Q1 2025 Arrow Electronics Inc Earnings Call
Operator: Good day and welcome to the Arrow Electronics first quarter 2025 earnings call. Today's conference is being recorded.
Good day and welcome to the Arrow Electronics first quarter 2025 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Brad when Bigler Arrows Treasurer, and Vice President of Investor Relations. Please go ahead.
Brad Windbigler: At this time, I would like to turn the conference over to Brad Windbigler, Arrow's treasurer and vice president of investor relations. Please go ahead. Thank you, operator.
Thank you operator, I'd like to welcome everyone to the Arrow Electronics first quarter 2025 earnings conference call.
Brad Windbigler: I'd like to welcome everyone to the Arrow Electronics first quarter 2025 earnings conference.
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 Morano, and our President of Global Enterprise Computing Solutions, Eric Nowak. 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 our 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 this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC.
Joining me on the call today is our president and Chief Executive Officer, Sean Kerins, Our Chief Financial Officer, Raj AGA wall, our president of global components, Rick Marrano, and our President Global Enterprise Computing solutions, Eric Novak.
During this call we will make forward looking statements, including statements about our business outlook strategies plans 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 due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K, and other 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.
Brad Windbigler: We undertake no obligation to 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-GAAP measures, which are not intended to be a substitute for our GAAP. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release.
Events.
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 reconcile these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release, you can access our earnings release at Investor Dot Aero Dot com along with a replay of this call. We've also posted a <unk>.
Brad Windbigler: You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted the slide presentation to this website to accompany our prepared remarks and encourage you to reference these slides during the webinar.
Slide presentations to this website to accompany our prepared remarks and encourage you to reference these slides during the webcast.
Brad Windbigler: Following our prepared remarks today, Sean and Raj will be available to take your questions.
Following our prepared remarks today, Shaun Raj will be available to take your questions I'll now hand, the call over to our president and CEO Sean Kerins.
Sean Kerins: I'll now hand the call over to our President and CEO, Sean Kerins. Thank you, Brad. And thank you all for joining us.
Sean Kerins: Thank you Brad and thank you all for joining us today I'd like to discuss our first quarter performance provide some commentary on the broader market environment, and then close with some thoughts as we look to the balance of the year I will then turn things over to Raj for more detail on our financials as well as our outlook for the second quarter.
Sean Kerins: Today, I'd like to discuss our first quarter performance, provide some commentary on the broader market environment, and then close with some thoughts as we look to the balance of the year.
Sean Kerins: I'll then turn things over to Raj for more detail on our financials, as well as our outlook for the second quarter. For the first quarter, I'm pleased to report both consolidated and segment sales, as well as earnings per share that exceeded the high end of our guidance ranges. The overachievement was a function of several factors, most notably, in global components, we saw improving trends across the broader market, including healthy momentum in EMEA. Our enterprise computing solutions business delivered year-over-year billings growth with solid operating leverage. and we continue to benefit from both our value-added offerings and our ongoing expense management initiative.
Sean Kerins: For the first quarter I am pleased to report both consolidated and segment sales as well as earnings per share that exceeded the high end of our guidance ranges. The over achievement was a function of several factors most notably in global components, we saw improving trends across the broader market, including healthy momentum in EMEA.
Sean Kerins: Our enterprise computing solutions business delivered year over year billings growth with solid operating leverage.
Sean Kerins: And we continued to benefit from both our value added offerings and our ongoing expense management initiatives.
Sean Kerins: Now, taking a closer look at our global components business, our first quarter results were highlighted by stronger sales and anticipated with all three regions performing ahead of typical seasonality. In addition to the momentum we cited in EMEA, we saw sequential improvement in our industrial markets on a global basis alongside resilience and transportation, especially in the West. Both verticals represent a significant portion of our overall mix. We also enjoy sequential growth in the market for IP&E, underscoring our continued initiative to specialize or go to market efforts in this attractive segment. Lastly, our value added offerings, namely supply chain management and integration services were once again accretive to our operating results.
Sean Kerins: Now taking a closer look at our global components business. Our first quarter results were highlighted by stronger sales than anticipated with all three regions performing ahead of typical seasonality in addition.
Sean Kerins: The momentum we started in EMEA, we saw sequential improvement in our industrial markets on a global basis, alongside resilience and transportation, especially in the west both verticals represent a significant portion.
Of our overall mix.
Sean Kerins: We also enjoyed sequential growth in the market for IP and eat underscoring our continued initiative to specialize our go to market efforts in this attractive segment.
Sean Kerins: Lastly, our value added offerings, namely supply chain management and integration services were once again accretive to our operating results.
Sean Kerins: Now for some color commentary on a regional basis. Our results in the Americas were highlighted by a return to sequential growth in both the industrial and transportation sectors. In Asia, we saw improving momentum across a number of verticals, including compute and consumer markets. And given first quarter Lunar New Year celebrations, we were pleased to see sales results ahead of seasonal expectations. And then finally, our performance in EMEA was marked by strong sales activity in our industrial, transportation, and aerospace and defense verticals. Taking a closer look at the market more broadly, our leading indicators continue to trend positively.
Sean Kerins: Now for some color commentary on a regional basis.
Sean Kerins: Our results in the Americas were highlighted by a return to sequential growth in both the industrial and transportation segments and.
Sean Kerins: In Asia, we saw improving momentum across a number of verticals, including compute and consumer markets.
Sean Kerins: And given first quarter lunar new year celebrations, we were pleased to see sales results ahead of seasonal expectations.
Sean Kerins: Finally, our performance in EMEA was marked by strong sales activity in our industrial transportation and aerospace and defense verticals.
Sean Kerins: Taking a closer look at the market more broadly are leading indicators continue to trend positively.
Sean Kerins: Our book-to-bill ratios improved throughout the quarter and now sit at or above parity in all three regions. Even with steady and manageable lead times, our backlog is growing again and should contribute to improving visibility. And notably, industry wide intelligence continues to indicate customer inventory levels in areas of the market are trending for replacement.
Sean Kerins: Our book to Bill ratios improved throughout the quarter and now sit at or above parity in all three regions.
Sean Kerins: Even with steady and manageable lead times, our backlog is growing again and should contribute to improving visibility.
Sean Kerins: And notably Industrywide intelligence continues to indicate customer inventory levels and what areas of the market are trending for replenishment.
Sean Kerins: Considering these and other factors, our guidance reflects our belief that demand trends are at a cyclical turning point, and the business is beginning to return to more normal and seasonal patterns, creating a foundation for the future. As we move into the second quarter and consistent with the earlier stages of cyclical improvement, we do anticipate stronger trends in Asia and across the larger OEM customer base.
Sean Kerins: Considering these and other factors our guidance reflects our belief that demand trends are at a cyclical turning point and the business is beginning to return to more normal seasonal patterns, creating a foundation for the future as.
As we move into the second quarter and consistent with the earlier stages of cyclical improvement, we do anticipate stronger trends in Asia.
Sean Kerins: The larger OEM customer base.
Sean Kerins: Finally, rapidly evolving trade policies are clearly top of mind throughout the electronics industry. While we continue to both assess and mitigate the impacts of tariffs to our business, Our top priority lies with our suppliers and customers. Leveraging our global supply chain network and related services offerings, whether aimed at improving their supply chain visibility or guiding them through effective component level selection, sourcing, and staging options, we are well-poised to help them navigate an uncertain trade landscape. Specific to the impact of tariffs on near-term demand trends, we've not yet seen changes in customer behavior in the form of order acceleration to any material degree.
Sean Kerins: Finally rapidly evolving trade policies are clearly top of mind throughout the electronics industry, while we continue to both assess and mitigate the impacts of tariffs to our business.
Sean Kerins: Our top priority lies with our suppliers and customers.
Sean Kerins: Leveraging our global supply chain network and related services offerings, whether aimed at improving their supply chain visibility or guiding them through effective component level selection sourcing and staging options, we are well poised to help them navigate an uncertain trade landscape.
Sean Kerins: Specific to the impact of tariffs on near term demand trends.
Sean Kerins: Not yet seen changes in customer behavior in the form of order acceleration to any material degree.
Sean Kerins: While the tariff environment remains highly fluid and until the dust fully settles, longer-term implications are more difficult to predict.
While the tariff environment remains highly fluid and until the dust fully settles longer term implications are more difficult to predict.
Sean Kerins: Now turning to our global ECS business. In the first quarter, we again delivered year-over-year growth in billings, gross profit, and operating income. Generally speaking, what we experienced in the fourth quarter of 2024 continued into the early stages of 2025. Our top-line momentum was characterized by continued strength in cloud and infrastructure software, along with an uptick in hybrid cloud technology. Regionally, our performance in EMEA was broad based with growth across all of our enterprise technology categories. And in North America, we saw improving activity levels in the Enterprise Data Center, along with continued acceleration of our cloud portfolio.
Sean Kerins: Now turning to our global ECS business in the first quarter, we again delivered year over year growth in billings gross profit and operating income.
Sean Kerins: Generally speaking what we experienced in the fourth quarter of 2024 continued into the early stages of 2025, our topline momentum was characterized by continued strength in cloud and infrastructure software along with an uptick in hybrid cloud technologies.
Sean Kerins: Regionally our performance in EMEA was broad based with growth across all of our enterprise technology categories and in North America, we saw improving activity levels in the enterprise data center, along with continued acceleration of our card portfolio.
Sean Kerins: Most importantly, our ECS backlog grew in the first quarter by more than 50% year over year. We believe this reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now being served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now approaching one-third of our total billings met. Last quarter, we highlighted several factors that gave us a level of optimism regarding our full-year outlook. These include recent supplier and customer-based expansion wins, along with the continued adoption of our AeroSphere digital platform. Given that context, our second quarter outlook reflects continued momentum in both regions, poised again for year-over-year growth in billings, gross profit, and operating income when normalized.
Sean Kerins: Most importantly, our ECS backlog grew in the first quarter by more than 50% year over year. We believe this reflects our ongoing alignment to the higher growth demand trends across enterprise.
Sean Kerins: Many of which are now being served on an as a service basis. This continues to contribute to the growth of our recurring revenue volumes now approaching one third of our total billings mix.
Sean Kerins: Last quarter, we highlighted several factors that gave us a level of optimism regarding our full year outlook. These include recent supplier and customer base expansion wins, along with the continued adoption of our aerospace digital platform given that context, our second quarter outlook reflects continued momentum in both regions.
Sean Kerins: Poised again for year over year growth in billings and gross profit and operating income when normalized.
Sean Kerins: In closing, we're encouraged by the positive momentum we see in both of our operating segments. We believe it's the result of modestly improving demand trends and a relentless pursuit of our growth priorities. While we recognize the current broader economic and geopolitical landscape contributes to uncertainty, we remain focused on the factors within our control, those that we believe will keep the business on an improving trajectory.
Sean Kerins: In closing we're encouraged by the positive momentum we see in both of our operating segments. We believe is the result of modestly improving demand trends and our relentless pursuit of our growth priorities.
Sean Kerins: While we recognize the current broader economic and geopolitical landscape contributes to uncertainty.
We remain focused on the factors within our control those that we believe will keep the business on an improving trajectory.
Sean Kerins: Lastly, I'm grateful for and impressed by the resilience of all of our Arrow teams and employees across the globe. They continue to lead us through the most pronounced cyclical correction in recent memory, and they do so with determination and dedication each and every day.
Sean Kerins: Lastly, I am grateful for and impressed by the resilience of all of our Aero teams and employees across the globe. They continue to lead us through the most pronounced cyclical correction in recent memory and they do so with determination and dedication each and every day.
Raj Agrawal: With that, I'll hand things over to Raj. Thanks, Sean. Consolidated sales for the first quarter $6.8 billion exceeding our guidance range and down 2% versus prior year for flat year over year on a constant currency basis. Global component sales were $4.8 billion above our guidance range and down 1% versus prior quarter or flat sequentially in constant currency terms. Enterprise Computing Solutions sales were $2 billion above our guidance range and 18% higher versus prior year or 19% higher year over year in constant current ECS billings grew 5% in the quarter compared to the same period last year.
Raj: With that I'll hand things over to Raj.
Thanks, Sean consolidated sales for the first quarter, $6 8 million exceeding our guidance range and down 2% versus prior year or flat year over year on a constant currency basis.
Raj: Global components sales were $4 8 billion above our guidance range and down 1% versus prior quarter or flat sequentially in constant currency terms.
Raj: Enterprise computing solutions sales were $2 billion.
Raj: All of our guidance range, and 18% higher versus prior year or 19% higher year over year in constant currency.
Raj: ECS billings grew 5% in the quarter compared to the same period last year.
Raj Agrawal: Moving to other financial metrics for the quarter. First quarter consolidated non-GAAP gross margin of 11.3% was down approximately 120 basis points versus prior year, driven primarily by overall mix in both global components and ECS. sequentially, our consolidated gross margin was lower by 40 basis points due to seasonality within the ECS business. global components gross margin was 11.6% and enterprise computing solutions was 10.8% both on a non gap basis. Our first quarter non-GAAP operating expenses grew $13 million sequentially to $593 million as we balanced managing costs with reinvestment priorities. Non-GAAP expense levels continue to decline year-over-year, with the first quarter approximately $25 million lower compared to the same period last year, demonstrating the results of recent initiatives and our continuing focus on expenses.
Raj: Moving to other financial metrics for the quarter.
Raj: First quarter consolidated non-GAAP gross margin of 11, 3% was down approximately 120 basis points versus prior year, driven primarily by overall mix in both global components and ECS sequentially.
Raj: Sequentially, our consolidated gross margin was lower by 40 basis points due to seasonality within the ECS business.
Raj: Global components gross margin was 11, 6% and enterprise computing solutions was 10, 8% both on a non-GAAP basis.
Raj: Our first quarter non-GAAP operating expenses grew $13 million sequentially to $593 million as we balanced managing costs with reinvestment priorities non.
Raj: non-GAAP expense levels continued to decline year over year with the first quarter approximately $25 million lower compared to the same period last year.
Raj: Demonstrating the results of <unk>.
<unk> initiatives and our continuing focus on expense efficiency.
Raj Agrawal: In the first quarter, we generated non-GAAP operating income of $179 million, which was 2.6% of sales, with global components operating margin at 3.6% and enterprise competing solutions at 3.8%. both on a non-GEP. Interest and other expense was $56 million in the first quarter, and our non-GAAP-affected tax rate was $22.99.
Raj: In the first quarter, we generated non-GAAP operating income of $179 million, which was two 6% of sales.
Raj: Global components operating margin at three 6% and enterprise computing solutions at three 8%.
Raj: On a non-GAAP basis.
Raj: Interest and other expense was $56 million in the first quarter and our non-GAAP effective tax rate was 22, 9%.
Raj Agrawal: And finally non gap diluted EPS for the first quarter was $1.80, which was above our guided range mainly due to favorable sales Turning to Word and Capital. Networking capital declined sequentially in the first quarter by approximately $340 million, ending the quarter at $6.4 billion. Inventory at the end of the first quarter was $4.8 billion. Our cash conversion cycle was unchanged in the first quarter at $0.77. Our cash flow from operations was $352 million in the first quarter. This was the seventh consecutive quarter of positive cash flow generation. Gross balance sheet debt at the end of the first quarter was $2.8 billion.
Raj: And finally non-GAAP diluted EPS for the first quarter was $1 <unk>, which was above our guided range, mainly due to favorable sales results.
Raj: Turning to working capital.
Raj: Net working capital declined sequentially in the first quarter by approximately $340 million ending the quarter at $6 4 billion.
Raj: Inventory at the end of the first quarter was $4 $8 billion, our cash conversion cycle was unchanged in the first quarter at 77 days.
Raj: Our cash flow from operations was $352 million in the first quarter. This was the seventh consecutive quarter of positive cash flow generation.
Raj: Gross balance sheet debt at the end of the first quarter was $2 8 billion.
Raj Agrawal: We repurchased $50 million of shares in the first quarter, and our remaining repurchase authorization stands at approximately $275 million. In the short term, we are continuing to balance our capital priorities with managing our debt rate.
Raj: We repurchased $50 million of shares in the first quarter and any repurchase authorization stands at approximately $275 million.
Raj: In the short term, we are continuing to balance our capital priorities with engineered debt ratios.
Raj Agrawal: Now turning to Q2 Garden. We expect sales for the second quarter to be between $6.7 billion and $7.3 billion. We expect global component sales to be between $4.8 billion and $5.2 billion. which at the midpoint is up 4.6% from prior quarter. In enterprise computing solutions, we expect sales to be between $1.9 billion and $2.1 billion, which is approximately up 7.5% at the midpoint year-on-year.
Raj: Now turning to Q2 guidance.
Raj: We expect sales for the second quarter to be between $6 7 billion and $7 3 billion.
Raj: We expect global components sales to be between $4 8 billion and $5 2 billion.
Raj: Which at the midpoint is up four 6% from prior quarter.
Raj: In enterprise computing solutions, we expect sales to be between $2 9 billion and $2 $1 billion, which is approximately up seven.
Raj: Seven 5% at the midpoint year on year.
Raj Agrawal: Recent tariffs represent uncertainty, so we have not factored in recently enacted policies into our revenue guidance. Based on what we know today and current policy, we estimate that incremental tariffs could increase global components sales by two to four percentage points sequentially, and we expect minimal impact on ECF sales. While tariffs introduce significant complexity, we are working with suppliers and customers end-to-end, and our focus remains on mitigating impacts through intelligent routing and, where necessary, passing through and collecting incremental costs and potential credit.
Raj: Recent tariffs representing or uncertainty or we have not factored in recently enacted policies into our revenue guidance.
Raj: What we know today in credit policy, we estimate that incremental tariffs could increase global components sales by two to four percentage points sequentially and we expect minimal impact on Vcs sales.
Raj: While tariffs introduced significant complexity, we are working with suppliers and customers tend to earn and our focus remains on mitigating impacts through intelligent routing and where necessary passing through and collecting incremental cost and potential credits.
Raj Agrawal: We're assuming a tax rate in the range of approximately 23 to 25% and interest expense of approximately $60,000. and or non-GAF diluted earnings per share is expected to be between $1.90 and $2.00.
Raj: We are assuming a tax rate in the range of approximately 23% to 25% net interest expense of approximately $60 million.
Raj: And our non-GAAP diluted earnings per share is expected to be between $1 $92.10 and.
Raj Agrawal: And finally, given recent weakness in the U.S. dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the second quarter, increasing reported sales by approximately 80 basis points, or $60 million, compared to the second quarter of 2024.
Raj: And finally, given recent weakness in the U S dollar, particularly relative to the Euro we estimate changes in foreign currencies to be a tailwind in the second quarter of increasing reported sales by approximately 80 basis points or $60 million compared to the second quarter of 2024 <unk>.
Raj Agrawal: The details of foreign currency impact can be found in our earnings With that, Sean and I are now ready to take your questions.
Raj: The details of foreign currency impact can be found in our earnings release.
Sean Kerins: With that Sean and I are now ready to take your questions.
Operator: Operator, please open the line. At this time, if you'd like to ask a question, press star, then the number one on your telephone keypad.
Raj: Operator, please open the line.
At this time, if you'd like to ask a question Press Star then the number one on your telephone keypad. Our first question will come from the line of Joe <unk> with Wells Fargo. Please go ahead.
Joseph Quatrochi: Our first question will come from the line of Joe Quatrochi with Wells Fargo. Please go ahead. Yeah, thanks for taking the questions. Maybe first, just in terms of the guidance commentary, can you help us just maybe understand a little bit more of what you're trying to say in terms of the 2 to 4% increase in component sales not included in the guide? Is that to mean that essentially that price increases or surcharges or whatever you want to call it for tariffs that's not contemplated in your guide for tariffs that could potentially go into effect for semiconductors that are right now exempt?
Speaker Change: Yes, thanks for taking the questions maybe first one just in terms of the guidance commentary.
Speaker Change: Can you help us just maybe understand a little bit more on what youre trying to say in terms of the 2% to 4% increase in component sales not included in the guide.
Speaker Change: Is that to mean that essentially that price increases are surcharges or whatever you want to call. It for tariffs that's not contemplated in your guide for tariffs that could potentially go into effect for semiconductors. There right now event and then how do you think about I guess like a pass through of that or is that a potential kind of risks.
Joseph Quatrochi: And then how do you think about, I guess, like, the pass through of that? Or is that a potential kind of risk to even as we think about the guidance?
To EBIT.
Speaker Change: Think about the guidance.
Sean Kerins: Hey, Joe. Sure thing. Let me let me offer a little context as to how we've approached you know, the tariffs puzzle. And then I'll let Raj maybe speak to some of the details. He's been in the thick of this for several weeks now, as you might imagine. So, as you probably know, tariffs aren't new for us. But we do recognize, you know, how much more complex you know, the recently implemented tariffs are. And so we've been taking that pretty seriously. Based on what's actually been implemented, we feel like we've got a pretty good handle on the the top line estimate.
Speaker Change: Hey, Joe Sure thing, let me, let me offer a little context as to how we've approached.
Speaker Change: The tariffs puzzle and then I'll, let Raj maybe speak to some of the details. He has been in the thick of this for several weeks now as you might imagine so as you probably know tariffs aren't due for us, but we do recognize how much more complex.
Speaker Change: The recently implemented tariffs are and so we've been taking that pretty seriously based on whats actually been implemented we feel like we've got a pretty good handle on the topline estimate.
Sean Kerins: And that's where the two to 4% comes from. And you're right, that would represent basically surcharges or price uplifts to, you know, reflect the charges that we we have to pass on and that we can't mitigate otherwise. But we've also got a whole variety of mechanisms either in place or being put in place to mitigate margin risk. Those include things like intelligence sourcing and routing, foreign trade zone capabilities, and then a whole variety of process changes that we're implementing throughout our selling and support operations. I think even if existing or more significant tariffs don't take hold for the full year, we still have to largely assume they will and plan accordingly so that we're prepared accordingly.
Speaker Change: And that's where the 2% to 4% comes from and you're right that would represent basically surcharges or price uplifts to reflect the charges that we have to pass on that we can't mitigate otherwise.
Speaker Change: But we've also got a whole variety of mechanisms either in place or being put in place to mitigate margin risk.
Speaker Change: Those include things like intelligent sourcing and routing foreign trade zone capabilities, and then a whole variety of process changes.
Speaker Change: Is that we're implementing throughout our selling and support operations.
Speaker Change: I think EBIT.
Speaker Change: Even if existing or more significant tariffs don't take hold for the full year, we still have two largely assume they will.
Speaker Change: And plan Accordingly, so that we're prepared accordingly I think.
Sean Kerins: I think we feel like Q2 is going to be a very transitional quarter.
Speaker Change: We feel like Q2 is going to be a very transitional quarter theres still plenty of confusion at the customer level.
Sean Kerins: There's still plenty of confusion at the customer level, a lot of uncertainty surrounding what's ultimately going to play out.
Speaker Change: <unk>.
Speaker Change: The uncertainty surrounding what's ultimately going to play out.
Raj Agrawal: So with that, I'll let Raj maybe speak a little bit more to the numbers and how we're approaching the financials. Yeah, Joe, we did want to call out the potential impact of the current tariff policies in a separate range because it is volatile. It keeps moving around, as you know. It's certainly complex, as Sean just described. And so it is meant to be a two to four percentage point incremental benefit to the top line of global components. That's not in our baseline guide. Our baseline guide is really meant to show you what we believe the core business is doing before we talk about the incremental impact of current tariff policy.
Speaker Change: So with that I'll, let Raj, maybe speak a little bit more to some of the numbers and how we're approaching the financials, yes, Joe we did want to call out.
Speaker Change: Potential impact of.
Speaker Change: The current tariff policies in a separate range because it is volatile where it keeps moving around as you know it's.
Speaker Change: It's certainly complex that Sean just described.
Speaker Change: So it is meant to be a 2% to four percentage point incremental benefit to the top line of global components, that's not in our baseline guide.
Speaker Change: Our baseline guide is really meant to show you what we believe our core business is doing.
Speaker Change: Before we talk about the incremental impact of current tariff policy to the extent that something goes into place. After today, that's not envisioned it really is based on what we know today.
Raj Agrawal: To the extent that something goes into place after today, that's not envisioned. It really is based on what we know today that's going to impact the top line. So we wanted to make sure that was called out separately. So it's very clear to you on the impacts that we're talking about.
Speaker Change: The impact the topline so we wanted to make sure that was called out separately.
Speaker Change: Very clear to you on the impacts that we're talking about.
Joseph Quatrochi: And part of the reason for that, Joe, is we really wanted to give you our best view of the underlying business and how the cycle is really playing out because we think we're at kind of a modest turning point and we didn't want to conflate the two conversations. Yeah, understood. And I guess just just to clarify, and I've got a follow up, but just to clarify, that the two to 4% assumes that like the export exemptions for semiconductors into the US that's currently enacted, continues to the entire quarter? Is that the right way to think about it?
Speaker Change: Part of the reason for that Joe is we really wanted to give you our best view of.
Speaker Change: The underlying business and how the cycle is really playing out because we think we're at kind of a modest turning point and we didnt want to conflate the two conversations.
Speaker Change: Yeah understood and then I guess just to clarify and I've got a follow up.
Speaker Change: Just to clarify the 2% to 4% assumes that like the export or exemptions for semiconductors into the U S.
Speaker Change: Currently enacted continues through the entire quarter is that the right way to think about it.
Raj Agrawal: Yeah, yeah, the two to 4% assumes that everything that's in place as of right now continues on for the balance of the quarter. Obviously, things could change, but we've not assumed any change at this stage.
Speaker Change: Yeah, Yeah, the 2% to 4% assumes that everything thats in place as of right now continues on for the balance of the quarter.
Speaker Change: Obviously things can change, but we've not assumed any change at this stage.
Joseph Quatrochi: Okay, and then just as a follow up, you talked about customer inventories trending towards replenishment kind of stages.
Speaker Change: Okay, and then just as a follow up you talked about customer inventories trending towards replenishment kind of stages.
Sean Kerins: I guess, how do we think about that comment relative to Arrow's inventory and the trends that we should expect to see there? You know, obviously, your inventory state somewhat elevated here. But I guess, is it the right inventory in terms of where you're seeing the pull from customers? Yeah, Joe, in general, we think we're at a pretty good level. Just as a reminder, I think we we talked about last quarter that since, you know, late 23 inventories had come down, you know, over a billion dollars from their from their peak, I think, you know, we would consider the uptick in the first quarter this year is fairly marginal.
Speaker Change: How do we think about that comment relative to arrows inventory and the trends and we should expect to see there.
Speaker Change: Do you see your inventory stay somewhat elevated here.
Speaker Change: But I guess is it the right inventory in terms of where you're seeing the pull from customers.
Speaker Change: Yes, Joe in General we think we're at a pretty good level just as a reminder, I think we talked about.
Speaker Change: Last quarter that since late 'twenty, three inventories had come down over $1 billion from there from their peak I think we would consider the uptick in the first quarter. This year is fairly marginal but your instinct is right. We feel like our turns are roughly in line with <unk>.
Sean Kerins: But your your instinct is right, we feel like our turns are roughly in line with current sales levels, they're kind of in line with historical ranges. So we feel pretty good about them. It doesn't mean that there aren't still, you know, pockets of excess inventory and with certain component types. But we're we're pretty comfortable that the the aging profile of our inventory continues to improve. And, you know, as the industry continues to eat through pockets of excess, The good news here is that we see our inventory levels normalizing more closely in line with actual demand signals, and that's kind of where we want to be, and that will tell us that the market is normalizing in the right direction.
Speaker Change: Current sales levels are.
Speaker Change: In line with historical ranges, so we feel pretty good about them. It doesn't mean that there aren't still.
Speaker Change: Pockets of excess inventory and with certain component types, but we're pretty comfortable that the aging profile of our inventory continues to improve.
Speaker Change: As the industry continues to eat through pockets of excess.
Speaker Change: The good news here is that we see our inventory levels normalizing.
Speaker Change: We are closely aligned with actual demand signals and thats.
Kind of where we want to be and that will tell us that.
Speaker Change: The market is normalizing in the right direction.
Sean Kerins: I would say, though, to your point, since we're starting to see signs of incremental improvement, we also want to be on our front feet, not our heels. And so we've got to be conscious of what customers are going to need, and we want to be able to support growth as and when the market recovers.
Speaker Change: I'd say, though to your point since we're starting to see.
Speaker Change: Signs of incremental improvement, we also want to be on our front feet not our heels and so we've got to be conscious of.
Speaker Change: What customers are going to need and we want to be able to support.
Speaker Change: Gross.
Speaker Change: As and when the market recovers.
Joseph Quatrochi: Okay, thanks. Thanks for the details.
Speaker Change: Okay. Thanks, Thanks for the details.
Speaker Change: Sure.
Ilana William Stein: Our next question comes from Ilana William Stein with Truist Securities. Please go ahead. Great. Thank you.
Speaker Change: Our next question comes from the line of William Stein with Truth Securities. Please go ahead.
William Stein: Great. Thank you.
Ilana William Stein: I'd like to revisit the inventory question. Maybe I didn't follow the question or the answer. But let me set it up this way. We just saw inventory increase. And, you know, your inventory days are still, I don't know, 15 or 20 days above where you were a few years ago. Perhaps what you're saying, and if so, that's fine. I just want to get it clear. Is this the approximately correct long-term level of inventories that we're shooting for? Or are we still at an elevated level where over time we are trying? You know, Will, I would start by saying that, you know, there are still some pockets of excess in our inventory profile, as I just mentioned, we have seen the aging profile improve.
I'd like to revisit the inventory question.
Speaker Change: Maybe I didn't follow the question or the answer but.
William Stein: Let me set it up this way.
William Stein: We just saw inventory increase.
William Stein:
William Stein: And.
William Stein: Inventory days are still I don't know 15, or 20 days above where you were a few years ago.
William Stein: Perhaps what you are saying and if so that's fine I just wanted to get it clear is this be approximately correct long term level of inventories that were shooting for or are we still at an elevated level where over time, we are trying to take account.
Yeah.
William Stein: Well I would start by saying that.
William Stein: There are still some pockets of excess.
William Stein: In our inventory profile as I just mentioned, we have seen the aging profile improve there's still probably a little bit more work to do so turns could get incrementally better across the course of the year, especially if we.
Sean Kerins: There's still probably a little bit more work to do. So, turns could get incrementally better across the course of the year, especially if, you know, what we suspect is playing out does play out, but it won't be dramatic. You know, we don't feel we're far from where we ought to be. And I would say the one incremental difference between, you know, where we sit now versus where we might have a few years ago is we have been somewhat intentional about our commitment to the market for I. P. and E. that does require a different working capital profile.
William Stein: <unk> is playing out does play out.
William Stein: But it won't be dramatic we don't feel we're far from where we ought to be and I would say the one incremental difference between where we sit now versus where we might have a few years ago was we have been somewhat intentional about our commitment to the market for IPD.
William Stein: That does require a different working capital profile. So we can serve that business.
Sean Kerins: So we can serve that business. in the way that, you know, it's become accustomed to being served. But beyond that, no, we think we're we're in the right neighborhood. Yeah.
William Stein: And the way that.
William Stein: It's become accustomed to being served but beyond that no. We think we're in the right neighborhood, yes ill just add that you know over the last year or since the peak of inventory levels that we had we've actually brought them down by about $1 billion.
Raj Agrawal: Just add, Will, that, you know, over the last year or since the peak of inventory levels that we had, we've actually bottomed down by about a billion dollars. And so I think that's a good result. We've also generated a lot of cash flow, which is what you would expect when the business is declining. But now as we go into growth mode, as you look at the absolute dollars, we're going to wanna deploy working capital wherever it's needed. So yeah, the terms may look different or the number of days may look different, but those things will improve as the business grows.
William Stein: And so I think that's a good resolved. We've also generated a lot of cash flow, which is what you would expect when the business is declining but now as we go into growth mode.
William Stein: As you look at the absolute dollars.
William Stein: Going to want to deploy working capital wherever it's needed. So your average returns may look different or the number of days may look different but those things will improve as the business grows.
Ilana William Stein: Thank you. That's very helpful.
Speaker Change: Thank you.
Ilana William Stein: One other, if I can, I think you posted upside relative to the high in both end markets, but I want to focus on the systems business for a moment. You know, very strong revenue performance, especially relative to how you guided and you've highlighted strength in Europe. A dynamic that many companies have highlighted this quarter is pull-ins in response to elevated future risks from tariffs. And I wonder if you think that is not what we're seeing in your business. And if not, can you explain it for us?
Speaker Change: That's very helpful. One other if I can.
Speaker Change: Thank you posted upside.
Speaker Change: Due to the heightened booth and markets, but I wanted to focus on the systems business for a moment.
Speaker Change: Very strong revenue performance, especially relative to how you guided.
Speaker Change: And you highlighted strength in Europe.
Speaker Change: The dynamics that many companies have highlighted this quarter is.
Speaker Change: Pull ins in response to.
Speaker Change: Elevated future risks from tariffs.
Speaker Change: And I Wonder if you think that is not what we're seeing in your business and if not can you explain it for us. Thank you.
Sean Kerins: Thank you.
Sean Kerins: Yeah, sure thing, Will.
Speaker Change: Yes, sure thing will I kind of expected that question for the components business not the not the ECS business, but there you go we're pretty confident that we have not.
Sean Kerins: I kind of expected that that question for the components business, not the not the ECS business, but there you go. We're pretty confident that we've not All right, well, let's start with where you started on the ECS business. You know, first of all, I would just say the short answer is we're pretty confident that our outlook does not reflect any order acceleration in that business. And, you know, what we, I think, mentioned in our prepared remarks, you know, we feel really good about, which is the momentum we saw to close out the year continued into Q1.
Speaker Change: [laughter], alright, well, let's start with where you started on ECS business.
Speaker Change: First of all I would just say the short answer is we're pretty confident that our outlook does not reflect any order acceleration.
Speaker Change: In that business and what we I think mentioned in our prepared remarks.
Speaker Change: We feel really good about which is the momentum we saw to close out the year continued into Q1, and we kind of see more of the same.
Sean Kerins: And we kind of see more of the same in Q2. We're kind of striking a good balance between, you know, the, you know, above average growth rates we're continuing to enjoy in cloud, along with some improvement in the traditional data center for, you know, hybrid cloud infrastructure, along with, you know, continued growth in our infrastructure software portfolio. So I would say steady as she goes, we're obviously trying to make sure that we continue to execute as well in North America as we have been in Europe. But we like the path we're on.
Speaker Change: In Q2 were kind of striking a good balance between.
Speaker Change: The.
Speaker Change: Above average growth rates, where we're continuing to enjoy and cloud along with some improvement in the traditional data center for <unk>.
Speaker Change: Hybrid cloud infrastructure, along with continued growth in our infrastructure software portfolio. So I would say steady as she goes we're obviously trying to make sure that we continue to execute as well in North America as we have been.
Speaker Change: Europe, but we we like the path we're on.
Sean Kerins: And, you know, it's important not to confuse the, you know, the reported sales line with the gross billings line, because what that will do from time to time is sort of, you know, create some volatility in the reported sales number from one quarter to the next. And that's largely a function of how we account for all the different SKUs that that team sells. But if you look at the underlying operating margins on a billing basis, they were flat year over year in Q1. And we assume they'll be at least flat year over year in Q2.
Speaker Change: And it's important not to confuse the.
Speaker Change: Ported sales line with the gross billings line, because what that will do from time to time as sort of.
Speaker Change: Create some volatility in the reported sales number from one quarter to the next and that's largely a function of how we account for all.
Speaker Change: All of the different skus that.
Speaker Change: T cells, but if you look at the underlying operating margins on a billings basis.
Speaker Change: Were flat year over year in Q1, and we assume there'll be at least flat year over year in Q2.
Sean Kerins: You know, the reported sales number will vary, but the underlying, you know, health of the business is strong and improving.
Speaker Change: <unk>.
Speaker Change: The reported sales number will vary but the the underlying.
Speaker Change: Health of the businesses is strong and improving.
Speaker Change: Thank you.
Joseph Lehman: Again for any questions press star 1 and our next question comes from the line of Joseph Lehman with Bank of America. Please go ahead. Hi, this is Joseph on for Ruplu, were you seeing any pull forward in the quarter? Hey, Joe, I assume your question is one more about our, our electronics business. And here's how we would answer that question. Yeah, start with we didn't really see any any material impacts in that way, in Q1. And then we don't really see a whole lot of that playing out in our Q2 outlook either. We are seeing some of that in Asia, specifically China this quarter, but we don't think it's going to move the needle.
Speaker Change: Again for any questions Press Star one and our next question comes from the line of Joseph <unk> with Bank of America. Please go ahead.
Speaker Change: Hi, This is Joseph on for Grupo <unk>.
Speaker Change: Where do you see any pull forward in the quarter.
Speaker Change: Hey, Joe I assume your question is one.
Speaker Change: More about our our electronics business in here.
Speaker Change: So we would answer that question.
Speaker Change: I'll start with we didn't really see any any material impacts in that way in Q1.
Speaker Change: And then we don't really see a whole lot of that playing out in our Q2 outlook either.
Speaker Change: We are seeing some of that in Asia, specifically, China this quarter, but we don't think it's going.
Sean Kerins: And then when we look at our business in the US, where you'd expect You know, that question to be very valid. You were obviously monitoring this very closely. But, you know, when we break it down, we haven't seen an uptick in our quick turns activity, that would be evidence of a lot of order expedites. And we haven't seen that.
Speaker Change: Going to move the needle.
Speaker Change: And then when we look at our business in the U S where you would expect.
Speaker Change: Yes that question to be very valid.
Speaker Change: Obviously monitoring this very closely but.
Speaker Change: When we break it down we havent seen an uptick in our quick turns activity that would be evidence of a lot of order expedites and we haven't seen that and.
Sean Kerins: And when we look at the backlog for our US business, you know, we feel kind of, kind of good, because it's not just building in magnitude, it's building out in time, meaning into Q3 and Q4. And obviously, if it was more about tariff avoidance, it would be, you know, more of the immediate term. And we haven't seen any abnormal, you know, uptick in order activity related to basically country of origin China, for content. So all of those things tell us, you know, this outlook is, you know, probably not overly impacted by, you know, any of the tariff avoidance activity, as best as we can see it today.
Speaker Change: And when we look at the backlog for our U S business, we feel kind of good because it's not just building in magnitude is building out in time, meaning into Q3 and Q4.
Speaker Change: And obviously, if it was more about tariff avoidance.
It would be more of the immediate term and we haven't seen any abnormal uptick in order activity related to base.
Speaker Change: Basically country of origin, China for.
Speaker Change: For content, so all of those things tell us.
Speaker Change: This outlook is.
Speaker Change: Probably not overly impacted by any of the tariff avoidance activity.
As we can see it today.
Joseph Lehman: Okay, thank you. That makes a lot of sense.
Speaker Change: Okay. Thank you that makes a lot of sense and then just one follow up so would you say you are improving your visibility in situ H 'twenty five.
Sean Kerins: And then just one follow up. So would you say you have improving visibility in C2H25? Yeah, visibility is improving.
Speaker Change: Yeah visibility is improving.
Sean Kerins: You know, we always said the preconditions for an uptick, as we go through this cycle would be, you know, first of all, you know, industry wide inventory levels have got to come down, right? The industry's got to eat through all the excess. And so we think you know, what we're seeing, what we saw in Q1, you know, certainly in Europe, and what we see in Q2, is a level of replenishment playing out. You know, that had to happen.
Speaker Change: We always said the preconditions for an uptick as we go through this cycle would be.
Speaker Change: First of all industry wide inventory levels have got to come down right. The industry's got to eat through all the excess and so we think.
Speaker Change: What we're seeing what we saw in Q1.
Speaker Change: Certainly in Europe, and what we see in Q2.
Speaker Change: It is a level of replenishment playing out.
Speaker Change: That had to happen and then beyond that you sort of say well, what's going to signal the potential for recovery and we've always focused on three things one our book to bill ratios have to improve and they have.
Sean Kerins: And then beyond that, you sort of say, well, what's going to signal, you know, the potential for recovery. And we've always focused on three things. You know, one, our book to bill ratios have to improve, and they have. Two, backlog has to grow again. It grew again, for the first time in quite some time in Q1, and we expect it to grow again in Q2. And as part of that, the backlog, as I said, is building out in time, not just in magnitude. So our visibility into Q3 and Q4 is improving.
Speaker Change: Two backlog has to grow again it grew again for the first time in quite some time in Q1, and we expect it to grow again in Q2.
Speaker Change: And as part of that the backlog.
Speaker Change: As I said is building out in time, not just in magnitude so our visibility into Q3 and Q4.
Joseph Lehman: And then the third condition, you know, we always pay close attention to, you know, the whole portfolio of suppliers we represent, because ultimately, they're going to lead us out of this. And as we see their guides improve, you know, we think ours should follow. Okay, thank you. Thanks, Joe.
Speaker Change: Is improving and then the third condition.
Speaker Change: We always pay close attention to.
Speaker Change: The whole portfolio of suppliers, we represent because ultimately they're going to lead us out of this and as we see their guys improve we think ours should follow.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks, Joe.
Brad Windbigler: And that will conclude our question and answer session.
Speaker Change: And that will conclude our question and answer session I will turn the call back over to Brad when biegler for any closing comments.
Brad Windbigler: I'll turn the call back over to Brad Windbigler for any closing comments. Thank you all again for joining today's call. Have a great day.
Speaker Change: Thank you all again for joining today's call have a great day.
Operator: Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.
Speaker Change: Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
Speaker Change: Okay.