Q2 2025 Arrow Electronics Inc Earnings Call

Operator: Good day and welcome to ARROW ELECTRONICS' second quarter 2025 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rick Seidlitz, ARROW's Vice President of Investor Relations. Please go ahead.

Good day and welcome to Aero Electronics' second quarter 2025 earnings call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Rick Sidz, Vice President of Investor Relations. Please go ahead.

Rick Seidlitz: Thank you. I'd like to welcome everyone to the ARROW Electronics second quarter 2025 earnings conference call. Joining me on the call today is our President and Chief Executive Officer, Sean Kerins, and our Chief Financial Officer, Bradley Windbigler, 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.

Thank you. I'd like to welcome everyone to the Aero Electronics, second quarter, 2025 earnings conference call.

Joining me on the call today is our president and chief executive officer, Sean kerins, and our Chief Financial Officer. Roger wall.

Our President of Global Components, Rick Morano, and our President of Global Enterprise Competing Solutions, Eric Noke.

Rick Seidlitz: 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 results. We've reconciled 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.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this 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 CEO, Sean Kerins.

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 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 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've reconciled 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.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks, and encourage you to reference these slides during this webcast.

Sean Kerins: Thank you, Rick, and thank you all for joining us. Today, I'd like to discuss our second quarter results, provide some commentary on the broader market environment, and then close with some thoughts as we look to the balance of the year. I'll then turn things over to Raj for more detail on our financials, as well as our outlook for the third quarter. For the second quarter, we delivered sales as well as earnings per share that exceeded the high end of our guidance ranges, with solid contributions from both of our operating segments. In global components, our momentum was punctuated by year-over-year growth for the first time since Q4 of '22, with strength in Asia and improving trends across our industrial and transportation market segments.

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 CEO, Sean Kerins.

Thank you, Rick, and thank you all for joining us today. I'd like to discuss our second quarter results, provide some commentary on the broader Market environment and then close with some thoughts as we look to the balance of the Year, I'll then turn things over to Raj, for more details on our financials.

As well as our outlook for the third quarter.

Sean Kerins: And in enterprise computing solutions, we delivered year-over-year billings and gross profit dollar growth based on strength, both on-premise and in the cloud, as well as in both of our operating regions. Taking a closer look at our global components business, the prolonged cyclical correction is yielding to early signs of a market recovery. All three of our operating regions again delivered sales in excess of typical seasonality. Demand trends were highlighted by broad strength in Asia, improving activity levels in our industrial and transportation markets on a global basis, and healthy aerospace and defense patterns in Western markets. Additionally, our sales for IP and E components once again grew sequentially, but now also year-over-year, underscoring our continued commitment to specialization in the secretive and resilient market segment. Lastly, our value-added offerings, namely supply chain management, engineering and design, and integration services, contributed nicely to our operating margin stability.

Of our guidance ranges, we saw solid contributions from both of our operating segments. In Global Components, our momentum was punctuated by year-over-year growth for the first time since Q4 of '22, with strength in Asia and improving trends across our industrial and transportation market segments. In Enterprise Computing Solutions, we delivered year-over-year billings and gross profit dollar growth based on strength both on-premise and in the cloud, as well as in both of our operating regions.

Taking a closer. Look at our Global components business. The prolonged cyclical, correction, is yielding to early signs of a market recovery.

All 3 of our operating regions again. Delivered sales in excess of typical seasonality demand Trends were highlighted by broad strength in Asia improving activity levels in our industrial and transportation markets on the global basis and healthy Aerospace. And defense patterns in Western markets.

Additionally, our sales for IP&E components, once again, grew sequentially, but now also year-over-year, underscoring our continued commitment to specialization in the secretive and resilient market segments.

Sean Kerins: And for some color commentary on a regional basis, in the Americas, the industrial and aerospace and defense markets drove our results, supported by resilience in transportation. In Asia, our sequential growth was broad-based in nature, highlighted by strength in industrial, compute, and consumer, along with continued EV momentum in the transportation sector. And finally, our sales in EMEA grew sequentially despite macroeconomic and geopolitical headwinds. Results were marked by strength in industrial, transportation, and aerospace and defense markets. Now, as we look at the market more broadly, our book-to-bill ratios are above parity in all three regions. While lead times still approximate pre-pandemic norms, our backlog further improved, growing for a second consecutive quarter. Throughout our large OEM customer base, inventory levels are normalizing, illustrated through more sustainable order patterns, providing us with visibility into the real demand.

Lastly, our value added offerings, namely Supply Chain management, engineering and design and integration Services, contributed nicely to our operating margin stability. And for some color commentary on a regional basis, in the Americas, the industrial and Aerospace. And defense markets, drove our results supported by resilience and transportation,

In Asia, our sequential growth was broad-based in nature. Highlighted by strengthened, industrial compute and consumer along with continued EV momentum in the transportation sector.

And finally, our sales and AMIA grew sequentially. Despite macroeconomic and geopolitical headwinds, results were marked by strength in the industrial transportation and aerospace and defense markets. Now, as we look at the market more broadly, our book-to-bill ratios are above parity in all three regions, while lead times still approximate pre-pandemic norms. Backlogged further improved, growing for a second consecutive quarter.

Sean Kerins: We also believe our mass market customers are still in the later stages of destocking, suggesting there's still runway for a broader market recovery, particularly in the West. And finally, as in prior cycles, we expect to follow the suppliers that we represent, many of whom are now calling for growth through the balance of the year and beyond. The shape and slope of this recovery remain difficult to predict, but we believe these leading indicators point to a modest recovery taking flight. Our Q3 guidance reflects the continuation of these trends, highlighted by mid-single-digit sales growth and operating margin stability, while still navigating headwinds related to regional and customer mix. In regard to tariffs, due to uncertainty around future trade policy, we saw modest order acceleration in Asia, alongside less tariff uplift than anticipated in the US.

Throughout our large OEM customer base, inventory levels are normalizing, illustrated through more sustainable order patterns, providing us with visibility into their real demand.

We also believe our mass market customers are still in the later stages of these stockings, suggesting there's still runway for a broader market recovery, particularly in the West.

And finally, as in prior cycles, we expect to follow the suppliers that we represent, many of whom are now calling for growth through the balance of the year and beyond.

The shape and slope of this recovery remain difficult to predict, but we believe these leading indicators point to a modest recovery taking place. Our Q3 guidance reflects the continuation of these trends highlighted by mid-single-digit sales growth and operating margin stability, while still navigating headwinds related to regional and customer mix.

Sean Kerins: These dynamics did not materially impact our second quarter results, nor have we contemplated any material impact in our third quarter guidance. While the current trade environment continues to evolve, I'd like to reiterate ARROW's focus on helping our customers navigate the associated complexity. We will continue to lean on our global footprint of supply chain assets, as well as our portfolio of services, to help them do so. Now, turning to our global ECS business. In the second quarter, we delivered year-over-year double-digit growth in billings and gross profit, as well as operating income when normalized. The results were highlighted by solid contributions from both of our operating regions. Our performance in EMEA was broad-based, with year-over-year billings growth in cloud, infrastructure software, and cybersecurity. And in North America, we saw continued acceleration in our cloud portfolio, alongside strength in infrastructure software and data storage.

In regard to tariffs due to uncertainty around future trade policy. We saw modest order acceleration in Asia, alongside less tariff uplift than anticipated in the US.

These Dynamics did not materially impact. Our second quarter results nor have we contemplated any material impact in our third quarter guidance, while the current trade environment continues to evolve, I'd like to reiterate arrows focus on, helping our customers navigate. The associated complexity, we will continue to lean on our Global footprint of supply chain assets, as well as our portfolio of services to help them do so.

Now turning to our Global ECS business. In the second quarter, we delivered year-over-year, double-digit growth in Billings and gross profit, as well as operating income when normalized. The results were highlighted by solid contributions from both of our operating regions.

Sean Kerins: Our efforts to align our go-to-market strategy in North America in a way that mirrors our success in EMEA are starting to pay dividends. Looking to the future, we again enjoyed backlog growth in excess of 50% year-over-year. We believe this reflects our alignment to some very promising demand trends, many of which are now served on an as-a-service basis. Examples include hybrid cloud solutions, the deployment of infrastructure software in areas such as virtualization and data protection, and the early innings of AI in the traditional data center. In addition, our focus on the mid-market, enabled by the continued adoption of our digital platform, Aerosphere, positions us nicely for ongoing customer base expansion. With all of that in mind, our third quarter outlook again suggests healthy performance in both operating regions, poised for year-over-year growth in billings, gross profit, and operating income.

Our performance in Amia was broad-based with the year-over-year Billings growth in Cloud infrastructure, software and cyber security. And in North America, we saw a continued acceleration in our Cloud portfolio. Alongside strength and infrastructure software and data storage. Our efforts to align our go to market strategy in North America, in a way that mirrors our success in Amia is starting to pay. Dividends looking to the future. We again enjoyed backlog growth and excess of 50% year-over-year. We believe this reflects our alignment, to some very promising, demand Trends, many of which are now served on a NASA service basis.

Examples, include hybrid, Cloud Solutions, the deployment of infrastructure software in areas such as virtualization and data protection.

In the early innings of AI in the traditional data center.

In addition, our focus on the mid-market enabled, by the continued adoption of our digital platform, aerosphere positions us nicely for ongoing customer base expansion.

Sean Kerins: In closing, despite various market and geopolitical uncertainties, we are optimistic as we look to the near future. In global components, the evidence of cyclical recovery suggests we'll enjoy better than seasonal sales patterns for the balance of the year. In enterprise computing solutions, it's clear to us that our momentum will continue to build across the full second half. And for the company overall, our ongoing productivity initiatives will benefit us at more scale. As always, the credit for our progress belongs to all of the ARROW teams and employees throughout the world. I'm thankful for their dedication to our suppliers, our customers, and each other. And with that, I'll hand the mic over to Raj.

Points for year-over-year growth in Billings gross profit and operating income.

In closing despite various market and geopolitical uncertainties, we are optimistic, as we look to the near future in global components, the evidence of cyclical recovery. Suggests will enjoy better than seasonal sales patterns for the balance of the year. In Enterprise Computing Solutions, is clear to us that our momentum will continue to build across the full second half and for the company overall, our ongoing productivity initiatives, will benefit us at more scale.

As always, the credit for our progress belongs to all of the Aero teams and employees throughout the world.

I'm thankful for their dedication to our suppliers, our customers, and each other.

Bradley Windbigler: Thanks, Sean. Consolidated sales for the second quarter were $7.6 billion, exceeding our guidance range and up 10% versus prior year, or up 8% year-over-year on a constant currency basis. Global component sales were $5.3 billion, above our guidance range and up 11% versus prior quarter, or up 8% sequentially in constant currency terms. You will recall that in our Q2 outlook that we provided last quarter, we highlighted a potential 2% to 4% incremental lift to global component sales from tariff billing impacts. In our second quarter results, we attribute around 1% of sales to these impacts. Additionally, as Sean mentioned, we saw modest order acceleration related to tariff expectations, particularly in Asia, and we believe the impact could be 1% to 2% on second quarter sales.

And with that, I'll hand the mic over to Raj. Thanks, Sean. Consolidated sales for the second quarter were $7.6 billion, exceeding our guidance range and up 10% versus the prior year, or up 8% year-over-year on a constant currency basis.

Global components sales were $5.3 billion above our guidance range and up 11% versus the prior quarter, or up 8% sequentially in constant currency terms. You will recall that in our Q2 outlook, which we provided last quarter, we highlighted a potential 2% to 4% incremental lift to global components sales from tariff billing impacts.

In our second quarter results, we attribute around 1% of sales to these impacts.

Bradley Windbigler: Enterprise computing solutions sales were $2.3 billion, above our guidance range and 23% higher than prior year, or 20% higher year-over-year in constant currency. ECS billings grew 15% in the second quarter compared to the same period last year. Moving to other financial metrics for the quarter, second quarter consolidated non-GAAP gross margin of 11.2% was down approximately 110 basis points versus prior year, driven primarily by regional and customer mix in global components and by product mix in ECS. Global components non-GAAP gross margin was 11.2%, down 40 basis points sequentially due to regional and customer mix, and enterprise computing solutions was 11.2% on a non-GAAP basis. Our second quarter non-GAAP operating expenses grew $38 million sequentially to $631 million, due largely to variable costs to support top-line sales growth, as well as the impacts of currency exchange rates.

Additionally, as Sean mentioned, we saw modest order acceleration related to tariff expectations, particularly in Asia and we believe the impact could be 1 to 2% on second quarter sales. Enterprise Computing Solutions. Sales were 2.3 billion, above our guidance range and 23% higher than prior year for 20%. Higher year-over-year in constant currency.

BCS Billings grew 15% in the second quarter compared to the same period last year.

Bradley Windbigler: Also, although we have returned to growth, we remain committed to executing against our productivity initiatives, which will provide increasing benefits in the second half of this year. In the second quarter, we generated non-GAAP operating income of $215 million, which was 2.8% of sales, with global components operating margin at 3.6% and enterprise computing solutions at 4.3%, both on a non-GAAP basis. As a reminder, ECS operating income in the second quarter of 2024 included a $20 million benefit for the collection of certain aged receivables related to one customer. Interest in other expense was $60 million in the second quarter, and our non-GAAP effective tax rate was 17.6%, which is well below our typical range of 23% to 25% due to certain benefits, which we are not expecting to recur in the third quarter.

Moving to other Financial metrics for the quarter second quarter Consolidated non-gaap growth. Margin of 11.2% was down approximately, 110 basis points versus prior year, driven primarily by Regional and customer mixing Global components and buy product. Mix in ECS Global components. Non-gaap growth margin was 11.2% down. 40 basis points, sequentially due to Regional and customer, mix and Enterprise Computing Solutions was 11.2% on a non-gaap basis. Our second quarter, non-gaap property, expenses grew, 38 million sequentially to 631 million. Due largely to variable costs to support Topline sales growth, as well as the impact of currency exchange rates.

Also, although we have returned to growth, we remain committed to executing against our productivity initiatives, which will provide increasing benefits in the second half of this year.

In the second quarter, we generated non-GAAP property income of $215 million, which was 2.8% of sales. Global Components' operating margin was 3.6%, and Enterprise Computing Solutions' margin was 4.3%, both on a non-GAAP basis.

as a reminder, ECS operating income in the second quarter of 2024 included, a 20 million benefit for the collection of certain aged receivables related to 1 customer

Bradley Windbigler: We expect both interest expense and taxes to be a drag on third quarter EPS when compared to the second quarter. And finally, non-GAAP diluted EPS for the second quarter was $2.43, which was above our guided range, mainly due to favorable sales results and a lower tax rate. Turning to working capital, networking capital grew sequentially in the second quarter by $456 million, ending the quarter at $6.8 billion. However, our cash conversion cycle improved by 10 days in the second quarter to 68 days. Inventory at the end of the second quarter was $4.7 billion, down modestly quarter over quarter, and our inventory trends improved to our highest rate in over two years. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues. Cash flow used for operating activities in the second quarter was $206 million.

Interests, another expense was $60 million in the second quarter and our non-gaap effective tax rate was 17.6%, which is, well below our typical range of 23 to 25% due to certain benefits, which we are not expecting to recur in the third quarter.

We expect both interest expense and taxes to be addressed on third quarter EPS when compared to the second quarter.

And finally, non-GAAP diluted EPS for the second quarter was $2.43, which was above our guided range, mainly due to favorable sales results and a lower tax rate.

Turning to working capital, net working capital grew sequentially in the second quarter by $456 million, ending the quarter at $6.8 billion. However, our cash conversion cycle improved by 10 days in the second quarter to 68 days.

Inventory at the end of the second quarter was $4.7 billion, down modestly. Order recorded, and our inventory turns improved to our highest rate in over two years.

We will maintain our focus on matching, our inventory to Associated demand Trends as the current cyclical recovery continues.

Bradley Windbigler: In conjunction with cash generated in the first quarter, on a year-to-date basis, cash flow from operations was $146 million. Gross balance sheet debt at the end of the second quarter was $2.8 billion, or flat quarter over quarter. We repurchased $50 million of shares in the second quarter, and our remaining repurchase authorization stands at approximately $225 million. In the short term, we are continuing to balance our capital priorities with managing our debt ratios. Now turning to Q3 guidance, we expect sales for the third quarter to be between $7.3 and $7.9 billion. We expect global component sales to be between $5.3 and $5.7 billion, which at the midpoint is up 4% from prior quarter. In enterprise computing solutions, we expect sales to be between $2 billion and $2.2 billion, which is up approximately 12% at the midpoint year-on-year.

Cash flow used for operating activities in the second quarter was $206 million.

In conjunction with cash generated in the first quarter on a year-to-date basis, cash flow from operations was $146 million. Gross balance sheet debt at the end of the second quarter was $2.8 billion, or flat quarter over quarter.

In the short term, We are continuing to balance our Capital priorities with managing our debt ratios. Now, turning to Q3 guidance,

we expect sales for the third quarter to be between 7.3 and 7.9 billion. We expect Global components sales to be between 5.3 and 5.7 billion dollars which at the midpoint is up 4% from prior quarter.

In Enterprise Computing Solutions, we expect sales to be between 2 billion and 2.2 billion dollars which is up approximately 12% at the midpoint year on year.

Bradley Windbigler: In our outlook, we have factored in the direct billing impact from tariffs. Based on tariffs already in place, we estimate that this impact on global component sales will be similar in magnitude when compared to the second quarter. We have not factored in our guidance, any assumptions around evolving trade policies, nor does our outlook assume any order acceleration from customers. We're assuming our tax rate to return to our typical range of approximately 23% to 25% and interest expense to increase to approximately $65 million, as compared to $60 million in the second quarter. And our non-GAAP diluted earnings per share is expected to be between $2.16 and $2.36. And finally, given weakness in the US dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the third quarter.

In our outlook, we have factored in the direct billing impact from tariffs.

Based on tariffs already in place, we estimate that this impact on global components sales will be similar in magnitude when compared to Q2.

We have not factored in our guidance. Any assumptions around evolving trade policies nor does our Outlook assume any order acceleration from

customers.

We're assuming our tax rate will return to our typical range of approximately 23% to 25%, and interest expense is expected to increase to approximately $65 million, compared to $60 million in the second quarter.

And our non-GAAP diluted earnings per share is expected to be between $2.16 and $2.36.

Bradley Windbigler: The details of foreign currency impact can be found in our earnings release. With that, Sean and I are now ready to take your questions. Operator, please open the line.

And finally, given weakness in the U.S. dollar, particularly relative to the euro, we estimate changes in foreign currencies to be a tailwind in the third quarter. The details of the foreign currency impact can be found in our earnings release.

With that Sean. And I are now ready to take your questions. Operator, please open the line.

Operator: Thank you. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Please limit questions to one initial and one follow-up. Your first question comes from the line of Joe Quatroci with Wells Fargo. Your line is open.

Thank you. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. Please limit questions to 1 initial and 1 follow-up.

your first question comes from the line of Joe quatro 2 with Wells Fargo, your line is open

Joe Quatrochi: Yeah, and thanks for taking the question. Maybe just kind of trying to understand the demand dynamics relative to your inventory. How do you think about having the right inventory for maybe signs of a recovery here?

And thanks for for taking the questions. Uh, maybe just kind of trying to understand that that the demand Dynamic role to to, you know, your inventory and how do you think about, you know, having the right inventory for for maybe signs of a recovery here.

Sean Kerins: Sure, Joe. Well, as you know, because you've been following us for some time, our inventories are down well more than maybe a billion dollars from the peak that we saw in late '23. And I think in Q2, they came down roughly $50 million or more, something in that range. And we know our turns definitely improved as well. So I would say, you know, in the aggregate, you know, we feel like we've done a pretty good job managing inventory throughout, you know, this prolonged correction. There are still some pockets of excess, but we continue to eat away at them. You know, we're not concerned about the aging profile of the inventory. We believe we'll sell through it over time, and certainly we're adequately reserved for any risk that we would contemplate. But I think the bigger picture to your question is really all about the market.

Sure. Joe. Well um as you know, because you've been following us. Uh, for some time, our inventories are are down well more than, uh, maybe a billion dollars from the peak, uh, that we saw in late 23 and I think in Q2 they came down roughly 50 million, uh, or more, uh, something in that range. And we know our turns, uh, definitely improved as well. So, I would say in in the aggregate, you know, we feel like we've done a pretty good job.

Sean Kerins: You know, we pay real close attention to our customers and what they tell us and what they see going forward. You know, we want to be leaning in as the market recovers so we can best support them. And I think with some of the improving leading indicators we continue to see, you know, we don't intend to be caught flat-footed. So we can expect, you know, we will invest in working capital to support growth, you know, where and when it makes sense. And I think we're at that inflection point where we need to best support our customers.

Job managing inventory. Throughout, you know, this prolonged correction, there are still some pockets of excess, but we continue to, uh, eat away at them. Uh, you know, we're not concerned about the the Aging profile of the inventory, um, we believe we'll sell through it over time and certainly, we're adequately reserved for any risk that we would contemplate, but I think the bigger picture to your question is really all about the market. Um,

You know, we pay real close attention to our customers and their needs.

What they tell us and what they see going forward, you know, we want to be leaning in, uh, as the market recovers. So we can best support them. And I think with some of the improving leading indicators, we continue to see, you know, we don't intend to be caught flat-footed. Um, so we can expect, um, you know, we will invest in working capital, uh, to support growth, you know, where, and when it makes sense. And I think we're at that inflection point, uh, where, um, where we need to best support our customers.

Joe Quatrochi: That's helpful. And then, you know, maybe one for Raj, just trying to kind of like the puts and takes of, you know, the margin, you know, implied margin guidance for the September quarter, and then also kind of balancing that with the cost, you know, efforts that you guys have been undertaking over the last few quarters. Like, I guess, is it right to think that the margins are slightly down, I think, sequentially in the September quarter?

That that that's helpful and then you know, maybe 1 for Raj like just trying to kind of like to put some takes of you know, the margin uh you know in pi margin guidance for the September quarter and then also kind of balancing that with with the cost, you know um efforts that you guys have been undertaking over the last few quarters, like I guess or is it alright to think that the the margins are slowly down? Like I think sequentially in the September quarter.

Bradley Windbigler: That's probably not a right conclusion, Joe. You know, we see margins being relatively stable, certainly at an ARROW Inc. level and also in components. ECS has its own cyclicality that we have to deal with. But, you know, the gross margin is likely to see continued mix shift, given the APAC growth in components, as well as the large customer mix that we have. But we are certainly offsetting that with some of our productivity and cost savings initiatives. So that is certainly going to mitigate that impact. But we see relatively stable margins quarter over quarter.

Sean Kerins: And Joe, I would just add, in the global components business, the gross margin pressure that Raj alluded to is strictly a function of regional and customer mix. As you know, Asia typically leads the globe into recovery, and that's been the case now for a good couple of three quarters. And they're performing well on the sales line. The West will come back. But it's also a function of customer mix. You know, the larger OEMs are driving our sequential sales growth. We know the mass market will return at more scale. We're starting to see evidence of that in our backlog as it builds, you know, out in time into Q4 and even a little bit into Q1. When that happens, you'll see the gross margin line benefit and the operating leverage improve. So we feel good about the fact that the sales momentum has returned.

Um that's probably not a right conclusion. Uh Joe you know we we see margins being relatively stable certainly at an arrow ink level and and also in components uh ECS has its own cyclicality that we have to deal with. But, you know, the the gross margin is likely to see continued mix shift, uh, given the APAC growth in components as well as the large customer mix that we have. Um, but we are certainly offsetting that with some of our productivity and cost savings initiatives. So that is uh, certainly going to mitigate that impact, but we see relatively stable, margins quarter of a quarter.

Sean Kerins: We've always known that, you know, the operating leverage won't come until the scale comes back. So we think this is an encouraging sign.

And customer mix. As, you know, Asia, typically leads the globe, um, into recovery. And that's been the case now. For a good couple 3 quarters, um, and they're performing well on the sales line. Uh, the West will come back, uh, but it's also a function of customer mix. You know, the larger oems are driving our sequential sales growth. We know the mass Market will return it more scale. Uh, we're starting to see evidence of that in our backlog, as it builds, you know, out in time, uh, into Q4 and even a little bit into q1. When that happens, you'll see the, the gross margin line benefit and the operating leverage improved. So we feel good about the fact that the, the sales momentum has returned, we've always known that, you know, the operating leverage won't come until the the scale comes back. Um, so we think this is an encouraging sign.

Joe Quatrochi: Okay, clear.

Operator: Thank you.

Okay, clear. Thank you.

Bradley Windbigler: Thanks, Joe.

Thanks Joe.

Operator: Your next question comes from the line of William Stein with Truist Securities. Your line is open.

Your next question comes from the line of William Stein with truist Securities. Your line is open.

Joe Quatrochi: Great. Thanks for letting me ask a question. I'm hoping you can talk about your customer inventory level to the best of your ability. You talked a moment ago about when the broad-based end markets come back, that that should be more beneficial to margins. And I think it suggests that perhaps they still have some excess inventory or maybe just demand in those broader end markets is not as robust. Can you clarify and help us understand that a little bit?

Great. Um, thanks for letting me ask a question. Um,

I'm hoping you can talk about, uh, your customer inventory levels to the best of your ability. He talked a moment ago about when the broad-based.

Uh, and markets, uh, come back. That should be more beneficial.

Sean Kerins: Yeah, sure thing, Will. And thanks for joining. I think we made mention of it in the prepared remarks. But as you know, we're pretty disciplined about the leading indicators that we monitor. And I would say we definitely are seeing customer-level inventories normalize, especially in the larger OEM piece of the market. And that's been driving a level of replenishment activity. And you know, we're seeing normal booking patterns reemerge, if you will. We do think, you know, the mass market customer base lags the larger OEMs, to your point, with still some destocking playing out. Obviously, visibility will improve as either lead times extend or end market demand improves more sharply. But I think there's still some destocking going on in the broader piece of our customer base. And you know, that'll play out over time.

Uh, to margins. And I think it suggests that perhaps they still have some excess inventory, or maybe just, uh, demand in those broader markets, uh, is not as robust. Can you clarify, uh, and help us understand that a little bit?

Yeah, sure thing will, and thanks for joining. Um, I think we made mention of it in the, in the prepared remarks. But as you know, we're pretty disciplined about the leading indicators that we Monitor. And I would say, we, we definitely are seeing customer level inventories, normalized, uh, especially in the, in the larger OEM, uh, piece of the market. And that's been driving a level of replenishment activity.

Sean Kerins: And as it does, we'll see that piece of the market return to our mix at more scale. And that's where the, you know, the gross margin line will benefit most. But there is a difference playing out. Inventory is normalizing in the high end. Destocking is still playing out in the lower end. And if you think about it, you know, given the shortage market, the larger accounts got the inventory first and have certainly worked their way through good portions of it. You know, the mass market got it later on, and they're still digesting some of it as we speak.

And, you know, we're seeing normal booking patterns, uh, re-emerge if we, you will. We do think, you know, the mass Market customer base lags, the larger oems, to your point, uh, with still some of these stocking, uh, playing out. Um, obviously visibility will improve as, as either lead times extend or end market demand improves more sharply, but I think there's still some decking going in uh, going on in the, in a broader piece of our customer base and you know that's um, that'll play out over time. And as it does we'll see that piece of the market return to our makes it more scale. And that's where the, you know, the gross margin line will benefit most, but there is a a difference playing out. Inventory is normalizing in the high-end um, decking still playing out.

In the lower end. And if you think about it, you know, given the shortage Market, the larger accounts, got the inventory first, uh, and have certainly worked their way through uh, good portions of it. You know, the mass Market got it later on and they're still uh, digesting some of it as we speak.

Joe Quatrochi: That's very helpful for sort of more of a demand picture. So thank you for that. On the supply side, are you seeing still very short lead times, as I would expect, from the supply base? I think they haven't seen, you know, a huge recovery that would lead to extended lead times. But are we still seeing many of your suppliers "stock" from in terms of their lead times, or has that begun to reach a more normalized level? Thank you.

That's uh, that's very helpful for sort of more of a demand picture. Uh, so thank you for that. I'm going to supply side. Um, are you seeing still very short lead times as I would expect from the supply base? Um, I I think they haven't seen, you know, a huge recovery that would that would lead to Extended lead times, but are we still seeing, uh, many of your suppliers quote stock from, uh, uh, uh, in in terms of their lead times or

Sean Kerins: Yeah, you're right, Will. The lead times basically are stable. We have not seen lead times come in any further, but we also haven't seen them go out. They've been, you know, quite level at roughly pre-pandemic rates, if you go back to, you know, late '19, early '20, and haven't moved much over the past two to three quarters at all.

Or has that begun to um, reach a More normalized Level. Thank you.

No, you, you're, you're right will the lead times. Basically are stable. Uh, we have not seen lead times come in any further, but we also have seen them go out. Um, they've been, you know, quite level at roughly pre-pandemic, uh, rates. Uh, if you go back to, you know, late 19, early 20, um, and haven't moved much over the past, uh, 2 to 3 quarters at all.

Joe Quatrochi: Thank you.

Thank you.

Bradley Windbigler: Thanks, Will.

Thanks.

Operator: Your next question comes from Rupalu Bhattacharya. Your line is open.

Rupalu Bhattacharya: Hi. Thanks for taking my questions. Maybe I'd like to dig a little bit deeper into the ECS segment margins. I mean, ECS sales were up 23% year-on-year, but margins were down about 90 bips. I think, Sean, you said something had to be normalized for, so if you can just kind of explain that. And then how are you thinking about ECS segment margins for fiscal three Q and beyond?

Your next question comes from Rlu Bhattacharya. Your line is open.

Hi, thanks for taking my questions. Um, maybe I'd like to dig a little bit deeper into the ECS segment margins. I mean, ECS sales were up 23% year-on-year, but margins were down about 90 bips. I think, Sean, you said something had to be normalized for, so if you can just kind of, uh, explain that. And then how are you thinking about ECS segment margins for fiscal Q3 and beyond?

Sean Kerins: So, Rupalu, let me just start with, you know, the basics on Q2 performance in ECS. On a sales basis, we show operating margins declining by maybe 20 basis points year-on-year. But as we've said on multiple occasions, the sales number will vary, in some cases, quite significantly from one quarter to the next based on mix and based on the rules of agency accounting, and that the best way to look at, you know, both gross and operating margins is really on a billings basis. And that's partly why we now disclose our billings activity. And if you look at the billings-based operating margins in ECS year-on-year in Q2, they were stable. So we're very comfortable with the margin profile of the business. And as the transactional volume continues to scale, you know, we see the operating leverage improving further.

So, group Blue, let me just start with, um, you know the basics on Q2 performance and ECS.

So, um, operating margins are declining by maybe 20 basis points year on year.

Uh, but as we've said on multiple occasions, the sales number will vary, uh, in some cases quite significantly from one quarter to the next based on mix.

And based on the rules of agency accounting, and that the best way to look at, um, you know, both gross and operating margins is really on a billing spaces and that's partly why we we now disclosed, our billing activity. Uh, and if you look at the the billing space operating margins in ECS year-on-year, in Q2 they were stable.

Sean Kerins: In fact, I think if you look at it in Q2, billings were roughly in the neighborhood of 15% year-on-year. OI grew by almost 18% year-on-year. So they drove a little bit of leverage in Q2. And I think our guide reflects even better leverage in Q3. So we're comfortable with the margin profile, and we do believe it will improve in the future. The team is driving the right things from a mix perspective. But again, try not to read too much into the sales-based margin profile because it can mislead you from time to time.

Bradley Windbigler: And Rupalu, the adjustment you do have to make was from the second quarter of last year. We did receive a $20 million release from a bad debt reserve that we'd previously taken. And so as Sean was explaining it, if you make that adjustment, then you can see exactly what he was referring to.

Um, so we're very comfortable with the margin profile of the business and as the transactional volume continues to scale. Um, you know, we see the the operating leverage, um, improving further. Um, in fact, I think if you look at it in Q2, uh, Billings were roughly in the neighborhood of 15% year on year, uh, oi grew by almost 18% year-on-year. So they drove, uh, a little bit of leveraging Q2. And I think our guide reflects even better leveraging Q3. So we're, we're comfortable with the margin profile and we do believe it will improve in the future. Uh, the team is driving the right things from a mix perspective. But again, try not to read too much into the sales based, uh, margin profile because it can mislead you, uh, from time to time and and ruple the adjustment. Uh, you do have to make quotes from the second quarter of last year. We

We did.

Receive a twenty million dollar release from a bad debt Reserve that we'd previously taken and so Sean, as Sean was explaining it, if you make that adjustment, then you can see exactly what he was referring to.

Rupalu Bhattacharya: Okay. Oh, thanks for the details there. Can I ask you on component sales? Looks like EMEA sales were down year-on-year. How do you see that region progressing? And Sean, overall, your guidance for fiscal three Q components is pretty strong. It's like above seasonal growth. So what is giving you confidence that that growth continues? I think you said there's no benefit from tariff-related pre-buys. So, I mean, can you is Aerosphere, I think, is another thing you highlighted. Does that come in in Europe? And just your overall confidence in the guidance for components? Thanks.

Sean Kerins: Sure thing. Well, Rupalu, as you might recall, Aerosphere is a function of our ECS business. It's the digital go-to-market platform for that team. So it's not relevant in the components realm. But if you look at our components business, you're right. You know, we were better than seasonal in Q2 in all three regions. Our forecast means better than seasonal again in Q3 in all three regions. And you know, our backlog grew again in Q2, and this time even more substantially than it did in Q1. And the important thing there, Rupalu, is when we look at our backlog is that it's not just growing in magnitude, it's growing out in time, meaning into Q4 and a little bit into Q1. But I also think, you know, we're seeing better vertical trends, you know, throughout the world. And those vertical trends vary a little bit.

Okay. Okay, thanks for the details there. Um, can I ask you on component? Um, sales looks like immediate sales were down year on year. How do you see that region progressing and Sean, overall, your guidance for fiscal 3Q components is is, uh, is pretty strong. It's like above seasonal growth. So, what is giving you confidence? That that growth continues? I think you said there's no benefit from from tariff related, um, prebys. So, I mean, can you is aerosphere? I think is, is another thing you highlighted? Is that does that come in, uh, in in Europe? And, um, and just your overall confidence in, in the guidance, for, for components. Thanks, sure thing. Well, well, roof blue. As you, as you might recall, aerosphere is a function of our, our ECS business. It's the, the digital go to market platform for that team. So it's not not relevant in the components realm, but, um, if you look at our components business, you're right, you know, we were better than seasonal.

In Q2 in all three regions, um, our forecast means better than seasonal again, um, in Q3 and all three regions. And, you know, our backlog grew again, uh, in Q2 and this time, uh, even more substantially, uh, than it did in Q1. Um, and the important thing there, route flu, is when we look at our backlog, is that it's not just growing in magnitude; it's growing out in time.

Meaning into Q4 and a little bit into Q1. But I also think, you know, we're

Sean Kerins: So I thought I might have Rick Morano, who is the architect of our go-to-market motion in global components, just give you a little more color on that front.

Rick Marano: Yeah, thanks, Sean. And building off, Rupalu, what Sean had said is if you look at globally, what we're seeing is, you know, in the West, in both aerospace and defense and transportation in aggregate and some industrial in the larger markets, we're seeing market. And in Asia, based off where we are in the cycle and the recovery, we're seeing growth as well. But to Sean's point, the key is the fundamentals of backlog and backlog growth book-to-bill are giving us confidence in a recovery that's starting to take place.

We're seeing better vertical trends, uh, you know, throughout the world, and those vertical trends vary a little bit. So I thought it might have Rick Morano, who is the architect of our go-to-market motion and global components, just give you a little more color on that front. Yeah, thanks, Sean. And building off the blue with what Sean had said, if you look at globally, what we're seeing is, you know, in the West, in both aerospace and defense, and transportation and aggregate, and some industrial in the larger markets, um, we're seeing.

Markets in Asia are based off where we are in the cycle and the recovery we're seeing growth.

well uh, but to Sean's Point key is

The fundamentals of backlog and backlog growth book. The Bill are giving us confidence in a recovery, starting to take place.

Rupalu Bhattacharya: Okay. All right. Thank you. Thanks for the details.

Okay. All right. Thank you. Thanks for the details.

Rick Marano: Thanks, Rupalu.

Thanks.

Operator: And there are no further questions at this time. I will turn the call back over to Rick Seidlitz for closing remarks.

And there are no further questions at this time. I will turn the call back over to Rick Sides for closing remarks.

Rick Seidlitz: Thank you all again for joining today's call, and have a great day.

Thank you all again for joining today's call, and have a great day.

Operator: This does conclude today's conference. You may now disconnect.

This concludes today's conference. You may now disconnect.