we said in our prepared remarks, you know, book-to-bills stabilizing and improving slightly, inventories coming down, we feel good about where we are, probably still need this quarter and next just from an inventory perspective to see things, you know, fully normalized yet again. Okay, thank you for that.
Speaker Change: Work your way through the backlog is extending.
Speaker Change: But the right things are happening and as we said in our prepared remarks book.
Speaker Change: Book to bills, stabilizing and improving slightly inventories coming down we feel good about where we are.
Speaker Change: We still need.
Speaker Change: This quarter and next and just from an inventory perspective.
Speaker Change: To see things fully normalize yet again.
Speaker Change: Okay. Thank you for that and then just a question regarding margins.
Matthew John Sheerin: And then just a question regarding margins. In the March quarter, it looks like your operating margin is going to shake out in the mid 3% range or so, down year over year on volumes, obviously. But can you give us a sense of what the gross margin might look like sequentially? Is that expected to be down?
Speaker Change: In the March quarter. It looks like your operating margin is going to shake out in the mid 3% range or so so down year over year.
Speaker Change: On the volumes obviously, but.
Speaker Change: Can you give us a sense what the gross margin might look like sequentially is that expected to be down and then also on Opex. I know you have some restructuring program. So are you expecting to get opex dollars down quarter on quarter or year on year.
Sean J. Kerins: And also on OPEX, I know you have some restructuring programs. So are you expecting to get OPEX dollars down quarter after quarter or year after year? Sure, Matt.
Speaker Change: Sure Matt So let me, let me start with global components, because that represents the lion's share of our volume.
Sean J. Kerins: So let me start with global components because that represents the lion's share of our volume. You know, what you're seeing from an operating margin perspective is really more a function of regional mix than anything to do with pricing pressure. We've got a little bit less EMEA on a relative basis, you know, in this outlook than what normal seasonality might imply. But if you look at all of our forecasts, across the business, we kind of see gross margin holding up pretty well sequentially. So really, what we've got here is just, you know, a loss of operating leverage at these sales levels.
Speaker Change: What youre seeing from an operating margin perspective is really more a function of regional mix.
Speaker Change: Than anything to do with pricing pressure, we've got a little bit less EMEA on a relative basis in this outlook than what normal seasonality might imply but.
Speaker Change: But if you look at all of our forecasts across the business, we kind of see gross margins holding up pretty well sequentially. So really what we've got here is just.
A loss of operating leverage at these sales levels, we know that as demand improves the leverage piece of the equation is going to take care of itself.
Sean J. Kerins: We know that as demand improves, the leverage piece of the equation is going to take care of itself. You know, we're pretty comfortable that the structural, you know, contributors to our margin strength are holding up. From an OpEx perspective, you're right. We've always been pretty vigilant when it comes to our cost structure, and that's not changing, especially in this market environment. We are taking appropriate actions in the near term. You know, I can pretty confidently tell you that, you know, you'll see our absolute operating expense dollars trend downward over the course of the year.
Speaker Change: We're pretty comfortable that the structural <unk>.
Speaker Change: Contributors to our margin strength or are holding up.
From an Opex perspective, you're right, we've always been pretty vigilant when it comes to our cost structure, that's not changing especially in this market environment. We are taking appropriate actions in the near term.
Speaker Change: Pretty confidently tell you that youll see our absolute operating expense dollars trend downward.
Speaker Change: Over the course of the year.
Matthew John Sheerin: At the same time, you know, even though this correction is taking a little bit longer to play out, I would say we ultimately see this as, you know, short-term in nature. So we do intend to protect our growth priorities and the associated selling and engineering capacity for the long haul. And Matt, maybe I could just add, we also see in the first quarter the typical seasonality for ECS, where they had, you know, they had their largest quarter in the fourth quarter, and they also had their softest quarter in the first quarter. And so you're gonna get a natural step down in margins just in the ECS business. So that, you know, that's why you're sort of seeing the margin step down that you're seeing. Okay. Thank you very much. Your next question comes from the line of Melissa Fairbanks from Raymond James. Please go ahead.
Speaker Change: At the same time, even though this correction sticking a little bit longer to play out I would say, we ultimately see this as short term in nature. So we do intend to protect our growth priorities and the associated selling and engineering capacity for the long haul.
Speaker Change: And Matt maybe I could just add we also see a first quarter, where typical seasonality for ECS, where they had they have they're.
Matthew John Sheerin: The largest quarter in the fourth quarter and we also have their softest quarter in the first quarter and so youre going to get a natural step down in margins Jessica in the ECS adherence to that that's why you're sort of expanding that margin step down that you are seeing.
Speaker Change: Understood. Okay. Thank you very much.
Speaker Change: Your next question comes from the line of Melissa Fairbanks from Raymond James. Please go ahead.
Melissa Fairbanks: Hi guys, thanks very much for taking my question. I just had a quick one, maybe to go back on the inventory from a little different perspective. As we've heard from a number of your suppliers this quarter, some have managed their channel inventories better than others, but pretty much all are seeing the same demand dynamics as the supply has eased as what you're seeing. Are you starting to see any suppliers trying to push more inventory through to you as they work to manage their own working capital? Or is it still pretty much a fair balance? Hi Melissa.
Melissa Fairbanks: Hi, guys. Thanks, very much for taking my question.
Melissa Fairbanks: I just had a quick one maybe to go back on the inventory from a little different perspective.
Melissa Fairbanks: As we've heard from a number of your suppliers this quarter some of manage their channel inventories better than others pretty much all are seeing the same demand dynamics as a supply has eased as what youre seeing are you starting to see any suppliers trying to push more inventory through to you as they work to manage their own working capital or is it still pretty much.
Melissa Fairbanks: A fair balance.
Speaker Change: Hi, Melissa.
Sean J. Kerins: Welcome. And I'm glad you asked the question, because I wanted to clarify my last remark. You know, the short answer is no, we're not seeing that really at all. In fact, as lead times have normalized, for the most part, completely, suppliers have again returned to a more flexible posture with regard to, you know, the backlog that we're still managing through. So that means that, you know, we're able to reschedule as necessary, and cancel on occasion. That takes a little bit longer to convert the backlog, and our backlog still remains at significant levels beyond pre-pandemic days, but we're not seeing any pressure from our suppliers in this environment. I think we're getting to, you know, the other side of what you typically expect in that regard. Okay, great. That's great to hear!
Melissa Fairbanks: Welcome and I'm glad you asked the question because I wanted to clarify my last remark the short answer is no.
Speaker Change: We're not seeing that really at all in fact it.
Melissa Fairbanks: As lead times, if normalized for the most part completely suppliers again have returned to a more flexible posture with regard to.
Melissa Fairbanks: The backlog that we are still managing through so that means that we're able to to reschedule as necessary cancel on occasion.
Melissa Fairbanks: It's a little bit longer to convert the backlog and our backlog still remains that.
Melissa Fairbanks: Significant levels beyond pre pandemic days, but we are not seeing any pressure.
Melissa Fairbanks: From our suppliers in this environment I think we're getting to the.
Melissa Fairbanks: The other side of what would be typically expect in that regard.
Speaker Change: Okay, great that's great to hear.
Melissa Fairbanks: Maybe as a follow-up, just kind of dig in on what you mentioned about transport in Asia. You were actually starting to see a little bit of growth there on a sequential basis. What we've heard from a lot of your suppliers and maybe some of your own customers is that the demand has, outside of a few pockets, actually been fairly resilient. It's just been a matter of up and down the supply chain, and we'll now have enough buffer inventory. Are you starting to see goods sell through, or is it demand improvement, or maybe a balance of both? I'd say, you know, in general, Melissa, it's a balance of both, you know, and again, my comments were more on a relative basis. You know, I think we all know that the Chinese market remains, you know, down, certainly soft. And the, you know, the period for recovery is a little unclear, but transportation and, specifically, EV has been a little bit healthier for us as compared to most other verticals, although demand hasn't probably ticked up dramatically.
Speaker Change: Maybe as a follow up just kind of dig in on Sean What you mentioned on the transport in Asia, we're actually starting to see a little bit of growth there on a sequential basis.
Speaker Change: What we've heard from a lot of your suppliers and maybe some of your.
Speaker Change: Your own customers is that the demand has been outside of a few pockets has actually been fairly resilient. It's just been a matter of up and down the supply chain people now have enough buffer inventory.
Speaker Change: Are you starting to see good sell through or is it.
Speaker Change: Amanda improvement or maybe a balance of both.
Speaker Change: I would say in general Melissa it's a balance of both.
Speaker Change: And again my comments were more on a relative basis I think we all know that the Chinese market remains.
Speaker Change: Down certainly soft in the yes the.
Speaker Change: Periods for recovery is a little unclear, but transportation and specifically <unk> has been a little bit healthier for us as compared to most other verticals, but.
Speaker Change: The demand Hasnt, probably ticked up dramatically at the same time, we've been able to sell through pretty consistently.
Sean J. Kerins: At the same time, we've been able to sell through pretty consistently some of the inventory we do carry for that space. And I think that will be kind of the same posture for us in this quarter as well. Okay, great. Thanks so much.
Speaker Change: Some of the inventory, we do carry for that space.
Speaker Change: That will be kind of the same posture for us in this quarter as well.
Speaker Change: Okay, great. Thanks, so much that's all for me.
Joe Quatrochi: That's all for me. You bet. Your next question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.
Speaker Change: You bet.
Speaker Change: Your next question comes from the line of Joe <unk> from Wells Fargo. Please go ahead.
Sean J. Kerins: Yeah, thanks for taking the question. I just wanted to kind of understand, you talked about your IP, and you booked a bill approaching parity. In that context, can you help us just understand it, when we think about that relative to other cycles and the rest of your components business, has that been like a leading indicator of a recovery? Just kind of help us to maybe understand the importance of that kind of. You know, Joe, I would really, I probably wouldn't link IP&E to the broader correction cycle in that way, necessarily. Remember that IP&E, as compared to semiconductors, never really had the same shortage and capacity challenges as we saw in the semiconductor space. So, you know, lead times never went out as long, shortages never got to be that severe, and so we're really not in the same kind of correction in that piece of the market as we are in the semiconductor piece of the market.
Joe: Yes, thanks for taking the question.
Joe: I just wanted to understand you talked about your IP any book to bill approaching parity.
Joe: In that context can you help us just understand it.
Joe: When we think about that relative to other cycles and the rest of your.
Joe: Our components business has that been like a leading indicator of a recovery just kind of help us maybe understand.
Joe: The importance of that comment.
Speaker Change: Joe I would really I, probably wouldn't leak IP.
Speaker Change: <unk> to the broader correction cycle in that way necessarily remember that IP.
Speaker Change: As compared to semiconductor never really had the same shortage and capacity challenges as we saw in the semiconductor space. So lead times never went out as long shortages never got to be that severe and so we're really not in the same kind of correction in that piece of the market as we are.
Speaker Change: In the semiconductor piece of the market.
Sean J. Kerins: And yeah, it's been more resilient and more predictable for us, hence the reason book-to-bill is closer to parity. And as you know, we like the space. It's margin accretive.
Speaker Change: Yes, it has been more resilient more predictable for us hence the reason book to bills closer to parity.
Speaker Change: And as you know we like the space is margin accretive.
Sean J. Kerins: And our new leader for our global components business is doing a nice job of really standing up a differentiated go-to-market model for that piece of the market. And we think, you know, over time and the long term, it's really going to be quite attractive for us. Thanks for that.
Speaker Change: Our new leader for our global components business is doing a nice job of really standing up.
Speaker Change: A differentiated go to market model for that that piece of the market and we think.
Speaker Change: Over time and long term, it's really going to be quite attractive for us.
Speaker Change: Got it thanks for that and then just.
Joe Quatrochi: I guess as we're looking, you know, beyond the March quarter and trying to think about the regional mix and impact on margins on the business, as we think about seasonality into the June quarter, is it fair to assume that that's a bit of a negative headwind, just given that it sounds like Asia's maybe working through inventory a little bit faster than the Western region? You know, probably too early to call Q2. From a seasonality perspective, Joe, I can tell you when we look at Q1, we are getting below normal seasonality overall, you know, that's really a function of, you know, some more macro pressure in the West, you know, with evidence of, you know, some softness in industrial and parts of automotive.
Speaker Change: I guess as well.
Looking.
Speaker Change: Beyond the March quarter, I'm trying to think about and the regional mix and impact to margins on the business as we think about seasonality into the June quarter is it fair to assume that that's a bit of a.
Speaker Change: Negative headwind.
Speaker Change: Just given that it sounds like Asia is maybe.
Speaker Change: Working through inventory, a little bit faster than the western regions.
Speaker Change: Probably too early to call Q2 from a seasonality perspective, Joe I can tell you when we look at Q1.
Speaker Change: We are we are guiding below normal seasonality overall.
Speaker Change: That's really a function of some some more macro pressure in the west with evidence of.
Speaker Change: Some softness in industrial and parts of automotive.
Sean J. Kerins: I think in Asia, you know, we're not necessarily assuming the typical uptick that you'd see post the Chinese New Year. But as we work through the backlog, and as you know, inventories start to normalize, we're going to get better visibility into near-term demand. And that's going to be a good signal for business in the market overall. Thank you. Your next question comes from the line of William Stein from Truist Securities. Please go ahead. Great.
Speaker Change: In Asia, we're not necessarily assuming the typical uptick that you would see.
Speaker Change: Post the Chinese new year.
But as we work through backlog and as inventories start to normalize.
Speaker Change: We're going to get better visibility to near term demand and thats going to be a good signal for the business and the market overall.
Speaker Change: Got it thank you.
Speaker Change: Yes sure.
Speaker Change: Your next question comes from the line of William Stein from <unk> Securities. Please go ahead.
William Stein: Thanks for taking my questions and congratulations on the good results this quarter. I'm hoping you can linger a little bit on the legal settlement. If you can maybe remind us what that's related to, how big was it, and in which segment?
William Stein: Great. Thanks for taking my questions and congratulations on the good results this quarter.
William Stein: I'm, hoping you can linger a little bit on the legal settlement.
William Stein: If you can maybe.
William Stein: Remind us what that related to.
How big was it in which segments.
Sean J. Kerins: Sure, Will, and thank you. I'll let Raj speak to the number. But just for context, the settlement was related to a commercial dispute with a subset of our supplier base that dates back, you know, well more than a decade ago. Many of us weren't even on the scene when this played out, you know, but we are very pleased with this resolution. And we anticipate no ongoing consequences. Raj, maybe you can speak to our numbers. Will, this was all in the third quarter.
Speaker Change: Sure will.
Speaker Change: And thank you I'll, let raj speak to the number.
Param Singh: For context.
Param Singh: The settlement was related to a commercial dispute with a subset of our supplier base that dates back well more than a decade ago. Many of us weren't even on the scene when displayed out but we are very pleased this resolve and we anticipate no.
Param Singh: Ongoing consequences.
Param Singh: Maybe yes, we've done a number of saying well. This is all in the third quarter as you narrow the settlement that we took into our Opex was $62 million. The Regal benefit settlement that we got the benefit of that and that was in the components business and that was worth about 100 basis points.
Rajesh K. Agrawal: As you know, the settlement that we took into our OPEX was $62 million, the legal benefit settlement that we got the benefit of. That was in the components business, and that was worth about 100 basis points to the components margins in that quarter. Great, thanks.
Param Singh: Components margins in that quarter.
Param Singh: Yeah.
Rajesh K. Agrawal: And then share count. I know you're, I know you have, well, maybe you can just update us on what your expectation is for their share count in the current quarter. Yeah, we didn't give a guide to the share count. We don't typically, you know, guide the amount of shares we purchase because that's going to vary from quarter to quarter, as you can see, based on what we did in the fourth quarter. So we felt that giving you an actual share count wouldn't be appropriate either. We gave you the most important piece, though, Will. We gave you the EPS number that we're targeting and some of the other components in the P&L that you can sort of back into, you know, some of those key assumptions. So there is nothing unusual there.
Speaker Change: Great. Thanks.
Speaker Change: Sure counts although.
Speaker Change: I know you have.
Speaker Change: Maybe you can just update us on what your expectation is for the share count in the current quarter.
Speaker Change: Yes, we didn't give a guide to share count we don't typically.
Speaker Change: The amount of share repurchase because thats going to vary from quarter to quarter as you can see.
Speaker Change: Based on what we did in the fourth quarter. So we felt that giving you an actual share count wouldnt be appropriate either we gave you. The most important piece, though well we gave you the EPS number that we're targeting.
Speaker Change: Some of the other components too in the P&L that you can sort of back into some of those key assumptions.
Sean J. Kerins: Just, you know, we don't really guide the number of shares we purchase. So we didn't give you a share count either. Well, I would also add just to reconfirm our capital allocation priorities have not changed. Number one is, you know, organic investment or investment for organic growth, number two being appropriate M&A, and then number three, of course, returning cash to shareholders. As you can imagine, in this environment, we're going to be pretty surgical when it comes to organic investment. So, in lieu of an appropriate M&A target, we're still very prone to, you know, buybacks, as it makes sense relative to our debt capacity. Okay, thank you, as well. Thank you. You're next.
Speaker Change: Nothing unusual there just.
Speaker Change: <unk> really got to the number of shares repurchased so we didn't get the share count either.
Speaker Change: Well I would also add just to reconfirm our capital allocation priorities have not changed.
Speaker Change: Number one is organic investment or investment for organic growth.
Speaker Change: <unk> two being appropriate M&A and then number three of course, returning cash to shareholders. As you can imagine in this environment. We're we're going to be pretty surgical when it comes to organic investment. So a little of an appropriate M&A target, we are still very prone to buy.
Speaker Change: Buybacks.
Speaker Change: As it makes sense relative to our debt capacity.
Speaker Change: Okay. Thank you.
Speaker Change: Hello, Thank you.
Your next.
Operator: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead. Hi, thanks for taking my questions. I have one for Sean and one for Raj.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Your next question comes from the line of <unk> Bhattacharya from Bank of America. Please go ahead.
Ruplu Bhattacharya: Hi, Thanks for taking my questions I have one for Sean and one for Raj.
Ruplu Bhattacharya: Shawn, you were talking about investing organically. So in this weaker environment, can you talk about what areas you're going to be investing in? And in the prepared remarks, you talked a lot about several times about IT as a service. So how relevant is this to revenues? How should we think about that progressing over the next couple of years? And in terms of your growing portfolio of recurring revenue, how should we think about that? So, okay, Ruplu, you have got a few different threads here. Let me try to take them one at a time.
Ruplu Bhattacharya: Shawn you were talking about investing organically in this weaker environment can you talk about what areas youre going to be investing in and in the prepared remarks, you talked a lot about several times about <unk> as a service. So how relevant is this to revenues how should we think about that progressing over the next couple of years and in turn.
Ruplu Bhattacharya: The growing portfolio of recurring revenue, how should we think about that.
Ruplu Bhattacharya: Okay.
So okay.
Shawn: You've got a few different threads there let me let me try to take them one at a time.
Sean J. Kerins: Again, my comments about investment in this environment, you know, again, the key word there is surgical. We're taking the right steps and making the right moves to protect our cost structure and our profitability while we navigate this correction. To the extent that we have the ability to invest, you know, we just remain focused on the things that are core to our strategy, you know, demand creation, value-added offerings, and capabilities. Certainly, you know, our IP and e-selling motion, and then, of course, the transition to IT as a service in our ECS business. And so we're going to make sure that we're careful with respect to, you know, what's happening in the broader market in the meantime. But our investment priorities are fairly focused.
Again, my comments about investment in this environment.
Shawn: Again, the key word there is surgical.
Shawn: We're taking the right steps and making the right moves to protect.
Shawn: Our cost structure and our profitability, while we navigate this correction to the extent that we have the ability to invest we just remain focused on the things that are core to our strategy.
Shawn: Demand creation.
Shawn: You added offerings and capabilities.
Shawn: Our IP in the selling motion and then of course, the transition to <unk> as a service sooner in our ECS business and so we're we're going to make sure that we're careful with respect to what's happening in the broader market in the meantime, but our investment priorities are fairly focused.
Sean J. Kerins: With regard to your question about IT as a service, it's basically changing the shape of our sales numbers in that business. You know, the more we drive infrastructure software, and cloud-related solutions and services, the more you'll see our mix shift to a model that's more about GP dollars than it is about reported sales. And really, the right way to look at that business over time is through the lens of GPDollar and OIDollar growth as a result. But a good consequence of that pivot, and as you know, we've been on that journey for a good couple plus years now, has been the growth and the recurring piece of our total ECS business. We think now, when you look at cloud, when you look at things like the transition for And so, you know, we like that.
Shawn: With regard to your question about it as a service.
Shawn: It's basically changing the shape of our our sales number in that business.
Shawn: We drive infrastructure software.
Shawn: How'd related solutions and services.
Shawn: Youll see our mix shift to a model that's more about GP dollars than it is reported sales.
Shawn: Really the right way to look at that business over time is through the lens of.
Shawn: GP dollars and OID dollar growth as a result.
Shawn: But the good consequence of that that pivot and as you know we've been on that journey for a good couple of plus years now has been the growth in the recurring piece of our total ECS business. We think now when you look at cloud when you look at things like the transition for software from perpetual to subscription.
Shawn: Subscription based licensing models the recurring piece of our total mix is now approaching a third.
Shawn: And so we like that it's predictable, it's sticky and ultimately brings about accrete.
Sean J. Kerins: It's predictable, it's sticky, and ultimately brings about, you know, accretive contribution margins for, you know, that piece of our business. So we're staying the course there as well. And you'll have to forgive me, but I think you had a third question there. I want to make sure we don't forget it. I didn't, but I'm going to put one in just in terms of IT as a service. What are people buying? Are they buying hardware, or is it just software?
Shawn: The accretive contribution margins for that.
Shawn: That piece of our business. So we're staying the course, there as well and you'll have to forgive me, but I think you had a third question in there I want to make sure we don't forget it.
Speaker Change: I didn't but I'm going to put one in just in terms of Ikea and the service what are people buying are they buying hardware or is it just software at this point.
Sean J. Kerins: You know, ultimately, we think it's about both, but in the near term, and recently, it's been more about software. Okay, great. Thanks for all the details there. Rajesh, I just want to have a quick follow-up with you on margins. With respect to component margins, you know, there were 5.1% this quarter. Is there a revenue level you need to keep the segment margin above 5%?
Speaker Change: Ultimately, we think it's about both but in the near term and recently, it's been more about software.
Speaker Change: Okay, great. Thanks for all the details there Roger I just wanted to have a quick follow up with you on margins.
Speaker Change: With respect to component margins.
Speaker Change: There were five 1% this quarter is there a revenue level you need to keep the segment margin above 5% and then the same question on the ECS side, I think Sean talked about optimizing customers in line cards in Americas does that impact how we should think about margin trends in ECS this year already.
Ruplu Bhattacharya: And then on the ECS side, I think Shawn talked about optimizing customers and line cards in the Americas. Does that impact how we should think about margin trends in ECS this year? Or is it, the 1Q is the lowest, and then we should see sequential margin improvement until 4Q. So just your thoughts on the margins for both of these segments? Yeah, well, let me, there are a few questions in there, Ruplu, but let me take the first one to start. On the component side, you know, I don't think we have a set revenue level in mind for the higher margin target. We are still comfortable with the 5.5% to 6% in the components business in a normal environment.
Speaker Change: The <unk> is.
Life, and then we should see sequential margin improvement until <unk>. So just your thoughts on on this on the margin for both of these segments let.
Speaker Change: Let me all.
Speaker Change: There's a few questions in there let.
Speaker Change: Let me take the first one to start on that component side.
Speaker Change: Yes, I don't think we have a set revenue lateral in mind for the higher margin target and we still are comfortable with a five 5% to 6% in the components business in a normal environment right. Now we are going through the down cycle and as you heard some of the commentary that gross margins seem to be relatively steady and stable and it's really a function of.
Rajesh K. Agrawal: Right now, we're going through a down cycle, and as you have heard some of the commentary, gross margins seem to be relatively steady and stable. And it's really a function of negative leverage with the reduced revenue levels. So given the structurally higher margins that we have today, based on all the things that we did, we know that when revenue returns to a more normal environment, and that's, you know, to be defined, we're going to get that leverage back, and margins will take care of themselves. So we're confident about the long-term target that we have. And I'm going to turn to Sean a little bit on the second question.
Speaker Change: The negative leverage rates that reduced revenue level. So given the structurally higher margins that we had today and based on all the things that we did we know that when revenue returns to a normal to a more normal environment and thats to be defined.
Speaker Change: We're going to get that leverage back in margins will take care of themselves. So we're confident about the long term target that we have and I'm going to turn to Shanghai, but on the second question can you just repeat your question.
Rajesh K. Agrawal: Can you just repeat your question, Ruplu? Yeah, I just refer to what Sean said about the ECS segment. I think in the Americas region, you're trying to optimize customers and line cards. And so, where are you with that? And how does that impact how we should think about margins?
Speaker Change: Yes.
Shanghai: Efforts to what Sean had said about in the ECS segment I think in the Americas region, you're trying to optimize customers and line cards and so like where are you with that and how does that impact how we should think about margins I mean does that impact your margins positively this year versus prior years and how should we think about the trend in ECS margins.
Ruplu Bhattacharya: Like, I mean, does that impact your margins positively this year versus prior years? And what do we think about the trend in ECS margins? So I'm happy to take that Ruplu.
Shanghai: So.
Speaker Change: I am happy to take that route blue So again for context, we've got kind of two different models in our ECS business, We've got our regional business in Europe that.
Sean J. Kerins: So again, for context, we've got, you know, kind of two different models in our ECS business. We've got a regional business in Europe that really suits our strategy nicely. It's a mid-market region. It's one that lends itself nicely to a channel-based selling process. The mix, as we grew up in that business, was more about software and now the cloud as compared to the mix and the way that we grew up in North America, which was historically about hardware and larger enterprise accounts. So we're on the same path in North America to create the same model that we enjoy in Europe.
Blue: It really suits our strategy nicely with.
Blue: With the mid market region, and it's one that lends itself nicely to a channel based selling motion.
Blue: The mix as we grew up in that business. It was more about software and now cloud as compared to the mix and the way that we grew up in North America, which was historically about hardware and larger enterprise accounts. So we're on the same path in North America to create the same model.
Blue: The model that we enjoy in in Europe, and ultimately that should be occur.
Sean J. Kerins: And ultimately, that should be a positive on the margin line, but we're not calling it out for the full year yet at this point. We're just guiding one quarter at a time for all the reasons that you'd expect. But we think that that destination is a good one. We recognize we still have some work to do relative to more mid-market scale in North America, and we expect to see better progress across the course of 24. Okay, thank you for all the details; I appreciate it. Ruplu.
Blue: Accretive on the margin line, but we're not calling it out for the full year.
Blue: At this point we're just.
Blue: One one quarter at a time for all the reasons that you would expect but we think that that destination is a good one we recognize we still have some work to do relative to more mid market scale in North America, and we expect to see.
Blue: Better progress across the course of 'twenty four.
Speaker Change: Okay. Thanks for all the details appreciate it.
Speaker Change: Thanks for the color.
Anthony Bencivenga: We have no further questions in our queue at this time. I will now turn the conference back over to Anthony Bencivenga for closing remarks.
Speaker Change: We have no further questions in our queue at this time I will now turn the conference back over to Anthony Bencivenga for closing remarks.
Operator: Thank you, operator. And thank you everyone for joining us on today's call. We look forward to meeting you in the near future at upcoming investor events. Have a great day. This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Anthony Bencivenga: Yes. Thank you operator, and thank you everyone for joining us on today's call. We look forward to meeting you in the near future at upcoming Investor events have a great day.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Anthony Bencivenga: Please wait the conference will begin shortly.
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