Q3 2024 Arrow Electronics Inc Earnings Call
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Ladies and gentlemen, good day and welcome to the Arrow Electronics 3rd Quarter 2024 earnings call.
Speaker Change: Today's conference is being recorded.
At this time I would like to turn the conference over to Brad Windbigler, Rajesh Agrawal, and Vice President of Investor Relations. Please go ahead.
Thank you, operator. I'd like to welcome everyone to the Arrolytronics 3rd Quarter 2024, Ernest Conference Call.
Brad Windbigler: 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 Barano, and our President of Global Enterprise Computing, Eric Noak.
Brad Windbigler: During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans, and future financial results.
which are based on predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in our most recent islands with the SEC.
We undertake no obligations update publicly or revise any of the forward-looking statements as a result of new information or future events.
As a reminder, some of the figures we will discuss on today's call are non-gap measures which are not intended to be a substitute for our gap results. We've reconciled these non-gap measures to the most directly comparable gap financial measures in this course associated earnings release.
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, Sean and Raj will be available to take your questions.
I'll now hand the call over to our president and see Sean Kerins.
Thanks Brad, and thank you all for joining us.
Sean Kerins: Today, I'd like to discuss our third quarter results, provide some commentary on the market environment overall, and then close with some thoughts as to how we're lining up for the future.
I'll then turn things over to Raj, for more detail on our financials as well as our outlook for the fourth quarter.
For the third quarter, we delivered both sales and earnings per share that exceeded the midpoint of our guidance, generating total sales of $6.8 billion, and non-gap earnings per share of $2.38.
Contrivity to the sales results were sequential growth in our America's Components Business and solid year-over-year growth in global ECS.
In our Global Components Business, we were pleased to deliver sales and line with our expectations, but did so through a different regional and customer mix that originally anticipated.
We were also pleased to see better momentum in our ECS business highlighted by steady market dynamics in Europe and in improving trajectory in North America.
In addition, we continue to make positive strides related to the management of our working capital and the optimization of our cost structure, necessary initiatives in light of the current market environment. You'll hear more from Raj and both points shortly.
Sean Kerins: Turning further to our global component's business, the market correction appears to be more prolonged, than previously estimated. We believe both access inventory levels in macro headwinds are contributing to its persistence.
Speaker Change: Having said that, our leading indicators remained relatively stable in the quarter.
Our book to build ratios are still at or even above Q2 levels on a global basis.
They just not yet reached full parody overall.
Our backlogs have further stabilized and cancellation activity remains within normal ranges and our forward-booking profile continues to trend positively.
From a regional perspective and consistent with what we saw in Q2, market trends varied across regions and verticals. We thank largely consistent with the later stages of any cycle.
In Asia, we saw it mix patterns across the region but stability overall.
Our IP and E-business groups sequentially once again in the quarter. We saw a modest growth with improving trends in China, especially in the automotive sector. That was alongside some softest in parts of the industrial market and in azion.
In the Americas, we grew sequentially and with better than normal seasonality based on relative strength across a handful of verticals led by aerospace and defense, offsetting a decline across our industrial markets.
and in Amia, the sequential decline was brought based in nature reflecting its later entry into correction territory.
Our operating margins came under modest pressure in the quarter. This was due mainly to regional mix, specifically more Asia and less India on a relative basis, and customer mix, as our overall sales volumes skewed somewhat to the larger end of our customer base.
Recall that the mass market, we're pricing in margins, tend to be more attractive, has been a significant go-to-market priority for this business overtime.
As the market normalizes, we believe that these conditions are transitory in nature and not indicative of any structural changes to our business model.
Our Q4 outlook reflects continuation of ongoing market trends, especially those relevant to the markets in which we choose to compete. As such, we think we're still bouncing along the bottom.
Given the different trends we're seeing across regions and verticals, we can expect to see some Ed and Flow from 1-4 to the next.
Speaker Change: We expect our Asia Pacific business to perform closer to seasonal trends in the fourth quarter, with subseasonal activity levels in the West.
Speaker Change: Driven by softness across the industrial and automotive market segments.
Based predominantly on lower sales volume, we do expect operating margins will apply.
As has been the case throughout this piece of the cycle, the specific timing and shape of an eventual recovery remains difficult to predict.
Turning to global ACS, we delivered year over year revenue growth, well and excess of our expectations. That was a function of both continuous strengths in the Mia, along with improving execution in North America.
Once again on a global basis, we saw a healthy demand for infrastructure software, related to hybrid cloud and AI related solutions.
As a result, we delivered year over year gross profit dollar growth in the quarter and increasingly important proof point implied by our transition to the market for IT as a service.
We believe our steady pivot for the market for hybrid cloud solutions as well as the realignment of our North American business to better reflect the strategy we've successfully deployed in America, is leading us to better outcomes overall.
These included growing backlog, more recurring revenue streams, and a creative contribution margins.
Our Q4 outlook reflects consistent performance in the media and continued progress in North America. As a result, we expect year-over-year operating in Canberrauth and margin expansion.
Speaker Change: In closing, while we continue the managed through the cyclical correction in our component's business, we also remain focused on our strategic priorities.
Speaker Change: and Global Components, our supply chain management and design services offerings continue to grow through customer-based expansion.
We've now established Centers of Excellence for automotive, robotics, and high power. All aimed at scaling our go-to-market model in a solution-centric fashion.
Speaker Change: and we continue to make progress in the IPD market, deploying a motion in Asia similar to what we've established in the West.
Speaker Change: In Global ECS, our Aerospace or Platform is becoming central to our Go to Market Model, enabling the expansion of our customer base and growth in our recurring revenue streams.
and in both businesses, we're expanding our line card to position us for the future.
Lastly, I'd like to recognize and thank all of our employees around the world for their hard work during the quarter and throughout the year. They represent us proudly in the market each and every day. And with that, I'll turn things over to Rajesh.
Rajesh: Thanks Sean, consolidate a sales for the third quarter worth $6.8 billion, above the midpoint of our guidance range and down 15% versus prior year.
Global component sales were $4.9 billion down 2% versus prior quarter to head of the midpoint of our expectations.
Enterprise Computing Solutions sales were $1.9 billion, or 7% higher versus prior year due to favorable product mix and above the high end of our outlook.
Rajesh: Moving to other financial metrics for the quarter.
Rajesh: Third quarter, consolidated gross margins. The 11.5% was down approximately 80 basis points, sequentially driven primarily by regional and customer mixed impacts within our global components business.
Non-Gap operating expenses declined $18 million sequentially to $560 million in the third corner.
Recall that the second quarter also included a bad debt release of $20 million in applying an even greater step down in expenses.
We have then actively managing our expense space since the market turned with initiatives implemented over the past five quarters producing savings of approximately $200 million on an annualized basis.
In line with our continuing focus on reducing costs, we are simplifying our operations and beginning in the fourth quarter, our executing a plan to further reduce our annual operating expenses by approximately $90 to $100 million by 2026.
Rajesh: While achieving a possible one-third of these savings next year.
Rajesh: These efforts will focus on geographic realignment and consolidation of resources.
Reestimate Total Restructuring Spancers related to these initiatives to be approximately $135 million.
The company also intends to as is a non-douper farming, non-core business farms, which we estimate will generate approximately $15 million in additional costs.
Based on current market conditions and given expectations for future retirees, we believe these initiatives are appropriate and comprehensive.
Speaker Change: In the third quarter, we generated non-gap operating income of $215 million, which records at a 3.2% of sales.
with global components operating margin at 3.9%. And enterprise computing solutions at 4.1%. Both on a non-gap basis.
interest in other expense was $63 million in the third quarter as we benefited from lower average rent levels linked to our efforts to drive working capital efficiencies.
Our non-gap effected tax rate was 15.9% which benefited from successful resolution of recent audits.
And finally, non-gap diluted EPS for the third quarter was $2.30 a cent, exceeding the high end of our guided range, benefiting from favorable interest and tax expense.
Moving over to working in the capital.
Networking Capital grew modestly at the end of the third quarter by approximately $94 million compared to second quarter, ending the quarter at $6.9 million.
Inventory at the end of the third quarter was $4.5 billion, increasing $125 million from Q2. Our cash conversions cycle finished the quarter at 80 days.
For cash flow from operations, we've $81 million in the third quarter, or $804 million you get a date. This is the fifth consecutive quarter of positive cash for generation.
Speaker Change: NetGat at the end of the third quarter was lower compared to Q2 at $3 billion.
We repurchased $50 million of shares in the third quarter and a remaining repurchased authorization stand at approximately $375 million.
Due to day, we have repurchased $200 million of our stock.
In the short term, we are continuing to balance our capital priorities with managing our debt ratios.
Now, turning to Q4 guidance.
We expect sales for the fourth quarter to be between 6.67 billion and 7.27 billion dollars.
Leeds to collect global components sales to be between $4.5 and $4.9 billion. Leeds to be at the midpoint is down approximately 5% from prior quarter.
Enterprise Computing Solutions should benefit from typical fourth-quarter seasonality. They expect sales to be between 2.17 and 2.37 billion dollars, which is up 3% at the midpoint year on year.
Consolidated non-Gap operating margins are expected to benefit, order running quarter from fourth-quarter season out in ECS, more than offsetting and anticipated decline in global components operating margins.
Speaker Change: is alking primarily from negative operating leverage due to lower sales volume.
We're assuming it's saturating the range of approximately 23 to 25 percent, can interest 6 fans of approximately 60 to 65 million dollars.
and are non-gapter-witterings for share as expected to be between $2.48 and $2.60.
and finally, we estimate changes in foreign currencies to have an immaterial effect on a Q4 guide. The details of foreign currency impact can be found in our press release.
With that, Sean and I are now ready to take your questions.
Speaker Change: Operators, please open the line.
Thank you and we will now begin our question and answer session.
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And your first question comes from the line of Matt Sheeran with Seafall. Your line is open.
Yes, thank you on Good afternoon everyone. Just first question, relative to your guidance on for components.
Speaker Change: and Diving Down Around 4% sequentially. I think Sean, you said that you expect a few days to be seasonal in the Western markets to be down. Could you just clarify what that means?
Speaker Change: should have remained that age that should be sort of flat and you're up in North America down son high single digits.
and I have a follow up question.
Sean: Sure Matt, so I think the question is about the seasonality right? So if you're looking for how that compares to two three, you know, we see modest step-downs in the West.
and we see something that looks flat-ish in Asia. If that helps you out.
Sean: and the guy in terms of your book to Bill, you said it's a little bit better, but below one is at below one in all regions and basically Asia, the best followed by the two other markets.
Yeah, you got it. It's below one overall. It's still advancing just more slowly than we like. And Asia is leading the way.
Sean: Okay, great. And then on the gross margin.
Sean: which is you said has been weak and I think that's the lowest number in a few years. You talked about mix and I'll talk about a large seals.
With Europe expected to be down, as you said, lagging the other markets by at least two to three quarters. Redwood you expect pro-smartage to be back to 12% plus cause you sound like you're guiding gross margin to be flat as give or take for next quarter.
You know, man, I'd love to be able to say when that occurs. Obviously, you know, when the market improves again, I think you'll see, you know, the mass market return. Remember that the mass market typically follows.
The larger WEMs into recovery and right now it's a little bit more about the larger OEMs in our customer base than it is about the mass market when that happens.
You won't see the impact from that piece of our gross margin hit that we experienced in Q3. Tough to call. I think part of E.
Part of the challenge related to the recovery is that, you know, look, there's still excess margins, or I should say excess inventories.
throughout the industry, not just that distribution levels, but at customer levels as well.
Sean: and if you look at excess inventories a long time shorter lead times, that means we're not quite getting the visibility that we would need to lead us to be more certain about the timing of a broader recovery. We do believe it's coming but really tough to call it beyond more than say 90 days at a time.
Speaker Change: and your fair enough. Okay, thanks a lot Sean.
And your next question comes from the line of William Stein with truest securities. Your line is open.
Great, thank you for taking my questions.
When you're discussing the results I think perhaps even more so in the guidance that was a bit low expectations you cited.
William Stein: Customer Mix and Geomics, I think the Geomics Week we get that, but on the customer side I'm hoping you can linger on that for a minute maybe.
I'm not sure exactly how to ask it but maybe you can tell us more, be a little bit more specific about and markets or what's driving that in particular, can you tell us if there was any change of either policy or
It changed generally among any of your larger suppliers that could be influencing your performance in the outlook. Thank you.
Speaker Change: Yeah sure thing, well let's start there because there certainly wasn't any programmatic changes, you know that impacted us.
Sean: and Q3 or that we see impacting us in a material way in Q4. So I wouldn't cite.
Sean: You know, any big policy shifts, if you will. If you go back to what I tried to answer, you know, with Matt's question, I think.
Remember, the way the market typically exits a recovery, it tends to be Asia first and then the West follows typically North America and then eventually Europe and I think that's what we're seeing play out now. And then by customer type and you're right it does vary a little bit across verticals.
Sean: But by customer type, we typically see recovery before we see it in the large.
and to the market before we see it in the mass market and that's playing out now and so
It's a little bit tough to predict exactly what our mix will look like. You know, at the start of each quarter, we do a pretty good job of it.
Last quarter we think we saw a little more rotation to the larger end of our demand profile, which impacted us on the gross margin line. We think we've got it red fairly accurately for Q4, which is why we talk about...
The other main headwind to operating margin being strictly about the downturn and volume versus other factors. I'd say if you look at our...
are traditional mix, you know, we're very strong in.
Sean: You know the automotive sector especially across a whole variety of industrial markets.
and the Industrial Market themselves.
Sean: 10-do involve not just the big names that we all understand, but lots of smaller companies too.
and so, you know, we're not seeing all the small companies come back at the same rate. We are the large ones, aerospace and defense in the West has been more steady for us.
but that tends to at times involve larger programmatic deals as well. So a little bit more color. We think we've got a red well for at least the fourth quarter.
I appreciate that clarification. Maybe if I can just ask one more.
I just want to make sure I understand it. I think you answered it, but let me just go at it a different way. Several years, maybe quite in the number of years ago, one of the very big analog companies sort of changed the way to deal with attribution and that...
That has continued to play out over the years, but there's another one, like a competitor to them in that space.
Sean: where I think there's this idea circulating that that company is sort of falling suit and for example not paying for design wins and just going for fulfillment only. Is that a dynamic that you're seeing or is that not happening in these?
is not happened recently or in the outlook.
Well, as you probably might guess, we never talk about our suppliers other than in very general terms. But I'm actually glad you asked the question because it does allow me to talk a little bit about how we see our role.
in the broader industry as we look to the future. But maybe first just for a little bit of context. Our supplier portfolio is fairly diverse.
There's no, you know, not 81 supplier accounts for more than 10% of our total revenue.
and the fact is that over time suppliers do make program changes. It's been true in this business as long as I can remember.
But we feel like by and large, we're kind of too big at this point for any single change to alter our thinking as to, you know, the potential for growth and margin. You know, that we see in this market especially as we look longer-term.
And then I would also say, you know, look, we're not running away from opportunities related to, you know, things like channel consolidation.
Sean: We've got proven supply chain assets and processes across the globe. They're far reaching, they're scalable, they're resilient, they're compliant. And frankly, we're delighted to exercise them even further.
On behalf of our suppliers and large customers around the world and I think over time we're certainly well positioned to benefit.
Sean: from the economies of scale that would come with doing that. So I...
Sean: You know, I took the high road to your question because again we don't talk about specific suppliers but we don't see anything altering our view of the potential in the landscape and in the market over time.
Appreciate that. Thank you.
Thanks for watching. And your next question comes from the line of Joe Quattrochi with Wells Fargo. Your line is open.
Thanks for taking the questions. I quote one to ask about the age of demand that you're seeing, I think.
You know, you're competitive reported yesterday. So quite a bit stronger, kind of recovery and agent. So I just kind of wanted to understand, you know, what you're seeing from an end market there, and then maybe what's kind of different.
Yeah sure don't fair enough, you know if you look at two, three or we look at it, you know we think our Asian business
Sean: Approached typical seasonality, and that included
You know, some modest growth in China, we saw that as an improving sign.
Sean: And a good part of that came from really healthy growth and automotive specifically the...
the EV market in China. In our Q4 outlooks, you just saw something in line with normal seasonality, as I said earlier. So I think in general things are moving in a better direction than they were in that market this time last year.
I guess I would say without speaking to any of our competition, we play in a number of verticals in this region.
but are go to market priorities have always, you know, largely centered on the broader industrial mass market.
especially in mainland China. We're frankly thanks to Bencivenga to recover. We've got a riot on the ball, related to our strategy and where we play. That's what I try to keep the team focused on.
Speaker Change: and that's really helpful. And then to make it as a follow-up for Rajesh, it any health on just how to think about modeling the op-ax given the cost reduction claims that you outlined today.
bit VISTA be clear that 90 to 100 million is that a net savings or should we think about something that being reinvested and then is it mostly in components or is this fed across kind of the entire organization?
Yeah, Jill, let me just give you some background. I mean, as I mentioned in my comments, you know, we've done a pretty good job of taking up that felt last few quarters. You can see that the run rate of our up-backs is down materially from where it was just a year ago.
Speaker Change: and with the new actions today we do expect to get an incremental...
92 $100, and I would say that's net.
Speaker Change: We're always looking for investment opportunities that may come along but we do see that as a real savings to us. It is going to be across the organization so we are really consolidating certain functions and operations and focusing on.
More of the cost-efficient regions around the world and really going to more of a shared services delivery model. And so I think you'll see that across the board. You know, and I think it's a real structural savings in the business because we are.
and consolidating and putting certain functions and other things and other locations around the world. So we do expect to see that obviously you've got a taken to account, but you've directly to the business and how that moves along next year, but in isolation we'll certainly see that.
and Joe, I would just add, you know, these are no regrets actions that we already chose into undertaker. You know, we think they make a lot of sense for the company over the long haul, regardless of our near-term outlook. And in fact, this kind of structural stuff actually creates...
Reinvestment Capacity and Reinvestment Potential for us and we're looking to put some of that to work right away.
Perfect, thank you.
Speaker Change: Thanks for watching.
And your next question comes from the line of Rupert Plough Bautucharya with Bank of America. Your line is open.
Speaker Change: Thanks for taking my questions. Sean on the ECS side, can you talk about what product lanes were strong and which ones were weak and as we look into the next quarter are you expecting the same seasonal uptake in operating margin that you get in a typical year going from 3 you to 4K.
Sure, Root Blue and welcome. Well, I'll start with your second question first. The answer is yes.
For sure, we'll see the...
The normal season will uptick that we see in that business and we're grateful for it. Given the consolidated portfolio, we'll also see, you know, margin uplift your on year. And part of that is coming to your first question because if you look at the...
Speaker Change: The mix shift that we've been driving over time consistent with our strategy.
Speaker Change: You know we're getting...
I think better aligned to the pieces of the market we're seeing.
Really good growth and specifically, you know, we talk in terms of hybrid cloud and infrastructure software. And when we talk about infrastructure software, you can think, virtualization, you can think about data protection and cybersecurity. You can think about business and data intelligence.
Certainly that also leads to the role we're playing with AI in the indirect channel.
Speaker Change: Many of those offerings have the...
You know, the added feature of being...
You know, potentially recurring in nature, you know, therefore, a creative force on the contribution line, but more importantly they're growing.
Speaker Change: and while I may not be about billing as they do, which is why we talk a little bit about GP Dollar Growth, we think it bows well for our future.
Speaker Change: Okay, thanks for the details there. Sean, can I ask a question on the component side? I thought...
Speaker Change: Earlier this year the talk was that the inventory correction would be done by the end of December.
and now it sounds like it's still extending out. So any sense for which product lines or which components are still in excess and where does that inventory set is it sitting at distribution or is it at customers? And just related to this, I think I've heard correctly that as part of the restructuring you're also exiting some product lines or line cards. Do you...
Think that the recovery is going to be less strong than what you had anticipated, why exit these lines? Is there, are you sure that they won't come back in terms of demands? Just, just, just rationale for doing this right now.
Speaker Change: Yes, sure. We'll start there because what we're exiting is we would call it non-core and very immaterial from a revenue perspective.
It would really have no bearing on.
or Al-Luk for Q4 or much less next year. So don't read too much into that. As for the broader recovery, look as I said earlier, I wish I...
I knew exactly how to call it, you're right.
Speaker Change: The excess inventory challenge ultimately doesn't go away until the demand environment improves enough.
You know, for it to fully resolve itself.
Speaker Change: is a weird...
Still sitting on inventory that, you know, we still like, it's still relevant based on all the verticals and use cases we serve, it's just taking longer to sell.
Speaker Change: but until the demand upticks more sharply.
You know, the excess inventory tends to be a little bit of a headwind.
and it's part of your question, I think it's broad base, right? It's at the supplier level in some cases.
Speaker Change: is certainly in the channel at the distribution level and it's also at the customer level as well, both large OEM and certainly in the mass market. So it's gotten better. You're right about that, we thought.
You know, the pace of recovery would be a little bit healthier from where we sat earlier in the year. Things are taking longer to play out. It will resolve itself, but we're going to need, you know, a better demand environment before we see that.
Speaker Change: Got it. If I can just sneak one more in as part of a previous question you said that even though you're exiting some lines you have areas of investment and you're gonna quickly get into that. So, can you talk about like what areas of investment you're gonna focus on so that arrow is stronger as the recovery happens coming out of this downturn you're gonna be better position. So, if you can give us any details on what areas of a focus you have in terms of investment.
Well, I can talk broadly in terms of our strategic growth priorities. In our component business, we're pretty clear-eyed about the long-term potential we see in the mass market. That's always served as well, we think that's a...
Yeah, a great spot for demand creation, you know, so we're going to continue to look at how we increase capacity.
For that piece of our strategy, we will continue to
looked to invest in our value-edged offerings related to supply chain management and design services.
and we're making slow-best steady progress as it pertains to the market for IP and E.
Speaker Change: which is where a specialization is so important so that we distinguish our motion and that segment of the market.
versus our motion for semiconductor. So those priorities are really clear for us, and we've had to navigate a challenging market environment, but as we continue to make progress with structural costs, we know we can create investment capacity for those priorities at greater rates.
I would say in the world of global ECS, you know, it's all about the market for hybrid cloud infrastructure software. You know, we like to talk about all things IT as a service.
We like to outcomes that that, you know, piece of the market leads us to that doesn't involve just selling capacity. It also involves investment in our digital experience, Aerosphere, and we continue to invest that in that at a steady rate as well. And I think we're starting to see.
You know, better outcomes as a result.
Speaker Change: Okay, thank you for all the details, appreciate it.
And your next question comes from the line of Melissa Fairbanks with Raymond James. Your line is open.
Hi guys, thanks so much for taking my question. I had to put quick follow-up probably beating a dead horse at this point, but trying to get some more visibility into some of the non-core business that you plan to exit. I assume that this is something that happens kind of on a continual basis.
Wondering if you can give us some visibility into why this big chunk all at once, is it limited to either certain geographies or certain products?
Speaker Change: or what was kind of the catalyst behind a large scale exit. Not large scale, I know it's not. In material to revenue but just a little bit more color.
Speaker Change: Yes, sure, maybe just a couple more words, Melissa, and then I'll have Raj talk a little bit about the financial aspects of it. But we're talking about a very isolated line of business and a remote geography that again is in core too.
Raj: are global components, business overall, not material from a revenue perspective. And the time is right in this environment, to just, as you say, we're always looking at.
Raj: you know being smart about the portfolio and...
You know, this has happened to be the right time for that decision.
Yeah, I'm going to listen just to add about the charge that we said today for $50 million. We expect most of that will be in the fourth quarter as of right now and it is mostly a non-cash charge.
because the business that we're closing down has assets associated with it and the asset impairment and some inventory reserves as well. So that's why you see the bigger number, but it's mostly not cash at the stage.
Speaker Change: Okay, perfect, that's really helpful. Then as my follow up, I was wondering about in ECS.
How should we think about seasonality in the business over the long-term? So moving more toward cloud-based sales, IT as a service, does that change the complexion of seasonality or does it get smoothed out over time with more of the recurring revenue?
Speaker Change: You know, I think we're learning more about this as the recurring revenue piece of our mixed continues to grow. You know, it's now.
approaching something on the order of a third of our volume. So we'll see if that changes seasonality as this plays out further because it's still growing at.
That really nice rates. I think in general Melissa the...
You know, the IT spending cycle for most CIOs across the course of a year tends to be fairly similar, you know, overall these years and
It may not only be a change much, but I do think we're going to benefit from.
Speaker Change: You know, the recurring piece of our progress because that is generating, you know, larger and larger backlogs as that piece of our business continues to grow. So we might see, you know, we might see a little more spoofing over time, but I think that's going to be, you know, slower to play out.
Okay, perfect, thanks very much, that's very helpful, that's all for me.
Speaker Change: Thanks, Melissa.
Speaker Change: and your next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open.
Hi, thank you so much for taking the question. I had one for Sean and then one for Rajesh as well. Sean, a question on the pricing environment. I think most of your suppliers so far this quarter have said pricing remains pretty stable in the marketplace. There's a concern on the part of investors that...
You know, because pricing was so inflationary during the pandemic, that could reverse as, you know, the so-versal price situation kind of persists. What are you seeing in the market today and any concerns going into 2025?
So I think I can make this pretty straightforward for you. Well first we haven't seen, you know, many, if any of our suppliers actually reduce prices formally. So that, that hasn't.
You know, that certainly hasn't, you know, leaked into the channel yet. We happen to believe there's a lot of reason that it won't. The second thing I would say is, look, you know, I would agree that if you look at our traditional mass market customer base.
Speaker Change: The pricing environment and therefore transactional margins were...
Relatively stable in Q3, we accept the same, where we expect them to be relatively stable in Q4.
Speaker Change: Not necessarily assuming that that would change much.
in 2025. At the same time, I would say, as we mentioned, as our overall mix did skew somewhat towards the larger and of our customer base, you know, that is where pricing tends to be more heavily negotiated. That could be a factor in the near term, but as the mass market returns.
Speaker Change: You'll see that piece of the gross margin dynamic, normalize for us. At least that's how we're thinking about next year and beyond.
Speaker Change: Yeah, that's really helpful. Thank you. And then my follow-up for Rajesh.
curious how you're thinking about free cash flow going forward. You guys have done a really good job in bringing down inventory over the past year or so.
How are you thinking about working capital needs, as you hopefully go into an upturn in 25 and more importantly, you know, if you can speak to your capital allocation priorities, especially given where your stocks sits today, that would be really helpful. Thank you.
Yeah, I would say the business model hasn't changed so typically in times of decline in the business we're going to generate cash and over the last 12 months we've generated about $1.1 billion of operating cash flow.
and in times of growth, we're going to want to make sure that we're well positioned to have the working capital that's needed to grow the business.
and we'll use up more cash. Generally, we generate cash on an ongoing basis and it really is the working capital aspect of the business that varies from, you know, period to period, if you will. I'd say that from a capital allocation standpoint, nothing is changed from our perspective we've...
Historically, you know, always focused on investing organically in the business and
Whether it's capital, cap-ex, or working capital. We've done some small M&A. We announced a small one also earlier this week in the engineering space.
and so that's been a small use of cash and then we certainly have been very focused on buying back stock over the years last year and 2023 bought back about $750 million of cash.
and this year we've been more focused on that paydown just given the trajectory of the business, but at the right time we'll get back into that in the same way that we've done historically. So capital allocation priorities have not changed.
Speaker Change: God, thank you.
and that concludes our question and answer session. I will now turn the conference back over to Mr. Brad Windbigler for closing remarks.
Thanks, Abby, and thank you all for joining today's call. We look forward to meeting you at upcoming Investor events. Have a good day.
Here's concludes today's call and we thank you for your participation. You may now disconnect.
Speaker Change: The